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There's No Such Thing as a Free Lunch

September 11, 2007

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."


Safe Money Market Fund Yields Plummet

September 7, 2007

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. If investors panic sold Fidelity Cash Reserves, in all likelihood some would not get $1.00 per share – the price money market funds try to maintain. The manager probably couldn’t sell all that commercial paper at current prices.

So what’s a scaredy-cat yield-hound to do?

The best bet for the ultra risk averse is bank CDs. Unlike money market funds these FDIC insured (up to $100,000 per depositor per insured bank) accounts can’t be sold whenever you, want penalty free, but offer safe near 5% yields.

Also unlike money market mutual funds and short term bond funds, it doesn’t really matter what the bank does with your money (even if they make loans to questionable home buyers buying inflated condos) because the government will bail ‘em out. Just like the S&L Crisis…

Don't Forget the Little Guy

September 4, 2007

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)


MAXadvisor Powerfund Portfolios Update

September 3, 2007

Note to subscribers of the MAXadvisor Powerfund Portfolios: September's feature article has been posted. Subscribers can log in by clicking here.

This month we look at what August's market turmoil means for Powerfund Portfolio investors.

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.

Forbes Honor Roll

August 31, 2007

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.

Forbes has been calculating a fund honor roll since the 1970s – way before the boom in investing and funds. While Forbes gets an “A” for effort (using their own rating vernacular…), their honor roll probably won’t beat the market or most other funds going forward.

Forbes, for its part, has one of the more sophisticated “funds to buy now” lists around and considers up and down market performance. Other Johnny-come-lately-financial magazines (Forbes has been around since 1917) do simple performance screens that are far more dangerous to your wealth, even when they adjust for risk. If we had to own a Forbes honor roll fund or a random 5 star fund from Morningstar, we’d go with the Forbes pick. Still, byy considering down and up market performance as their main criteria they are data mining a list of funds that happen to invest in whatever did well in up and down markets in the past. This may or may not (more likely may not) work in the next downturn.

You’ll notice this list is heavily weighted towards value oriented funds, and mostly smaller cap value oriented funds. This is because small cap value stocks have done very well in recent down markets, particularly the 2000-2002 crash that cooked the goose of all the top fund from 2000 (Forbes goes back to 1994 in their up / down market review).

The trouble is, value is not such a value anymore. It is entirely possible – in fact likely – that stocks that don’t even pay dividends may do better in the next downturn than “safe” stocks. Many of the funds on the Forbes list have large stakes in financial stocks. These stocks have done very well in recent downturns- particularly the 2000-2002 market. Today things are different. Financial stocks are at the bottom of the performance charts, and their fat dividends and low valuations don’t seem to be helping much as even the NASDAQ is outperforming financials. Maybe they won’t be such a value once the bad mortgage problem fully flushes through the system.

The reason our MAXratings are not higher for some of these funds is they are in fund categories that have done so well in the past (our rating takes numerous fund quality issues AND fund category into consideration). We punish funds in categories our metrics say are overheated from hot returns and inflows of new money. This is why so many hot tech and growth funds had poor ratings on our site back in 2000.

Also consider that John Bogle, in his book “Bogle On Mutual Funds” did an extensive review of the Forbes Honor roll funds going back to 1974 – he tracked how you would do if you bought them when the list was published, then upgraded to the new list the next year. You would have done better in the Wilshire 5000. You also would have done better in the average stock fund.


Obvious Advice of the Week

August 29, 2007

Scott Burns at MSN Money meets this week's article quota by telling us that when shopping for mutual funds, you're better off going with cheap rather than expensive:

The least expensive one-eighth of large-blend funds had an expense ratio of 0.50% or less and provided an average return of 6.90%. More important, 49 of the 69 funds in the group provided superior returns, so you had a 71% chance of superior performance simply by selecting the least expensive funds."

While this advice might be a bit on the "duh" side for savvy MAXfunds readers, we reckon it never hurts to get a reminder every now and then.


Ask MAX: You call THIS a MAXadvisor Favorite?

August 27, 2007

Dear MAX,

I really do like your layout and the information that you provide.

I do have one question: You call the Vanguard Precious Metals & Mining Fund (VGPMX) a MAXadvisor Favorite Fund, but it has a MAXoutlook of -16%. Why do you call a fund a MAXadvisor Favorite if you think it is going to perform so poorly in the next year?


Russ T.

Dear Russ,

How can we like and hate the same fund? We’re not bipolar – here’s how it works:

We give MAXadvisor Favorite honors to at least one fund in every stock fund category. No matter how well we think a category is going to do, we'll try and find the best funds available to you. You'll find a Favorite Fund listed in some categories we think are currently a very bad place to be invested - categories like real estate, Latin America, and yes, precious metals.

Our MAXoutlook is our forecast for a fund’s performance over the next twelve months. This figure is largely driven by our forecast for the fund’s category, the fund’s quality and fees, and the fund’s risk level. Safer funds generally don’t have big negative forecasts even if the category ranks poorly.

While the Vanguard Precious Metals fund is one of the best precious metals funds currently available to investors, we don't think the precious metals category as a whole is going to post very good performance in the next year. You’ll note we have even more dismal performance forecasts for some other more mediocre precious metals funds in the category.

Our category rating comes from three factors (each visible on a fund’s MAXfunds data page): 1) Category Hot Money – how fast money is coming into funds in a particular category 2) Category Fat Fund – how many funds in a category are too big and 3) Category Outperformance – how well a category has done compared to other categories. These are contrarian indicators – fund categories that have done well compared to other categories get bad ratings here. For example, precious metals funds get a 4 – Bad category outperformance rating due to the fact that precious metals funds have performed quite well over the last three to five years compared to other fund categories. Usually a period of out-performance like that is followed by a period of under-performance. In financial circles, it’s called reversion to the mean. When we build portfolios, we try to focus on owning favorites from categories we think are positioned to perform well going forward. It’s like the one-two punch to deliver better returns.

If you have a notion that we're just plain wrong about the precious metals category and you were looking for a place to take advantage of an even bigger precious metals boom (or maybe you like the short term momentum of investing where the money is going), Vanguard Precious Metals fund would be a great place to be. It's extremely low cost compared to other precious metals funds, and its risk adjusted performance has consistently been at the top of its category - and that (among other factors) is why it's a MAXadvisor Favorite Fund.

Bottom line: Vanguard Precious Metals is a good fund in a fund category our analysis says should perform badly going forward.


Want to ask MAX a question of your own? Send him an email by clicking here. Please include your name and where you live.

Mad Investors

August 23, 2007

Barron's online did a comprehensive review of Jim Cramer's Mad Money stock picks, and the results are unsurprisingly mediocre:

Cramer, by all accounts, had a stellar career as a hedge-fund manager. And he is held out by CNBC as the guy who can help viewers make big money. But a comprehensive and careful review of his stock picks by Barron's finds that his picks haven't beaten the market. Over the past two years, viewers holding Cramer's stocks would be up 12% while the Dow rose 22% and the S&P 500 16%, according to a record of 1,300 of the CNBC star's Buy recommendations compiled by YourMoneyWatch.com, a Website run by a retired stock analyst and loyal Cramer-watcher.

We also looked at a database of Cramer's Mad Money picks maintained by his Website, TheStreet.com. It covers only the past six months, but includes an astounding 3,458 stocks — Buys mainly, punctuated by some Sells. These picks were flat to down in relation to the market. Count commissions and you would have been much better off in an index fund that simply tracks the market."

We'd normally advise people to go ahead an watch CNBC's Mad Money because of its entertainment value, but Cramer is so good at making his picks sound like can't miss investments opportunities that even I've occasionally been tempted to fire up E*Trade and dive in. Mad Money no longer sullies my TiVo. I watch Jeopardy instead.


Read Also:

Ask MAX: Should I sell based on Cramer's warning?

Cramer Talks Too Much

Mad at Blodget

Bring in the Love, Push out the Jive

August 22, 2007

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.


MAXadvisor Powerfund Portfolios Update

August 17, 2007

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.