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august 2007 performance review

09/18/07 - Powerfund Portfolios Performance Review

August came in like a lion and went out like a lamb. Miraculously the stock market recovered early losses – not all the losses from July, but the losses from early August. At the end, the S&P 500 was up 1.5% for the month, just outpacing the Dow’s 1.4% return. The real action was in tech stocks, with the NASDAQ up 3%. Even small cap stocks came back (though are still underperforming over the last year) with a 2.52% gain in the Russell 2000 small cap index.

How Some Mortgages Are Like Load Funds

09/14/07 - 'Best Funds' Lists, Sub Prime Woes

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...

Too Much Fund Focus – A Bad Thing?

09/12/07 - Investing Advice, Investing Tips

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?...

There's No Such Thing as a Free Lunch

09/11/07 - Watch Out

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."

LINK

Safe Money Market Fund Yields Plummet

09/07/07 - Sub Prime Woes, Subprime Woes

It looks like the era of earning a nice risk-free 5% is over. The Federal Reserve hasn’t even lowered the Fed funds rate (the main driver of money market yields) from the current level of 5.25% and many good low fee money market funds are already yielding closer to 4%.

Uncertain times on Wall Street have sent even high-risk investors running for cover. Demand for the lowest of the low risk investments – U.S. Government Treasury bills – has sent yields way down. Today’s terrible jobs number and continued boo-scary foreclosure news has all but assured investors that interest rates are heading down fast and furious, lest the economy tailspin into a depression.

What this all means is a nice old fund like Vanguard Treasury Money Market Fund (VMPXX) yields 4.48%, 10% less than just a few weeks ago. Higher fee money market funds like T. Rowe Price U.S. Treasury Money (PRTXX) are now yielding 3.88%. As new money goes into these funds, their managers are forced to load up on lower yielding debt, which waters down the higher-yield holdings.

Interestingly, money market funds that own CD’s and commercial paper (highly rated, sort term debt backed by corporate America, not Uncle Sam) still yield around 5% (and higher). The perception is that this debt now has some risk - if not default risk than liquidity risk. Vanguard Prime Money Market Fund (VMMXX) yields 5.1%. Fidelity Cash Reserves (FDRXX) yields 5.11% - even more than it did a few months ago. Both funds tip the scales at about $100 billion in assets.

Apparently people don’t like seeing “Countrywide Financial Corp” in their money market portfolios anymore.

And there are some issues here...

Don't Forget the Little Guy

09/04/07 - Investing Tips

Jonathan Burton at Marketwatch says that when shopping for mutual funds, don't just go with the big boys like Janus and Vanguard. Smaller fund firms tend to deliver better returns than industry giants:

The best-performing small firms often do better than similarly high-ranking large firms, regardless of whether they own small-cap, midcap or large-cap stocks or follow a value or growth investment style. Forty percent of money managers in the top 25% of their peers have less than $2 billion in total assets under wraps, according to research from financial-services firm Northern Trust Corp.

For investors, the message is that giving money exclusively to industry giants shuts out a large group of talented stock pickers. Broadening horizons to include small firms boosts the odds of finding innovative managers with results in the top 25% of their peers, says Ted Krum, a vice president at Northern Trust who helps institutional clients with money-manager searches.

New research Krum expects to release this fall looked at results over five years through 2006 for managers investing in small-cap and midcap stocks. It found that among firms in the top 25% of their class, the smallest players, handling less than $1.4 billion, delivered returns almost two percentage points better than the giants.

Tiny investment shops returned 16.5% annualized on average in the period, which covered both bull and bear markets, while firms of $1.4 billion to $17.9 billion in size averaged competitive 16% gains, the forthcoming research says.

Performance slipped as assets grew, the study reports. Midsize firms with $17.9 billion to $66.5 billion gained 15.6% on average, while the biggest outfits, managing $66.5 billion to $785.4 billion, posted average gains of 14.7%."

Funds from smaller fund companies mentioned in the article:

Auxier Focus Fund (AUXFX)

Al Frank Asset Management (VALUX)

Berwyn Fund (BERWX)

Berwyn Income Fund (BERIX)

Amana Trust Growth Fund (AMAGX)

Amana Trust Income Fund (AMANX)

Sextant International Fund (SSIFX)

LINK

MAXadvisor Powerfund Portfolios Update

09/03/07 - Powerfund Portfolios

Rings of Fear

09/03/07 - Powerfund Portfolios Feature Article

August certainly didn’t seem like a month that would end better than it began. The S&P 500 was up just over 1% - not exactly a barnburner, but given the turmoil in July and early August, nothing short of a miracle - and certainly the result of some sort of divine intervention. That divine intervention involved no less a deity than the Chairman of the Federal Reserve himself, who in mid-August reversed what appeared to be a true stock market death spiral

Forbes Honor Roll

08/31/07 - 'Best Funds' lists, 'Best Funds' Lists

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...

Obvious Advice of the Week

08/29/07 - Investing Tips