Beating The Market Is Easy (and Here Is How)
Settling for the average by index investing is ok, but one can surely do better. Tim Middleton at MSN Money offers some time-tested mutual fund recommendations.
"It's a simple misunderstanding but one with profound implications for your personal fortune, and fortunes. "The market," as represented by the 500, isn't the market at all. It's the equivalent of an average domestic mutual fund that invests in large companies. With the 500 down 0.51% as of Feb. 28, as represented by Bogle's flagship fund, Vanguard 500 Index (VFINX), you would have to work hard to do worse. And this isn't a fluke, although the breadth and depth of defeat is particularly stark right now. If you've been tricked into thinking an S&P 500 index fund is a one-stop solution to your portfolio planning, it's understandable. Thanks to relentless promotion from Standard & Poor's and Vanguard, the 500, in the minds of investors, "represents ..." Full StoryAre Mutual Fund Managers Gaming The (Morningstar) System?
While it is certainly true that one can game the system by being risk-averse -- Morningstar values risk-adjusted returns instead of absolute returns -- I still believe in the franchise of Morningstar and the effectiveness of its rating system. At the end of the day, Morningstar's rating is a relative rating comparing each fund to its competition in the same style category, so if everyone is trying to reduce the risk, you can safely bet the trend will turn opposite ways before soon.
"In trying to attract and retain assets, Goldman says it believes fund companies are trying to "reverse engineer the Morningstar process" to earn coveted four- and five-star ratings that consumers often solely rely on when researching mutual-fund investment options. "Morningstar did something thoughtful in evaluating what mutual-fund managers say they're doing," says Don Mulvihill, a managing director at Goldman Sachs. "But the fund industry has reacted to it by trying to game the system to get star ratings." The result: lower risk and returns inside the funds. ... So, how might investors respond? Goldman's Mr. Mulvihill says these results strengthen the argument for pursuing a so-called core-and-satellite portfolio. The core of this approach is built around large-cap U.S. and foreign shares owned through index funds ..." Full StoryMutual Fund Tax Bills Are Climbing
It shouldn't be a surprise to mutual fund investors that after a few years of steady returns, mutual funds are returning more money to investors as capital gain distributions. How should smart investors respond? Stay with those funds with low turnover and long-term perspective.
"April figures to be a cruel month for fund investors. Fund investors' tax bills are on the rise for the fourth year running. The average capital gains distribution for U.S. equity funds in 2006 rose to 4.17% of assets compared with 3.32% in 2005 and 1.67% in 2004. For international equity, the average distribution was 4.98%, for balanced funds 1.95%, and for taxable bond funds 0.12%. The cause of those payouts is of course a good thing. It means funds have produced solid returns for a few years running. Although returns were pretty good in 2003 and 2004, the distributions were small because capital gains were offset by realized losses during the early-2000s bear market. However, most of those losses are long gone." Full StoryThe 10 Hottest Selling Mutual Funds
Morningstar's Russel Kinnel found out the best selling funds in 2006 are not the trendist funds.
"For 2006, though, I was pleased to see that the trendiest stuff didn't make the list. No China funds, no Russia funds, not even a real-estate fund. Rather, the top-selling funds were broadly diversified, well-managed, and low in cost. True, there was an emphasis on funds with strong recent returns and many of the funds suffer from asset bloat, but those are minor concerns compared with buying supertrendy supercostly niche funds like the top-performing China funds."
"American Funds Growth Fund of America (AGTHX) American Funds Capital World Growth & Income (CWGIX) American Funds Capital Income Builder (CAIBX) American Funds EuroPacific Growth (AEPGX) Dodge & Cox International Stock (DODFX) Vanguard Total Stock Market Index (VTSMX) Fidelity Diversified International (FDIVX) PIMCO Total Return (PTTRX) American Funds Fundamental Investors (ANCFX) Davis New York Venture (NYVTX)" Full Story2006 Morningstar Fund Managers of the Year
Morningstar announced its 2006 award of Fund Managers of the Year. The report also includes some good fund picks too.
"Domestic Equity: O. Mason Hawkins and Staley Cates Longleaf Partners Fund (LLPFX), Longleaf Partners Small-Cap (LLSCX) In his latest Analyst Report for Longleaf Partners, Gregg Wolper reports that "smarts, guts, and patience" sent that fund to the top of the charts in 2006. Those characteristics have also marked the whole of Staley Cates and Mason Hawkins' remarkable tenure here. The pair are value managers in the Buffett mold, seeking companies that are trading at a discount of 40% or more to their estimates of intrinsic worth. International Equity: David Herro Oakmark International (OAKIX), Oakmark International Small Cap (OAKEX) Just like Hawkins and Cates, David Herro is a value maven who looks for budget-priced stocks trading at a big discount to what he thinks they're worth ..." Full StoryWill Fidelity Magellan Ever Beat The Market Again?
Although those at Kiplinger's Personal Finance remain positive, I seriously doubt the new manager Harry Lange can master a turnaround story for this $45 billion fund.
"Magellan’s asset base swelled to $100 billion in 1999. But today it stands at just $45 billion -- the result of losses incurred during the 2000-02 bear market and a steady stream of shareholder redemptions (including both load and no-load funds, Magellan is now the 10th largest stock fund). Today, Magellan is an entirely different animal. It is run by Harry Lange, who took over in October 2005 after building a stellar record over nine years at Fidelity Capital Appreciation, a go-anywhere fund with a tilt toward growth stocks. Lange immediately repositioned Magellan as a growth fund. Soon after taking over, he ditched many of Stansky's stodgy blue chips -- such as Altria (MO) and Pfizer (PFE) -- and replaced them with racier fare, such ..." Full StoryFeatured Fund: Vanguard Wellington (VWELX)
Kiplinger's Personal Finance reviews the legendary balance fund Vanguard Wellington.
"One way Bousa picks stocks is by studying and projecting the supply and demand picture for industries and sectors. The idea is that when an industry is experiencing a supply shortage, companies that produce that particular product can raise prices. That often results in happy earning surprises -- and rising share prices. For example, Bousa loaded up on oil and gas stocks, including ExxonMobil and ConocoPhillips, when he saw that surging energy demand from China and India would strain supply. After observing the massive spending on telecom and technology in the late 1990s, Bousa decided to largely avoid those sectors. These days, Bousa thinks the supply-demand picture for food is attractive, so he's investing in such companies as John Deere, the big agriculture equipment maker ..." Full StoryTarget-Date Funds Launched at American Funds
Morningstar reported that American Funds has launched nine target-date funds. It shouldn't be a surprise since almost every major fund family has launched similar offerings.
"American Funds has joined the target-date retirement fund party. This month the fund family's advisor, Capital Research and Management, filed with the SEC to add nine new target-date retirement funds to its lineup. The new funds are Capital Research's first entries in a growing segment of the mutual fund industry. The earliest targeted retirement date for these new funds is 2010, with the other eight funds' target dates hitting at five-year increments after that through 2050. Capital Research's filings didn't include other information, such as how each offering will allocate assets among sibling funds (including how assets will be split between stocks, bonds, cash, and other investments), who will manage each one, or how much each fund costs. The introduction of these new funds precedes ..." Full StoryMutual Fund Investors: $20 Billion Tax Bomb On The Horizon
The time tested truth is if you have a profitable year in mutual fund investing, be prepared for a big tax bite.
"Remember, even if you don't sell your fund shares, you're on the hook for moves made by the fund manager unless you own the fund in a tax-deferred account such as a 401(k). Qualified stock dividends and long-term capital gains are typically taxed at 15 percent; interest income and short-term gains will be levied at federal income tax rates, which can be as high as 35 percent. One reason for the increased taxes is that the market has been especially volatile this year. Large caps overtook small caps as the market's favorites, for example, while emerging markets, homebuilding and energy stocks have moved abruptly in and out of favor. To stay on top of these market shifts, many fund managers traded more frequently. "All these ..." Full StoryMutual Funds Pass $10 Trillion Mark In Assets
Baby boomers, exchange-traded funds and stock market performance were mentioned as forces behind the $10 trillion achievement of the mutual fund industry. Will the collective actions by baby boomers someday cause massive cash outflow?
"Somewhere around the time that the USA was adding its 300 millionth person, investors were adding their 10 trillionth dollar to mutual funds. Fund assets stood at $9.7 trillion at the end of September, according to the Investment Company Institute, the industry's trade organization. Throw in assets of increasingly popular exchange-traded funds, which trade like stocks on exchanges, and fund assets blew past $10 trillion sometime in recent weeks. By comparison, the nation's entire gross domestic product is about $13.3 trillion. Smashing the $10 trillion barrier is all the more remarkable because mutual fund assets had plunged to $6.1 trillion in September 2002 as the 2000-02 bear market neared its close. Since then, investors have poured $566 billion, or an average of $11.6 billion a ..." Full StoryHow to Start Investing in Mutual Funds
If you are into investments but you don't want to invest in one kind of stock or another, perhaps you would rather invest in a mutual fund. With mutual funds you can diversify, meaning you can buy more than one kind of stock. By diversifying you reduce the risks without losing your returns. When you work with mutual funds you can manage them better. You normally don't buy mutual funds directly. Instead you hire a professional manager to care for your purchase. These managers know how to care for the fund and have credentials to prove it. Buy having mutual funds you can keep track of them easier. This is because you only have one portfolio to deal with instead of perhaps hundreds of stocks ... Full Story
Is Bill Miller's Lucky Streak About To Be Over?
Morningstar's Greg Carlson concludes that although it will be hard for Bill Miller to pull off another last-minute trick to beat S&P 500 for the year, investor should be better off appreciating the long-term appeal of his Legg Mason Value (LMVTX) fund.
"After beating the S&P 500 Index for a remarkable 15 consecutive years, Bill Miller of Legg Mason Value (LMVTX) is lagging the benchmark by nearly 11 percentage points for the year to date through Oct. 26, 2006. The extent to which the fund trails the S&P--which in turn has taken a toll on its longer-term comparisons with the benchmark--has some investors spooked. For example, after my colleague Russ Kinnel wrote a recent column that placed Miller among the 10 best current mutual fund managers, he received an e-mail from a reader who wrote that Miller, due to his bout of severe underperformance, is no longer among the industry's elite. ... The potential end of Miller's streak brings up a larger point. Even the very best ..." Full StoryInternational Fixed Income Fund Recommendations
I have no appetite to get exposure on international bond funds. I leave the task to Bill Gross by investing in his PIMCO Total Return fund.
"Moreover, eminent investors as diverse as PIMCO's Bill Gross and Berkshire Hathaway's Warren Buffett (as well as many others) have long believed that the U.S. current account deficits will likely lead to downward pressure on the value of the dollar relative to other currencies. In fact, Gross believes that the situation could lead to the eventual abandonment of the "strong dollar" policy, and he has counseled investors to move part of their portfolio away from U.S. assets and "toward more competitive economies." The upshot for investors is that there are several good reasons to consider fixed-income markets from a global perspective. With that in mind, we offer four funds that we think can play a role in many investors' portfolios. Loomis Sayles Global Bond (LSGLX ..." Full Story10 Best Domestic Equity Mutual Fund Managers
Russel Kinnel at Morningstar compiled a who-is-who list of famous mutual fund managers specializing in domestic stocks:
"Will Danoff - Fidelity Contrafund (FCNTX) Joel Tillinghast - Fidelity Low-Priced Stock (FLPSX) Bob Rodriguez - FPA Capital (FPPTX) Saul Pannell - Hartford Capital Appreciation (ITHAX) Mason Hawkins and G. Staley Cates - Longleaf Partners (LLPFX) and Longleaf Partners Small-Cap (LLSCX) Bill Miller - Legg Mason Value (LMVTX) Brian Rogers - T. Rowe Price Equity Income (PRFDX) Richie Freeman - Legg Mason Partners Aggressive Growth (SHRAX) Marty Whitman - Third Avenue Value (TAVFX) Howard Schow, Theo Kolokotrones, and Joel Fried - Vanguard Primecap (VPMCX)" Full StoryThe Cost Of Market Timing In Mutual Fund Investing
This New York Times article quoted a revealing study that ordinary mutual fund investors are paying dearly for timing the market.
"According to his data, the 200 equity funds with the largest money flows produced portfolio returns averaging 8.85 percent a year for the 10 years through 2005. But when adjusted for dollars actually at work, as Mr. Bogle has long advocated, the return of the typical investor in those funds was just 2.40 percent, annualized. That means an underperformance of 6.45 percentage points. The data included three funds whose typical investors lagged by more than 20 percentage points — because they were late to the party or moved in and out of the funds. These were Janus Enterprise, Old Mutual Select Growth Z and Pin Oak Aggressive Stock. For nine others, typical investors posted returns that were 15 to 20 points less than they would ..." Full StoryIs Bill Gross's Winning Streak Coming To A Close?
Scott Berry at Morningstar wonders if the Bond King will underperform the index this year now that his Harbor Bund (HABDX) returns slightly less than benchmark year-to-date, after many years of superior returns.
"We've written a lot about what makes Gross a great bond manager, but his success year in and year out versus the Lehman Brothers Aggregate owes much to his flexibility. While some managers peg their fund's interest-rate sensitivity to the index's, invest only in domestic bonds, avoid derivatives, or all three, Gross doesn't limit himself. He employs risk controls and keeps the portfolio broadly diversified, but he goes where he finds value. That can mean increasing the fund's interest-rate sensitivity as he did in 2002, bulking up on nondollar bonds as he did in 2003, or even dabbling in emerging-markets debt as he did in 2004. The result has been a remarkably consistent and terrific long-term record. Gross hasn't spun as much magic in 2006 ..." Full StoryKiplinger's Pick Of Best Mutual Funds
The list from the renowned Kiplinger's Personal Finance has some good names in it, but I'm very puzzled by why it will set up a "Best Fund Revival" category. Shall we expect consistency in performance for mutual fund picking?
"BEST U.S. STOCK FUND Dodge & Cox Stock (DODGX): "boasts a 41-year pedigree and a track record for excellence that's simply superb. Compared with all diversified U.S. stock funds, it ranks in the first decile for total return for the past one, three, five, ten, 15 and 20 years." BEST INTERNATIONAL STOCK FUND Dodge & Cox International (DODFX): "Stock picking by committee really works. Dodge & Cox International has barely been around five years, but no other no-load fund can touch its 17.6% annualized total return for the half-decade to September 1." BEST EXCHANGE-TRADED FUND iShares Dow Jones Select Dividend Index (DVY): "mimics an index of 100 stocks that generate above-average dividend yields, such as Altria Group and Merck. From its inception in November 2003 ..." Full StoryFord 401(k) Plan To Drop Fidelity Magellan
Ford followed the decision by Microsoft 401(k) plan administrators to abandon Fidelity Magellan fund (FMAGX). The fund has already lost over 50% of its net assets since 1999. Will it bleed to death before the new manager can enhance its performance?
"In a move that deals another blow to one of Fidelity Investments' largest funds, Ford Motor Co. will drop the Fidelity Magellan Fund from the 401(k) retirement plan it offers to employees. ... Total assets in Ford's 401(k) plan at the end of 2005 stood at $11.79 billion, of which 22.5% was in company stock, says David Kudla, chief executive at Mainstay Capital Management LLC of Grand Blanc, Mich., which provides investment advice to hundreds of workers in Ford's 401(k) plans. The last significant change that Ford made to its 401(k) plan was in 2002 when, in an effort to streamline its plan, it went from offering 61 investment options to 36, Mr. Kudla says. But the plan's allocation in retail mutual funds makes up ..." Full StoryWhat Are Insurance Bonds?
Insurance bonds are offered by a number of life insurance companies. Unlike traditional insurance policies, insurance bonds are far more flexible and work similar to Unit Trusts. Insurance bonds are used to create capital appreciation without any immediate income. Any money made is reinvested until the bond reaches maturity or the bond owner dies. Full Story
What Are Superannuation Funds?
Superannuation funds are a great way to save for retirement. An income is drawn on these investments until the date of maturity which parallels the date of the investors' retirement. Superannuation funds are usually very conservative and low risk. Which is great for investors that want a constant and stable rate of return on their principal investment. Full Story
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