Tougher Tax Times Ahead for Mutual Fund Investors
The Chicago Tribune reports that taxes paid by mutual fund investors, muted for years by the big losses of the early 2000s, are set to rise again:
The opportunity is fading for your fund manager to offset capital gains from selling winners in the fund portfolio with losses from having sold losers during the market tumble earlier in the decade.
'The last four years, we have been on a tax holiday of sorts, and the party is over,' said Tom Roseen, senior research analyst at fund tracker Lipper, a unit of Reuters.
The stock market advance since late 2002, combined with higher interest rates and increased dividend payments by many companies, swelled the amount of capital gains and income distributions paid by mutual funds to their investors.
Moreover, the turnover of portfolios, as active managers buy and sell in an effort beat market benchmarks, has increased.
As a result, Lipper, in a 114-page report issued this week, estimates that taxable-mutual-fund investors, who hold funds outside tax-deferred savings accounts, such as IRAs and 401(k)'s, saw a 56 percent increase in taxes from 2005 to 2006, to $23.8 billion.
Most mutual fund investors reinvest income and capital gains. But they still must pay the tax, even though they have a buy-and-hold investment strategy, Roseen said. So-called tax loss carry-forwards from the years of the market slide are being used up or expiring, he noted. They expire seven years after the date of the sale."
Subprime Loan Trouble Can Hurt Mutual Funds
If the formerly red-hot real estate market really tanks, it could drag the entire economy and stock market down with it. The Federal Reserve may even have to lower interest rates if the housing market crumbles in an effort to try to let the air out of the bubble slowly.
In an article for FOX News, MAXfunds co-founder Jonas Ferris focuses in on the core problem in the lending market. Surprise, its not predatory lenders.
Now that the real estate market has stopped its meteoric rise, the questionable loan practices and buyers' logic that was once the foundation of the late stages of the boom is starting to crack. Double-digit home price gains year-after-year hid a whole bunch of mistakes.
Home buyers and lenders were both duped into the belief that home prices always go up, so putting very little money down and "buying as much home as you could possibly afford" is always a sound investment strategy, regardless of the entry price."
Your mutual fund portfolio could take a hit when home prices fall. While most of the damage would be to real estate sector funds that invest in companies that could see their businesses sink if a glut of foreclosed homes hit the market – funds like Fidelity Real Estate Investors (FRESX), Third Avenue Real Estate Value (TAREX), T. Rowe Price Real Estate Fund (TRREX), American Century Real Estate Inv (REACX) - mutual funds that only own REITs (Real Estate Investment Trusts – primarily companies that operate properties for rental income) like Vanguard REIT Index (VGSIX) would also suffer.
See Also:
The Great Real Estate Bubble
Broadly speaking, there are three asset classes: stocks, bonds, and real estate. Cash, or money market funds, are really just a type of bond – very short term and very safe. While investors can gain access to all three with mutual funds, most own real estate directly. For many, real estate is their biggest, and often their best investment.
There are three main reasons real estate has generally been a successful investment for most people: 1) by buying a home, investors are effectively paying themselves rent 2) a mortgage is essentially a forced savings program paid into each and every month 3) because of the nature of the investment, real estate investors tend to avoid the poor decisions they make when they invest in other major asset classes.
Unfortunately, this last factor may be changing. ...read the rest of this article»
Advantage Mutual Funds
On the fence about whether to invest in mutual funds or individual stocks? You shouldn't be. For the vast majority of investors, mutual funds are the way to go. Barden Winstead in the Rocky Mountain Telegram reviews the inherent advantages mutual funds have over other investments:
Mutual fund investing may offer several benefits for individual investors. For starters, funds are managed by experienced, full-time money managers. They research market and economic trends, and then use the information they gather to make decisions about buying, holding or even selling securities to enhance returns.
Another distinct advantage is diversification, one of the basic tenets of successful investing. By spreading your money over a number of investments, a mutual fund doesn't depend on any one investment for your return. And on the other side of the coin, the impact of one poor performer on your entire portfolio is also reduced.
Mutual funds also offer several convenient features, such as automatic reinvestment, systematic payments and no-cost exchanges. If you choose to, you can automatically reinvest any dividends and capital gains (profits) to purchase more mutual fund shares. Mutual funds can also provide you with monthly or quarterly automatic withdrawals."
Winstead also cites mutual funds' liquidity and low minimum investment requirements.
Please note: Winstead works for a full service broker, and forgets to mention that many mutual funds are sold without loads of any kind. There is also no discussion of the main downside of mutual funds: expenses. Of course you can always find out if a particular fund has sales loads or is just expensive right here at MAXfunds.com by typing in the fund ticker symbol into our handy dandy Fund-o-Matic search window and then perusing our fund analysis page.
See also: MAXuniversity Part II
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.
Unusual Fund Mergers at Fidelity
One of the dirty little tricks of the fund industry is when fund companies merge the assets of mutual funds with poor performance records into better performing funds. Fund companies know that most investors make investment decisions based on past performance, and that lousy performers are unlikely to be marketable. Merging allows fund companies remove the lousy fund from their roster while keeping investor's money in the family. But Chuck Jaffe reports on recent fund mergers at Fidelity which are unusual because the funds being merged are all top performers:
The mutual fund industry is a survival-of-the-fittest world where management companies frequently kill off their weakest offspring by merging them into their best and healthiest issues. So when one of the industry's biggest players announces plans to merge two issues into sister funds, it's no big deal.
Unless the funds have an annualized average return of more than 21 percent over the last five years, are leaders in their respective asset categories and are being merged into funds with slightly lesser results and different investment objectives. And that's precisely what Fidelity Investments is doing in its recently announced decisions to merge Fidelity Nordic (FNORX) into Fidelity Europe (FIEUX) and Fidelity Advisor Korea (FAKAX) into Fidelity Advisor Emerging Asia (FEAAX).
The move is interesting for investors because observers believe it may be a sign of things to come, with management companies opting for less specialization and more economies of scale. Investors may also take it as a sign that there's little reason to go for extreme niche offerings."
This could be an acknowledgment that super-targeted funds are under increasing competitive pressure from lower fee (and tradable) ETFs (exchange traded funds).
Bond ETF War Heats Up – First Junk Bond ETF Starts Trading
Mere days after Vanguard’s new bond ETFs (exchange traded funds) started trading, ETF giant iShares sixteenth bond-focused ETF began trading on the American Stock Exchange.
The iShares iBoxx $ High Yield Corporate Bond Fund (ticker: HYG) is the first junk bond ETF to hit the market, with a record-setting 0.50% expense ratio – more than double iShares most expensive bond ETF and near five times as expensive as Vanguard's new offerings.
There are currently only two players in the bond ETF area: iShares and Vanguard. While bond ETFs by number are a fraction of the increasingly more eclectic ETF area, as Lee Kranefuss, CEO of Barclays Global Investors’ Intermediary and Exchange Traded Funds Business notes "…financial advisors are looking to generate income for their 'Baby Boomer' clients."
Baby boomer retirement - the wave has only just begun and we're already seeing the financial services industrial complex gearing up for the greatest battle for assets in the history of investing. Can't wait. We're already sick of advertisements with classic rock soundtracks or Dennis Hopper waxing poetic about hip retirements afforded by those who choose the right broker.
More info on the new iShares ETF
New Vanguard Bond ETFs Bad Now, Better Later
ETFs are popping up all over, but until now not many have invested in bonds. While some famous rich person once said, "gentlemen prefer bonds", ETF investors clearly do not. While Vanguard was a little late to the exchange traded fund game, in recent years they have put the pedal to the metal in ETF launches. Now Vanguard is launching four new bond ETFs:
- Vanguard Total Bond Market ETF (BND) - Benchmark: Lehman Brothers Aggregate Bond Index
- Vanguard Short-Term Bond ETF (BSV) - Benchmark: Lehman Brothers 1–5 Year Government/Credit Index
- Vanguard Intermediate-Term Bond ETF (BIV) - Benchmark: Lehman Brothers 5–10 Year Government/Credit Index
- Vanguard Long-Term Bond ETF (BLV) - Benchmark: Lehman Brothers Long Government/Credit Index
The benefit of the four new Vanguard ETFs is lower fees – 0.11% compared to the 0.15% - 0.20% cost of the few other bond ETFs. Expenses in bond investing are a big deal as bond yields are low today – the less taken out of your coupon payments, the better. Until trading volumes pick up, investors who don't buy and hold may get a better total price with iShares as thinly traded ETFs tend to cost more to buy and sell.
Vanguard claims, “By operating as share classes of existing funds (rather than as stand-alone funds or unit investment trusts), Vanguard bond ETFs will be able to provide lower expense ratios and broader diversification among issues and issuers than competing products can, resulting in greater credit replication and the potential for tighter benchmark tracking.” In practice, early investors are getting a raw deal.
As of a little after 1PM on April 11th, 2007, the market price for the iShares Lehman Aggregate Fund (AGG) is up 0.19%. The new Vanguard fund based on the same benchmark, Vanguard Total Bond Market ETF (BND), is DOWN 0.15%. AGG has traded 243,000 shares compared to BND’s 14,000.
Why the performance gap? Lack of liquidity means trouble arbitraging the fund with the underlying fund holdings - the mechanism that keeps ETF’s market price close to the NAV. Those who bought BND near the market close yesterday paid a roughly 0.50% premium to NAV, while buyers of AGG paid a 0.20% premium. That’s three years worth of "savings" in fund expenses down the tubes.
Until this problem works itself out, stay away. Or consider Vanguard Total Bond Index (VBMFX). Sure its 0.20% a year, but you buy and sell at NAV commission free (at Vanguard).
Other bond ETFs:
iShares iBoxx $ Investment Grade Co (LQD)
iShares Lehman 7-10Yr Treasury Bond (IEF)
iShares Lehman Aggregate Fund (AGG)
iShares Lehman Credit Bond Fund (CFT)
iShares Lehman Intermediate Credit Bond Fund (CIU)
iShares Lehman 1-3 Year Credit Bond Fund (CSJ)
iShares Lehman Government/Credit Bond Fund (GBF)
iShares Lehman Intermediate Government/Credit Bond Fund (GVI)
iShares Lehman 3-7 Year Treasury Bond Fund (IEI)
iShares Lehman MBS Fixed-Rate Bond Fund (MBB)
iShares Lehman Short Treasury Bond Fund (SHV)
iShares Lehman 10-20 Year Treasury Bond Fund (TLH)
Brokers to be Held Accountable for Bad Advice
A new ruling by the U.S. Court of Appeals in D.C. means that brokers will now be subject to the same regulatory standards as investment advisors. Previously brokers could sell you whatever crappy investment that made them the biggest commission and only pretend to have your best interests at heart, and then not get sued when those investments lost you a bundle:
The U.S. Court of Appeals for the District of Columbia ruled March 30 that the Securities and Exchange Commission doesn't have the authority to allow some brokers to sidestep regulation as investment advisers. The court's ruling makes all brokers fiduciaries, and increases their responsibility and liability to clients.
Investment advisers adhere to a different set of standards than the transaction-oriented broker, or registered representatives, as they are known in the financial-services industry. Investment advisers are mandated to provide advice that is in the best interest of a client. They can't recommend an investment product strictly for the purposes of a sale.
Rather, investment advisers have to take into account an investor's entire financial planning scenario and give appropriate advice. Registered representative brokers, however, could until now sell investment products that were in their best interest (say a higher-paying commission product) instead of in their client's best interest.
This is probably why more wealthy people have chosen investment advisers to manage their money. Can you trust that a broker employed by a large Wall Street brokerage firm is selling you the right type of investment product for your portfolio or is merely trying to make a buck?"
No, you can't. That's why the founders of MAXfunds.com manage money as commission-free investment advisors, not as brokers.
A 401(k) Cost 'Sticker'?
We review a lot of 401(k) plans for clients of our MAXadvisor 401(k) Planner service. Some are good, offering a wide variety of high-quality mutual fund investment options. Most, alas, are not. And one of the main reasons why so many 401(k) plans are lousy, writes John Wasik at Bloomberg, is their cost:
Matt Hutcheson, an independent fiduciary consultant based in Tigard, Oregon, says workers are overcharged by as much as 3.5 percent annually. 'Just 1 percent in excess cost to participants represents a wealth transfer of $25 billion to others -- each and every year,' he said.
Some of the most egregious charges are often hidden in retirement-plan documents and involve revenue shared between fund managers and middlemen.
So-called pay-to-play fees also saddle workers with charges that are loaded into your fund expense ratios. For example, a fund company may pay for 'shelf space' or inclusion in a 401(k) plan, also called a platform, says Tim Wood of Deschutes Investment Advisors LLC in Portland, Oregon.
'The participant may be paying up to 0.90 percent annually for a fund,'' says Wood, 'but is not able to determine what fee may have been paid to the platform provider. It is possible that a better option could have been made available to the participant from the entire universe of funds rather than only those that will agree to revenue sharing with a platform provider."
Wasik suggest a 'cost sticker' be included in monthly 401(k) statements that would disclose in an easy-to-read format exactly how much the funds in your 401(k) plan are charging you:
Employers have a huge incentive to open up the black box of 401(k) expenses. At least 16 lawsuits are pending that allege employers and insurers that offered plans failed to disclose third-party fees.
The reason for enhanced disclosure and identifying who is running your plan is simple. The more you know about how much you are being overcharged, the more you can lobby for lower fees. It's called having consumer choice in the free market."
Sounds good to us.
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