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Goodbye, and Good Riddance

January 4, 2008

Chuck Jaffe looks back at eight mutual funds that closed their doors in 2007, and for good reason. It's a roll-call of weird, expensive, or just plain lousy funds run by managers with a deadly combination of hubris and incompetence. None of these funds will be missed, least of all the Ameritor Investment fund, which was quite possibly the worst mutual fund (from perhaps the worst fund family) of all time:

The Ameritor funds started life in the 1950s as the Steadman funds. They were nicknamed the 'Dead Man funds,' because they finished dead last in their peer group, losing money all the way, for years. Ultimately, Steadman Oceanographic — which was supposed to profit from companies that were farming and building communities at the bottom of the sea — and Steadman Technology ran through almost all of their money.

When Charles Steadman died in the late 1990s, his daughter took over. The funds had no prospect for growth, but she had no reason to shut them; the double-digit management fee was like a personal annuity, up to the point where it bled the fund to death. When the Securities and Exchange Commission finally filed paperwork stating that the fund 'had ceased to be an investment,' the loss over the last 10 years was 98.98 percent, turning a $10,000 investment into $102. It took about four decades for the losses to drive shares down to less than a penny, but Ameritor got the job done, and then kicked the bucket.

It’s a lesson in just how bad mistakes can be if you insist in hanging on to them. Sadly, this fund is survived by a sister, Ameritor Security Trust (ASTRX), with performance that is 'better,' but only when compared to its all-time loser sibling."

The long life of the Ameritor Investment fund highlights an important point. While mutual funds are regulated by the Securities and Exchange Commission, it is possible for a fund to be operating within the letter of the law but still be an absolutely horrible scam-grade investments.

There is no law against high fund expense ratios - when a fund's assets fall below about $10 million and the management company stops caring about the shareholders, the sky's the limit on expenses because the minimum fixed costs of running a fund have to be paid by a small group of investors. We call these "free range" expense ratios - ones that are not capped by fund companies because frankly, my dear, they don't give a damn. As Jaffe notes, Ameritor Security Trust (ASTRX) still clings to life - with two million of investor assets and an expense ratio of 16.36%.


Focus On: Asia Funds

January 3, 2008

When we watch some of our favorite funds climb over 300% in just a few short years, we know that it's time to consider downgrading our category outlook (a measure of our expected future performance of a fund category in general).

The Favorite Funds List is not just our assessment of the best funds in each major stock fund category, but also our forecast for each category as a whole. Most of your future returns – which is what we're most concerned with around here – are driven by each category's performance going forward.

From early 2002 until mid-2006, we rated Asian funds a (Interesting - should outperform the market over the next 1 to 3 years). After investors began investing in emerging markets with somewhat irrational exuberance, we downgraded this category to a (Neutral) in 2006. In the fall of 2007, after a very hot 12-month span, we finally went with a negative rating (Weak - should underperform the market) in our most recent favorite funds ratings update. Now, at the end of 2007, we’re giving the Asian offerings our lowest rating of (Least attractive).

There are many signs that the best days are now behind us in this category. Four of our five favorite Asian funds have accumulated over $4 billion dollars in assets. Fidelity Southeast Asia (FSEAX) was up roughly 60% for the year at the end of November in spite of an 11% drop in November. Its five year annualized return is just over 35%. T. Rowe Price Asia (PRASX) posted similar returns.

Positive performances attract an influx of big money from fund investors. This new money then results in stock overvaluations and sloppy investing by fund managers. This pattern's also a broader indication that there's too much money sloshing around where you're trying to earn a buck. Fund managers and investors alike start to believe their own performance and think anything is possible in a dynamic economy with a hot stock market.

Most of our anticipated poor future returns will occur as this category begins to cool off, if not flat out crash, in general. Some of the decline will happen due to the funds' underperformance as managers accustomed to managing relatively small portfolios struggle to successfully invest billions of dollars in new money. We’re proud that the majority of the funds on our list have been category leaders since we picked them, but some are already showing signs of performance problems.

Matthews Pacific Tiger (MAPTX), which fortunately has been closed to new investors since last year, has been lagging for the last two years. It’s hard not to notice such subtle underperformance when performance in general has been so red-hot. If this fund had been underperforming because it was avoiding China – the hottest area for Asian funds now – it could be excusable, and a benefit going forward. However, this fund is into China and Hong Kong stocks to the tune of 35% - in line with benchmark indexes. The secret to Pacific Tiger’s underperformance lies in its overinvestment in financial stocks, underinvestment in energy stocks, and its manager's general aversion to the high-risk, high-valuation investing trend that has begun to dominate the Asian markets. Despite all of this, Matthews Pacific Tiger is still cheap for its category. We believe it should outperform the other funds in this category as the Asian markets sink, so we're keeping it on our Favorite Funds list for now.

T. Rowe Price New Asia and Fidelity Southeast Asia will likely fall about 10% more than Matthews Pacific Tiger once the air comes out of this market. Frankly, after reading some fund manager commentary, we get the impression that the Matthews people believe that Asian stocks are overblown, but like most actively managed sector and regional funds, they still remain fully invested because that’s what their fund investors want.

Although many of the older funds in this category have grown too large during the recent Asian funds hoopla, the fund industry has been dutifully launching new funds to meet the demand – which is usually a bad sign for future returns. Most of these launches have introduced new exchange traded funds, or ETFs, which are fast becoming the vehicle of choice for performance chasing investors, but there have been plenty of ordinary open-end funds available as well.

In the last two years, we’ve discovered the following new Asian open-end funds:

Buffalo Jayhawk China (BUFCX)
SPARX Asia Pacific Opportunities (SPAPX)
SPARX Asia Pacific Equity Income Fund (SPAIX)
Oppenheimer Baring China Fund (OBCAX) (Load)
Guinness Atkinson Asian Pacific Dividend (GAADX)
AIM China (AACFX) (Load)

And ETFs

iShares S&P Asia 50 (AIA)
PowerShares FTSE Asia Pacific S/M (PDQ)
PowerShares FTSE Asia Pacific ex Japan (PAF)
PowerShares Dynamic Asia Pacific (PAF)
SPDR S&P China (GXC)
First Trust ISE Chindia (FNI)
SPDR S&P Emerging Asia Pacific (GMF)
WisdomTree Pacific ex-Japan High Yield Equity (DNH)
WisdomTree Pacific ex-Japan Total Dividend (DND)

Opportunity rarely knocks by the dozen…

Even with this bounty of new product we don’t see a reason to replace a favorite here at this time but we’re keeping a close eye on the new SPARX funds. We’d add a China fund on about a 50% - 75% pullback in Chinese stocks or seeing some China funds close.

We wouldn’t be adding any new money to Asian funds today, even the best ones in the category shown here. Asian funds with less exposure to China should perform best over the next few years.


  1. T Rowe Price New Asia (PRASX)
  2. Matthews Pacific Tiger (MAPTX)
  3. iShares MSCI ex-Japan (EPP)
  4. WF Advantage Asia Pacific (SASPX)
  5. Fidelity Southeast Asia (FSEAX)

Should You Target Target Funds?

January 2, 2008

The idea behind target date mutual funds is that the funds get safer by adjusting their allocation as the investor grows older and nears retirement. A young investor just out of college might buy the Fidelity Freedom 2050 (FFFHX), which has 90% of its holdings in Fidelity stock funds and just 10% in Fidelity bond funds. In ten years the same fund would be 85% allocated to stock funds and 15% to bond funds. If an investor sticks with the fund for the long haul, when they reach the fund's target date their investment allocation would become more balanced with 50% in stocks and 50% in bonds. After 2050 the fund gets even more conservative, ultimately hitting 20% in domestic stock funds and 80% in bond funds - and half of that 80% in short term bonds - about ten to fifteen years after the target date. Eventually the fund merges into Fidelity Freedom Income (FFFAX).

David McPherson, a financial planner writing for ABC News' website, posts a solid overview of target date mutual funds. His bottom line, and ours: Target date funds can (being fund of funds) be a little pricey to own, but are a good option for many investors:

When might a target-date fund be right for you?

First, when you are gripped with uncertainty. The truth is many retirement savers are overwhelmed by choice and can't make up their minds. Quite often, I see clients who when forced to make a decision seize up and put their money in a safe money market or bank CD. This tends to happen when somebody must roll over funds from an employer-sponsored plan into an IRA.

The problem is that due to inertia this money is likely to sit too long in that low-yielding account and not earn the returns it should over the long haul.

Second, if you are in your 20s or 30s, a low-cost target date fund could be the perfect solution. At those ages, an individualized portfolio is not critical and maybe even unnecessary. Rather the most important factors are that you are putting aside money, it is invested for the long term and it is diversified among different types of investments.

It is when investors grow older -- in their 40s, 50s and 60s -- that a customized portfolio constructed with the help of a qualified adviser is most needed. At those ages, you're losing out on the benefits of time that younger investors enjoy and most need an investment mix suited to your individual circumstances.

Third, if your access to professional financial advice is limited, a target-date fund may be the right choice. The truth is that most paid financial help is out of reach for low-income workers and even many middle income workers.

Let me say that I do believe many do-it-yourself investors are quite capable of constructing and managing their portfolios. With a little interest and a little reading, most folks can learn the basics of sound investing. The fact is, however, that many workers will never learn enough about investing to do it themselves.

In such cases, I say give them a target-date fund."

We'd add another benefit of target date funds (and other funds setting fixed bond and stock percentage allocations): these funds rebalance aggressively and end up buying low and selling high by selling stocks after big moves up and buying after big drops. Investors typically do the opposite and underperform the market over time.

Funds mentioned in the article:

Fidelity Freedom Funds
Vanguard Target Retirement Funds

See also:

Ask MAX: What does MAX think of the Vanguard Target Retirement Fund?

New 'Best Case' Data Point Now Live

January 1, 2008

The first day of 2008 brings a brand new data point for MAXfunds users.

The 'Best Case' scenario is derived from a fund's previous risk behavior as well as the type of fund in question. The number is our prediction on how much you can expect to gain in percentage terms under ideal market conditions for each mutual fund.

This data point is the companion to our 'Worst Case' number, which is how much you can expect to lose in each fund, in percentage terms, from the top to the bottom – a boom to bust cycle that could span several years or happen very quickly during a sharp market crash.

You'll find the 'Best Case' and 'Worst Case' numbers on each fund's research page, like this one for Dodge & Cox International Stock (DODFX). Enjoy!

2007 - The Year In Funds (The Short Version)

January 1, 2008

Lots o' ups, lots o' downs, but in the end, 2007 was a good year for the vast majority of mutual funds.

To sum up 2007, growth beat value, large cap beat small cap, foreign beat domestic, safe bonds beat risky bonds, and emerging markets and natural resources topped the charts. If you avoided financials and real estate, you probably did fine in 2007.

The typical diversified U.S. stock fund was up around 6% in 2007 - not bad, but underwhelming for their risk. Lets not forget for most of the year you could get over 5% in Vanguard money market funds, good CDs, and FDIC insured online savings accounts.

As Investor's Business Daily notes in their 2007 fund review, just about everything was up except funds tied to the deflating real estate bubble:

Stock mutual funds made 2007 the fifth year in a row of gains. But it often didn't feel like the market was advancing.

The year was marked by volatility. U.S. diversified stock funds lost ground in four months -- February, June, July and November.

The main culprits were the subprime lending crisis and ensuing credit crunch. Investors also worried about inflation, soaring key commodity prices, slowing U.S. economic growth and a falling dollar. And don't even ask about geopolitical tensions.

Still, the market grew. U.S. diversified stock funds racked up a total return of 6.85% for the year through Dec. 27, according to Lipper Inc. That lagged their five-year average annual return of 13.95% and 15-year average annual gain of 9.98%. Growth walloped value in all size groups. Mid-cap growth beat all other categories, averaging 17.04%.

The leading sector was natural resources, which skyrocketed 40.01%."


Looking to start 2008 on the right financial foot? Consider joining the MAXadvisor Powerfund Portfolios - seven expertly managed model portfolios from the founders of MAXfunds.com. Click here to learn more.

Those Confusing Capital Gains

December 31, 2007

Judging from the traffic numbers to our How Mutual Funds Work - Capital Gains article, there are a whole lot of you out there confused by the tax implications of mutual fund ownership. And why shouldn't you be - mutual fund capital gains can be a perplexing bit of  financial folderol that unfortunately is a necessary evil of fund ownership.

About.com has a piece that does its best to clear things up, including this bit that tries to explain how a mutual fund taxable gain distribution affects the value of your fund investment:

The short answer is it doesn't. The NAV [Net Asset Value or fund price] will drop by the amount of the distribution. For example:

To make this example simple, assume that Fund A's stock holdings don't change in value during this period.

Fund A was worth $5.60 a share on December 5th (the record date).

On December 6th, the X-Date in this example, the Fund's stock holdings didn't change in value, but the NAV did drop by $0.05 to $5.55 to reflect the $0.05 per share distribution it intends to pay those share holders who held the fund on the record date.

On December 7th, the distribution date, the fund pays out the $0.05 per share distribution.

If your account value was $10,000 at the start of this period, it is worth $10,000 at the end of the period and if you chose to have the mutual funds reinvested, you will still hold $10,000 of Fund A.

This example is simplified because it ignores regular changes to the NAV from stock or bond movements that it holds."

If you didn't choose to have your capital gains distribution reinvested, you would receive a check from the fund company for the distribution amount. When you receive a check, the amount of shares you owned in the fund will not change and your account value should fall by the amount of the check (assuming no changes in the value of the portfolio investments). If you reinvest your fund distributions, the fund company will buy you more shares of the same fund at a lower price. In such a case your share total goes up but your account value remains the same because the fund price fell by the amount of the distribution.


See also:

How Mutual Funds Work - Capital Gains

Ask MAX: Did My Fund Fall 41% In One Day?

Ask MAX: Capital Gains Quickies

When Do We Update Our Data?

December 28, 2007

MAXfunds.com reader Don wrote in to ask how often we update our Average Annual Return and Average Annual Return Vs. Similar Funds data on our mutual fund research pages.

Performance information, and all other fund data on MAXfunds.com for that matter, is updated once a month, usually about a week after the start of the month (which is when our data supplier, Thomson Financial, releases the new data feed to us).

You can check how fresh our data is by looking at the very bottom of each mutual fund research page. There you'll find, right next to our copyright info, a 'DATA ON THIS PAGE AS OF' notice. Our monthly data updates include data through the end of the previous month, so our next data update the first week of January will have an 'AS OF' data of December 31st, 2007.

Do you have a question about MAXfunds.com? Ask away by clicking here.

Long Short Funds Excel At Charging Fees, Investing….Not So Much

December 27, 2007

Today’s Wall Street Journal takes a look at the often questionable performance of mutual funds looking to profit from the market’s ups and downs:

These investments, often referred to as 'long-short' or 'market-neutral' funds, aim to zig while the markets zag, and potentially even profit in declining markets. However, a handful of them are in the red this year, even as the Dow Jones Industrial Average is up 8.7% and the Standard & Poor's 500 stock-index is up 5.6%.

The worst performer: Forward Long/Short Credit Analysis fund, which invests in primarily low-quality municipal and corporate bonds, and is down 17% year-to-date, according to research firm Morningstar Inc.

Other funds down this year include Analytic Global Long-Short fund, down 4.7% year-to-date, Robeco Boston Partners Long/Short Equity, down 3.9%, State Street Global Advisors' Directional Core Equity fund, down 3.8%, and DWS Disciplined Market Neutral fund, which is down 3.6%.

In one case, Phoenix Market Neutral fund, the directors have taken the unusual step of proposing to change its managers. The fund is down 2.7% year-to-date, and among the worst performers in this category over the three- and five-year periods according to Morningstar."

Image Source: Wall Street Journal

We’ve been critical of this category in the past but have been recommending some long-short funds in our Powerfund Portfolios this year, notably American Century Long-Short Equity Inv (ALHIX) which was up 7.6% for the year through yesterday. This decent return disguises a very scary patch for this fund in August during the market gyrations that sent many heavily shorted stocks up, up, and away (and many funds that short down big on certain days). This fund has closed to new investors.

We also recommended both 1st Source Monogram Long/Short (FMLSX) (up 6.34% this year) and SSGA Directional Core Equity (SDCQX) (down 3.84% this year and one of the stinkers noted in the WSJ article) as alternatives to ALHIX for Powerfund Portfolios investors.

A third Powerfund Portfolios alternative was Laudus Rosenberg U.S. Large/Md Cap Long/Short Equity (RMNIX) which was acquired by Vanguard and converted into Vanguard Market Neutral Fund (VMNFX). The fund is up 12.90% for the year. Now that Vanguard has their hands on it, the fund is the lowest fee long short fund in the business with a sub-1% expense ratio (and a $250,000 or $5 million minimum depending on share class). Those who bought before the conversion were grandfathered into the newly cheap Vanguard version.


Some Top Fund Managers Sour On Economy

December 26, 2007

Bob Rodriguez manages the (closed) small cap value fund, FPA Capital (FPPTX), and bond fund FPA New Income (FPNIX). He has been hoarding a large cash stake for quite some time, which hasn't been such a smart move in general for stocks, but considering this year's crummy small cap stock returns has helped him stay competitive with other similar funds.

Morningstar noticed Rodriguez's recent move to the even more dour camp of PIMCO's Bill Gross when it comes to America's future:

...[Rodriguez] recently announced he put a halt to purchases of stocks and high-yield bonds at both portfolios on Dec. 14. His decision is a reaction to the subprime mortgage-induced credit crunch, which he expects to worsen in coming months. Rodriguez says he'll review his actions weekly, but he doesn't anticipate any change in course until February or March 2008.

Rodriguez's move is virtually unprecedented. Many investors, including Rodriguez himself, aren't shy retreating to cash when they're nervous. But few money managers have ever publicly foresworn stocks and bonds altogether."

When your smarter fund managers are starting to sound this pessimistic, it may be time to reassess your expectations for stocks and bonds in 2008.


Big Mutual Fund To Buy Merrill Stock At Discount

December 24, 2007

Today Merrill Lynch (MER) announced they would be selling stock in a private placement to two big investors, Singapore based investment firm Temasek Holdings and famed fund managers Davis Selected Advisors. Davis manages – among others - $50 billion in assets Davis NY Venture Fund (NYVTX) and is one of the most famous mutual fund companies in the business. In the private stock offering, Temasek will get up to $5 billion in Merrill stock, Davis up to $1.2 billion.

Merrill Lynch (NYSE: MER) today announced it has enhanced its capital position by reaching agreements to raise up to $6.2 billion of newly issued common stock in a private placement with Temasek Holdings and Davis Selected Advisors. Merrill Lynch expects these transactions to close by mid-January 2008.

'One of my first priorities at Merrill Lynch was to strengthen the firm’s balance sheet, and today we have made great progress towards that by bolstering our capital position through these investments and our announced sale of Merrill Lynch Capital,' said John A. Thain, chairman and CEO of Merrill Lynch. 'The benefits of these transactions are not limited to strengthening our financial position…'"

The real benefit is the investment bank needs to raise capital to offset mega-billions in losses related to overly enthusiastic wheeling and dealing in the U.S. mortgage market.

What is notable to investors in funds managed by Davis is that the Merrill stock will likely be acquired at a discount to the current market price of Merrill Lynch stock ($48 as opposed to the $58 or so this morning.

Davis doesn’t currently own Merrill Lynch stock in Davis NY Venture, but does own it in Clipper (CFIMX), which Davis now manages after some turmoil at Clipper. Davis NY Venture has done well this year considering their large stakes in financials including banks like JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and Wachovia (WB), hard hit in 2007 – and is only slightly underperforming the S&P 500 (5.3% YTD through last Friday as opposed to 6.5% for index).

We don’t know for sure, but based on the Temasek deal Davis probably has the option to buy Merrill stock at $48 until January 31st, 2008, or if they wait, the option to buy it at 90% of the then current market price after January 31st. March 28th, 2008 is the drop dead date to get in at a discount.

As part of the arrangement, Merrill can’t sell more stock in themselves at a price lower than $48 without reimbursing the buyers and Davis can’t sell or otherwise hedge their big Merrill stake for one year.

The fact that Merrill is raising money by selling stock at half the price of earlier this year, watering down other shareholders in the process, speaks to the troubles facing those involved in mortgage lending in recent years.

We’re dying to see how this stock gets allocated to the various Davis funds, separate and institutional accounts because in theory its worth much more than they paid – in fact the option to buy Merrill stock at $48 is worth at least $250 million to Davis right now – essentially free money for locking up for a year and committing to so much stock.

Link to press release (PDF)