The MUTUALdecision Blog

Jennison Value Fund Earns an A+

Bill Byrnes — Thu, 12 Nov 2009 07:09:00 -0600

The Jennison Value Fund (fund class tickers include PBQIX and PEICX ) earns an A+ rating from MUTUALdecision. This is the first fund in six months to earn our highest rating. It comes from ranking in the top decile of all four of our academic models, an impressive and infrequent accomplishment.

The Jennison Value Fund invests in large cap stocks, an attractive market segment as discussed in our recent blog, Where Do We Go From Here? What type of large cap stocks the fund invests in is an interesting question. Using Sharpe style analysis we conclude that the fund currently has a growth stock orientation. Our friends at Morningstar classify its holdings as a blend between growth and value. (Morningstar also only gives the fund three stars but that just highlights the difference between a historical based rating system and MUTUALdecision's academic based predictive system.) Of course, the fund has "value" in its name suggesting it invests in value stocks. Perhaps the best answer might be that the fund's managers have a somewhat flexible approach. What it is, it works as evidenced by the fund's 36% Y-T-D return. This month's return may be hurt because one of the fund's largest holdings was CVS which is significantly down in price due to a weak forecast. However, this may have created a good entry point into the fund. The Jennison Value Fund is well worth your consideration.

Is It Miller Time?

Bill Byrnes — Thu, 05 Nov 2009 07:29:00 -0600

The lead article in the recent Barron's, It's Miller Time, discussed Bill Miller and his Legg Mason Value Trust (symbol: LMVTX). Miller is a very visible fund manager in large part because his fund outperformed the S&P 500 for 15 consecutive years. Then it underperformed in 2007 and 2008 leading critics (who also point out the high fees charged by the fund) to conclude that Miller had lost his touch. And, no doubt, making proponents of indexing happy.

We, at MUTUALdecision, take an objective view of fund performance. Academic research concludes that there is a small percentage, less than 10%, of mutual funds that consistently beat their benchmark. No fund can be expected to outperform every quarter and even the best fund manager has a bad year (or two). We ignore the hoopla and emotion surrounding a manager or fund and measure its recent performance and portfolio changes against four variables that academic research has determined to be significant predictors of future fund performance. Based upon our most recent analysis, Bill Miller is back on track and the Legg Mason Value trust receives an "A" rating.

Where Do We Go From Here?

Bill Byrnes — Tue, 27 Oct 2009 10:54:00 -0500

The Dow is bouncing around the 10,000 level. This is where I said, back on April 13, the Dow would peak in 2009. The stock market is no longer selling at a firesale price as it was at the beginning of the year. The initial stage of the bull market, triggered by the expectation - now reality - that the economy would pullout of the recession, has run its course. A period of consolidation and retrenchment is to be expected until the end of the year. What will drive the stock market higher is an improving economy: corporate earnings growth, a peaking (then decline) in the unemployment rate, improvement in housing values and increased automobile sales (the latter two based on fundamentals, not a temporary government program) and progress on reducing the deficit. Demand from countries such as China will be another driver.

If the market will move sideways for a while and the next leg up will be based on fundamentals, what should an investor do? Consider large cap mutual funds. These funds invest in big companies and will avoid some of the downside losses if the stock market corrects before moving higher. Big cap companies such as Hewett - Packard, McDonalds and Caterpillar derive a substantial portion, in come cases a majority, of their earnings from international sales, thus, partially shielding them for downturns in the US economy and enabling them to participate in the strong demand from the new economies such as China and India. Some top rated big cap funds to consider include: Lord Abbett Affiliated (LAFPX), Old Mutual Focused (OIFCX) and Wells Fargo Advantage Large Cap (CBLSX). Note that these funds have multiple classes, I've given the ticker for only one.

A New Way to Find Top Performing Mutual Funds

Bill Byrnes — Tue, 06 Oct 2009 09:34:00 -0500

Academic models use state-of-the-art mathematical and statistical techniques to identify unique variables to predict the mutual funds that will perform the best. Backtesting over a minimum of twenty years validates the academic research. MUTUALdecision uses four leading academic models to find the mutual funds that will earn you the greatest risk-adjusted returns. This month's top funds, at the top of the list of the approximately 3,700 funds we rate, include Wells Fargo Advantage, CBLSX, and Seligman Large Cap Value, SLVAX. These two funds are noteworthy because they only receive three stars from Morningstar. The difference in ratings highlights the difference between an academic based predictive system and a historical based model. In this time of challenging investing, academic insights can help you make better mutual fund decisions and earn superior returns.

Occam's Razor, Albert Einstein and the Stock Market

Bill Byrnes — Wed, 30 Sep 2009 18:06:00 -0500

Is the stock market headed up or down? I'm not talking about whether there will be a pullback from its current level, because some consolidation is to be expected, but whether we are in a bull market or a bear market rally. And, whether you should be buying stocks or not.

Occam's razor says to make as few assumptions as possible and you'll be better off in your decision making. Einstein expressed it differently: look for the simplest concepts and the link between them. So, let's focus on the big picture and ignore whether home sales are up or down this month, the level of unemployment and all the economic clutter that clouds our thinking everyday. The big issues are: 1. the U.S. economy is expected to have grown by 2-3% in the just ended quarter and to grow by as much as 5% in 2010; 2. The Fed and the Congress have flooded the economy with money through their respective programs of providing liquidity and fiscal stimulus; 3. Short term interest rates are near zero; 4. International economies, notably China, Korea and India are strong, creating demand for U.S. products and many of our largest companies derive the majority of their sales internationally; 5. The Dow is over 40% below it's high of two years ago and, according to an article in Business Week, priced where it was in the mid-90s on an inflation adjusted basis; 6. Speaking of inflation -- there isn't any. So, it doesn't take an Einstein to conclude that the stock market will move higher.

Time to Think About Value Funds

Bill Byrnes — Wed, 23 Sep 2009 14:05:00 -0500

With the Dow approaching 10,000 and up 50% from it's low of the year, the easy money in this leg of the bull market has been made. Investors looking for a prudent way to participate in the market would do well to consider mutual funds that look for value stocks. These are stocks that usually sell at lower P/Es than growth stocks and have solid fundamentals such as a high level of tangible assets. Value type funds that rank highly in MUTUALdecision's four academic models are: the Yacktman Fund (YACKX), which invests in large cap value stocks; the Thornburg Value Funds (TVIFX, TVCFX), our overall top rated mutual funds, which invest in a mix of mid-cap value and growth stocks, and the Royce 100 Funds (ROHHX, RYOHX), which invest in small cap value stocks. All of these funds regularly appear at top of our models. Another thing for investors to consider: Big Cap stock funds typically are the least volatile equity investments, with small caps being the most volatile. So, pick your stock/company size according to your risk level. Value stock funds are a way to participate in the upside of the stock market while not exposing yourself to as much downside risk through more aggressive investments. Now's the time to consider value stock mutual funds.

The (Trade) War with China Has Begun

Bill Byrnes — Tue, 15 Sep 2009 07:06:00 -0500

The United States has imposed a tarriff on tires from China becasue China has been "dumping" - selling at artificially low prices - tires in the U.S. China has retaliatied by imposing tarriffs on car parts and chickens (the chickens are the only winners here). See articles in the New York Times, The Wall Street Journal and the Washington Post. What's interesting is these papers refer to China as our banker and we must tread carefully so as to not upset China. What they're really saying is China holds so much of our debt (Treasuries) and we're so dependent on China for financing our trade and fiscal deficits, that we have lost our economic independence. China subsdizes its exports directly, through a currerncy it does not allow to float up to its true value, and through lax workplace regulations, all of which contriubte to atrifically low prices for its goods. The result is we are not only exporting dollars to China but we're also exporting jobs and the jobs loss permanently weakens our economy. This is all part of the Chinese government's campaign to become a major world power and weaken the U.S. I've written about this major threat before, see my blogs "The End of the Dollar," 9/7/09 and "We Won the Cold War but Are Losing the Ecomnoic War," 8/7/09.

I welcome China into the league of major world nations and believe its economic growth will benefit everyone but it cannot come at the unfair expense of the U.S. We need to stand up to China now and regin in our fiscal and trade deficits before we lose this war.

The End of the Dollar

Bill Byrnes — Mon, 07 Sep 2009 06:51:00 -0500

Since the end of World War II the dollar has been the world's reserve currency -- the currency trade is denominated in, the currency governments and businesses worldwide use in their dealings and hold for their reserves. Reserve currency status results from the political and economic power and stability of the U.S. and has benefits in both areas. One unintended benefit is the ease with which we can fund our fiscal and trade deficits. Our fiscal deficit is expected to be $1 trillion this year (and we face growing Medicare and Social Security expenditures). Our trade deficit runs $500 billion annually largely due to our dependency on foreign oil. Foreigners have readily bought Treasury bonds to fund our fiscal deficit and businesses have taken our dollars in trade and recycled them into Treasuries. Some dollars, a relative few, have been used to purchase U.S. companies, as such icons as Anheuser Bush become foreign owned.

The ease with which the U.S. can print Treasury bills keeps interest rates low and goods flowing into the U.S. This is great except it can't last forever and there is a growing chorus of world leaders who are calling for an end to the dollar as the reserve currency. The creation of the Euro and the emergence of China and other growing economic powers make this a real possibility. Add in the twin U.S. deficits, one effect of which has been a 40% decline in the value of the dollar versus the euro over the past eight years, and the dollar (and Treasuries) looks less attractive as a currency foreigners want to hold.

The erosion of the U.S. manufacturing base through outsourcing and the lack of a domestic economic policy exacerbates our trade problems. China is poised to become the largest manufacturing country in the world and surpass the U.S. in automobile production (mostly made by Japanese companies with plants in the U.S.) in 2010. We also should not underestimate the political reasons for replacing the dollar as the world's reserve currency. China and India, among others, aspire to great nation status and are more independent of the U.S. than European nations. Dethroning the dollar is consistent with these nations intent to become bigger players on the world stage.

We will soon face the day when the world no longer wants our dollars. This may come gradually as will be evidenced by a depreciating dollar, more expensive imports (think oil), and higher interest rates. It may come suddendly as a foreign government wields the dollars (Treasuries) it holds and the goods we need as a weapon against us. Rumblings of replacing the dollar as the world's reserve currency are an unpleasant sign of things to come. We must reign in our twin deficits before it's too late.

Mutal Funds that Beat the Market

Bill Byrnes — Tue, 01 Sep 2009 05:12:00 -0500

There's an interesting article on actively managed mutual funds in the September 7 BusinessWeek, Time to Take Action. It says that now is the time to invest in actively managed mutual funds. The reason is that there are some stocks selling at bargain prices as a result of the financial meltdown. The argument for index funds is that no one can beat the market and with their lower expenses (no trading, research, etc.) index funds are your best investment. What the indexers ignore is extensive academic research that shows 8% - 10% of funds (really the fund managers) do outperform their benchmark, i.e., beat the market, on a consistent basis. Index funds are prudent investments, but given the dramatic disruption in the economy and the stock market over the past two years, we may be in a once-in-a-lifetime opportunity to significantly outperform the market by buying the right actively managed mutual funds. The top ranked funds on MUTUALdecision are a good place to start. In case you're wondering, of the funds recommended in the BusinessWeek article, the Davis NY Venture fund, NYVTX, ranks the highest of the six, with a B+.

Yogi Berra and the Stock Market

Bill Byrnes — Mon, 31 Aug 2009 04:09:00 -0500

As Yogi said, "When you come to a fork in the road take it." Investors may be at the fork in the stock market's road. The Dow has risen by 48% from its February lows and stands at 9544. It's close to our 2009 target of 10,000. The Dow has been fueled by encouraging economic data indicating we're coming out of the recession. But corporate profits, although better than expected, haven't taken off and 2010 estimates haven't been raised. The result is that the P/E for the stock market has risen along with the Dow. Stocks are no longer cheap. Never has the stock market come this far, this fast, without a correction. The expectation of a slow recovery, unemployment likely continuing to rise (it's a lagging indicator), households upside down on the equity in their homes or in arrears on their mortgages, are among the reasons why the recovery will be uneven (as they always are). If investors were to look at the glass as half empty, rather than half full, a correction will occur. Although I don't base predictions on historical results, September and October generally have been the worst months of the year for the stock market. Why when investors come back from vacation and their kids go back to school they turn pessimistic is anyone's guess but with September about to begin it's worth noting.

So, what's an investor to do? Step back, determine your long term investment objectives and review your portfolio to see if it matches your objectives. No one can time the market and the worst investment decision you can make is one based on the prevailing market direction. We all become over optimistic when the market rises and over pessimistic when it declines. Remember how you felt about the stock market in February? Yet, it was the perfect time to invest.

Now you should review your portfolio asking the question: do I have enough invested in equities? That's were the long term growth of your retirement nest egg or college fund is going to come from. Not from bonds. Too many investors took too much money out of equities when the market went down and missed the first leg up in the stock market recovery. Now they may have a good entry point. Even if the market corrects, we're still at the beginning of an economic recovery, so investors already in the market shouldn't get disheartened but should stay the course. The risk with the stock market is not being in it, particularly for investors who need to rebuild their nest egg.