WHAT'S NEW? Our Latest Updates!

Pay Less, Make More

April 27, 2007

When it comes to mutual fund performance, you don't get what you pay for. In fact, according to a recent study by Morningstar, the less you pay for your fund, that better that fund is likely to perform.

Of domestic stock funds, 47% in the cheapest quintile succeeded in beating the category average over a ten year period, 33% in the next quintile, 30% in the following quintile, 27% in the next and just 19% in the costliest quintile. Or in other words, you are over twice more likely to beat the category average if you are in a low cost fund than in an expensive fund. The success disparity was also similar for other fund categories. For foreign stocks the probability of category out-performance between the low cost funds versus high cost funds was 40% to 18%, for taxable bond funds this was 48% and 7%; 49% and 9% in municipal bonds."


Are You an Overconfident International Investor?

April 25, 2007

When a fund sector or category does well, fund investors' negative associations with that area declines. Since outperformance can actually increase the severity of the next downturn, this thinking leads to misplaced confidence in fund categories that should inspire wariness - which is exactly what is currently happening with international funds.

A recent survey of wealthy American investors found that more than half believe U.S. markets are riskier than international markets. That's a reversal of traditional thinking and a sign that investors may be taking potential problems in overseas markets too lightly."

Over-enthusiastic international investing can be especially hazardous because the volatility of international funds can vary wildly.

Along with specific countries, sector allocation is something investors may not be heeding closely enough in their international fund, said Jeffrey Kleintop, chief market strategist at LPL Financial Services. He said a fund that concentrates too heavily on the BRIC countries (Brazil, Russia, India, China) could be presenting a fairly sizeable risk for that investor, given the sectors involved.

'They've been an interesting area to invest in recently, but when you take a look at commodities exposure there, energy and materials make up 50% of the market cap of those countries. You're making a pretty big bet on the continuation of the bull market for commodities...that's a risk you may not be aware of.'

Conversely, some international funds may be lacking in exposure to certain sectors, Kleintop said. 'Most international markets are more value-oriented than those here in the U.S. For example, looking at the EAFE (Europe, Australasia, Far East) Index, that only has one-third the weighting of technology we have in the S&P 500, half the weighting we have in health care. We would consider those to be growth sectors from a style perspective."

This phenomenon is taking place in other fund categories as well. A few years ago – before the big run-up – precious metals and other commodities were considered high risk/low reward investments (when tech was high reward/low risk…). Today both individual and professional investors - and most analysts and reporters - view funds that invest in these areas in a much more positive light.

To get a better idea how risky a fund or category is, check MAXfunds' risk level graphic on each fund's data page (and ignore your easily-swayed-by-past performance gut). To get a handle on how confident fund investors are in any fund category, take a look at our innovative fund category numbers on each fund’s data page here at MAXfunds.com.

Since how outperformance can lead to future underperformance (reversion to the mean) we have a Category Outperformance 1-5 measure – “bad” categories have outperformed other fund categories in recent years. Category Fat Fund shows how many funds in the category are too big – another sign investors are putting too many chips into a fund category. The Category Hot Money level measures recent inflows of new money into a category. The MAXratings Category Rating takes all three into consideration.


A 401(k) Cost 'Sticker'?

April 23, 2007

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.


Tougher Tax Times Ahead for Mutual Fund Investors

April 20, 2007

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

April 18, 2007

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 'Rent vs. Buy' Lie

The 'F' Word: Foreclosure

The Great Real Estate Bubble

The Real Estate Bubble Can Pop

Advantage Mutual Funds

April 17, 2007

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

April 16, 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.

Unusual Fund Mergers at Fidelity

April 15, 2007

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

April 12, 2007

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

April 11, 2007

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)

Info at Vanguard.com