March 2006

The Lipper Mutual Fund Awards 2006

The 2006 Lipper Mutual Fund Awards for the USA have been announced as part of the firm's global programme of events, held in 18 countries, to reward funds that have delivered consistently strong risk-adjusted performance relative to their peers. The awardees are selected using the Lipper Leader rating for consistent return. A full, 17-page list of winners, which includes overall group awards, as well as top three-, five-, and ten-years picks, in multiple mutual fund categories, can be found here.

'Survivor Bias' Distorts Returns in 41 of 42 Morningstar Mutual Fund Categories

A "survivor bias" in the Morningstar mutual fund data relied upon by many individual investors and financial advisors may have the effect of "systematically and significantly" overstating the performance of actively managed mutual funds relative to their related indexes (for the 10- year period from 1995-2004), according to a new study released yesterday by Savant Capital Management and the Zero Alpha Group (ZAG). The study makes a strong case for low-cost, passive indexing. For an explanation of the methodology used in the study and full findings visit Savant Capital (study) or Zero Alpha Group.

Bonds or Bond Mutual Funds?

Meg Richards, AP Business Writer, explores the advantages and disadvantages of investing in bonds directly and through mutual funds, and finds that for many investors, mutual funds may offer a better deal. Richards spoke with Douglas T. McGinley, fixed income portfolio manager for Fidelity Investments, who said, "The reality is, many individual investors lack the asset size and expertise to construct a truly diversified bond portfolio," and added, "In addition, even the most meticulously built bond ladders lack exposure to huge parts of the market, such as asset-backed securities -- mortgages, auto loans, credit cards -- which aren't generally available to individual investors." In the Associated press article (via Yahoo Finance), Paul Herbert, an analyst with Morningstar, mentions Vanguard's Total Bond Market Index (VBMFX) as "your fixed income anchor," and other no-load funds with strong records and low expenses including Baird Aggregate Bond Fund (BAGIX); Harbor Bond (HABDX); Fidelity Investment Grade Bond (FBNDX), and Dodge & Cox Income (DODIX), as well as a fund that "has more latitude to go into non-investment grade issues," the Fidelity Total Bond (FTBFX).

New Small-Cap Fund with Unusual Performance Fee

Chuck Jaffe, a senior columnist for MarketWatch, reports the introduction of a new mutual fund from TFS Capital Management (the TFS Small Cap fund, TFSSX), where the fund managers fully align their interests with shareholders, and are compensated according to performance. In the article, published at azstarnet.com, Jaffe explains that "if the fund beats the Russell by more than 2.5 percentage points, management will be entitled to a bonus that, at its maximum, would double expenses to 2.5 percent (a level achieved by topping the benchmark by 5 percentage points). If management lags the index, however, it must rebate fees to the fund. While management can get paid if the fund loses money but beats the index, it gets nothing if performance matches or is below the Russell." And, he adds, that "According to Strategic Insight, an industry research firm, fewer than 5 percent of all equity funds have performance fees. Janus recently added a sliding pay scale to some of its funds, and Fidelity and Vanguard have long used them for certain funds, but no firm has ever allowed fees to swing this wildly, or to risk going completely unpaid."

Many Mutual Fund Investors Failing to Allocate Assets

Eileen Alt Powell of the Associated Press spotlights a recent study by the Wharton School at the University of Pennsylvania which showed that "of accounts managed by the Vanguard Group,... 80 percent of savers made no trades in 2003 and 2004, and 10 percent made just one trade," and she notes, in contrast that "Next to deciding how much money to save for retirement, the most important decision a worker can make is how to allocate assets..." In the article, published at the Beacon Journal, Powell points to a couple of asset allocation calculators on the web, at Vanguard, www.vanguard.com, to produce suggested asset allocations based on an investor's age and risk tolerance, and at Fidelity Investments, www.fidelity.com, finding model portfolios in its Retirement Resource Center.

Vanguard Funds Growing Quantitative Investing

Todd Mason, Knight Ridder, looks at one of the fastest-growing parts of the Vanguard Group's fund management -- the firm's quantitative mutual funds, in this article from the Sun News. Mason reports that, "This offshoot of Vanguard's trademark index-fund operation oversees $18.7 billion in 11 actively managed funds, up from just $3.7 billion at the start of 2001." While the group mostly manages "money for institutions and pieces of huge Vanguard funds such as Windsor II and Morgan Growth," they also have established their own fund at Vanguard, the strong performing Strategic Equity fund, and are planning a new all-quantitative fund, Strategic Small-Cap Equity, in April, according to Mason, who also the firm's quantitative strategies in the article.

Diverse Array of New Exchange-Traded Funds (ETFs)

BusinessWeek Online spotlights a wide range of new exchange-traded funds (ETFs) including: Deutsche Bank's (DB) DB Commodity Index Tracking Fund (DBC), Barclays Global Investors (BCS), State Street's (STT) streetTRACKS Gold Trust (GLD), State Street's SPDR Homebuilders (XHB), State Street's streetTRACKS KBW Bank Fund, PowerShares Water Resources Portfolio (PHO), Barclays microcap fund, First Trust Portfolios microcap ETF, PowerShares two new small and microcap offerings, The PowerShares Zacks Small Cap Portfolio (PZJ) and The PowerShares Zacks Micro Cap Portfolio, and notes that if these aren't enough, "Some three dozen [new ETFs] are in registration."

10-Point Checklist for Mutual Funds Portfolio Tuneup

Meg Richards, AP Business Writer, suggests that, "If your mutual fund portfolio hasn't been performing as well as you think it should and you're not sure why, it might be time for a bit of spring cleaning," in this article from Times Daily. Richards adds, "A cluttered investment lineup is inefficient at best and costly at worst; by identifying overlapping holdings and gaps in your asset allocation plan, you may be able to cut your expenses and boost your total return," and she provides a detailed 10-point checklist of various key factors to evaluate.

Vanguard Raising Stock Holdings in Target Funds

Deborah Yao, AP Business Writer, reports that after "half of [Vanguard's] target retirement funds lagged behind the peer group average for the [past] year," The Vanguard Group is raising the stock holdings of its six target retirement funds by 10 to 20 percentage points starting in June to boost returns. In the article, via ABC 7 News, Yao added, Vanguard chief executive John Brennan said, "While the changes ... will result in modestly higher risk profiles for the funds, we believe that shareholders will benefit from broader equity diversification and higher return potential."

The Downside of Exchange-Traded Funds (ETFs)

Kathy Kristof of the Los Angeles Times, cautions on exchange-traded funds in this article from azstarnet.com, noting that, "For a small investor, the trading costs overwhelm the savings from investing in exchange-traded funds, unless the investor leaves the money alone for years. The funds can make sense for bigger investors -- those with tens of thousands of dollars -- as long as they trade sparingly and through discount brokers." And, Kristof cites Dan Culloton, senior mutual fund analyst with Morningstar, who said, "It's ironic, but ETFs make the least sense for some of the people who are most prone to use them -- small investors who trade a lot."

Why the Bulls Have Outperformed

"Through a period marked by a boom-bust in many stocks, terrorist attacks on U.S. soil and the war in Iraq, stocks have significantly outperformed the two other main classes of financial assets. Again," says Chet Currier, a Bloomberg News columnist, in this article. Currier details the superior returns of popular equity mutual funds compared with bond and money market funds, and explores why equities have generally outperformed, looking in three areas: risk, patience, and pessimism.

Long-Term Top Performing Mutual Funds

Scott Burns, Universal Press Syndicate, cites "a handful of funds that have been consistent top performers," which include Bruce fund (BRUFX), Dodge and Cox Balanced (DODBX), Van Kampen Equity and Income A shares (ACEIX), Vanguard Wellington (VWELX), Mairs and Powers Balanced (MAPOX), Leuthold Core Investment Fund (LCORX), T. Rowe Price Capital Appreciation (PRWCX), and Value Line Income and Growth (VALIX). Details can be found in the article from chron.com.

"How to Be a Buy-and-Hold Investor"

Russel Kinnel of Morningstar explores why buy-and-hold mutual fund investing, which should be easy, isn't, and he details three fund selection strategies, "Look For Stable, High-Quality Management," "Choose Low-Cost Funds," "Develop Realistic Performance Goals," (and plugs the firm's "Morningstar FundInvestor") in this article via Yahoo Finance.

Perspective on Gabelli and Gabelli Mutrual Funds

Last week the Justice Department said it is taking over a five-year-old civil lawsuit that seeks financial damages from mutual fund manager Mario Gabelli. However, Chuck Jaffe, senior MarketWatch columnist, urges Gabelli fund investors not to panic or redeem their funds based on headline news. Jaffe provides details of the situation and offers a "decision tree shareholders should climb whenever they get bad news about their fund company," in this article from MarketWatch.

Assessing Asset Growth in Mutual Funds

Russel Kinnel of Morningstar.com looks at ways to determine whether a fund's assets have grown unwieldy, in this article from MiamiHearld.com. He suggests fund investors should look at two categories of factors, the fund managers themselves, and how involved they, and their firm, are with other accounts. Looking at the managers, Kinnel points to three areas, turnover rate, depth of research team, and general asset levels where some funds have closed to new investors. He found that "the median point at which small-, mid- and large-cap funds closed to new investors... [was], small-cap funds, $800 million; mid-caps, $3 billion; and large-caps, $18 billion."

Rydex Pure Style Exchange-Traded Funds (ETFs)

Rydex Funds recently introduced six S&P Pure Style Exchange-traded funds (ETFs) as a more precise way to invest in growth and value styles. According to the firm, "Rydex S&P Pure Style ETFs filter out those stocks whose style characteristic is uncertain, removing any overlap between growth and value to deliver style exposure based only on stocks with the strongest style attributes." Now, The American Stock Exchange (Amex) has announced that it is launching trading in options on these Rydex funds which include: Rydex S&P 500 Pure Growth ETF (RPG), Rydex S&P MidCap 400 Pure Growth ETF (RFG), Rydex S&P SmallCap 600 Pure Growth ETF (RZG), Rydex S&P SmallCap 600 Pure Value ETF (RZV), Rydex S&P 500 Pure Value ETF (RPV), Rydex S&P MidCap 400 Pure Value ETF (RFV).

Mutual Fund Investors Flocking to Gold, Natural Resource, and Real Estate Funds

Jonathan Clements of the The Wall Street Journal reports that "Mutual fund investors are doing the right thing for the wrong reason -- and maybe at the wrong time... shoveling money into gold, natural resources and real estate mutual funds." In this article from SouthCoastToday.com, he notes that, "Chicago investment-research firm Morningstar Inc. calculates that these so-called hard-asset funds now have combined assets of almost $104 billion, up from less than $19 billion five years ago." While these asset classes can be used to diversify and balance a broader portfolio, and reduce risk, Clements adds, "... let's be honest: A lot of what we're seeing is foolish performance chasing. Will it end badly? It always does."

QQQDirect Allows Direct, Fractional Investing in NASDAQ-100 ETF

For the first time, QQQDirect enables investors who purchase the same dollar amount of shares at regular intervals to have direct access to an exchange traded fund. Nasdaq Global Funds, Inc. and MyStockFund Securities, Inc. announced yesterday that they have jointly developed QQQDirect, a service that allows dollar cost average investors to buy the NASDAQ-100 Index Tracking Stock (NASDAQ: QQQQ) directly through the NASDAQ-100 Trust, holder of the NASDAQ-100 Index Tracking Stock, also known as "QQQ." QQQ is an exchange traded fund (ETF) designed to correspond to the price and yield performance of the NASDAQ-100 Index, one of the most closely followed indexes in the U.S. NASDAQ Global Funds CEO John Jacobs said, "By buying a single share of QQQ, dollar cost average investors will own a portfolio of NASDAQ's industry leading companies..." QQQDirect is an affordable online investing service that provides one plan purchase of QQQ per month free of any charge. It is a fractional share, dollar-based service that allows as little as $10.00 per month to be invested with QQQDirect's AutoVest Schedule. A single share of QQQ represents 100 of NASDAQ's large-cap growth companies while adding a broad-market index to investment portfolios.

Morningstar Introduces Rating for U.S. Exchange-Traded Funds (ETFs)

Morningstar, the investment research firm, announced Friday that it has launched a Morningstar Rating for exchange-traded funds (ETFs) based in the United States. The Morningstar Rating, often called the "star rating," may help investors and advisors compare the risk-adjusted returns of ETFs with other ETFs and similar open-end mutual funds. "Increasingly, investors are using exchange-traded funds as vehicles to help them implement their investment strategies," said Dan Culloton, senior mutual fund analyst at Morningstar. "By providing ratings on ETFs, we can help investors do their homework and better evaluate whether an ETF makes sense for their portfolios." ETFs are often compared with open-end index funds, and the rating provides an additional measure for comparing these investments. The Morningstar Rating for ETFs is derived by comparing each ETF to open-end mutual funds in the same Morningstar Category, or peer group. Morningstar is providing ratings for 107 ETFs; investors can find them on Morningstar.com.

U.S. Stock Funds Cool in February

After galloping out of the gate in the first month of the new year, U.S. stock funds cooled down considerably in February, Standard & Poor's announced yesterday. In its review of mutual fund performance for February, Standard & Poor's notes that in addition to high energy prices and geopolitical tensions in oil-rich Iran and Nigeria, investors appear to be concerned over the direction the Federal Reserve Board will take on interest rates in March when Chairman Ben Bernanke holds his first meeting later in the month. All mutual fund style categories, as defined by Standard & Poor's, were essentially flat in February, with domestic stock funds returning -0.46% on average for the month. Large-cap value funds held up best in February, edging up 0.15% for the month, while mid-cap growth funds showed the worst returns, falling 0.95%. Year-to-date, however, returns of U.S. stock funds continue to impress. The average domestic equity fund has gained 4.27% through the end of February, while small-cap growth funds have climbed 7.78%, topping all style categories. The large-cap S&P 500-stock index rose just 0.27% in February, but remains up 2.93% through the first two months of 2006. More details, including a table of fund investment style returns, can be found in the full press release.

U.S. Mutual Funds Increasing Foreign Holdings

InstitutionalInvestor.com reports here that "A larger percentage of stocks in a growing number of mutual fund portfolios are foreign, according to Morningstar. The fund tracker found that there are now more than 100 U.S. stock funds that consist of more than one-fifth of their portfolios in foreign securities..." The article gives several examples of funds revising their foreign stocks allocations and notes that "adding more foreign stock in the funds could make it more difficult to evaluate a fund's performance which is benchmarked against a U.S.-based market index."

Watching Fees on 401(k)s and Mutual Funds

The Duluth News Tribune cautions on fees on 401(k)s and mutual funds in this article. The author advises, "Pay close attention to fees. They can range from a very low 0.12 percent to a very high 2 percent, according to Hewitt Associates LLC, a benefits consulting firm. For example, if a person had $100,000 in a 401(k), and her fees were 1.5 percent, she would have about $286,160 in 17 years if her investments were averaging an 8 percent annual return. But if she was able to pay 0.5 percent in fees, she would have $339,770. Try your calculation at www.sec.gov/investor/tools/mfcc/about-costs.htm." Also, "If the expense ratio is more than 1.4 percent, you are probably wasting money. About 1 percent would be better, and less than that would be best. Studies show cheaper funds actually perform better than those that charge you high fees."