MAXadvisor Powerfund Portfolios Update
Note to subscribers of the MAXadvisor Powerfund Portfolios: this month's portfolio performance data update and commentary has been posted. Subscribers can log in by clicking here.
The MAXadvisor Powerfund Portfolios is a collection of seven model mutual fund portfolios ranging in risk from very safe to quite aggressive. Each portfolio is made up of a group of terrific, no-load, low-cost mutual funds that are carefully chosen to work together to lower volatility and increase returns. You can learn more about the MAXadvisor Powerfund Portfolios (and sign up for a free trial if you like what you see) by clicking here.
It's Not All Sub-Prime's Fault
Sure, the sub-prime mortgage mess played a big part in this week's wild market gyrations, but it wasn't the only factor. Charley Blaine at MSN Money says there's plenty of blame to go around, and points the finger at hedge funds, quant models, even the securities and exchange commission.
How Safe Is Your Money Market Fund?
In a market that has seen even supposedly super-safe funds lose upwards of 6% in a single day, are even safer-than-super-safe money market funds immune from getting walloped? Gail MarksJarvis at ChicagoTribune.com writes that while companies that run money markets do everything they can insure that investors in their funds won't lose money, it's not impossible that the sub-prime mess could take a toll:
The models used by Wall Street to design the securities have been a flop. As a result, the securities have plunged in value. Some financial firms are laying low, holding onto the sludge, and hoping that if investors calm down the securities will regain some of their value.
Money market funds are allowed to invest in the mortgage-related securities, but only the safest slices -- or traunches -- of them; such as those rated AAA or AA.
Still, in the current environment, even those slices have lost value, and investors are learning that the top AAA rating on the mortgage-related securities is not akin to AAA in corporate bonds."
But don't panic. While money market funds are not backed by the government, the odds of a money market meltdown are slim:
According to federal rules, the securities within money market funds are supposed to mature quickly -- no longer than 13 months for securities, or 90 days on average for all the investments within a fund. Within those constraints, money market funds can also hold 'illiquid securities' -- or securities, like the mortgage-related bonds. 'Illiquid' means the bonds cannot be sold easily. Of course, in today's nervous market, institutions holding the mortgage-related securities can't find willing buyers at decent prices.
By requiring money market funds to keep risky securities at a minimum, and mandating that most securities mature quickly, the funds have had a reliable track record.
The industry prides itself on guaranteeing that funds "don't break a buck." In other words, if you put a dollar into a fund, you can get that dollar out.
Still, money market funds are not insured by the Federal Deposit Insurance Corporation like bank savings accounts are. So investors cannot take them for granted."
Contact Your Congressperson
We here at MAXfunds.com obviously are pretty fond of mutual funds. After all, we've been encouraging readers of the site to invest in them since MAXfunds began way back in 1999 (though with more than a healthy dose of criticism and contrarian opinion). But while we think mutual funds are the best investment choice for just about everybody, they aren't perfect. One of their biggest drawback is the way investors in mutual funds are taxed.
When you invest in a mutual fund, you are essentially handing your money over to somebody else to invest for you. Because you lose direct control over your investments, you also lose control of your tax situation. If a fund manager sells a stock for a profit and has no losses to counter the gain, you are liable to pay a tax on that profit even if you haven't sold any of your shares in the fund. That means in any given year you could be hit with a monster tax bill clear out of left field - even if you didn't sell a single share of the fund.
Chuck Jaffe from Marketwatch reports on a law pending in Congress that would dramatically change how mutual funds are taxed.
The Generate Retirement Ownership Through Long-Term Holding Act of 2007 -- call it the GROWTH Act -- was introduced in June by Rep. Paul Ryan, R-Wis., effectively rehashing a sound proposal that he has put forth several times since 2003. The bill would allow fund investors to defer capital gains taxes on reinvested distributions until the fund is sold, a change that would simplify personal accounting, make fund investing more attractive and that would put funds on a similar tax plane as stocks."
The effect would be to turn every mutual fund portfolios into a kind of junior Roth IRA:
Allowing an investor to save in a fund without paying taxes on distributions indefinitely effectively creates the "lifetime savings account" that so many politicos have kicked around in recent years. For a buy-and-hold investor, it turns a "taxable fund account" into the equivalent of a traditional IRA, without the contribution limits. (Traditional IRAs require payment of taxes only upon withdrawal but allow investors to trade in and out of securities without generating a tax bill; in an ordinary taxable account, every trade is a taxable event.)"
For fund investors, we think this is a no-brainer. If you agree, why not drop your congressperson a line and tell them to get behind it. For many investors it would be a bigger investing tax break than the recent dividend tax cut.
What's Happening?
Yikes! It's a Dow-dropping-subprime-panic-triple A-summer-meltdown. Jim Juback at MSN Money explains the reasons behind the latest Wall Street wipe out in language you don't have to be Ben Bernanke to understand:
How did all this happen? As any good con man will tell you, the success of a con depends on the mark wanting to believe. The victim, in essence, talks himself into getting fleeced.
In this case, the global investment community wanted to believe that Wall Street and other centers of financial engineering could manufacture investment-grade, long-term debt to meet the huge demand of insurance companies, pension funds and central governments for predictable, long-lived and safe interest-paying investments. Because the need for this paper was so great, these marks were willing to suspend belief. They knew in their heads that you can't manufacture investment-grade debt. But in their hearts they wanted to believe. They needed to believe. They had to believe.
Because, you see, it's the only way out for an aging world that's running a huge shortage of the real stuff. So investors were all too willing to buy fake investment-grade paper -- at prices commanded by the real investment-grade stuff -- until finally the con was revealed as assets were marked to market at 50% or less of their assumed value."
So basically it's all old people's fault.
MAXadvisor Powerfund Portfolios Update
Note to subscribers of the MAXadvisor Powerfund Portfolios: August's feature article has been posted.
Last week's 585 point drop in the Dow was the worst in five years. What does the market's recent volatility mean for MAXadvisor Powerfund Portfolio investors? Subscribers click here to find out.
The MAXadvisor Powerfund Portfolios is a collection of seven model mutual fund portfolios ranging in risk from very safe to quite aggressive. Each portfolio is made up of a group of terrific, no-load, low-cost mutual funds that are carefully chosen to work together to lower volatility and increase returns. You can learn more about the MAXadvisor Powerfund Portfolios (and sign up for a free trial if you like what you see) by clicking here.
Janus Back In The Game
Just a year or so after we slammed Janus in 2000 as being a fund family to avoid, investors started to withdraw money from the formerly hot fund family. Those redemptions accelerated as Janus' Go-Go growth funds tanked and the run for the exits really kicked in to overdrive when it became known that Janus was tainted in the fund timing scandal.
Apparently Janus just had their first quarter with net new money into Janus-managed funds in six years. While it’s no longer the $10 billion-a-month and up Janus of yesteryear, at least they are back in the game:
Janus reported on Thursday its core funds attracted $1.5 billion in long-term net inflows in the second-quarter, the first quarterly net inflows since 2001. It also posted a 57 percent jump in second-quarter profit, beating analysts' expectations.
Janus, which is focused on the 'growth' style of investing, started to see outflows from its funds when the tech bubble burst in 2000-01 and 'growth' style went out of favor.
The outflows worsened when Janus was caught up in the industry-wide mutual fund trading scandal of 2003-04, leading to a change in management."
These days there are three fund families with around a trillion or so in assets – Fidelity, Vanguard, and American Funds. Fortunately for Janus, strong markets and solid fund performance has carried them back to just under $200 billion. For comparison, Dodge and Cox has almost this much money in just four funds, and Janus had over $300 billion before the fall.
We’ve actually been recommending a few Janus funds in recent years, and list quite a few in our quarterly favorite fund report (free for subscribers of the MAXadvisor Powerfund Portfolios).
Homes Sink Stocks
Yikes! Lately it seems like it takes something along the line of a big drop in the Chinese market or an exotic macro problem to make the market fall fast and furious. Not this time.
Stocks plummeted on Thursday, with the Dow industrials tumbling more than 300 points, on signs of further weakness in the housing market and deteriorating conditions for corporate buyouts....
...The daily drumbeat of bad news on housing on Thursday came from two of the largest home builders, as D.R. Horton Inc and Beazer Homes posted quarterly losses.
Financial shares took a beating on growing evidence that problems in the subprime mortgage market are spreading, making financing the corporate buyouts that drove the market's spring rally more difficult."
This drop was all about the American dream - your house. Apparently all those billions of dollars in loans to people with no money down and questionable finances wasn't such a good idea after all. What will turn a bad situation into a near crisis is the fact that the homes backing up these loans aren't worth anywhere near the housing boom peak.
This past week marked the point where even the economic optimists realized this problem isn't just about subprime loans, and it probably won't stay neatly contained in the housing sector.
Ahhh…That New Fund Smell
New funds have some advantages over larger, older funds, as noted in a recent Fortune article about interesting young funds:
Some of the rookies, though, have genuine all-star potential, whether because of a smart strategy, proven management, or - as you'll find in the funds that follow - a combination of both. Adding to their appeal, new funds can actually have some advantages over their more established counterparts. They tend to be smaller, for example, allowing managers to invest more nimbly."
But while new funds do offer real competitive advantages over their old-fogey counterparts, there is one critical downside for being a Ponce de Leon investor: new funds are often launched to meet ill-timed investor demand. We saw new tech and internet funds launched when fund investors were infected with dot-com mania, new commodity oriented funds after a hot run in oil and gold, and a flurry of international funds after a run of foreign stocks beating the U.S.
A winning fund investor should be open to new and small funds, but ask themselves: is this just a fund being launched to satisfy performance chasing investors...or is this a genuinely good time to buy this type of fund from this manager or company?
Bring in the Love, Push out the Jive
Lately the market has had more ups and downs than Lindsey Lohan's personal life. CNNMoney.com looks at five no-load mutual funds that have succeeded in capturing market gains while limiting losses during downturns.
1. Fairholme Fund (FAIRX)
2. Third Avenue Value Fund (TAVFX)
3. Jensen Fund (JENSX)
4. Neuberger Berman Fasciano Fund (NBFSX)
5. Royce Special Equity Fund (RYSEX)
Of the five, two (Fairholme and Neuberger Berman Fasciano) are currently included in the MAXadvisor Our Favorite Funds list – our hand-picked list of the best funds in each fund category. Jensen is no longer a fund favorite, but was in the past. We recently sold or stake in Fairholme in our MAXadvisor Powerfund Portfolios because the fund has become too popular with investors (thanks to lists like the above…).
We don’t think value in general and small cap value in particular are going to save a portfolio from the next major market downdraft. What worked in 2000-2002 won’t necessarily work today.
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