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Fidelity Sued By Former Employee

March 27, 2008

The Boston Globe reports on a lawsuit by former Fidelity Investments employee Jackie Hosang Lawson that alleges Lawson was forced to resign after calling attention to problems with the the mutual fund industry giant's financial statements:

In her complaint, Lawson alleges Fidelity retaliated against her after she pointed out violations of federal rules 'relating to fraud against shareholders of Fidelity mutual funds.

...She raised concerns that initially drew praise but also hostile responses from others, she claims, and eventually led Fidelity to give a promotion to another employee 'to cover up fund profitability issues.'

She continued to raise issues and also contacted federal agencies including the Securities and Exchange Commission, the suit states. (The head of the SEC's Boston office, David Bergers, declined to comment.)

According to Lawson's suit, she was yelled at, berated, and assigned unrealistic deadlines for projects as a result, leading her to resign last fall. She also said Fidelity wouldn't allow her to speak with the trustees.

I am currently in a predicament where I can no longer honestly stand behind the financials that are presented to the Fidelity Mutual Fund Board of Trustees,' she wrote colleagues in a resignation letter."

We have no idea if these allegations have merit (much less what the impact on Fidelity fund shareholders might be), but it could relate to our long held belief that fund companies sometimes favor smaller and newer funds to boost returns and marketability (often at the expense of other funds within the same family). These new fund advantages could include allocating them shares of favorable IPO (initial public offering) or sticking some fees with larger funds where the performance impact will be minimal.


Foreign TIPS ETF

March 25, 2008

Terrified the U.S. economy is going into a death spiral of low economic growth and inflation? Normally Treasury Inflation-Protected Securities, or TIPS, would be the right choice for you.

Slow or negative economic growth can mean lower interest rates (as we've seen lately) and rising defaults on corporate debt. TIPS are default risk-free, and the inflation adjusting feature of TIPS means investors don't have to worry about rising inflation.

But what if you also think the U.S. Dollar is about as sound as the Mexican Peso used to be (in other words, not very)? Then the mutual fund industry has a new exchange traded fund (ETF) for you:

SPDR DB International Government Inflation-Protected Bond fund (WIP) [is a] new exchange traded fund launched Wednesday on the American Stock Exchange. It's the first international TIPS ETF available in the U.S.

State Street launched the fund to meet rising demand as investors try to hedge against inflation and dollar exposure, says James Ross, senior managing director at State Street.

The fund tracks the performance of the Deutsche Bank Global Government ex-U.S. Inflation-Linked Bond Capped Index. The index includes 120 inflation-indexed bonds from 18 developed and emerging countries outside the U.S. Investors will also have exposure to 15 currencies. It has a 21% return over the last year...."

One thing to watch out for are high fees:

...This ETF will cost 0.50%. That's almost double the cost of the two domestic inflation-protected bond ETFs available: iShares Treasury Inflation-Protected Securities (TIP) and the SPDR Lehman Barclays Treasury Inflation-Protected Securities (IPE). But the international coverage is the SPDR fund's draw."

Bottom line, if the sluggish U.S. economy remains so, this new ETF will do well. If however the future holds falling inflation rates, rising interest rates globally, and a rising U.S. dollar, this new ETF could perform so poorly you'll wish you had left your money in a boring ole U.S. dollar denominated CD at your local bank. We expect the latter scenario over the former. Investor demand for TIPS has recently reached ridiculous proportions - we've even seen negative yields on some TIPS recently as investors clamor for an inflation hedge. As most investors usually do the exact opposite of what they should be doing, this probably means rough times for TIPS investors ahead.


Spring Clean Your Finances

March 24, 2008

Bankrate.com says that after you're done throwing open the windows and airing out the wintry must, you should turn your attention to spring cleaning your money. No, they are not talking about laundering ill-gotten cash.

They suggest five financial areas that could probably use a good dusting, tell you exactly how to get started, and about how much time and money you'll have to devote to each:

Banking: Consolidate accounts, streamline with online statements and bill pay, toss old statements and checks.

Credit cards/debt: Check your credit report, shop around for lower interest rates, and come up with a payment strategy.

Estate planning: Create or update a will or trust; consider a living will and financial power of attorney; toss old documents.

Retirement accounts and investments: Consolidate accounts, rebalance and update beneficiaries.

Insurance: Get new quotes for car, home and life insurance policies; update beneficiaries.

Here's one Bankrate.com left off the list: review your mutual fund portfolio, and if your allocations are significantly out of whack, rebalance!


Of Gold and Beanie Babies

March 21, 2008
MAXfunds.com co-founder Jonas Ferris discusses this past week's collapse in gold and other commodities. Feel free to ignore the other guests and be sure to watch the entire video for the comparison of gold to beanie babies.

Of Gold and Beanie Babies

March 21, 2008

MAXfunds.com co-founder Jonas Ferris discusses this past week's collapse in gold and other commodities. Feel free to ignore the other guests and be sure to watch the entire video for a fascinating comparison of gold to beanie babies.

MAXadvisor Powerfund Portfolios Update

March 18, 2008

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 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.

Where Can A Yield Hungry Fund Investor Go?

March 14, 2008

The current financial turmoil has lead to a series of unfortunate events for investors looking for safe yield. To bail out a sliding economy and housing market, the Federal Reserve is lowering interest rates to rock bottom levels, which shrinks yields paid by money market funds, CDs, and short-term bond funds. Panicked investors have bought government bonds down to pathetically low yields - 3.5% on the ten year, far less on shorter maturities. To make matters worse, these yields, after tax, are below the rate of inflation. This leaves the yield hungry between a rock and a hard place (and rock prices are rising).

A BusinessWeek article notes some options:

  1. Stay Away from Treasuries
  2. Look at Muni Bonds, Despite the Bond Insurer Crisis
  3. Inflation Is Hard to Beat [TIPS are overpriced]
  4. "Mortgage" Isn't Always a Dirty Word
  5. Corporate Debt Can Offer Good Returns—But Beware

We'd add that investors might have to take on even more risk. Funds that write covered calls can generate attractive yields, albeit with far more risk than most bond funds but less than ordinary stock funds. High yield (junk) bond funds like Vanguard High-Yield Corporate (VWEHX) yield about 8.6%, now rewarding investors quite a bit more than safe debt yields for the heightened risk (even though such funds have 20% downside risk in a bad market for low-grade debt). Even stock index funds are looking attractive (thought with much higher risks than most bond funds) given the 2.37% yield on the S&P 500, which actually beats some bonds adjusting for the tax break on dividend yield. One strategy could be to start buying these higher risk / higher yield funds now with a relatively small portion of your portfolio, and if the credit markets and economy worsen, increase your stake further.

Be warned that reaching for extra yield can be dangerous (as all the hedge funds and other investment partnerships buying mortgage debt with leverage are finding out). Of course long haul, earning less than inflation is dangerous as well.


Experts Chase Performance Too

March 10, 2008

Individual investors are often guilty of flocking to whatever investment has performed well, growing optimistic while markets are strong, turning pessimistic they weaken. Mutual fund inflows are almost always highest into those fund categories that have performed the best, almost always negative in ares of bad performance. Guess what? Professional money managers are no better.

As noted on Marketwatch.com, the latest Schwab survey of financial advisers reveals some startling examples of the correlation between good performance and optimism for the future:

Investment advisers are increasingly pessimistic about U.S. stocks, with many expecting further losses as higher inflation, rising unemployment and a weak housing sector take their toll, according to a survey released Wednesday.

The survey of 1,006 financial advisers by brokerage firm Charles Schwab & Co. Inc., taken in late January, showed investment professionals are much gloomier about the U.S. market's near-term prospects than they were in a similar poll in July....About 46% of respondents say the Standard & Poor's 500 Index will be higher in six months, down from 67% who felt that way in July. Forty-one percent predict the benchmark will be lower versus 18% who said so in July....

About 80% of respondents see housing prices continuing to soften and the same number forecast higher unemployment in six months, compared to just 35% who did in the survey in July....

...Accordingly, many advisers are taking a defensive stance with clients' investment portfolios...About one-third of advisers say they'll invest more in large-cap U.S. and international stocks. Raising cash is part of the strategy for 28% of respondents, up from 16% in the previous survey, and 27% will boost bond positions, up from 18% last July.

...Utilities, many of which offer a cushion in the form of quarterly cash dividends, was the fourth most-favored sector, with 30% of advisers choosing the category compared with 11% in July....

Advisers are less sanguine about technology...

... Enthusiasm for Japanese shares has deteriorated since the July survey, when 40% of advisers thought Japan would be the best-performing developed market....Among emerging markets, advisers expect the best results from China and India (tied at 36%), followed by Brazil (33%) and Russia (23%)....Meanwhile, advisers anticipate investing less in U.S. small-cap stocks and their international counterparts in both developed countries and emerging markets."

In summary, if it stunk, investment professionals now hate it. If it has been pretty hot, they want in.


Rates Down, Interest Up

March 7, 2008

The funny thing about money market funds is investor interest often climbs as the main perk - safe yield - falls. You'd think investors would leave money market funds when the yields plummet to below the inflation rate, but just like in 2002 and 2003 when investors were leaving stock mutual funds by the boatload and money market fund shares were selling like hotcakes (all while yields plummeted to around 1%), today money market funds are all the rage:

Total money market mutual fund assets rose by $22.64 billion to $3.451 trillion for the week, the Investment Company Institute said Thursday.

Assets of the nation's retail money market mutual funds rose by $3.66 billion in the latest week to $1.240 trillion.

Assets of taxable money market funds in the retail category rose by $1.30 billion to $948.19 billion for the week ended Wednesday, the Washington-based mutual fund trade group said. Tax-exempt fund assets rose by $2.37 billion to $292.29 billion.

Assets of institutional money market funds rose by $18.98 billion to $2.210 trillion for the same period. Among institutional funds, taxable money market fund assets rose by $16.34 billion to $2.032 trillion; assets of tax-exempt funds rose by $2.63 billion to $178.10 billion.

The seven-day average yield on money market mutual funds fell in the week ended Tuesday to 2.78 percent from 2.89 percent the previous week, said Money Fund Report, a service of iMoneyNet Inc. in Westboro, Mass."

Of course the real interest by many investors today is avoiding the slide in stocks and eventual (we've been waiting for years...) rise in interest rates that will sting bond holders. Money market funds deliver: investors avoid stock market downside.

Money market yields are perilously close to the dividend yield on the Dow. At just under 12,000, the Dow yields about 2.62%, the S&P 500 yields about 2.22%. Hopefully these investors will move into stocks when money market yields drop below stock yields once again. More likely they will wait until the market recovers 20%, dividend yields are lower, and money market funds yield over 5%, a time when money market funds are actually attractive again.


Want More ETFs? Your Wish Has Come True.

March 5, 2008

If Axl Rose of Guns and Roses fame wrote songs about mutual funds, he might have had a hit with, 'Welcome to The (ETF) Jungle, Baby', especially after yesterday's 3-0 Securities and Exchange Commission vote. As reported in the Wall Street Journal:

The Securities and Exchange Commission voted 3-0 yesterday, as expected, to propose changes that would allow exchange-traded funds to be introduced quickly without review by federal regulators and give mutual funds more leeway to invest in ETFs.

Under the proposal, most ETFs could be brought to market directly, saving sponsors the time and expense of obtaining approval from the SEC. The speedier approach would apply to passively and actively managed ETFs that trade on national securities markets and provide daily pricing to investors.

...SEC Commissioner Paul Atkins endorsed the new approach, saying the agency's ETF review process has sometimes taken years, rather than months, and that innovative product ideas may wind up getting shelved.

...SEC Chairman Christopher Cox called the proposal 'a significant step forward for investors' that would allow new ETF products to be brought to market sooner, and provide similar disclosure documents to investors in mutual funds and ETFs. Currently, ETF investors receive a full-blown prospectus but the SEC proposal calls for such investors to get a shorter summary, in line with a pending SEC proposal for mutual funds.

Actively managed ETFs that don't provide daily information about their portfolio holdings wouldn't be covered by the SEC's proposal."

Perhaps the SEC is willing to give new exchange traded funds the benefit of the doubt because they are generally lower fee than ordinary mutual funds, and to them cheapness outweighs concerns about potential risk. Perhaps they are concerned they have an antiquated regulatory regime (true) that isn't keeping pace with ever more newfangled exchange traded fund like products, like exchange traded notes.

But this diminishing SEC scrutiny will only encourage the launching of ever wackier ETFs. While we have nothing against ETFs, our experience is that the more targeted a fund, the more fund investors as a group tend to lose. Adding intra-day trading, commissions, and bid / ask spreads will likely only exacerbate this problem.

We're not saying the government should get in the way, only that getting out of the way so investors can get more ETFs more quickly could expose some investors to less than desirable products. Lets not forget that in theory all the innovations in mortgage lending were a benefit to consumers and in some cases can save money over a traditional 30 year fixed mortgage. Trouble is, the typical home buyer probably didn't benefit from the innovation of a negative amortization, no money down, adjustable rate 5/1 ARM linked to LIBOR. Perhaps the same will eventually be said about a double inverse China tech stock ETF.