What's New

Want More ETFs? Your Wish Has Come True.

If Axl Rose of Guns and Roses fame wrote songs about mutual funds, he might have had a hit with, 'Welcome to The (ETF) Jungle, Baby', especially after yesterday's 3-0 Securities and Exchange Commission vote. As reported in the Wall Street Journal:

The Securities and Exchange Commission voted 3-0 yesterday, as expected, to propose changes that would allow exchange-traded funds to be introduced quickly without review by federal regulators and give mutual funds more leeway to invest in ETFs.

Under the proposal, most ETFs could be brought to market directly, saving sponsors the time and expense of obtaining approval from the SEC. The speedier approach would apply to passively and actively managed ETFs that trade on national securities markets and provide daily pricing to investors.

...SEC Commissioner Paul Atkins endorsed the new approach, saying the agency's ETF review process has sometimes taken years, rather than months, and that innovative product ideas may wind up getting shelved.

...SEC Chairman Christopher Cox called the proposal 'a significant step forward for investors' that would allow new ETF products to be brought to market sooner, and provide similar disclosure documents to investors in mutual funds and ETFs. Currently, ETF investors receive a full-blown prospectus but the SEC proposal calls for such investors to get a shorter summary, in line with a pending SEC proposal for mutual funds.

Actively managed ETFs that don't provide daily information about their portfolio holdings wouldn't be covered by the SEC's proposal."

Perhaps the SEC is willing to give new exchange traded funds the benefit of the doubt because they are generally lower fee than ordinary mutual funds, and to them cheapness outweighs concerns about potential risk. Perhaps they are concerned they have an antiquated regulatory regime (true) that isn't keeping pace with ever more newfangled exchange traded fund like products, like exchange traded notes.

But this diminishing SEC scrutiny will only encourage the launching of ever wackier ETFs. While we have nothing against ETFs, our experience is that the more targeted a fund, the more fund investors as a group tend to lose. Adding intra-day trading, commissions, and bid / ask spreads will likely only exacerbate this problem.

We're not saying the government should get in the way, only that getting out of the way so investors can get more ETFs more quickly could expose some investors to less than desirable products. Lets not forget that in theory all the innovations in mortgage lending were a benefit to consumers and in some cases can save money over a traditional 30 year fixed mortgage. Trouble is, the typical home buyer probably didn't benefit from the innovation of a negative amortization, no money down, adjustable rate 5/1 ARM linked to LIBOR. Perhaps the same will eventually be said about a double inverse China tech stock ETF.

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The First Rule Is...There Are No Rules

03/05/08 - Investing Advice

Choosing winning mutual funds is tough business.The experts regularly fail because past winners often become future losers. If we had to leave our readers with one sentence of fund picking advice, it would be this: choose low-fee funds that are not perennial losers in out-of-favor fund categories, and stick with them for a few years.

An article in yesterday's Financial Times offers a humble review of fund data to consider (much of which you can find right here on MAXfunds.com) when choosing your mutual fund investment:

Although many investors are swayed by evidence of excellent recent performance, statistically, it is unlikely that fund managers will manage to do well consistently over a period of years.

'There is some evidence that last year’s winners tend to repeat next year. But it is very slight. Mostly the effect comes from the fact that really bad funds stay bad. Their expenses are high, and their choices stay haphazard,' said Paul Samuelson, an academic, in his article 'The Long-Term Case for Equities', which appeared in the Journal of Portfolio Management in 1994.

However, this does imply that it is worth considering performance, if only to avoid the poor performers.

...When choosing an investment fund, performance is important. But it is also important to bear in mind that even excellent performance can be eaten up by investment management fees. A cheap index fund might do better for the investor than a well-managed active fund, so performance should not be the only consideration."

Using statistical measures of risk-adjusted return are useful but far from an end-all-be-all. Often funds that delivered have delivered good risk-adjusted returns in the past go on to deliver poor risk-adjusted returns in the future.

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Fund Bad, ETF Good?

03/04/08 - ETFs, Investing Advice

Yield Overreach

03/03/08 - Powerfund Portfolios Feature Article

Over the last year, the strategy that has hurt investors (mostly large institutional ones) the most has been, for lack of a better term, the "yield reach." We'll define this strategy as buying a riskier income-oriented investment in order to attain a higher yield.

Bill Gross On Today’s Muni Bond Crash

02/29/08 - Experts Only, VUSTX, VWLTX

Do As Suze Says, Not As Suze Does

02/28/08 - Investing Advice

OMG! Vanguard Shows GMO The Door

02/27/08 - Breaking News, VEXPX, VUVLX

Vanguard U.S. Value (VUVLX) and Vanguard Explorer (VEXPX) may be among the cheapest actively managed value and growth funds (respectively) around, but Vanguard apparently has had it with their lagging performance:

Vanguard's Quantitative Equity Group (QEG) has begun managing the portions of Vanguard U.S. Value Fund and VVIF–Small Company Growth Portfolio previously managed by Grantham, Mayo, Van Otterloo & Co., LLC (GMO). QEG has also assumed primary responsibility for the assets previously managed by GMO for the Vanguard Explorer Fund.

QEG joins AXA Rosenberg Investment Management LLC as a co-advisor for Vanguard U.S. Value Fund. QEG now oversees approximately one-third of the fund, employing a quantitative investment approach to select stocks from the Russell 3000 Value Index that it deems attractive.

QEG will share advisory responsibilities with Granahan Investment Management for managing VVIF-Small Company Growth Portfolio. The firm will also expand its portfolio management role for Vanguard Explorer Fund, assuming responsibility for most of GMO's former portfolio, with the remainder allocated to the other advisors of the fund.

"Vanguard brings a vast amount of experience and expertise to its quantitative mandates and the funds' boards of trustees are highly confident in the group's ability to complement the strategies of the existing advisors and produce competitive long-term returns," said Mr. Brennan. "GMO has provided advisory services to Vanguard funds since 2000 and, on behalf of our shareholders, we thank them for their efforts."

Vanguard U.S. Value has been a fund favorite around here since 2002, largely because of low fees, and GMO's detailed and often doomsday-grade outlooks on the U.S. markets. While a MAXfunds favorite it has beat the S&P 500, but more recently the fund's managers have made some missteps. We have downgraded our outlook for large cap value funds in general due to years of outperformance and asset growth at many value funds - but this fund has underwhelmed in a weak category recently. In 2007 the fund underperformed the Russell 1000 Value Index (an index of larger cap value stocks) by about a half percent. In 2006 the fund missed the mark by around eight percent.

GMO (Grantham, Mayo, Van Otterloo) uses a quantitative take on value investing: like many other value managers, they screen for low value stocks (preferably ones that are unpopular with other investors) by looking at their interpretation of intrinsic value and price-to-normalized earnings. In addition, they look for stocks with some positive momentum. Unfortunately, this screen put GMO into too many retailers like Home Depot (HD), Dollar Tree Stores (DLTR), and Kohl's (KSS), financial services companies like Citigroup (C), Bank of America (BAC) and First American (FAF), and healthcare stocks like Pfizer (PFE), Merck (MRK), Unitedhealth (UNH).

GMO manages some $150 billion (and falling after this news...) largely in foreign stocks. GMO's own foreign funds (institutional funds) have done well next to competitors, however, their own U.S. stock funds have performed near the bottom of the heap.

The funny thing is we expect GMO's foreign funds to have more problems going forward than their domestic funds. By dumping GMO, Vanguard is in effect playing the same game they tell us not to play: performance chasing. (Or perhaps Vanguard just wants to manage more of their portfolios themselves. Better for profit margins...)

We are currently reviewing U.S. Value for possible expulsion from Our Favorite Funds lists, large cap value category.

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Your Fund Company As Influence Peddler

02/26/08 - Insider Info

Fund investors may not realize it, but some of the management fees they pay each year may be going to Washington lobbyists.

Mutual funds, which are technically called investment companies, have a trade association, the Investment Company Institute, that looks out for their best interest. Sometimes these interests are not the best interests of actual fund shareholders. Apparently the ICI was active in 2007 nuzzling up to politicians:

The mutual fund industry's trade association, the Investment Company Institute, paid Covington & Burling $240,000 in 2007 to lobby on tax issues.

The firm lobbied Congress and the Treasury Department on the taxation of mutual funds and mutual fund investors, according to a form posted online Feb. 13 by the Senate's public records office."

Lobbists may be ranked just above lawyers on many people's least popular list, but in this case the ICI's lobbying could be completely benign. Fund companies would like to get favorable tax treatment for fund shareholders. This would be good for shareholders and fund companies would have a more marketable product. However, sometimes fund companies want to rub out competing products (exchange traded notes perhaps...) that may offer tax and fee savings to investors who would ordinarily choose mutual funds.

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Love Thy Neighbor, Pay Their Fund Taxes

02/22/08 - Mutual Funds and Taxes

Depression Era Funds A Good Bet?

02/21/08 - Watch Out