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PIMCO To Launch Bond ETF

July 30, 2008

The firm known most for active fixed income management is launching a rather dull bond index-based Exchange Traded Fund according to Dow Jones:

Bond mutual fund giant Pacific Investment Management Co. plans to dip its toe into the fast-growing exchange-traded fund business.

The Newport Beach, Calif. firm, often known as Pimco, said its initial ETF would follow the Lehman Brothers U.S. Aggregate Index, a broad bond market benchmark that is already the basis for popular ETFs from Barclays PLC (BCS), State Street Corp. (STT), and Vanguard Group."

PIMCO - the home of famed bond fund manager Bill Gross - actually manages several ETFs - if you define an ETF as a fund that trades on an exchange...they manage closed-end funds. Closed-end funds are actively managed with higher fees, and are often leveraged, but lack the snazzy arbitrage process that keeps the fund market price in check with the actual value of the fund (net asset value or NAV).

As more fund money goes to ETFs, big actively managed firms are damned if they do, damned if they don't: they don't want to manage lower fee index ETFs, but don't want to see their higher fee actively managed money go out the door either. PIMCO has their work cut out for them. Second and third versions of existing ETFs don't gather the trading volumes or assets of the earlier to market funds. Perhaps the target customer is other PIMCO clients.


T. Rowe's Small Cap Value Unlocks the Door

July 22, 2008

Kiplinger reports that T.Rowe Price Small-Cap Value fund (PRSVX) re-opened to new investors in the spring.

Yet another venerable fund has reopened its doors to new investors. After being shut for six years, T. Rowe Price Small-Cap Value quietly began accepting new money in May.

With assets of $5.2 billion and 300 stock holdings, Small-Cap Value is a large small-company fund. Preston Athey has run the fund (symbol PRSVX) since August 1991, and he's run it skillfully. Over the past ten years through June 30, the fund returned an annualized 10% -- an average of 4.5 percentage points per year better than the Russell 2000 index of small-company stocks and two and a half points per year ahead of the Russell 2000 Value index.

Athey says the breadth of his holdings helps dampen the portfolio's volatility, which is lower than that of the Russell 2000. 'I believe in having a broadly diversified portfolio with representations in nearly all industries,' he says. 'I'm not smart enough to tell you what the best sectors will be the next two years.'"

Smaller cap stocks have been under-performing larger caps. This, plus a weak stock market, has led to opportunities to get into some previously closed mutual funds.

So should you hop in while the door's open? We probably wouldn't. While T.Rowe Price Small-Cap Value is a solid fund with low fees, it is still a bit too large in terms of investor assets for our taste. In other words, they should have kept this one closed for a while longer.


We Need Another Bubble And Fast

July 17, 2008

The Onion is not a financial news organization - in fact it is not news at all - it's satire. As such we normally would not write about "news stories" that appears on The Onion, but in the case of a recent article about America's bubble-hopping economy, the joke was just too spot on to pass up:

A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

'What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future,' said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. 'We are in a crisis, and that crisis demands an unviable short-term solution.'

The current economic woes, brought on by the collapse of the so-called 'housing bubble,' are considered the worst to hit investors since the equally untenable dot-com bubble burst in 2001. According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent."


Some Load Funds Don't Know Their ABCs

July 15, 2008

Find load fund's multiple share classes confusing? Turns out so do the fund companies themselves. The New York Times examined a selection of prospectuses from several sales load-bearing mutual funds and found that sometimes the information about a fund's share classes printed in them was misleading or just plain wrong:

It’s hard enough to make sense of load funds’ expenses when the documents describing them are accurate. But an informal survey revealed surprising errors in prospectuses. Some arose when a fund company ignored the shift in the cost structure of a B share to that of an A share after a certain period. Other funds applied inaccurate back-end sales charges or misstated the amount that a brokerage firm receives to recommend the shares.

In some cases, prospectuses steered investors away from Class B or Class C shares, calling them more expensive, even though for the typical fund transaction — less than $50,000 invested for around four years — B and C shares can be cheapest.

Prospectus errors seemed to favor Class A shares. Consider an error in the statement of the Lord Abbett Affiliated Fund, dated March 1, 2008. In a table showing average annual returns for 1-, 5- and 10-year periods for all share classes, it assigned an annual return of 7.26 percent for A shares over 10 years, versus 7.2 percent for B shares.

But these figures overlook the B share compensation change in the eighth year, when its fees are the same as those of the A shares. According to the Finra calculator, a holder of B shares would wind up with slightly more in his account over 10 years than an A share investor. Using a 5 percent annual return on $10,000 invested, the calculator says an A share holder would have $14,162, versus $14,273 held by a B share investor.

So what's an investor to do? Simple: avoid load funds like the plague. There are thousands of low-cost, high quality no-load funds out there that have just one straightforward easy-to-assess retail share class.


Buy Low Advice From A Legendary Investor

July 9, 2008

When the stock market hits bear market territory and the Dow seems to drop by triple digits every day, it may help your returns (and sleep) to remember investor fortunes tend to be made buying when others are scared.

Sir John Templeton, sort of the Henry Ford of international mutual funds, just passed away this week. The Globe and Mail takes a look at some of what he has given society, and notes his optimism during times of distress:

It's 1939, and American investors are worried about protecting their portfolios. Not John Templeton. He was busy buying undervalued European stocks as the continent teetered on the brink of war.

Mr. Templeton bought shares in 104 European companies listed in New York – only four of the investments didn't work out – and that cemented his reputation as a stock picker with global savvy who would revolutionize the mutual fund industry.

Nowhere would that reputation loom as large as in Canada, where he incorporated his Templeton Growth Fund in 1954 – essentially founding the country's mutual fund industry – and introduced investing to the masses.

Mr. Templeton died of pneumonia yesterday in the Bahamas at 95."

He was a guy who knew how to look for the market's silver lining - even while everyone else was running for cover. And while current market conditions might not be as scary as they were back then, next time you consider cashing in your chips and heading to the safety of money markets after a significant market drop, ask yourself this: what would John Templeton do?


Fairholme Fund Interview

July 2, 2008

One of our biggest dilemmas around here is what to do with the Fairholme Fund (FAIRX). We've put the fund in our Growth Powerfund Portfolio in late 2004, but sold it in June 2007 after enthusiastic recommendations by the financial media and big inflows of new money (such inflows generally mean the best days of a fund are behind it). Still, we've kept Fairholme on our favorite fund list in the mid cap value category. Now with around $10 billion in assets, we're seriously considering removing it - even though the market beating returns continue - and with low fees to boot.

Perhaps this Fox Business interview with contrarian fund manager Bruce Berkowitz will help us decide. For all those sick and tired of dull fund manager interviews by fund-clueless CNBC anchors who don't know anything about the fund they are talking about, watch this video. Bruce likes healthcare. Hopefully he's right, we have healthcare funds in our model portfolios. He also is avoiding banks - which seems like the contrarian dream sector.


Got The Fed Rate Cut Blues?

June 26, 2008

One unfortunate result of the Fed's attempts at economic stimulus is the ever-lowering rates of interest offered by money market funds. How low? Today even most Vanguard money market funds yield under 2% TAXABLE (higher fee funds yield even less). Apparently the Federal Reserve is more concerned with encouraging borrowing (and why not, it has worked so well in the past...) and supporting asset bubbles and speculators in higher risk investments than looking out for the few, the proud, the low-risk money savers.

What's a guy to do? While those with millions of dollars to park are basically hosed, small investors can find some great teaser deals in FDIC-insured bank products. An article. by Laura Bruce for Bankrate.com notes some of the best:

HSBC, for example, has raised the rate on its HSBC Direct Online Savings Account to 3.5 percent, from 3.05 percent. The yield is good through Aug. 15 and applies to new and current funds.

Some institutions, such as EverBank, seem to a have an introductory offer for new money. EverBank is paying a yield of 4.01 percent for the first three months on its money market and interest checking accounts.

Some yields are eye-popping, such as Shore Bank's 10 percent for 90 days on its Grand Slam Checking account. You have to live in Maryland or Virginia to take advantage of the offer. The same goes for Flagstar Bank's 10 percent, six-month CD that you can get if you open a checking account at one of the bank's offices in Michigan, Indiana or Georgia."

To play the game right, be prepared to move on to the next teaser when yours expires (though some of these companies have decent deals even after the teaser period ends). Not worth the effort? Perhaps, but just think about how much time you spent finding the best deal on your T.V.


Mutual Funds for Saints or Sinners

June 24, 2008

Mental Floss give a quick rundown of mutual funds designed to allow investors to put their money where their morality is.

Ave Maria and the Timothy Plan are two fund families whose aims are to invest in accordance with Catholic or Christian values respectively. Amana Mutual Funds' investment policies are guided by Sharia, the body of Islamic religious law. They won't invest in (among other things) any companies whose principle business is alcohol, pornography or pork processing companies.

The most interesting fund on the list, however, could be the Vice Fund (VICEX), whose aim is to attract investors whose moral compasses point squarely toward Las Vegas:

The fund focuses on four sectors: defense/weapons, gambling, tobacco, and booze. As the fund’s website proudly boasts in all caps, no other fund concentrates solely on these four sectors. As fund manager Charles Norton told the Financial Times in 2006, '[N]o matter what is happening in the world economy, people will continue to drink, smoke, gamble and nations will need to defend themselves. As a result, in general these companies tend to be steady performers in good times and bad—they are mostly insulated from economic slowdowns.' In short, the fund has targeted four areas of the economy where it thinks demand is fairly inelastic whether for reasons of addiction or necessity as a hedge against market downturns. It works, too; for 2006 the fund had returns of over 23%."

All that fun comes with a price though - the Vice Fund comes with a sky-high 1.93% expense ratio. As for the theory that people will continue to gamble regardless of economic conditions, it's worth noting that Market Vectors Gaming ETF (BJK), a new exchange traded fund launched just five months ago that specializes in casino and other gaming stocks, is already down about 25% - far more than the less sinful stocks of the S&P 500.


Your Fund Manager Probably Doesn't Own Shares of Your Fund.

June 18, 2008

A recent report from Morningstar alerted fund investors to a seemingly disturbing fact: almost half of mutual fund managers don't own shares of the funds they manage.

Each manager on a fund must disclose his or her investment, so there are multiple investment amounts for every fund with more than one manager. When looking at the data (encompassing approximately 6,000 funds), the figures that jump off the page are those where no one invested a dime. In U.S.-stock funds, 47% report no manager ownership...With the two exceptions I spelled out, I can't think of why anyone should invest in a fund that its own manager doesn't invest in."

This piece led to several articles, including this one, where reporters were equally outraged. After all, would you eat in a restaurant where the chef doesn't eat his own food?

As long-term critical observers of mutual fund industry goings on, we're not going to take the bait on this one. We don't really care either way if a fund manager has money in the funds they manage.

Mutual fund managers at top fund companies are different than many individual fund investors. They are often very rich. Many of them make seven or eight figure incomes; many own stakes in their fund companies worth millions or even billions of dollars.

There are more investment opportunities open to rich people than mutual funds, including venture capital, hedge funds, and private equity. Most actively managed mutual funds are not ideal investments for rich folk in the highest tax bracket because funds often distribute other investors capital gains to whomever happens to own the fund at a certain time. Wealthy people don't even like paying their own taxes much less yours. Top fund managers can own stakes in the fund company itself. Buying their own fund would only increase there exposure because if the funds slip, the fund company stock they own could also drop. In addition, for the same reason we recommend keeping you allocation to company stock in a 401(k) down, fund managers may not want the additional risk of owning their fund because if they get fired for bad performance, they would have also lost a good chunk of their retirement money in the fund with the bad performance.

Most mutual funds are a retail product, meaning they are generally designed for people with net worths between $25,000 and maybe $1 million. The fee structures for many retail funds - notably load funds - are relatively high, and the more money invested the more in fees an investor pays. The benefit of diversification and active management are often worthwhile trade-offs for average investors given the difficulty of diversifying a portfolio globally with a small portfolio. Many of these expert money managers would do better owning the stocks directly. Let's not forget they are fund managers and choose their own stocks for a living.

We'd guess a lot of mutual fund managers do invest in high minimum/low fee institutional class mutual funds, ETFs, index funds, and even closed-end funds. In fact we've been watching famed bond manager Bill Gross buying shares in some PIMCO closed-end funds recently. If you have $10 to $100 million dollars and an annual income of over $1 million, you should do the same. For everybody else, keep an eye on the fees of your funds and do your best with a relatively small portfolio to keep the total portfolio expense ratio down and avoid load funds.


Popular Move Into Battered Financials Doesn't Pan Out

June 10, 2008

Many investors - both great and small - have bought bank and other financial stocks over the last year. Rationales for these purchases probably included "the worst was over" or "the stocks were cheap and more than reflected the problems in lending." Early this year in we noted that there was more money going into the popular Financial Select Sector SPDR (XLF) after it fell sharply - a rare flip-flop in normal fund investor buy-high/sell-low behavior.

How have investors done since moving into financial stocks? Not so well. Yesterday Financial Select Sector SPDR (XLF) was near the 52-week low, down about 15% from early February.

Barron's discusses the bargain hunt that hasn't led to many bargains so far:

After riding out the credit crunch, the subprime-mortgage debacle and the March collapse of Bear Stearns, investors in April and May began bargain-hunting in the group. But June struck like a thunderbolt, with Lehman Brothers (ticker: LEH), the new hedge-fund whipping boy, plagued by rampant rumors about its liquidity. There were reports Lehman planned in response to push up its earnings release and announce a rights offering to raise capital."

As far as we're concerned, we're largely staying away from financials until something REALLY dramatic happens and scares away fund investors - a big commercial bank failure, a Fannie / Freddie catastrophe - before we'll consider a broad recommendation to bottom fish financial sector funds. As we noted in February, it's not a true buying opportunity until only a few people want to buy.