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Taxing Issue

March 5, 2007

Here's a simple trick, via Morningstar, that can save you a bundle in taxes, and that a surprising number of investors don't do: put funds with potentially high capital gains distributions in your non-taxable retirement accounts like your IRA or 401(k), and put tax-efficient funds in your taxable accounts:

When a fund realizes capital gains by selling stocks or bonds at a profit or receives interest or dividends, any amount above the fund's expense ratio must be paid out to shareholders, who are then taxed on that income. Some funds are much better than others at shielding shareholders from taxable income and capital-gains payouts. And some investors make it a habit to steer clear of "tax-inefficient funds," those that pay out a substantial portion of each year's gain as taxable income.

When you're choosing a fund for an IRA, though, you can ignore this issue. The attraction of IRAs and other tax-sheltered accounts, of course, is that the profits aren't taxed right away. Instead, they compound until you actually withdraw the money from your account. Only then do you pay the tax. That means some funds you might avoid in a taxable account are suddenly back on the menu when you're investing in your IRA."

They list four example funds that are likely to issue above-average taxable gains distributions and hence would be good fits for your non-taxable accounts:


WaMu Sued

March 3, 2007

Washington Mutual is accused of steering investors into their own mutual funds when better alternatives were available:

A class-action lawsuit was filed today against Washington Mutual, alleging that it deceived investors by steering them to the bank's own portfolio of mutual funds which were less attractive than alternative funds.

The complaint alleges that Washington Mutual and its subsidiary companies had an undisclosed "preferred list" of funds, and issued misleading disclosures and omissions regarding a side agreement designed to improperly promote WM Financial Services to favor Washington Mutual's proprietary funds, and thereby drive sales, regardless of alternatives for their individual retail investors."


Who would have thought that some guy at the bank isn't looking out for your best interests?

Market Drops, Fund Investors Run

March 2, 2007

Skittish mutual fund investors bailed out of mutual funds after last week's troubled waters:

Investors withdrew a net $2.39 billion from global equity mutual funds tracked by TrimTabs Investment Research in the week ended Thursday, a sharp reversal from the $2.73 billion that flowed into the funds during the previous week.

The decline came after the U.S. stock market on Tuesday suffered its biggest one-day point decline since immediately after the terror attacks of Sept. 11, 2001. The sell-off was triggered by a combination of factors, including a 9% decline in the Chinese stock market, persistent worry about U.S. subprime loans and the Japanese yen's sharp appreciation."


This year is looking like a classic example of misplaced fund investor enthusiasm. We saw one of the biggest months of inflows to stock funds in January – just in time to experience this week's drop.

Unlike past drops in stocks, this one started abroad. Of course, unlike previous bull markets, fund investors have been much more enamored with funds investing abroad than previous bull markets. It would not surprise us at all to see fund investors bail on funds in droves – perhaps $100 billion in a few weeks of withdrawals – if the global stock markets fall over 10% in the next few weeks. Much of our fund investing philosophy and metrics are based on avoiding the fund investing herd. We think investors should lighten up on stock funds when others are buying, and increase one's allocation when others are bailing out.

Vanguard Online Troubles

March 2, 2007

If you had trouble accessing your account via Vanguard.com yesterday, you weren't the only one:

A computer network outage at The Vanguard Group, which manages $1.1 trillion in mutual fund assets, temporarily left customers unable to access online accounts Thursday afternoon.

The glitch blocked customers from using Vanguard's Web site to place trades or check 401(k)s and other accounts in the wake of Tuesday's big sell-off on Wall Street.

Vanguard spokesman John Woerth said the outage lasted about an hour. It did not prevent customers from registering trades by calling Vanguard's toll-free number; if they did so they would have been guaranteed a fund's 4 p.m. price, Woerth said. Mutual funds are priced once a day.


We’ve experienced some sluggishness logging in to brokerage account websites this week ourselves. With record trading volumes amidst the market mini-crash Tuesday, it’s no wonder.

Of course, site sluggishness is nothing compared to the stock exchange. At one point during the slide on Tuesday the Dow fell over 100 points in just a few seconds. Turns out the Dow calculations were lagging badly behind the underlying stock price. We’re not sure what this means to those that bought say, the Dow Diamonds (DIA) ETF at an artificially high price moments before it fell hard – though the ETF appeared to be priced a little more accurately than the Dow itself.

Focus On: Large Cap Growth

March 1, 2007

(Published 03/01/2007) With yet another year of large-cap growth funds underperforming basically every other fund category out there, fund investors are finally throwing in the towel.

Lipper estimates that investors yanked $3.2 billion out of large-cap growth funds in the first four weeks of the New Year. What’s unusual is that January is a month where fund investors put almost $40 billion into stock funds – almost $20 billion alone into funds that invest in international stocks.

There have been many calls for out-of-favor, large-cap growth funds to lead the market – notably by us in the summer of 2006 when we upgraded large-cap growth funds to a (Most Attractive) for the first time in our history. While the a stock market in general (large-cap growth in particular) has done fine since then, large-cap growth funds have not been where the big action has been.

Long-time MAXfunds readers remember how negative we were on the whole large-cap growth and tech craze in 2000 – with our anti-Janus articles and the like. We started our MAXadvisor fund investing service in early 2002 with a (Weak) rating on large-cap growth funds. As large-cap growth continued to underperform other categories, we slowly increased the rating.

Why hasn’t large-cap growth taken off yet? The last year large-cap growth was king of the hill was 1998, when these funds scored about a 30% return. In 1999, larger cap growth funds were up almost 40% - but since other categories were even hotter (these were the bubble years remember), 40% was only an average return.

Small cap value funds – the funds that have been topping the charts more or less ever since the glory days – were basically flat during 1998 and 1999. No wonder fund investors bailed and put money in large-cap growth funds. Nobody likes a boring party.

Herein lies the reason large-cap growth stocks have yet to take off: they had so much over-valuation to work off. If one asset group almost doubles in two years, and another remains the same, it can take years of the cheaper asset group outperforming the former leader before relative valuations are back in sync.

Moreover, fund investors never really bailed out of larger cap growth funds. Today many of the formerly hottest funds still have billions in assets – though asset growth has slowed or reversed at one time or another in recent years. Today larger cap growth stocks would represent excellent value and opportunity to double your money in a few years, if only fund investors had pulled out tens of billions each quarter for the last seven years or so.

Unfortunately for us contrarians, mildly out of favor is about as good as it is likely to get here. Your best relative value in the market is large-cap growth stocks (and money markets…) and we expect this category to be in the top tier for the next few years.

Category Rating: (Most Attractive) - should outperform the market and 80% of stock fund categories over the next 1 to 3 years

Previous Rating (6/30/06): (Interesting) - should outperform the market and 60% of stock fund categories over the next 1 to 3 years

Expected 12-month return: 8% (increased from 7% in our last favorite fund report)

1. Janus Research (JARFX) 6-Feb 11.25% 0.31% 8.85% 20.81%
2. Marsico Growth (MGRIX) 3-Jun 47.65% -3.04% 8.30% 5.18%
3. Chase Growth (CHASX) 1-Sep 39.53% -5.68% 3.29% 3.94%
4. Janus Growth & Income (JAGIX) 2-Aug 63.81% 1.04% 5.83% 11.31%
5. Vanguard PRIMECAP Core (VPCCX) 5-May 24.80% 3.87% 7.15% 14.45%

MAXadvisor Powerfund Portfolios Update

March 1, 2007

Note to MAXadvisor Powerfund Portfolios subscribers: the First Quarter, 2007 'Our Favorite Funds' report has been posted. MAXadvisor Powerfund Portfolios subscribers can access it by clicking here. Each 'Our Favorite Funds' report reveals what our analysts consider to be the very best no-load mutual funds in each fund category.

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.


March 1, 2007

Seeking Alpha takes a look at the performance of alternative strategy funds during Tuesday's wipe out:

Many funds have rolled out alternative mutual funds and ETFs recently, and it is instructive to examine how they have performed on Tuesday's big down day.

One in particular, the Claymore Sabrient Defender Index (DEF), was designed to "Defend" against down days. The specifics of the methodology are proprietary, but in general terms, the fund is rebalanced quarterly by looking back at the last quarter and seeing what did well on the down days. So how well did it play on D day?

An awful -3.00%."


Red Letter Day

February 28, 2007

Yesterday's Dow drop leave you jittery? Relax. This too will pass (and in fact the Dow, as of 12:28 PM EST, has already bounced back a bit today). Chuck Jaffe at MarketWatch puts it in perspective:

If the stock market's big decline Tuesday made you nervous, try the following: Take a red marker and make a big X on Feb. 27 in your calendar. Make no other marks or notations. Then go about your regular business for the next 10 months.

When the end of the year rolls around -- assuming you review your calendar before you either file it or toss it -- see if you remember why you actually made Tuesday a red-letter day.

Chances are the 416-point decline in the Dow Jones Industrial Average will pass, just like so many others before it. And what investors need to keep in mind is that there have been many others; while Tuesday's drop represents the seventh-largest point drop in Dow history, at 3.27% it is just the 37th-largest percentage decline day since 1950. In percentage terms, if you go back to 1900, you'd have another 200 days where the Dow suffered bigger losses.

...The point of marking the calendar is that virtually every big market drop becomes routine in time. Nearly 20 years after the market crash of 1987, for example, there is not a crowd of people claiming that they would be able to retire today, rather than working a few years past age 65, if they had only been out of the market on that particularly bad day. The market plunged more than 22% on Oct. 19, 1987."


We do think that yesterday's drop does mark the end of higher risk or alternative investments beating more traditional ones. From here on out we predict the S&P 500 will outperform emerging markets like China.

Today's Market Drop is Your Fault

February 27, 2007

The financial press will cook up dozens of reasons why the market fell so hard, so fast today (the Dow was down over 500 points or over 4% before finding some footing). Most will point toward China and tell you that nothing much has changed since yesterday, stay the course. But something has changed. High-risk assets are finally done leading the market. The music has stopped, and investors are looking for chairs.

Downplaying risk and focusing exclusively on upside is why fund investors have sunk billions into higher-risk fund categories like emerging markets, Asia, Latin America, and high-yield bonds. It’s why an ETF like iShares FTSE/Xinhua China (FXI) has brought in billions in recent months.

As of 1:17 p.m. today, a China fund, Oberweis China Opportunities Fund (OBCHX), is the fourth most viewed fund page (out of more than 20,000) on MAXfunds.com. This tells you more about the causes of today’s drop than all the financial analysis you’ll read about the rest of the week.

Fund investors have a bad habit of getting most excited about a certain sector or fund category shortly before in sinks. The last time we saw big fund inflows was early in 2006, and in the following months the U.S. stock market slipped, and emerging markets flat out tanked –though both came back later in the year.

This year fund investors have already put around $40 billion into stock funds – most of it into international funds, and a lot of that into emerging markets.

Nobody knows where the market is going in the short run, but it is likely that all the fund categories attracting the most money early this year will perform the worst in coming months. Maybe this isn’t the end of the great high risk asset bull market, but today’s action shows investors the risk of adding new money late in the game.

Seven Steps to a Better Portfolio

February 27, 2007

Kiplinger.com's How to Choose Winning Funds lists seven 'simple steps' to building a winning fund portfolio without the help of a broker:

  1. Determine your objective
  2. Home in on a specific category
  3. Watch your costs
  4. Study past performance
  5. Consider risk
  6. Size up the fund
  7. Know who's at the helm


Any similarity to our own Seven Golden Rules of Mutual fund Investing is purely coincidental:

  1. No Loads!
  2. Don't Overestimate Past Performance Figures
  3. No Fat Funds
  4. The Younger the Better
  5. Watch Expenses
  6. Check Performance Relative To Class
  7. Know The Fund's Risk Level