The Mutual Fund Industry Says They Are Doing a Terrific Job
A report released by the mutual fund industry's trade association (the ICI or Investment Company Institute) last week trumpets a decades' worth of changes made by fund companies designed to benefit shareholders - changes that include creating independent boards and audit committees tasked with protecting shareholder interests. But Chuck Jaffe (who has been writing about funds for much longer than one decade) says that fund companies still have plenty of work to do before earning a self-congratulatory pat on the back.
What you haven't seen in the last decade is those boards standing up regularly to management practices that are bad for investors. Plenty of funds have retained mediocre or lousy managers year after year, have pushed through fee increases or have failed to push management to close a fund to new cash after passing the ideal size for the strategy that is employed.
On the governance front, you have seen no steps by the big fund firms to set up multiple boards so that a director serves no more than, say, 25 funds. A director can only be so "independent" working for dozens of funds run by the same firm.
While boards have been marginally more active in dismissing subadvisers - outside hired guns brought in to run money - they appear no more interested in jettisoning in-house managers. They may be independent, but boards aren't firing insiders."
New GendeX Mutual Fund is Cooler Than You
Ultra-hip mutual fund company Thrasher Funds takes aim at the long-coveted young investor market with their just-launched and peculiarly capitalized GendeX Mutual Fund.
According to the firm's website:
The GendeX Mutual Fund was developed and is managed by young adult investors for young adult investors. A group of more than 60 million Gen X and Y'ers largely untapped by the financial market place...until now.
The GendeX Mutual Fund offers this demographic the opportunity to leverage their youth, along with a disciplined investment and savings strategy to help use what they already know to engage the stock market. We provide this Next Generation of investors the opportunity to invest in markets near to them, while providing the structure, fundamentals, and diversity currently available in investment products aimed at older generations.
We created The GendeX Fund for any investor who does not feel a connection to the traditional investment establishment. Welcome Home."
Besides a website featuring photos of attractive twenty-somethings and even an original soundtrack, the new no-load fund attempts to woo young investors by offering an initial minimum investment requirement of just $100 with enrollment in an automatic investment plan ($2,500 minimum for non-AIP investments). The fund is on the expensive side with a 1.5% (capped) total expense ratio. There is also a a $2 per month maintenance fee for accounts under $2,500, and a 2% redemption fee shares sold within a year of purchase – a bit high and long for a fund that owns mostly actively traded U.S. stocks... ...read the rest of this article»
Seventh Annual MAXfunds Turkey Awards
It's Not an Honor Just to be Nominated.
Gobble gobble. It’s that time of year again: Time for MAXfunds to nominate funds for our seventh annual fund turkey awards. With over 25,000 funds (counting all share classes and ETFs) out there, there are plenty of Butterballs to go around this Thanksgiving... ...read the rest of this article»
Can Money Market Funds Fail?
Got money? Then there's a good chance some of it's in money market funds. Investors now own over $3 trillion in these buck-per-share mutual funds that offer the liquidity of cash, the yield of Treasury bills, and the safety of …. well, that’s the part that's now in question.
Money market funds have only been around for about three decades, making them the young'ns of a mutual fund business that's existed in one form or another since before the Great Depression. Whenever we suffer a credit crisis of some sort, the same question comes up – are money market funds safe?
The number of articles written about the money fund industry's current troubles has been climbing in lockstep with the number of financial institutions taking multi-billion dollar write-offs related to mortgage “investments” (and we use the term loosely).
In last week’s Wall Street Journal, for example:
The risk to money-market funds is that a decline in the value of a single investment can cause them to "break the buck," or allow their net asset value to fall below the $1 level the funds are required to maintain.
FAF Advisors [a unit of U.S. Bancorp] is the latest in a string of about a half-dozen financial institutions that have taken steps to protect their money-market funds. The others include Bank of America Corp.'s Columbia Management Group, Credit Suisse Group's Credit Suisse Asset Management and Wachovia Corp.'s Evergreen Investments. No money-market fund has broken the buck in the recent turmoil.”
Like a top-40 radio station, the (mortgage) hits just keep on coming. This latest evolution of the mortgage disaster is now placing even the safest category of mutual funds in jeopardy. But just how risky are these funds?... ...read the rest of this article»
Ask MAX: Did My Fund Fall 41% In One Day?
Bobbie asks:
Can you please tell me what happened to the Fidelity Advisor Korea A (FAKAX) fund? It dropped 41% in one day. I have been holding this for many years and didn’t hear anything negative news that would have caused this."
On December 5th Fidelity Advisor Korea fund (FAKAX) paid out $3.06 worth of short term capital gains (taxed as income if you own the fund in a taxable account) and a whopping $13.03 of long term capital gains – a total of $16.09 or 42% of the fund price. These payouts are tax events – not actual drops like you see when fund investments fall.
Depending on what box you checked when you invested, you’ll either get a dividend check in the mail in the amount of 42% of your investment in the fund, or (more likely) the 42% dividend was reinvested for you into more shares of the fund. Either way you didn’t actually lose 42% of your money overnight. In fact the fund was actually up slightly on December 5th, adjusting for the distribution.
The bad news is if you own this fund in a taxable account (outside of an IRA or 401K), you’re on the hook for the taxes due on this amount come April 15th... ...read the rest of this article»
Six Funds from Fortune - Five Thumbs Down From MAXfunds
Fortune Magazine lists 'six standout mutual funds', inexpensive no-loaders run by managers that have posted category-beating returns over the last decade:
We started by screening for funds that have outperformed their peers by the widest margins over the past ten years, using data from fund-tracking firm Morningstar. To make sure our choices would be easy to buy and affordable to own, we ruled out names that were closed to new investors and focused only on no-load offerings with minimum investment requirements of $25,000 or less. We also limited our picks to funds with expense ratios lower than the average for their category. Finally, we eliminated specialized funds, as well as those whose current managers were too new to be primarily responsible for the fund's performance record."
Here's the complete list:
- CGM Focus (CGMFX)
- Manning & Napier World Opportunities (EXWAX)
- Oakmark Select (OAKLX)
- FBR Focus (FBRVX)
- Bridgeway Ultra-Small Company Market (BRSIX)
- Artisan International (ARTIX)
While owning lower fee funds with good long term track records is better than some fund investing strategies, you’ll likely underperform the market in the next 1-3 years if you buy the funds on this list. ...read the rest of this article»
To Tame Portfolio Upside, Consider Some Trendy New ETFs…
The Wall Street Journal’s personal finance guru Jonathan Clements is keen on some of the new fangled ETFs mutual fund companies are churning out by the fistful:
Wall Street has rolled out some 600 exchange-traded index funds, those stock-market-listed products that have exploded in popularity. Many, however, merely mimic existing mutual funds -- or are so narrowly focused that they're of little use to prudent investors.
But lately, all that's changed. ETF sponsors have launched intriguing funds in four key sectors, offering ordinary investors some great new ways to diversify"
The article notes the fabulous diversification offered by new ETFs investing in foreign real estate, international small caps, commodities, and foreign bonds:
Foreign Real Estate
iShares S&P World ex-U.S. Property (WPS)
SPDR DJ Wilshire International Real Estate (RWX)
WisdomTree International Real Estate (DRW)
International Small Caps
iShares MSCI EAFE Small Cap (SCZ)
SPDR S&P International Small Cap (GWX)
WisdomTree International SmallCap Dividend (DLS)
Commodities
Shares S&P GSCI Commodity (GSG)
PowerShares DB Commodity (DBC)
iPath Dow Jones-AIG Commodity (DJP)
iPath S&P GSCI Total Return (GSP)
International Bonds
SPDR Lehman International Treasury Bond (BWX)
Adding these funds will add diversity: your boring U.S. stock, bond, and money market funds will go up in coming years while the new ETFs will go down. That’s diversity we can do without. ...read the rest of this article»
Big Mutual Fund To Buy Merrill Stock At Discount
Today Merrill Lynch (MER) announced they would be selling stock in a private placement to two big investors, Singapore based investment firm Temasek Holdings and famed fund managers Davis Selected Advisors. Davis manages – among others - $50 billion in assets Davis NY Venture Fund (NYVTX) and is one of the most famous mutual fund companies in the business. In the private stock offering, Temasek will get up to $5 billion in Merrill stock, Davis up to $1.2 billion.
Merrill Lynch (NYSE: MER) today announced it has enhanced its capital position by reaching agreements to raise up to $6.2 billion of newly issued common stock in a private placement with Temasek Holdings and Davis Selected Advisors. Merrill Lynch expects these transactions to close by mid-January 2008.
'One of my first priorities at Merrill Lynch was to strengthen the firm’s balance sheet, and today we have made great progress towards that by bolstering our capital position through these investments and our announced sale of Merrill Lynch Capital,' said John A. Thain, chairman and CEO of Merrill Lynch. 'The benefits of these transactions are not limited to strengthening our financial position…'"
The real benefit is the investment bank needs to raise capital to offset mega-billions in losses related to overly enthusiastic wheeling and dealing in the U.S. mortgage market. ...read the rest of this article»
Some Top Fund Managers Sour On Economy
Bob Rodriguez manages the (closed) small cap value fund, FPA Capital (FPPTX), and bond fund FPA New Income (FPNIX). He has been hoarding a large cash stake for quite some time, which hasn't been such a smart move in general for stocks, but considering this year's crummy small cap stock returns has helped him stay competitive with other similar funds.
Morningstar noticed Rodriguez's recent move to the even more dour camp of PIMCO's Bill Gross when it comes to America's future:
...[Rodriguez] recently announced he put a halt to purchases of stocks and high-yield bonds at both portfolios on Dec. 14. His decision is a reaction to the subprime mortgage-induced credit crunch, which he expects to worsen in coming months. Rodriguez says he'll review his actions weekly, but he doesn't anticipate any change in course until February or March 2008.
Rodriguez's move is virtually unprecedented. Many investors, including Rodriguez himself, aren't shy retreating to cash when they're nervous. But few money managers have ever publicly foresworn stocks and bonds altogether."
When your smarter fund managers are starting to sound this pessimistic, it may be time to reassess your expectations for stocks and bonds in 2008.
Go Big Or Go Index?
The largest funds (in terms of investor assets) are often the ones with the best track records – they don’t get big by accident. These monster funds deliver huge profits to the companies that run them, so they can afford to hire the best managers. Giant funds also tend to have lower fees because they have so many shareholders to cover fund operating costs. Sounds like a recipe for continued success.
So what is the better investment – a big successful actively managed fund or an index fund?
Morningstar takes a look back at how the ten biggest funds of 1997 in the large cap blend category did in the ensuing ten years.
Of the 10 biggest large-blend funds back in 1997, six have outperformed the majority of their rivals since October 1997. We recommended five of those funds for purchase at that time….The other four funds in that group of 10 have underperformed their typical large-blend rival since 1997. True, we did recommend all four funds at the time…"
The takeaway from this article appears to be that big funds do well (and that Morningstar seems likes recommending big funds…). But a 60% success rate is not particularly impressive.
Throwing darts at large blend funds in 1997 and falling asleep at the wheel for ten years should lead to a 50% success rate – odds are half of the dartboard funds would be in the top half of the performance curve... ...read the rest of this article»