WHAT'S NEW? Our Latest Updates!

Less is More

November 16, 2007

In a move that would have been timely about a decade ago, the Securities and Exchange Commission is 100% in agreement to think about ways to help fund investors compare funds.

Under the proposed changes, investors would receive a summary of information about a fund, on paper or electronically, depending on their preference. The SEC also proposes encouraging mutual-fund companies to make greater use of the Internet, giving investors the choice to request a printed copy of the full prospectus or obtain more-detailed information online.

The SEC will seek public comment on the proposal for 90 days. Adoption of any changes requires a second SEC vote."

Pretty soon we should see summary info about funds online and maybe companies like Vanguard will have websites to compare their funds. It’s just amazing what The Internets can do.


The Mutual Fund Industry Says They Are Doing a Terrific Job

November 12, 2007

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

November 8, 2007

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.

The fund's investment strategy also comes with a hipster hook. Fund manager James C. Perkins, Jr. will identify attractive investments using what he calls the Demographic Convergence Thesis a "proprietary model seeks to capitalize on the convergence of what the firm believes to be two generational socioeconomic trends: the Baby Boomer generation’s increased life expectancy, elongated career life cycle, along with its member’s propensity to emulate younger lifestyles, and simultaneously, Generations X and Y’s increased access to capital and increasingly younger financial maturity." The fund's current holdings list includes companies like Apple (of course), Volkswagon and American Apparel (Endeavor Acquisition Corp - EDA).

So should you re-route some of your disposable skateboard/sushi/tattoo money to the GendeX? While we're (alas) no longer in the target demo, we’re not against investments targeted to younger investors. Any company that can get people to invest at an earlier age is good by us – it wasn’t that long ago (seven years ago actually) that we held our MAXfunds.com Young Investor Summit in New York City.

As for the actual investment strategy, we’re a little suspicious of demographic trend investing, notably because noted Dow 40,000 futurist Harry Dent's underwhelming AIM Dent Demographic Trends Fund. That said we’ve always felt Wall Street doesn’t really understand young people, fads, and trends. Traditional investors don’t really get video game stocks, they missed the Apple turnaround, and generally get on board of a trend after it takes off – like Urban Outfitters (URBN). We’ll have to see if these fund managers have that finger on the pulse of the young.

For other young investors looking for a more traditional choice, we would go with a good old-fashioned investment in the decidedly un-hip Vanguard Target Retirement 2050 Fund (VFIFX). Vanguard does have a $3,000 minimum investment requirement, but subsequent investments can be as low as $100.

Like other lifecycle funds, this Vanguard fund gets increasingly more conservative as retirement nears and is meant to be a one stop invest-and-forget portfolio.

See also: Ask MAX: What does MAX think of the Vanguard Target Retirement Fund?

Capital Gains Questions?

November 5, 2007

Mutual fund coverage at The Motely Fool is, to put it mildly, hit or miss - but today they post a nice explanation of what is a confusing issue for many fund investors: capital gains distributions.

When a capital gains distribution is made, the fund's value is adjusted downward accordingly. If you buy just before the distribution, you'll face taxes on an investment you didn't own for very long -- and in many cases, one you never owned. Funds often wait nearly the entire year before paying out gains from a sale early in the year."

The article lists several legitimate techniques you can use to minimize your capital gains exposure, including buying funds with high capital gains potential through non-taxable accounts like your IRA and investing in ETFs (which aren't subject to capital gains distributions).

One note: unlike most fund reporters and analysts (including the author of The Motley Fool's article) we are not big fans of reinvesting dividends in funds held in taxable accounts unless the fees to buy other funds with the distributions are excessive (loads, commissions). It can be very difficult to determine your cost basis later when selling after random reinvest points determined by fund distributions. We prefer putting the cash from various fund distributions into new funds, or to rebalance your current stock / bond / cash stake.


Stable Value – Good Or Bad for 401(k)s?

October 31, 2007

Stable Value funds are low risk choices in many 401(k)s. The funds create the illusion of stability by owning bonds and getting some big insurance company to eat any fluctuations in the fund’s price that result from bond prices changing when interest rates move.

Stable value funds tend to benefit investors over more traditional bond funds when interest rates rise sharply, but underperform when rates fall. But creating the illusion of stability isn't free, and you can expect stable value funds to underperform low fee bond funds over long periods of time.

The insurance industry has done a good job of getting this product into 401(k)s (where they now represent around 10% of all plan assets). Unfortunately for the insurance business, stable value funds are not going to be allowed in new automatic enrollment choices – the plan to opt in employees to their 401(k) as if they actively took steps to save. Apparently the labor department would rather see young investors splurging on stocks with a traditional bond chaser than use the nervous nelly stable value choice. Looks like the fund lobby beat the insurance lobby on this one.

A recent WSJ article notes the usefulness of stable value funds in 401(k)s:

But others say these funds, which are hybrids of fixed-income investments and insurance policies and are found in 401(k) plans and other retirement accounts, can have a place in a portfolio's conservative corner. They offer a good parking place for money that may be needed soon and may also work as a substitute for cash or as a holding for extremely risk-averse investors…

In some ways, they are similar to bank certificates of deposit. They aim to protect an investor's principal, and offer a yield that's typically at least a percentage point higher than that of a money-market fund with less volatility than a short-term bond fund….

We’re not so sure the portfolios of stable value funds are as rock solid as everyone thinks. Some of them might have invested in some once top investment grade mortgage debt that has suddenly fallen far down the bond quality totem pole. Unlike CDs, they are not guaranteed by the U.S. government.

In general we prefer low fee short term bond funds or money market funds for the safe yield allocation in a 401(k). Unfortunately sometimes stable value is the only safe choice in a 401(k) plan, or the bond or money market fund choices are expensive and crappy.

One oddity – why are ordinary super safe bank CD’s not in 401(k)s for a similar deliverable: no volatility and no risk?


Perplexed about ETFs?

October 29, 2007

According to InvestmentNews, most investors don't know the difference between a mutual fund and an exchange traded fund.

a recent survey of 500 individual investors by Rydex Investments of Rockville, Md., found that 53% did not know the difference between an ETF and a mutual fund. Thirty-eight percent of those surveyed didn't know what an ETF is."

Well here's the short answer: the key difference between an ETF and a mutual fund is that it can be bought and sold throughout the day (and can change in value throughout the day), like a stock. A mutual fund is priced just once, at the end of each day.

There are other differences between ETFs and mutual funds - like ETFs are not actively manged unlike most mutual funds. Some of the features investors find attractive about exchange traded funds are their low fees and a fund market price that, because of a complex arbitrage system, doesn't vary much from the actual fund NAV (or net asset value), a key shortfall of the other exchange traded funds: closed end funds.


Go Big Or Go Index?

October 23, 2007

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.

The real question is how have actively managed fund done against the most similar index funds. In this case the comparison is easy because the Vanguard 500 Index (VFINX) is a large cap blend fund.

Here are the eight mega-funds the article mentions and their returns* from 1997 to 2007 (a ninth, AIM Premier Equity, performed so poorly it merged into AIM Charter [CHTRX] in early 2006 and a tenth is mysteriously missing from the study):

Fund Annualized Total Return
Oppenheimer Main St A - (MSIGX) 6.34% 84.95%
American Funds Fundamental Investors A - (ANCFX) 9.89% 156.87%
Davis New York Venture A - (NYVTX) 8.30% 121.89%
Oakmark Fund I -(OAKMX) 6.29% 84.05%
DWS Growth & Income S - (SCDGX) 2.64% 29.73%
Fidelity Growth & Income - (FGRIX) 5.38% 68.92%
Neuberger Berman Guardian Inv - (NGUAX) 4.51% 55.40%
Vanguard Instl Index - (VINIX) 6.62% 89.77%
Average 6.25% 86.45%

And the return of the Vanguard 500 Index:

Fund Annualized Total Return
Vanguard 500 Index Inv - (VFINX) 6.49% 87.54%

Of the nine (including the merged fund), it appears that only two of the actively managed giant funds beat the benchmark index over the following ten years (Vanguard Institutional Index is a low fee, high minimum index fund). We’re not even looking at after tax returns, where index funds do even better due to the limited taxable distributions.

The last ten years have not been kind to mega cap weighted investors in the S&P 500: more than half of domestic stock funds have beaten the index over the last ten, five, and three years. Now that larger cap investing has come back into vogue, we can expect the S&P 500 to beat even more stock funds.

At best, giant funds perform like index funds with high fees going forward. Go with index funds or smaller, low fee actively managed funds and shy away from the giant funds everybody else is investing in. This is why our fund rating system has always punished the fat and expensive.


Janus Fund Manager To Step Down

October 22, 2007

Marketwatch reports that Janus Fund (JANSX) is getting a new manager:

David Corkins, a 12-year veteran of Janus and manager of its flagship Janus Fund (JANSX) and other large-cap growth stock-fund vehicles, will leave the Denver-based company effective Nov. 1."

The Janus fund has posted better returns than a large cap growth index and similar funds since early 2006 when Corkins took over management, so his departure is not due to unsatisfactory performance, but rather that old Janus internal management turmoil that we used to know and hate (Janus recently announced that Scott Schoelzel, manager of Janus Twenty's [JAVLX], will be leaving at the end of the year). Maybe Corkins has his eye on a big hedge fund salary.

It's a good idea for owners of a fund that has changed management to keep a close eye on their investment. Bringing in a new manager to a mutual fund is kind of like starting a new quarterback in the NFL: investors are hoping for a hall-of-famer like Tom Brady, but they might end up with a washout like Ryan Leaf. New fund management can bring a entirely different investment approach, so much so that you could look at the Janus Fund after November 1st as an entirely different investment than the one it was under Corkins.

In this case we don’t think there is going to be a change for the worse here – we like the new managers and have other funds they manage in our MAXadvisor Powerfund Portfolios - but you can expect our ratings for the Janus Fund ratings to change slightly here in coming months (fund manager turnover generally hurts our custom quantitative ratings).


Like Funds, Newsletters That Sink Can Swim

October 18, 2007

Mark Hulbert has been tracking financial newsletter performance (via the Hulbert Financial Digest) longer than anyone else.

Judging financial newsletters by their past performance is just about as useless as judging mutual funds by their past performance. Top performing financial newsletters one year can be at the bottom of the heap the next.

As we’re coming up on the 20th anniversary of the greatest one day drop in stock market history, Hulbert took a look at some of the best and worst performing newsletters during the 1987 crash, and how they did afterwards:

On the whole, the best performers during the 1987 Crash have been below-average performers ever since, and vice versa. As an example, consider one of the newsletters with the best performances during the month of October 1987: Bernie Schaeffer's Option Advisor, with a gain of 61.5%, according to the Hulbert Financial Digest, in contrast to a 24.5% loss that month for the Dow Jones Industrial Average Since then, according to the HFD's calculations, it has produced a 3.4% annualized loss, and is very near the bottom of the HFD's performance rankings for performance over the past 20 years."

This means that doing well in a crash environment can mean crummy performance in a non-crash environment. Conversely, newsletters portfolios that fall hardest in down markets can perform very well post crash. The Prudent Speculator, a financial newsletter that performed poorly during the crash, has posted “… an annualized gain of 21.5%..[since 1987].”

It’s also interesting to note that Bernie Schaeffer’s newsletter has a negative twenty year track record (while the S&P 500 climbed more than 600% with dividends including the crash of 1987), but he still has a vibrant newsletter business and is sought after for market opinions and analysis.

Only four mutual funds have posted a worse performance than Shaeffer’s newsletter in the last twenty years. They are either gold funds, bear funds, or sky high expense ratio funds with no assets.


Fidelity's New Funds Give You Your Money Back

October 15, 2007

Last week we told you about three new 'managed payout' mutual funds from Vanguard, which promise an up-to 7% yearly payout with minimal reduction of initial investment principle. The funds will be marketed to retirees who want a steady stream of income.

The Wall Street Journal reports on eleven new funds from Fidelity aimed at those same investors.

Fidelity's new funds build on the success of the company's target-date funds, says Boyce Greer, president of asset allocation at the company. The Income Replacement funds are also portfolios of Fidelity stock and bond funds, with a mix that grows more conservative over time.

But instead of building toward a target date -- like retirement -- these funds make payments to you until a date you choose. The 11 funds range from Income Replacement 2016 to 2036.

How much do you get? That changes every year. The company will figure your monthly payments as a percentage of your annual account balance. If your portfolio grows, so will your payments.

The percentage of money you get also rises closer to your horizon date.

At 20 years out, you get 6.4% of your balance spread over 12 monthly payments; by the time you're 10 years away, you'll be getting 10%. In the last year, the fund pays 100% of what's left."

The Fidelity funds are structured to behave more like annuities than the new Vanguard funds in that Fidelity's funds are basically giving investors back their own money over a period of time (along with the underlying investment returns). The payouts of the new Fidelity funds are more aggressive than the Vanguard funds but can erode the principal more aggressively as well.


See also: Vanguard’s 7% Forever Funds