Too Much Fund Focus – A Bad Thing?
An article in the Chicago Tribune warns of the risks of mutual funds with too few holdings:
No equity-fund manager has made a clearer confession than William Nygren, co-manager of the Chicago-based Oakmark Select Fund, a so-called focus fund holding stocks in just 24 companies at the end of June. Fourteen percent of the fund was in mortgage lender Washington Mutual.
The fund's performance has been 'dreadful,' Nygren wrote to shareholders last month. So far in the quarter, the fund is down nearly 9 percent….Ed Maracinni, co-manager of the JohnsonFamily Large Cap Fund in Racine, Wis., said the pessimism in stocks has been overdone, apart from financial and real-estate-related stocks. The fund is down nearly 5 percent in the current quarter….This summer's concentrated disasters prove the risk of narrow bets on a few stocks or a few sectors..."
We’d counter with "Too much diversification spells mediocrity for most stock funds".
While it is true that diversification lowers risk, it also reduces upside. At MAXfunds we tend to prefer more focused funds with fewer than 100 holdings (in fact it has been a component of our ratings and is highlighted on each funds data page). While these funds can fall the hardest in down markets, they tend to outperform in up markets. Why is this a good thing?... ...read the rest of this article»
Backdoor Men
Some fund managers are the financial equivalent of rock stars - investing idols that pack their famous funds like Springsteen fills Giant Stadium. But as anyone who's ever been stuck in the nosebleeds when attending a concert at a mega-arena can tell you, sometimes smaller is better. Same goes with mutual funds. Rob Wherry at Smartmoney
points out that investors can get more intimate access to some of the biggest names in fund management by investing in their lesser-known offerings... ...read the rest of this article»
Why You Should Worry About Your Bond Funds
Today’s mutual fund investor is offered a broad range of choices covering every imaginable risk level - everything from essentially no-risk money market funds to leveraged sector short funds that can fall 10% or more in a single day.
As long as an investor understands the risks, investing in a risky fund in not inherently any better or worse than investing in a safe fund. With more risk comes more reward.
A risky fund tends to rise faster but fall harder. By researching a fund’s potential upside and downside an investor can make an informed decision whether or not they should invest in that fund... ...read the rest of this article»
E*Trade Stops Offering HELOCs Below Prime
In another sign that lending standards are tightening fast, starting today E*TRADE Financial Corporation (ETFC) no longer offers home equity lines of credit (HELOC) at rates below Prime regardless of a borrower’s credit rating or equity in the home. This comes just a few days after some less liquid, investment grade mortgage related securities were repriced downward, hurting some safe bond funds... ...read the rest of this article»
Forbes Honor Roll
Forbes just published its list of 'Honor Roll' funds for 2007, and while there's not a real stinker in the bunch – this is no buy list. Here are the funds that made the cut, along with our MAXrating for each one:
Bruce Fund (BRUFX) MAXrating: 84
Delafield Fund (DEFIX) MAXrating: 63
Keeley Small Cap Value (KSCVX) MAXrating: 68
Mairs & Power Growth Fund (MPGFX) MAXrating: 80
Muhlenkamp Fund (MUHLX) MAXrating: 61
Osterweis Fund (OSTFX) MAXrating: 77
Perritt MicroCap Opportunities (PRCGX) MAXrating: 93
Stratton Small-Cap Value (STSCX) MAXrating: 70
Third Avenue Value (TAVFX) MAXrating: 85
Value Line Emerging Opportunities (VLEOX) MAXrating: 93
According to Forbes, to get on the Honor Roll "contenders must pass a number of stringent tests. The managers must have been on the job for at least six years; a newbie can't ride on the boffo showing of his predecessor. We also want portfolio diversification. Thus sector funds don't get in. And a fund must be open to new investors." Forbes also looks at how well funds have done through past up and down markets.
But like all top fund lists, this one has its share of problems... ...read the rest of this article»
How Some Mortgages Are Like Load Funds
Many borrowers are now finding that getting out of their mortgage can be financially painful, according an article in the New York Times:
Homeowners whose loan rates are soaring may want to head for the exits. Many of them, though, will find no way out. If they sell their home or
refinance, they will face a penalty of thousands of dollars for paying off their loans early."
While we feel sorry for the borrowers who were not aware of penalties, millions of mutual fund investors have faced a similar unexpected punishment when trying to move out of one fund and into another.
Back end load funds were invented by the mutual fund industrial complex as a way create the illusion of selling a no load fund (a fund where the investor pays no sales commissions to buy) while still collecting the load. The sales fee, or load, in only charged when the investors sells. To this day, most back end load class fund investors have no idea there is a large commission involved - as high as 5.75% - when they sell shares... ...read the rest of this article»
Motley Fool’s Orwellian Moment
In Animal Farm, George Orwell describes a Utopian society that slowly morphs into the evil farm that its founders initially rose up against. The Motley Fool’s latest advertisement, touting "255% Gains in Six Months," is perhaps their "four legs good, two legs better" moment.
This pattern of closing mutual funds that fall on hard times in order to focus on the good stuff looks strangely familiar. That's because it's the same strategy used by the very mutual funds that the Motley Fool used to ridicule. With mutual funds, this cleansing process is called survivorship bias. This trick-of-the-trade is why many fund companies appear to hold only decent funds in their roster. The Merrill Lynch Internet Strategies Funds of the world are effectively deleted from history.
One thing the Motley Fool does today that mutual funds are not allowed to do is cherry pick performance information in order to market their wares. Of course, the Motley Fool is not alone here. Virtually all investment newsletters tout their spectacular returns through methodologies that would make a mutual fund marketer blush. But because everybody is doing it, selling an investment newsletter without such circus barker-grade promotion is nearly impossible... ...read the rest of this article»
Vanguard’s 7% Forever Funds
Vanguard recently announced plans to launch three new managed payout funds. Managed payout, managed distribution, or level-rate dividend policies mean the mutual fund company decides how much the fund’s distributions will be, or manage the portfolio specifically to create a certain distribution payment stream. With most mutual funds irregular capital gains and dividend distributions are the result of income and realized capital gains building up in the fund portfolio. According to Vanguard, their highest payout fund is:
…geared toward investors who seek a higher payout level to satisfy current spending needs while preserving their capital over the long term. This fund is expected to sustain a managed distribution policy with a 7% annual distribution rate…"
This move by Vanguard brings a little legitimacy to a sometimes questionable strategy used primarily by closed end funds to give investors the illusion of steady yield.
As investors retire, they want regular returns so they can live off their portfolio. Stocks offer growth to beat inflation, but little in the way of regular income – even a fund made up of the highest yielding common stocks in the market delivers under 4% today. Bonds offer slightly more yield, but no principal growth to offset 30 retirement years of inflation.
Vanguard’s new funds will attempt to address this problem. They will be formulated with the right asset mix to allow monthly liquidation at a rate as high as 7% a year with minimal principal downside... ...read the rest of this article»
Seven Habits of Highly Defective Funds
Yesterday we noted a high yield bond fund that has seen its fund price (NAV) fall about 40% since early June. Higher risk bond funds follow a pattern of feast and famine – the key to investing in such funds is to identify the types of bond funds that can tank 40%, and either avoid them completely or consider a speculative investment near the bottom of a famine cycle.
The trouble is that these bond funds tend to look the best at exactly the wrong time. They have the best reviews and ratings, and the performance figures smash the competition.
But remember, for most types of bond funds, performance comes largely from just two things: the fund’s expense ratio and the quality of bonds the funds hold. A much smaller part of the performance can be attributed clever bond selecting.
Here then, dear reader, is the MAXfunds “Seven Habits of Highly Defective Bond Funds”, our step by step instructions for lousy managers to destroy their perfectly good bond fund... ...read the rest of this article»
There's No Such Thing as a Free Lunch
Investing seminars marketed to seniors as educational get-togethers are often nothing more than crooked high-pressure sales pitches for questionable products, the SEC says.
The Securities and Exchange Commission held a 'seniors summit' on investment fraud and abusive sales practices with the North American Securities Administrators Association, which represents state securities regulators; AARP, the advocacy group for seniors; and the Financial Industry Regulatory Authority, the securities industry's self-policing organization.
While their promoters paint the 'free lunch' seminars as educational sessions, sometimes promising that nothing will be sold, 'they are designed to sell -- either at the seminar itself or later,' said Lori Richards, director of the SEC's Office of Compliance Inspections and Examinations. 'They're not educational events.'
The investigation conducted by the SEC, state regulators and FINRA found the use of scare tactics to get seniors to question their current investments, claims of fantastic returns with no risk, and "ringers" in the audience who would stand up and offer testimonials of how much they had earned."
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