Mutual Funds - Education, Investment Company, Market News: Mutual Funds

Total money market mutual funds rose by $16.47 billion in latest week: ICI

ridodirected@gmail.com (RIDO) — Fri, 09 May 2014 23:58:00 +0000

Thu May 8, 2014 3:54pm EDT
Article from http://www.reuters.com/

(Reuters) - The Investment Company Institute on Tuesday issued the following money market mutual fund assets report:

"Total money market fund1assets increased by $16.47 billion to $2.59 trillion for the week ended Wednesday, May 7, the Investment Company Institute reported today. Among taxable money market funds, treasury funds (including agency and repo)increased by $6.96 billion and prime funds increased by $7.37 billion. Tax-exempt money market funds increased by $2.14 billion.

Retail:2 Assets of retail money market funds increased by$5.30 billion to $906.64 billion. Treasury money market fund assets in the retail category increased by $1.88 billion to $201.36 billion, prime money market fund assets increased by $2.20 billion to $517.37 billion, and tax-exempt fund assets increased by $1.22 billion to $187.91 billion.

Institutional:2 Assets of institutional money market funds increased by $11.16 billion to $1.68 trillion. Among institutional funds, treasury money market fund assets increased by $5.08 billion to $712.74 billion, prime money market fund assets increased by $5.16 billion to $899.97 billion, and tax-exempt fund assets increased by $920 million to $71.20 billion.

ICI reports money market fund assets to the Federal Reserve each week. Data for previous weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website.

1 Data for exchange-traded funds and funds that invest primarily in other mutual funds were excluded from the series. ICI classifies funds and share classes as institutional or retail based on language in the fund prospectus. Retail funds are sold primarily to the general public and include funds sold predominantly to employer-sponsored retirement plans and variable annuities. Institutional funds are sold primarily to institutional investors or institutional accounts purchased by or through an institution such as an employer, trustee, or fiduciary on behalf of its clients, employees, or owners. For a detailed description of ICIclassifications, please see ICI New Open-End Investment Objective Definitions."

Thu May 8, 2014 3:54pm EDT
Article from http://www.reuters.com/

Top Ranked Socially Responsible Mutual Funds

ridodirected@gmail.com (RIDO) — Sat, 03 May 2014 06:04:00 +0000

Article from http://www.zacks.com/stock/news/
Published on April 30, 2014

Back in 2008, some MBA students at the University of California, Berkeley, launched a Socially Responsible Investment (SRI) fund that has returned over 50% in six years. Performance of this fund, Haas Socially Responsible Investment Fund, is just an example of the potential of SRI funds.

The demand for SRI has been gaining strength in recent years and is most likely to grow. F&C Asset Management says environmental, social and governance (ESG) issues are now “material to long-term company performance”. The asset management firm believes investor values, management of risks and stronger codes and standards will drive responsible investing, which “continues to gather momentum globally”.

For investors interested in socially responsible investment, we have certain top ranked funds to suggest. Before that, let us take a look at what socially responsible investment is about and its performance so far.

Growth of SRI

SRI is indeed witnessing higher demand. A Forbes article last year said that $1 of every $9 in professional management in the US can fall under the SRI category. The Forbes article also reported that SRI investing has increased over 22% to $3.74 trillion worth of total assets under management (period not specified).

The Wall Street Journal reported “environmental and social issues have accounted for 56% of shareholder proposals, representing a majority for the first time” in 2014. The surge in number of socially responsible mutual funds itself echoes the growth story. Reportedly, there were over 50 mutual funds in this category in 1995. As of 2012, the number reached almost 500.

Changing Dynamics

Over the years, the SRI term has evolved to be also known as sustainable responsible investing. SRI investors now stand better chance of getting more returns banking on larger options of funds, diversification of investments and improved approach.

The number of funds has increased by a great margin and investors also get option to invest in Exchange Traded Funds. There are funds of all market capitalization and investors can also pick among domestic, foreign and global funds. In fact, investors get the option to invest in funds whose strategy and social responsibility agenda matches with that of investor financial objectives. The approach thus has improved.

Investments are now made not only based on social or environmental conscience. Now, there are funds that may invest in companies such as gun manufacturers or casinos.

3 Social Responsible Funds to Buy

It is obvious that investors are not only looking for social causes. iShares MSCI USA ESG Select Social Index Fund (KLD), which tracks equity performance of companies with positive environmental, social and governance (ESG) characteristics, has returned 108.4% in the last 5 years. Thus, the chance of earning is strong enough from these socially responsible funds. Here we will suggest 3 such funds that carry Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) and have provided decent returns.

Domini Social Equity Investor (DSEFX - MF report) seeks to provide total return over the long term. The fund invests a lion’s share of its assets in securities of mid to large domestic companies. Investments are made after evaluating the social and environmental standards in which the businesses are involved in.

Top holdings include Microsoft Corporation, Eli Lilly and Co and Apache Corporation

The fund currently carries a Zacks Rank #1 (Strong Buy). The fund has returned 2.3% year to date. Over the last one, three and five years, the fund has returned 22.1%, 11.2% and 18.8%, respectively.

Calvert Large Cap Core A (CMIFX - MF report) seeks to provide return higher than that of Russell 1000 Index. It invests a lion’s share of its assets in large-cap domestic companies whose financial, sustainability and social responsibility investment factors match the fund’s strategy. It is part of Calvert Investments, which is considered to be one of the largest SRI firms in the US.

Top holdings include Apple Inc., Johnson & Johnson and Capital One Financial Corp.

The fund currently carries a Zacks Rank #2 (Buy). The fund has returned 1.2% year to date. Over the last one, three and five years, the fund has returned 15.5%, 11.7% and 18.3%, respectively.

Parnassus Small-Cap (PARSX - MF report) invests in companies whose market capitalization is below $3 billion during the initial purchase. It is part of Parnassus Investments which claim their “investment philosophy is to own good businesses at attractive valuations”. Parnassus’ funds fund generally omits securities from alcohol, tobacco, gambling and even at times companies that engage in producing electricity from nuclear power.

Top holdings include Compass Minerals International, Inc., Gentex Corporation and Dominion Diamond Corp. The fund currently carries a Zacks Rank #1 (Strong Buy). The fund has returned -7.31% year to date. However, over the last one, three and five years, the fund has returned 17.0%, 3.5% and 16.1%, respectively.

Article from http://www.zacks.com/stock/news/
Published on April 30, 2014

Should you invest in multi-cap mutual funds?

ridodirected@gmail.com (RIDO) — Tue, 22 Apr 2014 13:12:00 +0000

Sanjay Kumar Singh, ET Bureau Apr 21, 2014, 08.00AM IST
From http://articles.economictimes.indiatimes.com/

Avantika Singh, a 23-year-old electronics engineer, has just begun investing in equities. Having already put money in a couple of large-cap funds with consistent track records, she now wants to invest in a mid- and small-cap fund. However, her uncle, a financial planner, suggested that she should not overlook the multi-cap category, which has an important role to play in an equity portfolio.

Retail investors like Singh need to have an allocation to multi-cap funds for various reasons. Why invest in multi-cap funds One reason to opt for this category is that different parts of the stock market tend to do well at different times. The data from 2006 onwards shows that while the large-cap index has done well in a given year, in the next, the mid- and small-cap indices have done the same.

"A multi-cap fund, which has exposure to all the categories, can benefit from the outperformance of any of these," says Taher Badshah, senior VP and co-head of equities, Motilal Oswal AMC, which has recently launched Motilal Oswal MOSt Focused Multicap 35 Fund.

Two, retail investors tend to invest on the basis of recent performance. If, over the past six months, mid-cap stocks have done well, they will tilt their portfolios towards these funds. Fund managers of multi-cap funds are better placed to decide whether to invest more in large-caps or in mid- and small-caps, based on objective criteria like prospects of individual stocks and valuations. They, thus, prevent 'recency bias' from creeping in.

Three, a multi-cap fund is less affected by lack of liquidity when the markets tank. When the markets are rising, investors bet aggressively on mid- and smallcap stocks. When the environment turns adverse, liquidity dries up in these stocks. However, multi-cap funds with the right mix of large-caps and mid- and small-caps are not affected as much.

"To meet redemption requests, the fund manager can sell large-cap stocks. He does not have to sell mid- and small-caps at distressed valuations, as happens in portfolios that are heavily loaded with these stocks," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

How much should you allocate? When you begin to build a long-term equity portfolio, start with products that offer the least risk and move up the risk ladder. So, 30-40% of your equity portfolio should go to large-cap funds. Next comes the turn of multi-cap funds, which should take up another 30-40%. Mid- and small-cap funds will take up the balance that is left after a 10-20% allocation to international funds.

Explaining the rationale behind a 30-40% allocation to multi-cap funds, Dhawan says, "When you invest in equity, you have to take a couple of decisions: one, how much will you allocate to equity versus fixed income? How much will you allocate to different market segments? By investing a good part of your portfolio in multi-cap funds, you delegate the second decision to an expert, the fund manager."

Points to remember While investing in multi-cap funds, keep the following points in mind: Cash allocation: Does the multi-cap fund remain invested in equity at all times or does it take large cash calls? Taking a cash call means that the fund manager moves to cash when he thinks the market may decline, and to equity when he thinks it may move up.

Avoid funds that take large cash calls for two reasons. One, taking such calls has an element of market timing, and nobody has ever timed the market right for a considerable period. Two, whether to move to equity or cash is an asset allocation decision that should be taken by the investor or his planner, not the fund manager.

If the fund manager takes high cash calls, the asset allocation decision takes place at two levels.

Consider an investor, who has a negative view on equity, decides to move 30% of his portfolio to fixed income and leaves 70% in equity. His fund manager also decides to move 30% in cash and has only 70% of the fund portfolio in equity. This means that the investor's effective exposure to equity is now only 49%. If the cash call goes wrong, there is a double impact on his portfolio.

Hence, stick to funds that have a less than 5% allocation to cash at all times. Fund manager's limits: Within the multicap category, some fund managers are allowed to go entirely to large caps or entirely to mid- and small-caps. Others are allowed to move to a particular category up to a certain limit.

While the former type of funds can earn higher returns, they can also falter badly if their calls go wrong. Choose a fund that matches your risk appetite.

Expectation mismatch: Multi-cap funds hold a mix of large-cap and mid- and smallcap stocks. In most years, they will produce middle-of-the-road performance. In a year when mid- and small-caps have done well, they will lag behind this category, while doing better than large-caps. The reverse could also happen in certain years.

So, understand why these funds have fared well or badly, and don't fret about their performance.

Sanjay Kumar Singh, ET Bureau Apr 21, 2014, 08.00AM IST
From http://articles.economictimes.indiatimes.com/

Actively managed mutual funds continue to receive a failing grade

ridodirected@gmail.com (RIDO) — Thu, 09 May 2013 06:33:00 +0000

Peter Watson, Dollars & Sense|May 08, 2013 - 2:55 PM
From http://www.insidehalton.com/opinion/columns/article/

Why do people invest in a manner that consistently gives them inferior investment returns?

There are two basic but very different approaches to investing. The most common and least successful is to invest in products that use active managers. The second, lesser-used way, is the passive management approach, which mimics an index or provides a broad market exposure.

Standard and Poor’s has been tracking the success of active managers for years. Active managers make ongoing investment decisions on behalf of their clients, who usually hire them by purchasing the mutual funds they manage. Within a mutual fund, active managers decide what stocks to buy and sell and the timing of those transactions.

Mutual funds charge investers fees to delegate investment decisions to an expert, the mutual fund manager, but the outcome is most often less than favourable.

The science of investing has been studied and written about by the academic community for the last 50 years. The conclusion is active managers only outperform the underlying market they invest in about one in every three years. When they outperform, the gains are lower than their shortfall during the years they underperform.

Standard and Poor’s reports the same information and break it down into shorter time periods.

In 2012, 41 per cent of active managers of Canadian Equity funds beat the S&P/TSX Composite Total Return. When we extend the holding period, we see only 10 per cent of active managers beat the index over the past five years. In the U.S., 12 per cent of managers beat the S&P 500 Total Return as measured in Canadian dollars during 2012. During the last five years only five per cent outperformed the index.

Consider the Standard and Poor’s information as a report card for active managers, who do not get a passing grade. Canadians have approximately $800 billion invested in mutual funds and most are actively managed.

The Standard and Poor’s report summarized the performance by stating, “The only consistent point we have observed over a five-year horizon is that a majority of active managers in most categories lag comparable benchmark indices.”

Investment decisions and their performance are vitally important to our well-being as investment dollars help finance our children’s post-secondary education and our own retirement. If active money management doesn’t add value when comparing the performance results to the markets in which they invest, then why pay any form of cost to continue to invest this way?

Now is the time to answer that question and re-evaluate how you invest.

Submitted by Peter Watson, MBA, CFP, R.F.P., CIM, FCSI., Certified Financial Planner
May 08, 2013 - 2:55 PM
From http://www.insidehalton.com/opinion/columns/article/

6 funds for your 401k in 2013

ridodirected@gmail.com (RIDO) — Tue, 07 May 2013 05:37:00 +0000

These mutual funds are leaders in their asset classes and are solid choices for IRAs as well. If you can't buy exactly these funds, you may want to look for similar ones.

By Jeff Reeves, InvestorPlace

From http://money.msn.com/mutual-fund/

Best in class

Picking stocks is a difficult game, especially in this volatile market. But mutual fund investors with 401k plans don't necessarily have it any easier.

After all, they still have to decide which funds to buy -- and how much to put in them -- just like stock pickers. And sometimes the strategy and expenses can be just as confusing as dissecting an individual corporation's 10-K filing with the Securities and Exchange Commission.

If you're looking to take the guesswork out of your 401k in 2013, following are five individual funds that rank top of class. These mutual funds would be great additions to your 401k or even your individual retirement account, and each is representative of a specific asset class that I think you should invest in.

If you can't find these particular mutual funds in your 401k group, try to find the "flavor" in a similar investment. That way, even if you can't pick the exact list here you may be able to get similar returns in the new year.

For more on the best 401k funds for 2013, click through this slide show, published Dec. 12.

Index fund

What if you don't want to overthink and simply want to "buy the market" to get a piece of stocks in an easy and low-cost way? If that's the case, there's nothing better than an index fund, which, as the name implies, is a mutual fund that is locked into a benchmark and its constituent holdings.

Vanguard pioneered low-cost index funds, and its Vanguard 500 Index (VFINX) fund is one of the most popular products out there, with more than $25 billion under management and a rock-bottom 0.17% expense ratio. That's a mere $17 on every $10,000 invested!

Its holdings are those in the Standard & Poor's 500 Index ($INX) -- blue chips you know and love, such as Apple (AAPL) and General Electric (GE). It's easy to track your performance -- you simply watch the headline index; your fund will mirror its performance almost exactly.

Index funds are the bedrock of any good 401k because they are low-cost and because active managers have a hard time outperforming them. It might surprise you, but passive index funds regularly return more money to investors than do funds that rely on human beings picking stocks.

So don't get crazy or enamored with a manager or a strategy. An index fund keeps expenses down and performance up.

If you can't add this Vanguard fund, ask your 401k administrator for a similar index fund. Any good plan should provide these kinds of options to investors.

Small-cap growth fund

If you're a long-term investor with many years until retirement, one of the areas you might want to consider in your 401k next year is small-cap growth -- that is, smaller companies that have a lot of upside potential as they gain reach and scale. Small-cap companies can be profit powerhouses when they hit on a great new product, and even if there are some rocky market movements in 2013, you can expect smaller and more agile companies to get up to speed faster than lumbering blue chips.

Check your 401k plan for your personal small-cap growth fund options. If it's available, consider Janus Triton T (JATTX). It has earned a five-star rating from Morningstar, and its lifetime rate of return is about 11% annually.

Current holdings include machinery manufacturer Dresser-Rand (DRC), aircraft components supplier TransDigm Group (TDG) and software developer MSCI (MSCI).

Managers Brian Schaub and Chad Meade have been with the fund since 2006, so there is stability in strategy and leadership.

Janus also has no transaction costs and a reasonable expense ratio of 0.94%. That means its management fee is $94 for every $10,000 you invest.

Large-cap dividend fund

With U.S. Treasurys and investment-grade corporate bonds providing paltry yields, many investors have been looking to blue chips for income opportunities. After all, if you can get a 3% dividend in some of the most stable utility and consumer staples stocks, why settle for half that in bonds?

If you like the idea of bigger yields and don't mind the added risk of stocks, then a dividend fund should be part of your 401k holdings. One of the best -- and most widely held, with more than $2 billion in assets -- is the Fidelity Strategic Dividend and Income Fund (FSDIX).

This fund gets four stars from Morningstar. It has no transaction charges and an expense ratio of just 0.84%. That's an $84 charge on every $10,000 you have invested.

Additionally, the fund has a yield of about 2.5%, thanks to bedrock blue chips like Exxon Mobil (XOM), Verizon Communications (VZ) and Procter & Gamble (PG) in its holdings.

You can find other funds with more yield, but beware chasing large dividends in exchange for share-price declines. Fidelity Strategic Dividend and Income has a lifetime return of about 6% annually, so this is a fund that doesn't trade big dividends for underperforming stocks.

If you're concerned with income but don't want to take on undue risk, consider a large-cap dividend fund in 2013.

International growth fund

Global equity markets have seen tough times in recent years, with China in particular underperforming U.S. benchmarks like the S&P 500 Index ($INX). However, if you're a longer-term investor worried about making sure you find the right investments over the next decade, you should strongly consider investing in international growth. After all, the idea is to buy low and sell high -- not to wait for the rally and buy at the top.

One of the best international growth opportunities for 401k investors right now is the Oakmark International I (OAKIX) fund. This mutual fund has a lifetime return of more than 10% annually, a five-star ranking from Morningstar and an impressive $9 billion under management.

Because this is a "blend" fund that mixes both value and growth plays, there is some stability via international blue chips like Daimler (DDAIF), Credit Suisse (CS) and Canon (CAJ). So don't think you'll be taking a Hail Mary on the next Chinese startup with this fund.

Manager David G. Herro has been with the fund since 1992, and international equity experience is crucial to understanding global markets.

The expense ratio is a reasonable 1.06%, meaning you pay $106 for every $10,000 invested.

Bond fund

When you think about bond investing, one firm comes to mind above all others: Pimco, with its iconic manager, Bill Gross. So if it's offered, you should consider adding the Pimco Total Return C (PTTCX) fund in your 401k portfolio. This fund offers low-risk income as well as a steady foundation of growth.

Bonds are unlikely to outperform stocks, especially in this low-interest-rate environment. However, they are much more reliable in their returns -- especially when you have someone like Gross ranking the bonds based on where he can get the best yield without sacrificing a risk of default. Pimco Total Return C invests only up to 10% of its portfolio in junk bonds, which offer higher yield but greater risk, so this is one of the most stable income investments out there.

The expense ratio is a decent 1.6% -- about $160 on $10,000 invested -- and many participants must pay transaction fees. However, the performance of this fund is well above its peers and could be worth the price of admission.

If you can't add the this fund, however, I strongly advise having some kind of income fund via investment-grade bonds in your portfolio -- particularly if you are close to retirement and are as concerned about capital preservation as about growth.

By Jeff Reeves, InvestorPlace

From http://money.msn.com/mutual-fund/

How To Avoid The Hidden Tax Hits Of Owing Mutual Funds

ridodirected@gmail.com (RIDO) — Thu, 12 Apr 2012 17:37:00 +0000

Deborah L. Jacobs, Forbes Staff

Article from Forbes

This is guest post by Bill Harris, former CEO of PayPal and Intuit, and now CEO of the financial advisory firm Personal Capital.

As you gather various financial documents to prepare your tax return this year, take a look at your investments. Do you own any equity mutual funds? If so, you may be subject to avoidable tax hits. Not sure if your investments are costing you extra? Read on.

Beware Churning

Actively managed mutual funds tend to make a lot of trades during the year. While investment managers may try to maximize returns through frequent buying and selling, they may also be charging you for each transaction. That really adds up if the fund’s turnover rate is 100% or more. And if they’re buying and selling to the point of generating strong returns, they may also be creating taxable gains that you’ll have to pay for come April 17 (that’s when tax returns are due this year).

According to Morningstar, the ten most popular mutual funds by assets under management carried a 1.05% average annual tax cost over a five-year period.

Say you invested $100,000 over the past five years. Using a simple average of these funds’ 5-year annualized returns, your investment would have grown to $115,467 before tax. After taxes, however, your investment would be worth $106,203. That’s a difference of $9,263.

Low Turnover

Turnover is a very real threat. Let’s look at the top ten mutual funds by assets under management as reported by Morningstar. The average turnover rate is 74.4%. This means these particular mutual funds turn over approximately 74.4% of their holdings during the year.

To avoid excess transaction fees and lessen the burden of taxable distributions, some investors choose to buy index funds. Index funds track stock indices, such as the S&P 500, and therefore follow a more passive investment strategy. These can be good options, but they aren’t immune to distributions, especially when the target index replaces one stock with another. To mimic the target index, the index fund will also sell that stock, which could result in capital gains. Exchange traded funds (ETFs) pose a similar risk, but they generally carry lower fee structures, making them more attractive overall.

Tax-Managed?

Of course, some mutual funds are “tax-managed,” meaning the investment manager strategically decides which stocks to buy and which to hold based on capital gains and capital losses. The idea is to add balance and limit tax exposure. Of course, most mutual fund managers would likely sell winning stocks in order to take advantage of gains. Doing so means investment gains for shareholders, but also means greater distributions and potentially higher taxes, too.

Timing Is Everything

When did you buy your mutual fund? Please don’t say November or December. Yearend is the worst possible time to buy a mutual fund. That’s because, in most cases, mutual fund distributions are issued at the end of the year. Unless your mutual fund is an IRA or 401(k), you’ll pay taxes on those distributions. In other words, you’ll pay for a year’s worth of distributions made on a fund you’ve owned for a month or less.

If you buy a mutual fund for a taxable account, you may be paying more in taxes than you’d like. Each mutual fund prospectus has information about how much the average investor actually made after taxes. You’ll definitely want to do your homework before buying.

The ETF Option

Instead of buying a mutual fund, you may consider investing in ETFs. With ETFs, you have access to a professionally managed investment product without the excess taxes that accompany mutual funds.

The turnover ratio for ETFs also tends to be lower. For the top ten ETFs (as ranked by ETFdb), the turnover ratio is an average of 9.7%, according to Morningstar, compared with the average turnover rate of 74.4% for the top ten mutual funds. Where would you rather put your money?

DIY Tax Optimization

To avoid excess taxes at yearend, your best option is to forgo mutual funds and ETFs altogether in favor of a separately managed account. By purchasing individual securities, you can track and monitor investment performance and capital gains. Then you can decide which securities to buy and sell according to your own personal tax optimization strategy.

Managing your own investments for tax optimization may sound time consuming and complicated. For a long time, these types of personalized strategies were available only to the super rich who could afford a team of financial advisors to run the numbers. Not anymore. New technology and free online resources allow investors to easily track their investments regardless of their total net worth. You can now sign up for financial services online and easily build your own investment strategy.

Article from Forbes

Is Your Mutual Fund Too Risky?

ridodirected@gmail.com (RIDO) — Tue, 10 Apr 2012 21:22:00 +0000

WSJ.COMAPRIL 9, 2012, 6:13 P.M. ET

Article from Smart Money

The Sharpe ratio is a measure that helps investors figure out how much return they're getting in exchange for the level of risk they're taking on. It can help in comparing funds that invest similarly.

By JONNELLE MARTE

Investors have long measured their mutual funds against benchmarks like the Standard & Poor's 500-stock index, content with a fund that could keep up with or top the index.

But when the broader market itself is unimpressive -- or downright nightmarish -- some pros say investors may need to rethink their standards. Instead of just focusing on returns, investors need to be conscious of the risk and volatility they expose themselves to along the way, advisers say.

Enter the Sharpe ratio, a measure that helps investors figure out how much return they're getting in exchange for the level of risk they're taking on.

"A lot of folks just look at the return side of the equation," says Wasif Latif, vice president of equity investments for USAA Investments in San Antonio. "But how smooth was your ride to get to that return?" The Sharpe ratio puts those two pieces together.

Getting Paid for Risk

Created by Nobel laureate William Sharpe, a Stanford University finance professor, the ratio is intended to be a measure of what an investment returned for each "unit" of risk it carried. The top half of the ratio looks at what a fund returned over a set period and subtracts what an investor could have earned in a risk-free investment, typically defined as three-month Treasury bills, over that same period. The denominator is the fund's standard deviation, which measures how much a fund strays from its average performance -- in other words, its volatility.

The higher the ratio, the more an investor is compensated for the risk he takes on, says David Blanchett, a research consultant for Morningstar (MORN: 60.40, -0.75, -1.23%) Inc.'s Morningstar Investment Management unit.

Consider two hypothetical stock funds with similar returns. Fund A gained an average of 12% a year over the past three years, but had a standard deviation of 30%, giving it a Sharpe ratio of 0.4. Fund B returned an average of 10% over that same period but had a standard deviation of 20%, giving it a Sharpe ratio of 0.5. (With short-term Treasury yields near zero, the amount to be subtracted -- the return on a risk-free investment -- for now is basically zero.)

While Fund A had a better return, Fund B delivered more return for the amount of risk it took, says Mr. Blanchett.

Some portfolio managers say they aim to have certain Sharpe ratios on their funds, using it as a checkpoint of sorts to make sure a fund's returns are in line with its risks.

Investors tend to have weaker stomachs during rocky markets, says Jeff Knight, head of global asset allocation for Putnam Investments, so having an easy way to compare investments on a risk-and-return basis can help them take emotion out of portfolio decisions.

"It's really about finding a good stable path," says Mr. Knight, who explains that he uses low-volatility stocks and options to help smooth out fund performance.

Useful Comparisons

For advisers and individual investors, Sharpe ratios, which Morningstar.com lists under a fund's "Ratings & Risk" tab, can be a particularly useful tool for comparing funds with similar strategies. For instance, two funds can end up with identical returns but have very different ways of getting there, Mr. Blanchett says. The Sharpe ratio can help investors determine which fund is causing them to take on more risk.

Sharpe ratios work best when figured over a period of at least three years, advisers say. Looking at the fund's risk-adjusted performance over several years offers insight on how the fund weathered different market environments, says Denny Baish, a mutual-fund analyst with Fort Pitt Capital Group, a wealth-management firm based in Pittsburgh. For instance, a fund with an attractive Sharpe ratio over the past 10 years would have managed to bring in returns to compensate investors for the risk it took through the recession of the early 2000s, the subsequent boom years, the recession that started in 2008 and the volatility of last year.

"You get more of a full market cycle," says Mr. Baish.

When used in conjunction with other measures, the Sharpe ratio can help investors develop a strategy that matches both their return needs and risk tolerance, advisers say. Mr. Baish, for instance, looks first at a fund's performance to get a sense for whether it might produce the sort of returns his clients need. Then he will look at the Sharpe ratio to see which funds are taking on outsize risk to get those returns. Some, like small-cap funds, will require taking on more risk than others, he notes.

No Predictor

To be sure, the measure has its limitations: It can be difficult to interpret and use for comparisons in periods when some funds' returns are below the Treasury-bill return or even negative. Investors should also keep in mind the Sharpe ratio is calculated using past performance, meaning it offers no guarantee on how a fund might behave in the future, says Mr. Blanchett.

But the ratio can be telling when comparing two funds that compete in the same category. For example, in Morningstar's large-blend peer group, the $2.3 billion Nuveen Tradewinds Value Opportunities has a three-year Sharpe ratio of 1.3 through March, while the $413 million Alpine Dynamic Dividend, came in at 0.66. The Nuveen fund bested the Alpine offering in both components of the Sharpe ratio: It delivered higher returns over the period -- an average of 22% a year versus 12% -- and was less volatile, as measured by standard deviation.

An Alpine Funds spokesman says the international exposure in the Dynamic Dividend fund caused it to underperform its peers in the past several years. Nuveen declined to comment.

— Ms. Marteis a reporter for SmartMoney.com. Email her at jonnelle.marte@dowjones.com.

Article from Smart Money

The Dividend-Fund Dilemma

ridodirected@gmail.com (RIDO) — Sat, 07 Apr 2012 07:57:00 +0000

THE INTELLIGENT INVESTOR

April 6, 2012, 7:28 p.m. ET

By JASON ZWEIG

Article from The Wall Street Journal

Sooner or later, the markets always punish investors who do the right thing for the wrong reason.

Some investors in dividend-oriented stock funds might end up learning that lesson the hard way.

So far this year, $9 billion has gone into mutual funds and exchange-traded funds that focus on U.S. stocks that pay stable, high or rising dividends, estimates EPFR Global, which tracks where investors are moving their money.

All other U.S. stock funds combined have had a net outflow of $7.3 billion.

Many of the investors joining the dividend stampede appear to be motivated by the low interest rates mandated by the Federal Reserve, which have led to a yield famine among traditional income investments like bonds, certificates of deposit and money-market funds.

Others might just be chasing past performance. The 100 highest-yielding stocks in the Standard & Poor's 500-stock index outperformed the overall market by an average of eight percentage points last year, according to Birinyi Associates.

Think twice before you jump on the bandwagon. While dividend-oriented funds are a perfectly legitimate way to invest in stocks, you shouldn't mistake them for bonds.

Nor, popular belief to the contrary, are they much safer than the stock market as a whole. And they could suddenly go from being tax-friendly to painfully taxable.

When you buy a Treasury, you collect interest and get your money back (not counting inflation) when the bond matures. When you buy a dividend-paying stock, you collect a quarterly payment—but that certainly doesn't mean the stock price will be stable.

In the fourth quarter of 2008, the S&P 500 fell 21.9%; dividend-oriented mutual funds lost 20.2%, according to investment researcher Morningstar MORN -0.79% . In other words, the average dividend fund fell nearly as much as the overall stock market. Bonds, meanwhile, performed beautifully: Over the same period, the Barclays Capital U.S. Treasury index returned 8.75%.

And from the stock market's peak in the fourth quarter of 2007 through its bottom in the first quarter of 2009, the Dow Jones U.S. Select Dividend index lost 53.8%, versus a 50.2% loss for the S&P 500, according to Fran Kinniry, an investment strategist at Vanguard Group.

In the long run, dividend-paying stocks are slightly less risky—and more rewarding—than the equity market as a whole. In the short run, however, they can expose you to the risk of being in the wrong place at the wrong time.

In 2007, 29% of the S&P 500's dividend income came from banks and other financial stocks, according to Howard Silverblatt, senior index analyst at Standard & Poor's.

That didn't end well. Many banks that had been paying steady income to shareholders suspended their dividends—or even went bust. Their investors suffered.

Today, financials account for only 13% of the S&P's dividends, with consumer staples (15%) and technology (14%) contributing the biggest share. Apple's AAPL +1.50% recent declaration of a dividend might prod more tech companies into distributing cash to shareholders. Some dividend funds could thus end up concentrated in technology stocks, much as they once were in financials, says Steve Condon, investment director at Truepoint, a financial-advisory firm in Cincinnati.

Another point: Since 2003, dividends have generally been taxed at just 15%, much lower than most bonds, whose interest payments are taxed at ordinary-income rates. Unless Congress and the White House take action, the dividend rate will leap to 43.4% next year for investors in the top federal tax bracket—the same rate that would apply to most bonds. You can avoid this problem in a tax-sheltered 401(k) or individual retirement account.

Robert Gordon, a tax expert at Twenty-First Securities in New York, thinks "there's a good possibility" that politicians can work out a deal to keep dividends taxed at today's lower rate, but there isn't any assurance of that.

The right reason to own one of these funds, says Daniel Peris, author of "The Strategic Dividend Investor" and co-manager of the Federated Strategic Value Dividend fund, is that stocks with growing cash distributions tend to be solid businesses that earn greater returns in the long run than stocks as a whole.

"I would like to think that every client who's buying a fund is buying for the right reason, but that would be naive," he says. "I acknowledge that some people, based on last year's strong returns, may be chasing past performance."

Any memory more than three years old is ancient history on Wall Street. But investors on Main Street should hark back to 2008. That year, many dividend funds provided at least 3% in income—but their average total return was minus-35%.

There aren't any easy ways to get income when the bond market is this stingy. Expecting the stock market to be generous certainly isn't one of them.

— intelligentinvestor@wsj.com; twitter.com/jasonzweigwsj

A version of this article appeared April 7, 2012, on page B1 in some U.S. editions of The Wall Street Journal, with the headline: The Dividend-Fund Dilemma.

Article from The Wall Street Journal

Mutual of Omaha Announces New Strategic Alliance with W.E. Donoghue & Co., Inc.

ridodirected@gmail.com (RIDO) — Thu, 05 Apr 2012 09:12:00 +0000

April 4, 2012, 4:32 p.m. EDT

Article from Market Watch

OMAHA, Neb., Apr 04, 2012 (BUSINESS WIRE) -- Mutual of Omaha’s Retirement Plans Division and Mutual of Omaha Investor Services, Inc. (MOIS), have announced a new strategic alliance with W.E. Donoghue & Co., Inc. (WEDCO) to provide wholesale distribution of its long-term investments including WEDCO’s Power Income Fund.

This alliance with WEDCO is part of Mutual of Omaha’s Retirement Plans Division and MOIS’ strategy to expand its established and successful asset management distribution by building alliances with innovative fund companies with the objective of providing risk controlled or defensive strategies.

“The Power Income Fund’s strong track record of trading between high yield bond funds and money markets to maximize outcomes while minimizing risk during economic shifts is an attractive option for advisors looking for retirement and long-term savings solutions for their clients,” said Seth Friedman, national sales director for Mutual of Omaha’s Retirement Plans Division.

Friedman also noted that the company expects to form strategic alliances with additional fund managers that feature risk controlled or other defensive strategies in the coming months.

“W.E. Donoghue is proud to announce our distribution alliance with Mutual of Omaha. As a seasoned asset management wholesaling team, Mutual of Omaha fits perfectly into our business model and provides the depth of professionalism WEDCO is privileged to collaborate with,” said Curt Meyer, managing director, W.E. Donoghue & Co., Inc. “We are confident this alliance will impact our growth initiatives across all channels and look forward to a long, healthy relationship with Mutual of Omaha.”

About W.E. Donoghue & Co., Inc:

W.E. Donoghue & Co., Inc (WEDCO) is a registered investment advisor established in 1986. The firm is a pioneer in the industry in providing tactical asset allocation solutions. WEDCO manages in excess of $650 million for individual and institutional separate account clients as well as mutual fund clients. The firm has been recognized by institutional and independent advisors as an investment solution highly sought out by their clients.

About Mutual of Omaha

Founded in 1909, Mutual of Omaha is a full-service, multi-line provider of insurance and financial services products for individuals, businesses and groups throughout the United States. With a client base of nearly 21,000 employer groups nationwide, Mutual of Omaha offers a wide range of plan designs and delivery options for employee benefits, including disability, life, dental, voluntary, special risk and retirement plans.

Mutual Funds involve risk including the possible loss of principal. Derivatives are subject to credit risk and liquidity risk. Additionally, even a small investment in derivatives may give rise to leverage risk, and can have a significant impact on the Fund's performance. In general, the price of a fixed income security falls when interest rates rise. The Fund will invest in high yield securities, also known as "junk bonds." High yield securities provide greater income and opportunity for gain, but entail greater risk of loss of principal. Mutual funds and ETFs are subject to investment advisory and other expenses, which will be indirectly paid by the Fund. As a result, your cost of investing in the Fund will be higher than the cost of investing directly in other mutual funds and ETFs and may be higher than other mutual funds that invest directly in fixed income securities. The Fund will incur a loss as a result of a short position if the price of the short position instrument increases in value between the date of the short position sale and the date on which the Fund purchases an offsetting position. A higher portfolio turnover will result in higher transactional and brokerage costs.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Power Income Fund. This and other information about the Fund is contained in the prospectus and should be read carefully before investing. The prospectus can be obtained by calling toll free 1-877-779-7462 (1-877-7-PWRINC). The Power Income Fund is distributed by Northern Lights Distributors, LLC member FINRA.

SOURCE: Mutual of Omaha

Mutual of Omaha

Lisa Wadell Smith, 402-351-5941

lisa.wadell@mutualofomaha.com

Article from Market Watch

Fact check: Is this mutual fund ad misleading?

ridodirected@gmail.com (RIDO) — Mon, 02 Apr 2012 20:37:00 +0000

April 2, 2012 11:17 AM

By Allan Roth

Article from CBS News

(MoneyWatch) Commentary Last month, I read an advertisement in Investment News, a weekly publication for financial advisors. The advertisement for Prudential mutual funds announced, in big bold capital letters, "HIGHLY RATED BY MORNINGSTAR. POWERED BY PRUDENTIAL INVESTMENTS." It went on to boast that "over 60% of our Morningstar-rated funds have earned 4 or 5 stars,*" the top two ratings of the five star historic performance rating system.

The ad was similar to this more updated Prudential brochure, which can be found on the company's web site. You can read the smaller print from this brochure, but I'll get back to that in a bit.

The claim that 60 percent of Prudential funds received the top two Morningstar ratings appears to be conclusive evidence that Prudential funds are indeed highly rated by Morningstar. That's because Morningstar only gives 10 percent of each category of funds a five star rating and 22.5 percent of the funds a four star rating. The big bold print appears to imply that 60 percent of Prudential mutual funds are in the top 32.5 percent of performers.

Fact Check

Now before handing your money over to Prudential Investments, you may want the following facts on how Morningstar actually ranked Prudential funds in each of four fund categories. Here are the average rankings:

Domestic stock: 3.1 stars

International stock: 2.5 stars

Municipal bonds: 3.0 stars

Taxable bonds: 3.2 stars

A three star ranking translates to average mutual fund performance, and, thanks to expenses, a mutual fund that turns in average performance typically underperforms the index it is trying to beat. The big bold print on the brochure claims that the funds are highly rated, but my interpretation is that Morningstar considers Prudential mutual funds merely average.

Prudential responds

I spoke to Scott Benjamin, Executive Vice President of Marketing for Prudential Investments, who defended the advertisement's accuracy. While he wasn't aware of the overall average Morningstar ratings I noted above, he pointed out that the advertisement clearly said "for class Z shares." It stated this in smaller print in the upper half of the Investment News advertisement and on page two of the brochure.

Class Z shares are a lower cost version of a mutual fund that cannot be purchased directly by the investor and can only be purchased through an advisor or a company's retirement plan. For example, the brochure lists the Prudential Government Income Fund (PGVZX) as a four star rated fund with a 0.68% expense ratio. If you bought the B share class of the same Prudential Government Income Fund (PBGPX), you'd own a two star rated fund with a 1.68% expense ratio. That's an above average fee level and below average performance, according to Morningstar. Typically, the advisor charges the client an additional fee in the Z shares, while the B shares have fees built in, and Prudential pays a "distribution" fee. The overall ratings of the funds are based on a weighted average of all share classes. Morningstar notes Prudential Investments have an overall average expense ratio so it's not surprising to see average performance.

Benjamin insisted the advertisement was accurate and strongly disagreed with my assertion that it was misleading, noting that it was in compliance with FINRA regulations. He also stressed that the company's funds are sold largely through financial advisors, and because more and more sales are coming through broker/dealer platforms that feature Z shares, Prudential now sells more in this share class than any other. Benjamin further pointed out that the advertisement in Investment News was directed to financial advisors, who understand share class pricing.

Still, I asked him why not be more clear and have the advertisement state something like "60 percent of our lower cost share class funds are highly rated by Morningstar"? Benjamin responded by saying that's what the advertisement does state.

My take

This Prudential advertisement is just an example of how the financial services industry selectively includes certain facts. Nowhere in the advertisement was there a disclosure that Morningstar considers the overall average of all of Prudential's mutual funds to have ratings between 2.5 and 3.2 stars. And you have to read on to see that the claim of being highly rated by Morningstar only applies to certain share classes. I'm saddened to say that I'm sure Prudential is right in stating it complies with FINRA regulations.

Prudential and I are just going to have to agree to disagree on whether the advertisement and brochure could be more straight forward. Still, my advice is to read any advertisement with the following in mind:

Spend even more time reading the small print than the large. Ask yourself what's not in the advertisement.

Allan Roth

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month. His goal is to never be confused with Mad Money's Jim Cramer.

Article from CBS News

Are funds too full of Apple?

ridodirected@gmail.com (RIDO) — Sun, 01 Apr 2012 09:20:00 +0000

If stock drops, some investors could take hit

By David K. Randall, Reuters April 1, 2012 2:06

Article from Calgary Herald

When it comes to Apple, investors could become victims of their own success.

It is a dilemma more mutual fund managers are wrestling with after the company's nearly 48 per cent gain this year. Those who bought Apple well below its current price have seen the value of their investment balloon, sometimes to more than 10 per cent of their fund's assets.

That effectively turns a brilliant decision into a concentrated stake, undercutting the benefits of diversification and making some mutual funds riskier.

As Apple stock has marched higher, well-timed bets on the company have helped some growth-oriented and blended mutual funds outperform the broad market. But in doing so, many of those funds have now tied investor dollars closer to the performance of a single company.

This isn't much of an issue when it comes to funds that market themselves as narrow bets on technology. But many funds whose broad holdings could be the core of a retirement plan are stocking up on Apple.

A dramatic fall in Apple's shares, however unlikely that may seem at the moment, would quickly ripple across the retirement accounts of millions of investors who thought they were safer investing in funds than individual shares.

"It adds to the risk profile of a fund to have a significant stake in one stock because it makes them more susceptible to bad news on one or two stocks and they won't be able to cushion the blow with diversification," said Todd Rosenbluth, a senior fund analyst at Standard & Poor's Capital IQ.

Generally in the mutual fund industry, any position over five per cent of assets is considered a large bet that may influence a fund, said Dan Culloton, a fund analyst at Morningstar.

Shares of Apple have nearly doubled from the $310 they hit in June, and at about $600 a share are up nearly 48 per cent in 2012 alone. Apple, the world's most valuable company by market capitalization, now has a weighting of 4.2 per cent in the broad S&P 500 portfolio, the benchmark against which the performance of most U.S. mutual funds are judged. That means 4.2 cents of every $1 invested in an S&P 500 index fund will be allocated to Apple shares, before fees.

By definition, actively managed mutual funds have overweight positions in companies they think will outperform the broad market, but usually not more than five or six per cent.

But 46 funds tracked by Morningstar have stakes in Apple that exceed nine per cent of assets, or roughly double the company's weighting in the S&P 500 index. This does not include sector funds that focus on technology or other specialized investment.

Some reluctance on the part of portfolio managers to sell Apple shares is understandable. Trimming exposure could lead to underperformance for a fund.

Some fund managers are taking steps to lower the weighting of Apple in their portfolios. "We got to the point where it was an inordinate part of our portfolio, and in order to control risk it was only prudent to trim it back," said Robert S. Bacarella, a Wheaton, Ill., fund manager.

Article from Calgary Herald

Analysis: Apple's gains make some mutual funds riskier

ridodirected@gmail.com (RIDO) — Fri, 30 Mar 2012 04:24:00 +0000

Article from Reuters

By David K. Randall

NEW YORK | Thu Mar 29, 2012 11:54am EDT

(Reuters) - When it comes to Apple, investors could become victims of their own success.

It is a dilemma more mutual fund managers are wrestling with due to the company's nearly 48 percent gain this year. Those who bought Apple well below its current price have seen the value of their investment balloon, sometimes to more than 10 percent of their fund's assets.

That effectively turns a brilliant decision into a concentrated stake, undercutting the benefits of diversification and making some mutual funds riskier.

This isn't much of an issue when it comes to funds that market themselves as narrow bets on technology. But many funds whose broad holdings could be the core of a (401)k or similar retirement plan - Fidelity's $14.7 billion Blue Chip Growth and the $28.7 billion T. Rowe Price Growth fund among them - are stocking up on Apple.

Apple makes up nearly 9 percent of Fidelity's $80.8 billion Contrafund, for instance. The fund is the sixth-most popular holding in 401(k) plans nationwide, according to BrightScope, a firm that ranks company (401)k plans.

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For a graphic on fund managers stocking up on Apple, click: link.reuters.com/qaq37s

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Generally in the mutual fund industry, any position over 5 percent of assets is considered a large bet that may influence a fund, said Dan Culloton, a fund analyst at Morningstar.

CONCENTRATED BETS

Shares of Apple have nearly doubled from the $310 they hit in June 2011, and at about $600 a share are up nearly 48 percent in 2012 alone.

Apple, currently the world's most valuable company by market capitalization, now has a weighting of 4.2 percent in the broad S&P 500 portfolio, the benchmark against which the performance of most U.S. mutual funds are judged. That means 4.2 cents of every $1 invested in a S&P 500 index fund will be allocated to Apple shares, before fees.

By definition, actively managed mutual funds have overweight positions in companies they think will outperform the broad market, but usually not more than 5 or 6 percent.

But 46 funds tracked by Morningstar have stakes in Apple that exceed 9 percent of assets, or roughly double the company's weighting in the S&P 500 index. This does not include sector funds that focus on technology or other specialized investment.

The $1.5 billion Oppenheimer Main Street Select fund, for instance, blends value and growth stocks in its portfolio of 34 companies. It had 10.5 percent of its assets, or two and half times the benchmark weight, in Apple as of the end of January, according to Morningstar data.

That concentrated bet is one reason that the fund is up 13.9 percent so far this year, or 2.6 percentage points above the broad S&P 500 index. A dip in Apple's share price and the fund could fall more than the broad market. The fund managers declined to comment.

Fidelity's Contrafund, meanwhile, focuses on growth stocks. It holds 427 stocks, but 8.6 percent of its portfolio, or a total of $6.6 billion, was concentrated in Apple at the end of January. That stake is more than even Apple's weighting of 7.6 percent in the narrower Russell 1000 Growth index, which many growth fund managers use as an internal benchmark.

The Contrafund is up 13.7 percent since the start of 2012. Fidelity declined to comment.

Some reluctance on the part of portfolio managers to sell Apple shares is understandable. Trimming exposure could lead to underperformance for a fund.

"We hear about this a lot from portfolio managers. I have no doubt that they'd like to sell it and take their profits, but you have to be in it to win it and right now Apple's momentum is going up," said Howard Silverblatt, senior index analyst at S&P.

These fund managers usually realize that they are taking on additional risk, Silverblatt said. "What helped you on the way up kills you on the way down."

CUTTING RISK

Some fund managers are taking steps to lower the weighting of Apple in their portfolios.

"We got to the point where it was an inordinate part of our portfolio, and in order to control risk it was only prudent to trim it back," said Robert S. Bacarella, a Wheaton, Illinois fund manager who runs the $49 million Monetta fund with his son.

Bacarella first bought 10,000 shares of Apple in early 2005 when it traded at around $40 per share. In September 2005, those 10,000 shares were worth $536,100 and accounted for 0.9 percent of his portfolio, according to Morningstar data.

Fast forward to December 2011, and Bacarella again had 10,000 shares of Apple. This time, however, their value was nearly $4.1 million, which accounted for 9.3 percent of his fund's weight. He trimmed his shares by 5,000 earlier this year. Apple now makes up 5 percent of his assets.

"This is about risk control. You never know what is going to happen," he said. The sizeable positions built up by other funds would only exacerbate an Apple fall , he added.

"If everyone sees deceleration of earnings growth, what will you do?" Bacarella asks. "I would think that you're going to bail and that will compound to the downside."

(Reporting By David Randall; Editing by Walden Siew, Jennifer Merritt and Tim Dobbyn)

Article from Reuters

The Actively Managed Mutual Fund Racket

ridodirected@gmail.com (RIDO) — Tue, 27 Mar 2012 21:17:00 +0000

MAR 27 2012, 9:45 AM ET 38

Timothy B. Lee -- Writer with Ars Technica and the Cato Institute

Article from The Atlantic

While I didn't discuss it in detail, one of the implicit points of my last post is an endorsement of index investing. That's the investment strategy that tries to replicate the performance of the market as a whole, at the lowest possible cost. The alternative is to buy into an "actively managed" mutual fund, which has a professional manager that tries to pick assets that will produce above-average returns. I claim that because active portfolio management costs more than passive management, the real-world returns of actively managed funds tend to be lower than passively managed ones.

Reader Moneyrunner disagreed with me:

If you invested in the vaunted, low cost, Vanguard 500 Index fund for the 10 years from 2000 to 2010 the good news is that your expenses were low, the bad news is that you lost money. For comparison, one of the biggest actively managed funds with expenses that are nearly 10 times higher than Vanguard's index fund - Growth Fund of America - made 13%. The truth is that in Bull markets, index funds do well partly by definition. Laggards are dropped from the index and indexes are weighted toward the largest market capitalizations. It's when markets fluctuate or go down that having active management becomes important.

This is reminiscent of a dealer at the casino arguing that his craps table will be a good deal tonight because one guy tripled his money last night. There are hundreds of actively-managed mutual funds out there. Obviously, with the advantage of hindsight you'll be able to point to examples of funds that did better than average. The question is whether there's a reliable way to identify such funds in advance.

There have been numerous studies comparing index funds to actively-managed ones, and they almost always reach the same conclusion: index funds consistently beat the average actively managed fund. This is for a simple reason: it's hard to consistently beat the market, but it's easy to waste money trying to do so.

But even if the average actively managed fund performs poorly, isn't it possible to find an individual fund that will beat the market? The problem is that it's impossible to know if a manager's past performance was the result of skill or luck—and most of the time it's luck. People point to Warren Buffett as an example of a guy who was able to consistently beat the market for decades, but he's famous precisely because people like him are so rare. And it's much easier to identify such people at the end of a long career, when it's too late to do any good.

If you were trying to decide how to invest your money in 1980, buying shares in Warren Buffett's Berkshire Hathaway would have been an option. Buffet had a couple of decades of solid performance under his belt and many people did invest with him. But Buffett was just one of many investors who had enjoyed above-average returns in the 1960s and 1970s. If you'd picked one of the other guys with Buffett-like results during the 1960s and 1970s, you almost certainly wouldn't have done as well in the 1980s, 1990s, and 2000s. Indeed, Buffett himself is a fan of index investing, betting in 2008 that an S&P 500 index fund could out-perform a collection of hedge funds over a 10-year period when fees are taken into account.

It's extremely difficult to identify, in advance, particular actively managed mutual funds that will consistently beat the market as a whole. But it's practically guaranteed that, on average, such funds will under-perform the market as a whole due to their high costs. So the smart investment strategy is to replicate the performance of the market as a whole at the lowest possible cost. And that means choosing passive money managers like the good folks at Vanguard.

Article from The Atlantic

Smart Investing Is Easier Than You Think

ridodirected@gmail.com (RIDO) — Sun, 25 Mar 2012 20:21:00 +0000

MAR 25 2012, 11:59 AM ET

Timothy B. Lee -- Writer with Ars Technica and the Cato Institute

Article from The Atlantic

Farhad Manjoo gives Slate readers advice on "how to stop investing your money like an idiot." He lucidly explains the principles of good investing, but then says that "for people who have extra money but not a lot of time or facility with investing, there has never been a simple way to invest in the rigorous, disciplined way that experts advise." Manjoo is far from the first writer to make this claim (and I'm kind of a broken record on the subject), but this isn't true. Vanguard has had funds that do exactly that since 2003, and they're significantly cheaper than the options Manjoo discusses in his article.

Manjoo reviews three options, and the one option Manjoo ultimately recommends, called Betterment, is pretty good. You tell Betterment how you want to allocate your money between relatively risky assets (like stocks) and relatively safe ones (like Treasury bonds). Betterment then automatically buys a mix of assets that fit your criteria and automatically adjusts them over time.

It's a great service, with one major weakness: the cost. Betterment itself charges between 0.15 percent and 0.35 percent of your money to help you decide which funds to buy, and the underlying funds Betterment buys, called ETFs, cost another 0.19 percent, on average. For example, if you invest $50,000 with Betterment, the annual costs will be around 0.44 percent, or about $220. That's pretty good. Many mutual funds have "expense ratios" around 1 percent, so you can save hundreds of dollars each year in fees--and end up with thousands of dollars more at retirement--by transferring your money from a higher-cost fund to Betterment.

But you can get an even better deal from Vanguard, long considered the lead in low-priced mutual funds. For example, my wife has her IRA invested in Vanguard's Target Retirement 2045 fund, which as the name suggests is for people planning to retire around 2045. Like Betterment, this fund buys a mix of stocks and bonds, automatically keeps its portfolio balanced, and gradually shifts to more conservative assets as you get closer to retirement. But for our hypothetical customer with $50,000 to invest, this fund costs less than half what Betterment does--0.19 percent, or about $95 per year. The $125 you save each year by switching from Betterment to Vanguard will really add up over the course of your career.

Vanguard has two big advantages that allow it to keep its costs much lower than its competitors. First, while most mutual funds are run by commercial firms that expect to earn a profit, Vanguard is owned by its customers. That means there are no conflict of interest between customers and shareholders--customers get every dime of Vanguard's "profits." Second, Vanguard's vast size--$1.8 trillion under management--allows them to take advantage of economies of scale.

I talked to Betterment CEO Jon Stein about how his service compares to Vanguard, and he didn't dispute that Vanguard has him beat on cost. But he argued that Betterment offers more sophisticated tools for fine-tuning your asset allocation. For example, saving for college or a new house might require a different asset allocation than saving for retirement. Vanguard may not offer a fund that meets the needs of these savers. Betterment also offers advanced portfolio customization features for users with more than $100,000 invested.

Stein also touted Betterment's for-profit structure as an advantage, noting that the most innovative companies in America tend to be for-profit firms, not cooperatives like Vanguard. But when it comes to retirement savings, it's not obvious that more innovation is better. After all, innovation typically costs money, and one way or another any money your mutual fund company spends is going to come out of your pocket.

So for the average consumer, smart retirement investing really is as simple as going here and clicking on the link corresponding to your expected retirement date. Betterment's fees are lower than most other mutual fund companies, so it's worth giving them a look if you need their "power user" features. But for most investors Betterment's premium features are overkill; you're better investing in Vanguard's more frugal funds and pocketing the difference.

And for the record, my only conflict of interest is that I'm a satisfied Vanguard customer.

EGAN MCARDLE - Megan McArdle is a senior editor for The Atlantic who writes about business and economics. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and The Economist. She is currently on leave.

Article from The Atlantic

BMO Investments Inc. Announces Proposed Changes to its Mutual Fund Line-Up

ridodirected@gmail.com (RIDO) — Fri, 23 Mar 2012 21:21:00 +0000

March 23, 2012, 3:17 p.m. EDT
Article from The Marketwatch

TORONTO, ONTARIO, Mar 23, 2012 (MARKETWIRE via COMTEX) -- BMO Investments Inc. today announced proposed changes to the BMO Mutual Funds and the BMO Guardian Funds line-ups. The primary objective of these changes is to reduce duplicate fund offerings and streamline the product suite to provide more cost-effective investment solutions for investors.

Proposed Fund Mergers

Subject to obtaining all necessary securityholder and regulatory approvals, BMO Investments Inc. proposes that each Terminating Fund listed in the table below be merged into the corresponding Continuing Fund also listed below. If approved, the mergers will be effective in June 2012.

If the proposed mergers are approved, securityholders of each class or series of each Terminating Fund will receive securities of the equivalent class or series of the corresponding Continuing Fund, determined on a dollar-for-dollar basis. Securities of the Terminating Funds will no longer be offered for sale beginning May 24, 2012. The Terminating Funds will be wound up as soon as possible following the mergers.

Securityholder approval for the relevant funds will be sought at special meetings to be held on or about May 18, 2012. In advance of the meetings, full details of the proposed mergers will be set out in notices of meetings and management information circulars that will be sent to securityholders of record as at April 9, 2012. The notices of meetings and management information circulars will also available on SEDAR at www.sedar.com .

The Independent Review Committee of the funds listed above has reviewed the potential conflict of interest matters related to the proposed mergers and has provided BMO Investments Inc., the manager of the funds, with a positive recommendation for each merger after determining that each merger, if implemented, achieves a fair and reasonable result for the applicable funds.

Pre-Approved Fund Mergers

BMO Investments Inc. also announced today that the following two pre-approved mergers will be effective in June 2012.

Each of these mergers has received approval from the Independent Review Committee after determining that each merger, if implemented, achieves a fair and reasonable result for the applicable funds. As these mergers satisfy certain regulatory criteria, they are not subject to securityholder or regulatory approvals. However, securityholders of each of these Terminating Funds will receive written notice of these mergers at least 60 days prior to the effective date of each merger.

Securityholders of each series of each of these Terminating Funds will receive securities of the equivalent series of the applicable Continuing Fund, determined on a dollar-for-dollar basis. Securities of these Terminating Funds will no longer be offered for sale beginning May 24, 2012. These Terminating Funds will be wound up as soon as possible following the mergers.

BMO Investments Inc. encourages securityholders to contact their financial advisor to determine the solution that best meets their individual investment needs and circumstances.

About BMO Investments Inc.

BMO Investments Inc. is a member of BMO Financial Group and part of the organization's Private Client Group. The Private Client Group provides integrated wealth management services and had total assets under management and administration of $435 billion as at January 31, 2012.

Contacts:
For all news media enquiries please contact:
Amanda Robinson, Toronto
(416) 867-3996
amanda.robinson@bmo.com

Sarah Bensadoun, Montreal
(514) 877-8224
sarah.bensadoun@bmo.com

Laurie Grant, Vancouver
604-665-7596
laurie.grant@bmo.com

SOURCE: BMO Financial Group and BMO Bank of Montreal

mailto:amanda.robinson@bmo.com
mailto:sarah.bensadoun@bmo.com
mailto:laurie.grant@bmo.com

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Article from The Marketwatch

When Wall Street's Bullish, Investors Head for the Exits

ridodirected@gmail.com (RIDO) — Wed, 21 Mar 2012 22:58:00 +0000

Published: Wednesday, 21 Mar 2012 | 2:17 PM ET Text Size

By: Jeff Cox

CNBC.com Senior Writer

Article from CNBC

All of Wall Street's wildly bullish calls on stocks may be having just the opposite effect, driving wary mom-and-pop investors out of the market despite the long-standing rally.

After all, they've been down this road before: One big-name analyst after another advocates a buy, buy and buy some more strategy, only to see a bubble burst that ends up trapping late-to-the-game individual investors.

True to form, Wall Street's biggest investment houses have been marching to the podium with avid encouragement to put money to work.

Goldman Sachs' Peter Oppenheimer drew headlines Wednesday for releasing a note in which he says stocks are presenting a once-in-a-generation buying opportunity. Similarly, Bank of America and Credit Suisse recently have taken up their full-year projections for the Standard & Poor's 500 [.SPX 1402.89 -2.63 (-0.19%) ]. JPMorgan Chase has remained strongly bullish, and BlackRock CEO Larry Fink several weeks ago said investors should have a total allocation to stocks.

The admonitions haven't worked among retail investors.

In just the last week alone investors pulled another $126 million out of stock-based mutual funds and shoveled $10.7 billion into bond mutual funds, according to the Investment Company Institute.

The total outflow from stock funds was comparatively small to recent weeks, but the move is significant in that U.S-based stock funds, despite a stunning gain of more than 30 percent off the October lows, lost nearly $1.4 billion.

"There's a feeling that another shoe is going to drop somewhere, and they don't want to be caught in a situation where they can't get out," says Quincy Krosby, chief market strategist at Prudential Annuities in Newark, N.J. "What they don't want to get involved in is some trap that is being set by hedge funds or asset managers to get in so (the managers) can get out."

Retail investors can be forgiven for feeling a little shell-shocked.

They just survived a decade in which two major bubbles popped — the dotcom mania and the subprime mortgage frenzy — and they worry that the stock market now is being fueled again by easy money from the Federal Reserve that ultimately will run out and leave them holding the bag.

"A lot of people are very skeptical. Look how wrong these guys were last year," says Kathy Boyle, president of Chapin Hill Advisors in New York. "The average individual is feeling there's a lot of propaganda going on."

Indeed, consensus forecasts in 2011 were looking for the S&P 500 to finish around 1,400 when in fact it registered an almost perfectly flat 1,257, a 10 percent miss.

Investors may have had a strong sense of deva vu — that was almost exactly where the index registered on Jan. 20, 1999.

"They suffered through everybody being bullish and telling them they could not lose at the top of the Internet bubble, then they suffered through everybody telling them you could not lose at the top of the financial bubble," says Walter Zimmerman, senior technical analyst at United-ICAP in Jersey City, N.J. "At this point, they're way past once-burned twice-cautious."

Of course, the retail reticence in the market is about more than not trusting Wall Street bullishness. But it certainly appears to be playing a role.

Zimmerman believes the depletion of U.S. savings accounts has made less money available for investors to put in the market.

Boyle, meanwhile, says mutual fund flows may not be painting an entirely correct picture about retail participation, given that many have flocked to exchange-traded funds .

Yet U.S.-based mutual funds actually have attracted more assets even as the ETF field has bloomed to a $1.2 trillion industry. Mutual funds held $8.6 trillion in assets as of February, an increase from just under $8 trillion in 2011, according to Morningstar.

The rally, then, appears in large part to be driven by the high-frequency trading platforms that big investors use, as well as a burgeoning level of corporate stock buybacks.

Repurchases hit an 11-month high of $5.3 billion a day last week and have totaled $33.5 billion in March alone, with big banks that cleared the Fed stress tests the most active participants, according to TrimTabs.

So what will bring mom and pop back into the fold?

Prudential's Krosby thinks more consistent improvements in the economic data, along with a surge in dividend offerings and a better entry point that would come with a healthy correction could entice the retail investor.

"If we were to see a pullback, a consolidation, then you might see many of the investors come in, provided the economic data continue to remain solid," she says.

"What doesn't help is when you hear CEOs or asset managers saying, 'Start pushing all your money into equities.' They look at that as suspect," Krosby adds. "They see those comments as a marketing ploy to lure them in, and they're very suspect of headlines like that."

Article from CNBC

Active funds and paradox of choices

ridodirected@gmail.com (RIDO) — Sat, 17 Mar 2012 19:51:00 +0000

B. VENKATESH

Article from The Hindu Business Line

With the increasing number of funds in the market place, your chances of picking a fund that underperforms is higher.

The universe of active funds has increased considerably in the recent past. In this article, we explain the paradox of choices- why more active funds does not necessarily mean better investment choices for you!

The number of mutual fund offerings has increased considerably in the last 10 years. This ought to bring cheer to investors; for more funds should essentially mean better investment choices. But more choices are not always better! Here is a simple rule that you can use to select funds.

PARADOX OF CHOICES

Portfolio management works on simple arithmetic. Collectively, those who outperform the benchmark index do so at the expense of those who underperform it. Suppose there are only three investors in the market- you and two of your friends. Suppose the annual return on the Nifty Index is 10 per cent. If you generated 14 per cent annual return, the excess four percentage points should have come from the collective underperformance of both your friends.

Now, the excess return comes from unique strategies. More unique the strategy, greater the chances that the fund manager can generate excess returns for a longer period. The problem is that a fund's uniqueness is likely to fade faster as the number of active funds increases. After all, these funds are chasing the same universe of stocks and, hence, could end-up with similar portfolios!

The increasing number of active funds, therefore, has two implications. One, the period for which a fund manager can generate excess return is likely to shorten.

We call this the alpha fade rate; alpha refers to the excess return over the benchmark index. And two, generating excess return will become more inconsistent; volatility of the alpha will increase.

Besides, the increasing number of funds makes your fund selection process even more difficult! How should you choose a large-cap fund from a universe of, say, 75 funds?

1/N HEURISTIC

When the Nobel-prizing-winning economist, Harry Markowitz, was forced to decide on how much to invest for his retirement fund, he chose to investment equally in equity and bonds! In behavioural finance, this strategy is called 1/n heuristic. We borrow Markowitz's asset allocation strategy to suggest a simple way for you to choose mutual funds.

We suggest you take two funds in each category. That is, two large-cap funds and two mid-cap funds and, perhaps, two sector funds. You should buy one active fund and passive fund from each style category. Using the 1/n heuristic, you will invest equal amount in all these funds.

Buy one large-cap active fund and one large-cap index fund. Index funds are easy to choose — you simply buy the one that charges low fees and closely tracks the index. Such funds give you average returns.

But how should you choose an active fund? We understand your comfort in choosing funds based on past performance. So, choose an active fund that has figured as one of the top five performers during all of the last 1, 3 and 5 years. You can then apply the second factor- familiarity or name-brand recall. If they are two or more funds based on the performance factor, apply the second factor- buy the product from the mutual-fund complex you are familiar with! We suggest this process because you may be unable to do a clinical evaluation of fund performance.

(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor learning solutions. He can be reached at enhancek@gmail.com)

Article from The Hindu Business Line

Japan mutual funds post record investment gains

ridodirected@gmail.com (RIDO) — Wed, 14 Mar 2012 21:10:00 +0000

Article from Reuters

TOKYO | Tue Mar 13, 2012 12:04pm EDT

(Reuters) - Japanese mutual funds posted their highest ever monthly investment gains in February, helped by a strong recovery in global stock markets and the yen's fall, but equities funds continued to see net outflows for a fifth straight month.

Outflows from Japan domiciled equities mutual funds may have accelerated during the month as retail investors likely squared off their exposure to equities funds after seeing a strong recovery in prices, said Investment Trusts Association Vice-President Fumio Inui.

He said investors had become nervous about exposure to risk assets after seeing severe monthly investment losses many times last year.

Investment trust funds, a type of mutual fund known as toushin, recorded an investment gain of 3.65 trillion yen ($44.39 billion) in February, nearly three times the 1.35 trillion yen gain posted a month earlier.

That pushed up the overall asset value by 6.1 percent or 3.6 trillion yen to 62.29 trillion yen -- the highest level since July last year.

Market participants closely watch the Japanese mutual fund market because of its size, the eighth-largest in the world and bigger than the economy of Turkey.

"The toushin market benefited from a strong recovery in global markets," Inui told a news conference.

He said prospects for the U.S. economy had brightened, pushing New York shares higher after strong jobs data in February. The Bank of Japan's surprise monetary easing measures and improvement in Europe's debt crisis had helped the market.

Japan's benchmark Nikkei stock average rose more than 10 percent in February, while the Dow Jones industrial average rose 2.5 percent.

The yen weakened across the board, down nearly 6 percent against the dollar and 8 percent against the euro during the month.

Still, Inui said the association was concerned about seeing steady outflows from equities funds.

Japan-domiciled equity investment trust funds posted net outflows of 224.1 billion yen in February, up from net outflows of 151 billion yen a month earlier.

That marked a fifth consecutive month of net outflows, the longest since 1997, which saw outflows in the six months between February and July.

"We are seeing some bright signs, although we'll be carefully watching trends in coming months," Inui said.

(Reporting by Chikafumi Hodo; Editing by Chris Lewis)

Article from Reuters

Manulife Mutual Funds Posts 87.3 Percent Year-over-Year Growth Rate in Fixed Income Fund Assets

ridodirected@gmail.com (RIDO) — Mon, 12 Mar 2012 20:41:00 +0000

March 12, 2012, 10:24 a.m. EDT

Article from Market Watch

Highest total fixed income assets growth rate among top 10 firms reporting to IFIC

TORONTO, March 12, 2012 /PRNewswire via COMTEX/ -- Manulife Mutual Funds posted the highest year-over-year growth rate - 87.3 percent - for total fixed income fund assets under management among the top 10 firms reporting to the Investment Funds Institute of Canada (IFIC) as at December 31, 2011. Manulife Mutual Funds' year over year growth rate was more than double that of the next highest major firm; the industry average growth rate for the top 10 firms was 24.2 percent.

Manulife Mutual Funds' fixed income assets under management were $2.6 billion at 2011's year-end, with market share of three percent.

"Over the past few years, Manulife Mutual Funds has continued to gather momentum from a steady stream of new fund launches, awards for investment performance, and strong diversified sales growth, all of which has helped position us as a leading provider of mutual fund solutions for financial advisors and their clients," said Paul Lorentz, President of Manulife Investments. "Advisors have shown very strong support for our yield-oriented fixed income and balanced funds. These make up a core strength of our product line-up as evidenced by strong sales of funds including our trust and corporate class versions of the Manulife Strategic Income Fund, Manulife Yield Opportunities Fund, Manulife Floating Rate Income Fund and Manulife Monthly High Income Fund."

About Manulife Mutual FundsManulife Mutual Funds, a division of Manulife Asset Management Limited, builds on 125 years of Manulife Financial's wealth and investment management expertise in managing approximately $17.7 billion as at December 31, 2011 for Canadian investors, through a diverse portfolio of forward-thinking mutual fund products. Our experienced Portfolio Managers offer access to markets in Canada, the United States and around the world, in a range of investment styles to help meet individual needs. Manulife Mutual Funds is part of Manulife Investments, which offers personal wealth management products and services, such as mutual funds, segregated fund contracts, annuities and guaranteed interest contracts. For more information, please visit manulifemutualfunds.ca.

About Manulife FinancialManulife Financial is a leading Canada-based financial services group with principal operations in Asia, Canada and the United States. In 2012, we celebrate 125 years of providing clients strong, reliable, trustworthy and forward-thinking solutions for their most significant financial decisions. Our international network of employees, agents and distribution partners offers financial protection and wealth management products and services to millions of clients. We also provide asset management services to institutional customers. Funds under management by Manulife Financial and its subsidiaries were C$500 billion (US$491 billion) as at December 31, 2011. The Company operates as Manulife Financial in Canada and Asia and primarily as John Hancock in the United States.

Manulife Financial Corporation trades as 'MFC' on the TSX, NYSE and PSE, and under '945' on the SEHK. Manulife Financial can be found on the Internet at manulife.com.

C$ unless otherwise stated

SOURCE Manulife Mutual Funds

Article from Market Watch

Pssst! Wanna Borrow Some Shares?

ridodirected@gmail.com (RIDO) — Sat, 10 Mar 2012 22:05:00 +0000

SATURDAY, MARCH 10, 2012

By BEVERLY GOODMAN

Securities lending can be a lucrative source of fund revenue, according to a recent study. But there is a catch.

Article from Barron

Securities lending is one of those Wall Street practices akin to indoor plumbing—when it operates smoothly in the background it performs a vital function, but when it breaks down it can be costly and, well, let's just say highly problematic.

Whether you're invested in mutual funds or exchange-traded funds, you're probably engaged in the practice of securities lending, and, depending on the fund, you are profiting a little or a lot.

Fund portfolios provide an appealing array of inventory for borrowers, and can therefore generate a pretty lucrative lending business. (Just how lucrative is almost impossible to discern; more on that in a moment.) Securities lending is the short-term loan of stocks or other securities to hedge funds and other institutional investors who are borrowing (usually) to short them. When selling a stock short, an investor borrows shares from an institution and sells them immediately on the assumption they will fall in value and can be returned at a lower cost. The borrower pays a fee for the loan, and must provide the fund collateral equivalent to 102% of the loan. So if a hedge fund borrows $100,000 worth of stock, the fund receives $102,000 in cash. Index funds and ETFs are the biggest lenders, since many active managers don't want to facilitate the short selling of stocks or bonds they own.

FUNDS AREN'T REQUIRED TO DISCLOSE their gross lending revenue, though the net revenue (the amount that goes back into the fund) can be pieced together from the balance sheet and income statements. According to one recent study, index mutual funds generate an average of $1.5 million of return per year. Funds with bigger lending programs, however, can see as much as $30 million a year, says John Adams, one of the study's authors and a finance professor at the University of Texas at Arlington. Both figures are deceptively low: Lending revenue, 50% of which must be returned directly to the fund, amounts to an average of five basis points, or 0.05%, of a fund's total net assets. This usually shows up in the form of a lower expense ratio. Since the median expense ratio of an index fund is 0.46%, the study says, lending revenue offsets nearly 5% of fund expenses. "That may not seem like much," Adams adds, "but that's a meaningful difference in a fund's cost and, ultimately, return."

Funds make money off lending in two ways: the fee they charge for the loan, and the reinvestment of the collateral. This is where it gets complicated.

About half the funds use a custodian, such as the BNY Mellon or State Street, to facilitate the lending. That means the borrowing fees are split between the custodian and the fund; clearly, the better the fund negotiates that split, the more its shareholders benefit. But a more disturbing finding of the study points to a potential conflict of interest when the fund uses a custodian it is affiliated with (for instance, sharing the same parent company). According to Adams, if the fund has an affiliation with the custodian, the return the fund sees from the lending program tends to be much lower. "Securities-lending returns are significantly higher when funds administer their own lending programs," Adams says. That includes Vanguard, which has an exemplary program and is one of the few companies that return 100% of lending proceeds to their funds.

VANGUARD SMALL-CAP INDEX FUND (NAESX), for instance, returned an average of 0.17% of assets to the fund annually for six years. The Dreyfus SmallCap Stock Index Fund (DISSX) saw just 0.12% of assets returned in the same period. Dreyfus is owned by BNY Mellon, one of the largest custodians. The Vanguard fund is considerably larger, but still manages a higher return. "Because the disclosure is so bad," Adams says, "there may be a legitimate reason for that type of difference, but we couldn't find it."

"If the fund investors are taking on 100% of the risk, they should get 100% of the return," says Joel Dickson, a principal and ETF specialist at Vanguard. The risk is that borrowers might not return the shares, or that the vehicle in which the collateral was invested runs into trouble—both of which happened to many lenders during the financial crisis. Vanguard keeps its collateral in its own money-market fund.

The upshot, according to Adams: A fund's board of directors might not be doing its job. Fund boards are responsible for negotiating and approving vendor contracts, including any deals made with custodians. The board at iShares, for instance, noticed that the return agreed to with parent and custodian BlackRock was the lowest legally permitted—50%. Two years ago that was adjusted, and 65% of lending revenue now goes back into the funds. "But at their scale, 65% isn't a very good fee split," Adams says.

Another finding: Funds whose directors were paid more than their peers at comparable funds saw less lending revenue than funds with more modestly paid boards. One theory is that high-paid directors are less likely to challenge management.

Out of Stock

Equity funds had average weekly outflows of $677 million in the four weeks through Wednesday, says Lipper. Taxable-bond fund inflows averaged $8.3 billion, and muni funds took in $1.5 billion. Money funds saw increasing outflows, averaging $3.3 billion a week.

E-mail: beverly.goodman@barrons.com

Article from Barron

Why does bratwurst capital have the best mutual funds?

ridodirected@gmail.com (RIDO) — Tue, 06 Mar 2012 20:52:00 +0000

Milwaukee boasts some of the top portfolio managers in the business; 'happy here in my ignorance'

March 5, 2012 2:58 pm ET

Article from Investment News

Albert Nicholas, the dean of Milwaukee money managers, has a theory why the mid-sized city best known for beer and bratwurst is home to so many top-performing mutual funds.

“We are not as influenced by fads and trends as people on the coasts,” said Nicholas, who has run the $1.7 billion Nicholas Fund since 1969. “We are very independent.”

Morningstar Inc. (MORN) in December named funds run by two Milwaukee firms -- Artisan Partners LP and Fiduciary Management Inc. -- as finalists for its domestic stock manager of the year. The $580 million FMI Focus Fund (FMIOX) beat 99 percent of rivals over the past 15 years, and eight more funds managed near Wisconsin's largest city, including the $10.1 billion Wells Fargo Advantage Growth Fund (SGROX) and the $2.4 billion Heartland Value Plus Fund, outgained at least 94 percent of peers over the past 10 years.

By comparison, only seven mutual funds based and managed in Chicago, which has four times the population and five times as many funds, beat 94 percent of peers over 10 years, Morningstar data show. Results for funds managed in Chicago for firms based elsewhere can't be tracked, the company said.

Many of Milwaukee's money managers, who collectively oversee about $57 billion in assets spread across 61 mutual funds, offer an explanation similar to Nicholas's for the city's success: its isolation from centers of finance. Milwaukee is 733 miles (1,180 kilometers) from Wall Street and 89 miles from Chicago, according to Bloomberg maps.

‘Fewer Toys'

“I don't have any neighbors who run hedge funds,” said Andrew Stephens, whose $5.4 billion Artisan Mid-Cap Fund (ARTMX) beat 99 percent of peers since its start in 1997. “No one is constantly talking stocks to me. I am happy here in my ignorance.”

Patrick English, FMI's chief executive officer, said down- to-earth Midwesterners are less concerned about “the size of your house or boat” than their counterparts elsewhere. “It is easier to focus on research when there are fewer toys to manage,” he said in an e-mail.

Much of the city's money-management community can trace its roots to Nicholas. Known as “Ab,” the 81-year-old Nicholas got his start at the University of Wisconsin in Madison, where he studied under Frank Graner, a dapper, chain-smoking professor of finance. At a time when investing was usually taught as a dry academic subject, Graner was an inspiring lecturer who emphasized stock-picking, Nicholas said.

‘The Pied Piper'

Ted Kellner, who started FMI, and William Nasgovitz, founder of Heartland Advisors Inc., both in Milwaukee, also studied under Graner.

“He was the pied piper of investment studies,” Nicholas said in a telephone interview.

In 1967 Nicholas started an investment firm with Richard Strong, another Wisconsin graduate. Seven years later, Strong created his own company, Strong Capital Management Inc., whose mutual funds were acquired in 2004 by Wells Fargo & Co. Kellner, who replaced Strong at Nicholas Co., founded FMI in 1980. In 1994, Carlene and Andrew Ziegler left Strong to set up Artisan Partners.

The University of Wisconsin link remains strong today. About 60 people who work for Milwaukee firms are graduates of the school's Applied Security Analysis Program, which trains money managers, according to Brian Hellmer, its director.

Real-World Experience

Students in the master's degree program get real-world experience by managing $53 million that comes from the university's endowment and alumni donations, Hellmer said. Thomas Ognar, manager of the Wells Fargo Advantage Growth Fund, and Adam Peck, co-manager of the $2.4 billion Heartland Value Plus Fund (HRVIX), are both graduates of the program. Ognar's fund beat 99 percent of rivals over the past 10 years and Peck's beat 97 percent, Morningstar data show.

With a population of 595,000, Milwaukee is America's 28th largest city, according to the 2010 U.S. census. In the mid-1960s, four Milwaukee brewers -- Blatz, Pabst, Schlitz and Miller -- were among the top 10 beer makers in the world, according to the Museum of Beer & Brewing. Miller, which is owned by London-based SABMiller Plc (SAB), is the only one still operating a brewery in Milwaukee today.

Harley-Davidson Inc., the biggest U.S. motorcycle maker, and Johnson Controls Inc., the largest U.S. auto supplier, are both based in Milwaukee.

‘Live Like Kings'

Most of the mutual fund companies are clustered along the shore of Lake Michigan in the city's downtown, which features wide streets and little traffic. Money managers boast of their short commutes and affordable homes.

“Professionals can live like kings here compared to Boston and New York,” FMI's English wrote in an e-mail. A median- priced single-family house in the Milwaukee metropolitan area cost $181,000 in the fourth quarter of 2011, according to the National Association of Realtors, compared with $325,000 in Boston and $363,000 in New York.

The climate may not be as big a draw. The average January temperature is 21 degrees Fahrenheit (-6 degrees Celsius) compared with 32 in New York.

The Milwaukee firms that run equity funds emphasize individual stock selection and their own research over seeking to ride macroeconomic trends.

“It is too risky to make big macro bets,” Wells Fargo's Ognar said in an October interview.

Read 10-Ks

In that same interview, he described Apple Inc., his largest holding, as a cheap stock, even though it had recently hit a record price of more than $422 a share. Apple closed March 2 at $545.18 in New York trading.

FMI, which manages $12.5 billion, Heartland and Artisan all stress their bottom-up approach. In an interview in his firm's Milwaukee office, Eric Colson, Artisan's CEO, described his money managers as people “who like to sit in the corner and read 10-Ks.”

Artisan, with $65 billion in assets, including funds managed by teams in other cities and money in separate accounts, withdrew a planned initial public offering in December, citing market conditions. One of the company's value investing teams, based in Atlanta, won Morningstar's award for domestic stock manager of the year in 2011.

Heartland's Nasgovitz called himself a disciple of Benjamin Graham, the legendary investor who was Warren Buffett's professor at New York's Columbia University. Like Graham, Nasgovitz looks for companies with little debt selling at a discount to their long-term value.

Bucking Trends

Heartland Value Plus attracted $770 million in 2011, according to Morningstar, bucking a trend that saw investors pull $135 billion last year from funds that buy U.S. stocks, according to data from the Investment Company Institute, a Washington-based trade association.

The $5.1 billion FMI Large Cap Fund (FMIHX), whose managers were also nominated for Morningstar's top award for 2011, gained $791 million. Ognar's Wells Fargo fund won deposits of $4.5 billion, which ranked it among the 20 most popular U.S. mutual funds, Morningstar data show.

On the bond side, Lyle Fitterer's $2.7 billion Wells Fargo Advantage Municipal Bond Fund (SXFIX) beat 99 percent of rivals over the past 10 years, Morningstar data show. After the municipal market sold off in December 2010 following analyst Meredith Whitney's prediction that there would be “hundreds of billions” of dollars of defaults, Fitterer said her forecast was off the mark.

‘Latest Sizzle'

“I am not saying there won't be defaults,” Fitterer said in a January 2011 interview. “But I have a hard time getting to $10 billion, let alone $50 or $100 billion.”

Fitterer's fund gained 10 percent last year as defaults totaled $2.6 billion, excluding tax-exempt debt in AMR Corp.'s bankruptcy, according to Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors.

The $754.7 million BMO Intermediate Tax-Free Fund (MITFX) beat 99 percent of competitors in the past five years, Morningstar data show. In December 2010, Bank of Montreal (BMO) agreed to buy Milwaukee-based Marshall & Ilsley Corp., the fund's owner, for about $4.1 billion in stock.

The $1.4 billion Baird Core Plus Bond Fund (BCOIX), managed by Mary Ellen Stanek, beat 94 percent of rivals over 10 years. In 2008, her $1.2 billion Baird Intermediate Municipal Bond Fund (BMBIX) beat 99 percent of similar funds by sticking to higher-quality issues, she said.

“We are hard-working Midwesterners here,” Stanek, president of Baird Funds Inc., said in an interview. “We may not always have the latest sizzle, but that sizzle often doesn't add value.”

--Bloomberg

Article from Investment News

Top 5 Zacks#1 Ranked Pacific Mutual Funds

ridodirected@gmail.com (RIDO) — Sat, 03 Mar 2012 22:40:00 +0000

Best of Funds

March 02, 2012

Article from Zacks

Technological advancement, increased per capita income and spending and increased capital flows from the first world countries make the Asia-Pacific one of the fastest growing regions. It is here that we find a unique blend of economic superpowers and emerging economies making the region a strategic tool of wealth creation over the long term. Mutual funds investing in the Pacific Basin region, with their diversified portfolios truly provide a unique and lucrative investment opportunity for the investor.

Below we will share with you 5 top rated Pacific mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform its peers in the future. To view the Zacks Rank and past performance of all Pacific funds, investors can click here to see the complete list of funds.

T. Rowe Price New Asia Fund (PRASX) seeks long term capital appreciation. The fund invests a majority of its assets in common stocks of Asian companies (excluding Japanese companies) without regard to their size. It predominantly invests in emerging markets such as China, India, Indonesia, Thailand, Hong Kong etc. The Pacific mutual fund has a three year annualized return of 35.46%.

The Pacific mutual fund has a minimum initial investment of $2,500 and an expense ratio of 0.96% compared to a category average of 1.79%.

Guinness Atkinson Asia Pacific Dividend (GAADX) invests heavily in dividend generating equity securities issued by companies form the Asia Pacific region. Common and preferred stocks, related convertible securities, rights and warrants constitute its major investments. The Pacific mutual fund has a three year annualized return of 26.24%.

Edmund Harriss is the fund manager and he has managed this Pacific mutual fund since 2006.

Matthews Asian Growth & Income Fund (MACSX) seeks long term capital appreciation along with high levels of current income by investing predominantly in dividend paying common stocks, preference shares and convertible instruments. The fund emphasizes on parking the funds in emerging markets such as China, India, Indonesia, South Korea, Singapore etc. The Pacific mutual fund has a three year annualized return of 18%.

As of September 2011, this Pacific mutual fund held 84 issues, with 3.83% of its total assets invested in Hisamitsu Pharmaceutical Co. Inc.

Vanguard Pacific Stock Index (VPACX) invests almost all of its assets in common stocks which make up the MCSI Pacific Index. The fund follows a passive management approach and aims to track the performance of the index. The Pacific mutual fund has a three year annualized return of 13.08%.

The Pacific mutual fund has a minimum initial investment of $3,000 and an expense ratio of 0.26% compared to a category average of 1.42%.

Wells Fargo Advantage Asia Pacific (SASPX) seeks capital growth over the long term. The fund focuses on purchasing securities of companies which have the potential for superior earnings growth, sufficient financial resources and an efficient management team. The Pacific mutual fund has a three year annualized return of 17.45%.

Anthony L.T. Cragg is the fund manager and he has managed this Pacific mutual fund since 1993.

To view the Zacks Rank and past performance of all Pacific mutual funds, investors can click here to see the complete list of funds.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank at http://www.zacks.com/funds.

Article from Zacks

Top 5 Best Performing Real Estate Mutual Funds Year to Date

ridodirected@gmail.com (RIDO) — Thu, 01 Mar 2012 21:11:00 +0000

Best Performing Funds Year To Date

Article from Zacks

CGMRX | KSRAX | KREAX | FRESX | MRESX

Mutual funds investing the real estate sector should definitely be part of portfolios with a long term horizon even though the sector has traversed rough waters in the recent past. Real estate mutual funds have delivered significantly high returns in the past and offer a convenient method for investing in this sector. With their low initial investment requirements, well diversified portfolios and professional management they can go a long way in lowering the risk involved. They also bring stability and steady returns to portfolios over the long term.

Below we will share with you the 5 best performing real estate mutual funds year to date. To view the Zacks Rank and past performance of all real estate funds, investors can click here to see the complete list of funds.

CGM Realty (CGMRX) seeks capital growth over the long term and current income. The fund primarily invests in companies in the real estate sector. Up to 20% of its assets may be used to purchase securities from other sectors. The real-estate mutual fund has a three year annualized return of 30.82%.

G. Kenneth Heebner is the Fund Manager and he has been managing this real estate mutual fund since 1994.

Forward Real Estate Long/Short A (KSRAX) invests the majority of its assets in real estate securities. These may be issued by real estate investment trusts or companies operating in the sector. The fund may purchase securities issued form emerging markets. The real-estate mutual fund has a three year annualized return of 34.42%.

The real estate mutual fund has a minimum initial investment of $4,000 and an expense ratio of 1.60% compared to a category average of 1.39%.

Forward Real Estate A (KREAX) seeks income with a secondary objective of capital growth. The fund invests a large share of its assets in companies from the real estate sector, without regard to their size. The real-estate mutual fund is non-diversified and has a three year annualized return of -2.03%.

Michael McGowan is the Fund Manager and he has been managing this real estate mutual fund since 2010.

Fidelity Real Estate Investment (FRESX) invests the majority of its assets in real estate companies or other investments related to the sector. The fund is non-diversified and invests in both domestic and foreign securities. The real-estate mutual fund has a three year annualized return of 34.49%.

As of December 2011, this real estate mutual fund held 53 issues, with 9.19% of its total assets invested in Simon Property Group, Inc.

Managers Real Estate Securities (MRESX) seeks capital gro0wth over the long term along with income. The fund utilizes a large proportion of its assets to purchase equity securities of companies from the real estate sector as well as real estate investment trusts. The real-estate mutual fund has a three year annualized return of 34.7%.

The real estate mutual fund has a minimum initial investment of $2,000 and an expense ratio of 1.41% compared to a category average of 1.39%.

To view the Zacks Rank and past performance of all real estate mutual funds, investors can click here to see the complete list of funds.

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15 Best Stocks at Top-Performing Mutual Funds (Update1)

ridodirected@gmail.com (RIDO) — Sun, 26 Feb 2012 08:54:00 +0000

By Frank Byrt 02/24/12 - 08:56 AM EST
Article from The Street

(Story updated to add that Regeneron raised its 2012 sales outlook for its leading product, Eylea.)

BOSTON (TheStreet) -- Equity mutual funds aren't doing much better than the benchmark index this year when fees are added. That's after a disappointing 2011, when the average U.S. stock fund lost investors money. But taking a peek at the top holdings of this year's better-performing, highly rated funds narrows down the superior investment ideas.

And that may be the best way to use mutual funds, as investing in them can prove to be costly. The average return for the almost 9,400 domestic equity funds tracked by Morningstar is 10% this year, versus the S&P 500's 8.3% gain. Last year the same group fell 2.5% versus the 2.1% increase for the benchmark.

And that's why they're losing ground to exchange traded funds. Investors pulled $135 billion from domestic stock mutual funds in 2011, the fifth straight year of withdrawals, according to the Investment Company Institute.

But that's not to say that many U.S. stock funds aren't worth their fees.

We screened for top-performing, actively-managed, diverse, domestic mutual funds that have at least a three-star rating from Morningstar and assets of at least $1 billion to see what their best performers are.

We chose five funds, including large-cap and mid-cap funds, that fit the bill with returns of 13.6% to 20% this year, and then culled their portfolios for some of their best performers.

The funds are: the $10 billion, large-cap growth fund Wells Fargo Advantage Growth Investor(SGROX_), which is up 13.6% this year and has a five-star Morningstar rating, its highest; the $40 billion, large-cap growth fund Fidelity Growth Company( FDGRX ), with a return of 14.3% and five stars from Morningstar; the $2 billion large-cap growth fund Touchstone Sands Capital Capital Select Growth(TSNCX_), up 15.3% and has a four-star rating from Morningstar; the $6 billion Artisan Mid-Cap Fund(ARTMX_), up 16.6% and with a four-star Morningstar rating; and the $1.2 billion Hotchkis and Wiley Mid-Cap Value Fund(HWMIX_), up 20% and with a three-star rating from Morningstar.

It's no surprise that most large-cap funds, and many in other categories, have iPad and iPhone maker Apple(AAPL_) as a top pick, so that won't be included in the stocks summarized below.

Here are 15 stocks that are big winners for five mutual funds this year, with three coming from each, ranked in inverse order of their returns:

15. Visa(V)

Company profile: Visa, with a market value of $95 billion, manages a group of global payment card brands, which it licenses to financial institutions that issue cards to their customers. It acts as the payment processor.

Investor takeaway: Visa's shares are up 15% this year and have a three-year 28% annualized return. Analysts give its shares 18 "buy" ratings, 10 "buy/holds," and eight "holds." They project earnings of $5.95 this year, growing to $6.95 in 2013. Institutional investors own 56% of its shares.

14. Whole Foods(WFM_)

Company profile: Whole Foods, with a $15 billion market value, is the largest U.S. retailer of natural and organic foods, with about 300 stores in the U.S., as well as in Canada and the U.K.

Investor takeaway: Whole Foods' shares are up 16% this year and have a three-year annualized return of 85%. Analysts give its shares nine "buy" ratings, five "buy/holds," and nine "holds," according to S&P, which gives it its "strong buy" rating. Those same analysts project earnings of $2.33 per share this year and that they will grow by 15% next year.

13. Alexion Pharmaceuticals(ALXN_)

Company profile: Alexion Pharmaceuticals specializes in the development and marketing of drugs for life-threatening medical conditions, including cancer.

Investor takeaway: Its shares are up 16.7% this year and have a three-year annualized return of 64%. Analysts give its shares 1 "buy" ratings, six "buy/holds," seven "holds," and one "weak hold," according to S&P. Fidelity owns 11.5% of Alexion's shares, by far the largest stake.

12. Red Hat(RHT )

Company profile: Red Hat, with a $10 billion market value, is a leading provider of distribution and support for open-source operating systems and middleware, including most prominently, Red Hat Enterprise Linux.

Investor takeaway: Red Hat's shares are up 18% this year and have a three-year annualized return of 50%. Analysts give its shares nine "buy" ratings, eight "buy/holds," seven "holds," two "weak holds," and one "sell," according to S&P, which has the shares rated "hold."

11. Trimble Navigation(TRMB_)

Company profile: Trimble Navigation, with a $6.3 billion market value, sells advanced global-satellite positioning instruments to government and commercial customers worldwide. They are used in surveying, vehicle navigation systems, mapping equipment, and instruments sold to the agricultural, military, aviation, and construction industries.

Investor takeaway: Trimble Navigation's shares are up 18% this year and have a three-year annualized return of 54%. Analysts give its shares five "buy" ratings, four "buy/holds," and five "holds," according to S&P. S&P has the stock rated "hold," on valuation concerns and a view that demand may be slowing in the near term.

10. Discover Financial Services(DFS)

Company profile: Discover Financial Services, with a $16 billion market value, issues credit cards and acquires transactions. It operates a closed-loop credit card network and also uses third parties to issue its cards.

Investor takeaway: Discover's shares are up 24% this year and have a three-year annualized return of 74%. Analysts give its shares 10 "buy" ratings, six "buy/holds," and nine "holds," according to S&P, which has its shares rated "buy."

9. Salesforce.com(CRM_)

Company profile: Salesforce.com, with a market value of $18 billion, is the leading provider of hosted customer relationship management, or CRM, software services. It's a big player in the rapidly growing cloud computing sector.

Investor takeaway: Salesforce's shares are up 26% this year and have a three-year annualized return of 70%. Analysts differ strongly on this one with S&P recently downgrading it two weeks ago to a "strong sell rating," on competitive and pricing concerns, while other analysts give its shares 17 "buy" ratings, 14 "buy/holds," six "holds," one "weak hold," and six "sells." Fidelity owns almost 15% of its shares, more than double that of the next largest shareholder.

8. Pioneer Natural Resources(PXD_)

Company profile: Pioneer Natural Resources, with a market value of $13 billion, is an independent exploration and production company with operations throughout the southern and central U.S.

Investor takeaway: Pioneer's shares are up 27% this year and have a three-year annualized return of 96%. Analysts give its shares 14 "buy"ratings, six "buy/holds," and seven "holds," according to S&P, which has its shares rated "buy," with a $125 price target, a 10% premium to the current price.

7. National Oilwell Varco(NOV_)

Company profile: National Oilwell Varco, with a market value of $37 billion, is one of the largest equipment suppliers in the drilling industry. It provides rigs, parts and repair services.

Investor takeaway: Its shares are up 28% this year, and have a three-year annualized return of 51%. National Oilwell Varco's 10-year annualized return is a huge 25%. S&P has its shares rated "buy," and its survey of analysts found 17 "buy" ratings, 11 "buy/holds," and one "hold."

6. Valassis Communications( VCI)

Company profile: Valassis Communications, with a $1.1 billion market value, is a marketing services company with several operating segments, including publication inserts, shared mail, and newspaper advertisements.

Investor takeaway: Its shares are up 32% this year and have a three-year annualized return of 164%. Analysts give its shares four "buy" ratings, three "buy/holds," and two "holds," according to S&P. Analysts project earnings of $3.05 per share this year, a 17% increase over the prior year.

5. CA Technologies(CA)

Company profile: CA Technologies is one of the largest independent providers of IT management software.

Investor takeaway: Its shares are up 34% this year and have a three-year annualized return of 17%. Analysts give its shares Analysts give CA's shares two "buy"ratings, four "buy/holds," and 10 "holds," according to S&P. Institutional investors own 75% of its stock.

4. Fossil(FOSL_)

Company profile: Fossil, with a market cap of $7.4 billion, makes wristwatches under the Fossil, Relic and Zodiac brand names, and also produces a complementary line of belts, purses, sunglasses, and jewelry, products that are sold worldwide.

Investor takeaway: Fossil shares are up 46% this year, and have a three-year annualized return of 104%. S&P has its shares rated "buy," with a $125 price target, a 6% premium to the current price. Other analysts give its shares five "buy" ratings, five "buy/holds," and five "holds."

3. Illumina(ILMN_)

Company profile: Illumina, with a $6.2 billion market value, makes equipment and consumables for genetic analysis. Its customers include academics, genome centers and pharmaceutical firms.

Investor takeaway: Its shares are up 67% this year, and have a three-year annualized return of 15.6%. Analysts give Illumina's shares six "buy" ratings, two "buy/holds," 13 "holds," and one "sell," according to S&P. Mutual funds own almost 50% of its shares.

2. Regeneron Pharmaceuticals(REGN_)

Company profile: Regeneron Pharmaceuticals, with a market value of $9.8 billion, develops products that fight inflammation, cancer and eye disease. Regeneron said recently, that it expects 2012 sales for its flagship product Eylea, which treats macular degeneration, to be in the range of $250 million to $300 million, up from a prior forecast range of $140 million to $160 million. In the fourth quarter 2011, Regeneron said its loss widened to $53.4 million, or 58 cents per share, from $14.6 million, or 17 cents per share, a year earlier.

Investor takeaway: Its shares are up 80% this year, and have a three-year annualized return of 76%. Analysts give its shares eight "buy" ratings, one "buy/hold," six "holds," and one "weak hold," according to S&P.

1. Cobalt International Energy(CIE_)

Company profile: Cobalt International Energy, with a $12 billion market value, is an independent, oil-focused exploration and production company.

Investor takeaway: Its shares are up 105% this year and 115% since it went public about a year ago. Analysts give its shares five "buy" ratings, four "buy/holds," and two "holds," according to S&P.

Article from The Street

The ABCs of Dodging Mutual Fund Fees

ridodirected@gmail.com (RIDO) — Tue, 21 Feb 2012 21:14:00 +0000

FEBRUARY 21, 2012, 11:38 A.M. ET

Article from Smart Money

Hough: Two investors who buy into the same fund could end up with significantly different returns, thanks to a confusing array of share classes.

By JACK HOUGH

Cash poured into mutual funds during the first week of February at the fastest pace in nearly two years, according to data from the Investment Company Institute, a trade group.

But not all fund investors are being treated equally. Two investors who buy into the same fund could end up with significantly different returns, due to a confusing array of share classes, each with a different fee structure.

As recently as 1989, the total number of share classes matched the number of funds: 2,262 in the U.S., not counting money-market funds, according to ICI data. By 2010 there were 6,928 U.S. funds available in 20,188 share classes.

"Most of these share classes weren't designed to help investors," says Mike Alfred, co-founder of Brightscope, which tracks retirement plans. "They were designed to pay someone else."

For example, the Amcap Fund, offered by American Funds, is available in A and C shares for all buyers, F-1 and F-2 shares for those who go through certain advisers and a handful of separate classes for investors who buy through a 529 college-savings plan.

A spokeswoman for American Funds says the purpose of different share classes is to allow investors to choose how they pay their adviser.

Most A, B and C share classes impose sales commissions, or "loads," based on the amount invested. Because loads pay salespeople, they are a needless expense for investors who choose their own funds or pay advisers directly, says Morningstar (MORN: 59.88, -1.73, -2.81%) analyst Eric Jacobson.

One way to get financial advice without sales charges is to find a planner who is paid by a set fee based on assets rather than a commission. The Financial Planning Association has a tool for that at FPAnet.org. Fees of 1% a year are common.

Even 1% can add up. For a 25-year-old who saves 9% of his pay in a typical stock and bond portfolio, the difference between paying, say, 0.25% a year and paying 1.25% amounts to having $510,000 or $410,000 by age 65, according to a study by Vanguard Group. A cheaper choice might be a planner who charges an hourly fee.

Some firms have fund marketplaces that allow investors to choose among hundreds of funds with simplified pricing. "We seek to have one and only one class of each fund," says Doug Hanson, who oversees the OneSource mutual-fund platform at Charles Schwab (SCHW: 12.84, -0.03, -0.23%).

Some marketplaces offer investors the ability to dodge loads. For example, A shares of the Federated Capital Appreciation fund cost a maximum of 5.5% up front through some channels, but the fee is waived for Schwab customers.

Just don't confuse "no load" with "bargain." That same Federated fund has ongoing expenses of 1.25% of assets per year. Princeton economist Burton Malkiel recommends mutual-fund buyers pay no more than 0.5% a year for an actively managed domestic fund, whatever the share class.

For investors who want a fund that comes only in A, B and C shares, deciding which class to choose is like deciding whether to rent or buy a house. Total future costs depend on unknowns, like holding periods and yearly returns.

A-class shares usually have hefty upfront fees, often 4% to 5.75%, and lower annual ones. Many offer discounts for larger purchases.

B shares usually have no upfront fees but higher ongoing ones, and impose a charge on holders who sell in the early years ("contingent deferred sales charge"). Typically, B shares convert to A shares after several years, thus shifting to lower ongoing expenses.

Over the past decade, the Financial Industry Regulatory Authority, or Finra, has stepped up enforcement actions against brokers for big-ticket sales of B shares that would have qualified for A-share discounts. Some mutual-fund companies have phased out B shares, including Fidelity Investments, Franklin Templeton and American Funds.

C shares also have high ongoing expenses. Minimum holding periods are short and charges for early sellers are modest. But C shares rarely convert to A shares, and thus stay expensive indefinitely.

It is possible to simplify the math. Finra offers a side-by-side comparison tool at Finra.org/fundanalyzer. For example, it shows that $10,000 placed in the Invesco S&P 500 Index fund, assuming it returns 5% a year for 10 years, will cost $1,269 with A shares and $1,630 with C shares.

The tool also shows that the similar Fidelity Spartan 500 Index fund, investor class, costs a good deal less: $115 under the same assumptions.

There is one last choice for people put off by share complexity: Buy individual stocks and bonds instead.

That is best left to experienced investors. But someone who can learn to analyze a contingent deferred sales charge probably has a head for telling whether Coca-Cola (KO: 68.84, -0.21, -0.30%) can keep paying its dividend.

—Jack Hough is a columnist at SmartMoney.com. Email: jack.hough@dowjones.com

Article from Smart Money