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Funds That Invest Like Buffett

March 29, 2007

Tim Paradis at the Aspen Daily News takes a brief look at mutual funds that try to invest like Warren Buffett, one of the worlds best-known and successful value investors. Some of these funds actually mimic the stock portfolio of Buffett, while others have merely adopted his buy-and-hold philosophy.

The funds, which characteristically invest in a smaller number of stocks than other mutual funds and often hold those investments far longer, can be a good match for investors looking years down the road who won't dwell on every bump."

Funds mentioned in the article:


Independent Fund Board Rule Kaput

March 27, 2007

Chuck Jaffe at MarketWatch writes:

Alas, when it comes to the debate over whether mutual fund boards should have chairmen and a supermajority of directors who are independent of the management company, it appears that fund interests are going to win out.

In 2004, the Securities and Exchange Commission passed a rule requiring all funds to appoint an independent chairman and to make three-quarters of the board of directors independent. The rule came in the aftermath of the rapid-trading scandals of 2003 and was universally applauded by consumer groups. But the Investment Company Institute and several big-name fund firms -- most notably Fidelity Investments -- railed against it, saying it was unnecessary and costly.

The rule was rejected twice in federal appeals court, which cited the SEC's administrative process as a big part of the problem. So the agency reopened the discussion.

In December the SEC released two reports from the Office of Economic Analysis examining the costs and benefits of having a chairman and 75% of the fund's board independent from the investment adviser. Both sides of the debate had until March 2 to file comments.

And while there is no official word from the SEC yet, it is pretty clear talking to agency insider's that the issue is dead."


While these independent fund boards are a great idea in theory, in practice we don't think the loss of this rule will be much of a negative for fund investors. These so-called independent directors would still have been appointed by the fund companies, so the true extent of their independence would have been debatable. Furthermore, the rapid-trading scandals of 2003 that this rule was a result of are probably not the kind of thing a once-a-quarter board of directors would have had uncovered. This rule would also have added significant costs to running a mutual fund, which would have unfairly hurt small and new fund companies.

22 Funds Morningstar Thinks You Should Sell

March 26, 2007

Morningstar's Fund Spy lists 22 funds their analysts think have "strong competitive disadvantages". The list includes SunAmerica Focused Large Cap Growth (SSFAX) because of poor long-term performance versus similar funds, Payson Value Fund (PVFDX) and BlackRock Basic Value II (MAVAX) because of relatively high expense ratios, and ten Principal Protection funds from ING because of concerns about the principle protection strategy in general and these funds in particular.


You'll also note serious problems with all these fund's MAXratings on our MAXdata pages. Click the links above to view our takes on them.

Business Week's Best Managed Funds List

March 24, 2007

Business Week published their list of the best managed mutual funds, chosen after "in-depth, face-to-face interviews with managers to quiz them on investment practices." The winners are:


Make More Cash On Your Cash

March 22, 2007

Sometimes even the safest mutual fund is too risky. There really is no stock or bond fund that is immune from at least some degree of volatility, and the last thing you want before putting the down payment on your new house into escrow is for you to all of a sudden have 5% less money than you though you did. That's where high yield savings accounts really come in handy. They are great places to stash cash that you don't need right away, and the best ones offer rates that can be many times higher than what you'll get in your bank's savings account. Get Rich Slowly runs down some popular options:

I did some research. I googled for “high yield savings account” and “ING direct” and “HSBC Direct“. I followed promising links (and ads) from the search results. As of March 19th, here are the offers that I was able to find with minimal digging. All of these accounts are FDIC insured.

  • Countrywide Bank offers a variable rate, from 4.00% to 5.40% APY, can link to other bank accounts. $1,000 minimum to open.
  • AmTrust Direct offers 5.36% APY, “no monthly service fee or minimum balance fees”, can link to other bank accounts. $1000 minimum. This is a money market account.
  • WT Direct offers 5.26% APY, no fees, can link to other bank accounts. No minimum to open, but your interest rate drops if you don’t have a $10,000 balance after 60 days.
  • E-Loan offers 5.25% APY, no fees, “industry’s strictest privacy policy”. $5,000 minimum.
  • Presidential Online Bank offers 5.25% APY, no fees, ATM access, web interface. $5,000 minimum to open.
  • Emigrant Direct offers 5.05% APY, no fees, can link to other bank accounts, web interface. No minimum.
  • E*Trade offers 5.05% APY, no fees, an automatic savings plan, can link to other bank accounts. $1 minimum to open.
  • HSBC Direct offers 5.05% APY (with a temporary 6.00% APY promotion), no fees, can link to other bank accounts, web interface. $1 minimum to open. The HSBC web site is a busy mess.
  • Capitol One offers 5.00% APY, no fees, free checks and ATM card, an automatic savings plan, can link to other bank accounts. $1 minimum to open. This is a money market account.
  • Citibank Direct offers 4.65% APY, no fees, $25 sign-up bonus. No minimum.
  • ING Direct offers 4.50% APY, no fees, an automatic savings plan, web interface. No minimum.


See also:

Ask MAX: A Good Place for Some Short-Time Money?
Ask MAX: Should I Settle for 3%?

Don't Buy Top Ranked Funds

March 21, 2007

We've said it before, and we'll say it again: when shopping for mutual funds, resist the urge to purchase top performers.

Given the scads of mutual funds out there, investors might be tempted to turn to the want ads rather than sort through heaps of funds in hopes of finding a good match. More often, befuddled investors depend on fund rankings to bring a cool empirical eye to their search. But those who invest solely based on rankings risk disappointment.

'Using historical top quartiles to predict top quartile performance is a bit like rolling the dice,' said Srikant Dash, an index strategist at Standard & Poor’s Corp. S&P found in a recent study that few funds that ranked among the top quarter or even top half of their peers managed to consistently maintain their performance.

In the past five years, only 13.2 percent of large-cap funds, 9.9 percent of mid-cap funds and 10 percent of small-cap funds were able to remain ranked among the top half of funds for the entire period.

The top 25 percent ranking proved even more daunting a challenge, with only 3 percent of large-cap and 2.5 percent of mid-cap funds staying in that zone for five straight years. Stats for small-cap funds were even more grim: None was able to hold onto a top 25 percent ranking for the entire period.

'The numbers are similar to what would happen if you just pick a fund randomly,'" Dash said.


Buying the funds at the top of this year's performance chart is step one of the all-to-common buy-high/sell-low cycle that is probably responsible for destroying more fund investor wealth than loads, high fees, and manager ineptitude combined (step two is selling that fund after its almost inevitable subsequent poor performance).

Cramer Talks Too Much

March 20, 2007

Jim Cramer, host of CNBC's Mad Money and the inspiration for scores of investors betting too much of their nesteggs on individual stocks, might have some explaining to do to the Securities and Exchange Commission:

In the video from TheStreet.com's "Wall Street Confidential" Webcast, Cramer boasts about manipulating the price of a high-flying stock down, and even acknowledges that doing so might have been illegal. The video is making the rounds on YouTube.

'A lot of times when I was short, I would create a level of activity beforehand that would drive the futures. . . . It's a fun game,' Cramer said in the Webcast, which was moderated by TheStreet.com Executive Editor Aaron Task.

Cramer later said that 'no one else in the world would ever admit that, but I don't care.'"

Yeah you can't do that.


Active Versus Passive Investing

March 20, 2007

An interesting take on the active versus passive debate from Chuck Jaffe. It's not so much whether you invest in an index or an actively managed fund that matters. They best kind of fund for you is the one that will make it less likely for you to get stuck in the devastating buy high, sell low cycle:

McGuigan was concerned when he read a Morningstar Inc. report this year, showing that the average investor in index funds actually captured just 79 percent of the return that they should have gained (so if the index was up 10 percent, the typical investor gained 7.9 percent).

Indexing is designed to be a buy-and-hold strategy. Yet numerous studies show that investors in all funds tend to earn less than the fund does, because they buy in after a fund has shown big gains and sell out when a fund hits rock bottom. McGuigan was surprised to see that indexers lagged their benchmarks by so much. He figured that a rapid indexer would know better than to jump around.

His conclusion is a simple equation, one that explains the real reason why many investors are better suited to actively managed funds regardless of the cost/turnover benefits of indexing:

Real investor returns = actual investment returns +/- investor behavior.

'The second part of the equation is so important, because investors constantly hurt themselves,' says McGuigan. 'So the important thing is that investors believe in what they are doing. If they believe in passive investing, they need to believe it enough to stick with it; if they believe they can pick better managers, they need to give those managers a chance.'

So the issue is not so much active versus passive - or a mix of the two - as it is: 'Which can you stick with when the going gets rough?'

No matter which type of fund you buy, declines are inevitable. But if you can pick a good performer, active or passive, and stick with it to get the same results that the fund actually delivers on paper, that's when you'll have a portfolio that has a real chance of helping you reach your financial goals.


MAXadvisor Private Management, the fund-based financial advisory company we founded in 2002, buys both index and low-cost actively managed funds for our client portfolios - and we never, ever buy whatever fund happens to be at the top of the performance heap for the very reasons that McGuigan describes.

See also:

Ask MAX: What's better: an index fund or an actively managed fund?

International Underdogs

March 19, 2007

Morningstar's Fund Spy lists three quality international funds that had a tough 2006 but that their analysts think will perform well going forward:

Today, we'll take a closer look at three such laggards that we think continue to be superior offerings, as their proven long-term concepts and people remain in place and their outlook for future success is positive."

Their picks are:

MAXfunds gives UMB Scout International a MAXrating of 82, the Mainstay ICAP International Fund a MAXrating of 88, and Masters Select International Fund a MAXrating of 69. Master International is currently closed to new investors. For a list of our highest rated International funds, click here.


MAXadvisor Powerfund Portfolios Update

March 17, 2007