Mutual Funds

All posts tagged Mutual Funds

I’ve been seeing a lot a recent press warning investors about Financial Advisors.

Most FAs aren’t your advisors. They are just salesmen of financial products. The titles on their business cards don’t mean anything. Financial Advisor, Wealth Manager, Private Wealth Manager, Your Personal CFO….they’re just made up titles with no minimum qualification. See this article in the New York Times cautioning you against advisors with fancy titles.

For the most part, they’re brokers (and thereby fully commissioned salespeople), whose main objective is to make as much money for their firm and for themselves. They do this by “selling” you a financial product like a mutual fund or insurance vehicle with an investment component.

Only they don’t call this “selling”. They call it “investing” your money.

But when someone puts my money in a vehicle with high up-front fees and ongoing expense ratios, I call that selling. Plain and simple.

One of my friends recently had an “advisor” put him in a bunch of mutual funds offered by Mass Mutual. These funds all came with a 5.75% front-end load (or fee) and an annual 1.75% expense ratio. All of the front-end load and part of the expense ratio was a commission back to his advisor.

One of the funds was a unit trust and even came with an expiration date. After a couple of years the fund automatically sells everything and you get the cash value of the stocks at that time. At that point your “advisor” is free to put you in another fund with an upfront fee and restart the whole process again. Read this excellent article about the mutual fund industry’s rating scam.

It’s not uncommon for unsuspecting victims, I mean customers, of such “advisors” to pay 6% in upfront fees and 2% a year in mutual funds fees. And then pay an additional 0.5% or 1% as the advisor fee!

But that doesn’t mean advisors don’t add value.  Here’s a great piece by the White Coat Investor on the benefits of using a Financial Advisor.

Before hiring a financial advisor, or planner, make sure you ask a few important questions.

Are they your fiduciaries?
That is, do they have a a legal obligation to put your interests first? Or does their firm come first?

How are they compensated?
Do they get commissions from any of the products they sell? If so, will it be disclosed upfront?

Ideally, you’d want to use a fee-only advisor – they only get compensated by the fees you pay them and don’t except any commission. This removes any conflict of interest.

What’s their investment methodology?
Do they just put you in a bunch of stocks or mutual funds? Or do they use Modern Portfolio Theory to put you in a well-diversified portfolio where they show you (and take the time to explain) the portfolio’s alpha, beta, standard deviation and sharpe ratio (see definititions at investopedia.com). If they use mainly low-cost ETFs instead of mutual funds, they might be able to pay for their services just by the reduction of fees alone. For example, if their portfolio of ETFs has an expense ratio of 0.4% and they charge 1%, that’s like you buying a mutual fund charging 1.4% on your own. But without the upfront load fees and mis-management that comes with it.

If you’re looking for financial planning advice then you want to make sure they have a background in finance, or a CFP to make up for it if not. Many ex-pharmaceutical sales reps (read pretty blonde women) make a career change and become financial advisors. Don’t just go for the cutest saleswoman. Make sure they understand investing and all the aspect personal finance like estate planning, and taxation.

When looking for a financial advisor, try looking for a Registered Investment Advisor Representative. People with this designation usually have a fiduciary duty and are more often than not fee-based instead of commission based. Go to Brokercheck.finra.org and put in the advisor’s name and you’ll find out whether he’s just a Broker or an Investment Advisor Rep. If he’s both, you definitely want clarification on how he is compensated.Investment Advisor Reps are required to provide prospective clients with a firm brochure called the ADV-2, which describes the services they provide, how they are compensated, their investment philosophy. Brokers are not required to provide this document. Make sure you ask for, and get this document from your advisor.

A trusted advisor can be a great resource. A salesperson can be disastrous to your financial future.

Do you have any advisor horror stories to share?

My investments are well diversified. I’m invested in foreign and domestic real estate, commodities, precious metals, domestic and international equities and foreign sovereign debt. However, I haven’t spent much time analyzing my portfolio allocation. While making money through investments is good, protecting what you have is paramount. As I grow older each year, volatility becomes a greater issue. In a few more years I”m not sure I ‘ll be able to stomach a 40% loss that the market experienced in 2008. (Luckily, I my retirement account was down only 4% that year so I didn’t have to stomach anything!)

There are tons of great books available on the subject of portfolio allocation, but I wanted something easy to understand (and thus, remember). One of the better models I can across was Harry Browne’s Permanent Portfolio.

The basic premise is to cover all possible scenarios in your porfolio:

25% of portfolio to protect against Inflation (eg. Gold)
25% of portfolio to protect against Deflation (Cash)
25% of portfolio to do well in a Bull Market (equities)
25% of portfolio to do well in a Bear Market (bonds)

Taking it a step further you can add in protection against Devaluation (eg. invest in foreign currencies and foreign bonds).  You can also add in real estate or REITs as an inflation hedge, and foreign equities. The the basic premise is simple. You try and benefit from any sort of market. 

This is pretty simple to implement. All you need is to do is buy low-cost ETFs and check your portfolio once a quarter to rebalance to the appropriate percentages.

If you like this philosophy but don’t want to implement it, you might want to take a look at the Permanent Portfolio Fund (PRPFX) which is modeled and named after Harry Browne’s  Permanent Portfolio. Over the past 27 years, it’s been down only 4 years. Maximum annual loss was 12% in 1984. In 2008, it lost less than 9%! It’s expense ratio is also reasonable at 0.82%. It’s 5-year average return is a respectable 10.3% vs say an S&P 500 index fund like (SWPPX) which had a 5-year average return of 0.99%.

 It’s portfolio consists of gold, silver, Swiss franc assets such as Swiss franc denominated deposits and bonds of the federal government of Switzerland, stocks of U.S. and foreign real estate and natural resource companies, aggressive growth stocks and dollar assets such as U.S. Treasury securities and short-term corporate bonds.

This guest post comes from Kevin at 20smoney.com, a blog covering financial topics such as investing, money management and the development of income streams.

Despite the fact that most people tend to think that a market that has already booked a 60%+ rally is a great time to be invested in stocks, I tend to lean the opposite direction.  With such a massive run already in place, the risk/reward scenario is not nearly as good as it was when compared to earlier in the rally.  So, how should you play the current environment?

The sectors with some of the largest gains this year have been technology and financials.  As such, these sectors warrant extreme caution if you are currently long or are getting long any companies within these sectors.  If you want to be long the sector, but aren’t sure of specific stocks, consider mutual funds or ETFs such as Financial Select Spider (XLF) and Technology Spider (XLK).

If you’re looking to gain exposure in these sectors, I strongly encourage you to monitor some basic technical signals so that you can identify a clear exit point in case the broad market and/or these sectors reverse and head lower.  Watch the 20 and 50 day moving averages.  If the stock (or ETF) breaks through these key averages, be ready to exit the position.  If you don’t feel comfortable with such a strategy and want to take a more long term focus, I would then wait for a significant pullback, at least 5%, to enter your position.  Remember, you’ve already missed a large run in stocks, and you need to be careful entering a position at these levels.

If you have held stocks this year, especially in the sectors named above, you may consider actually selling some of your positions to lock in profits.  Taking profits is never a bad idea, and if you don’t want to pull out completely, simply sell half or maybe a third of your position.

If you are looking to enter other long term positions, I would point you towards dividend paying companies that will pay you to hold them.  This will help offset any losses in share price if there is a reversal in the markets.  Also consider multi-national companies that generate a significant portion of their earnings from abroad (this will help you hedge against weakness in the U.S. economy).  In this category, consider Philip Morris International (PM), Wal-Mart (WMT), McDonalds (MCD) and perhaps Microsoft (MSFT).

For me personally, I’m pretty bearish on the economy and the markets.  I’m skeptical on the strength and durability of the recovery and the stock market rally.  I believe that we have structural issues with our economy that have not been addressed and therefore will prevent real growth.  I’m not adding to any positions in the current environment, rather I’m “keeping my powder dry” waiting for much more attractive buying opportunities.  I do own gold related instruments such as GLD and GDX because I think gold has the potential to perform well in both an inflationary recovery and a deflationary environment (pretty much the only asset with this ability).

As I mentioned above, if you’re looking to try and make a few bucks on the continued rally in the broad markets, be extra careful and be ready to exit by monitoring some key technical sell indicators.  Protecting your money is a better strategy, in my opinion, than chasing returns, especially today.  If you’re a long term believer in the recovery and the future of the economy, get long some solid companies, but don’t be afraid to be patient and wait for better entry points.

According to Morningstar, here’s the top ten performing mutual funds of 2007

1. Direxion Commodity Bull  2X Inv (DXCLX) : 87.6%

2. Direxion Latin America Bull 2X Inv (DXZLX): 83.7%

3. CGM Focus (CGMFX):  79.9%

4. AIM China A (AACFX): 74.9%

5. Nationwide China Opportunities A (GOPAX): 74%

6. Matthews China (MCHFX): 70.1%

7. Profunds Ultra Emerging Markets (UUPIX): 70.1%

8. T. Rowe Price New Asia (PRASX): 66.4%

9. Guinness Atkinson China & Hong Kong (ICHKX): 65.1%

10. Matthews India (MINDX): 64.1%

Unfortunately I didn’t own any of them. Recently, I did jump in CGMFX though, and hopefully it’ll keep up its momentum. A large part of its returns came from shorting Countrywide CFC. I hope they exited the position. Today Bank of America (BAC) announced they would be acquiring CFC. The stock was 50%+ on the news!

Its that time of year, where you should be looking at your investment portfolio, assessing your performance, seeing what you did right or wrong and if any part of it needs to be rebalanced.

Its also a good time to assess your tax liability and see if you can (or should) be funding your Roth IRA for last year. Typically, if you’re in the highest tax bracket, you cannot invest in a Roth IRA. It also doesn’t make much sense, since when you retire you might be a lower tax bracket. But in any case, you should be investing in a regular IRA. Up to certain income levels you get a tax credit for these contributions, so its definitely worth more research. You can invest up to April 15th for last year’s contribution.

You might also want to take a look at your life insurance and see if it still meets your needs. You may have had a life event which requires you to modify it.

Since I’m expecting to go to business school in the Fall, I want an evenly balanced portfolio and preferable a no-load Mutual fund with low fees. Typically, you’d chose several funds to balance out your portfolio. I already have a few country-specific ETFs that I’ve short-listed, but I also want a little bit in a fund that’s a bit aggressive and willing to go short if conditions permit.

After some research, I think I’ve found a pretty decent fund which suits my investment mindset. Here’s a snippet from there July 2007 semi-annual report:

CGM Focus Fund held major long positions in the oil service, metals and mining and engineering industries at quarter end. The Fund’s three largest long holdings were Open Joint Stock Company ‘‘Vimpel-Communications’’ ADR, Potash Corporation of Saskatchewan, Inc. and Schlumberger Limited. The Fund was also approximately 8% invested in stocks sold short at June 30 (percentage of total net assets). The short positions were in financial services and regional banks. The three largest short positions were Countrywide Financial Corporation, Indymac Bancorp, Inc. and Fortress Investment Group LLC.

CGMFX returned a whopping 80% in 2007. Except my BHP Billiton, Anglo American and Petro-China shares, most of my portfolio didn’t come anywhere close to these returns. Don’t know if it’ll continue to produce these stellar returns, but so long as Ken Heebner is the fund manager I think it will.

I was reading this article from the New York Times by Tim Gray called “Three Strategies That Kept Sizzling:

Ken Heebner, manager of CGM Focus, achieved a double distinction with his fund. He placed among the top performers for the most recent quarter and the five-year period. For the quarter, CGM Focus, which invests mainly in large-capitalization domestic stocks, returned 30.3 percent, while for the five years ended Sept. 30, it returned 32.9 percent, annualized.

Mr. Heebner’s offering isn’t for the faint-hearted. He shovels shareholders’ money into relatively few stocks  23 in late September and rapidly zips in and out of investments. When I buy a stock I say, What factors would cause me to change my view? he said.  If I see them, I immediately sell. And if I see something I like better, I immediately sell. If there?s an emerging opportunity, I don’t want to miss it.

As a result, his portfolio has a higher-than-average annual turnover rate 333 percent, versus 90 percent for the average stock mutual fund, according to Morningstar. His returns also zigzag more than those of other funds in his Morningstar peer group.

Mr. Heebner sniffs out trends economic, social or demographic and then tries to find well-run companies poised to benefit from them. Lately, that has meant loading up on energy shares. On June 30, the most recent date for which data is available, he held the American depositary receipts of Petroleo Brasileiro, the giant Brazilian oil company, and Cnooc, one of China’s big producers, as well as shares in several oil services outfits. Energy stocks accounted for a third of his portfolio.

If you can live with that sort of volatility, you might get some terrific gains. Note, however in 2002, the Fund was down 28%. But for 2007 its up a whopping 60%!!!! Makes my 18% return seem extremely pathetic in comparison!

I was also looking at buying TAVFX which buys undervalued companies. But its returns have been less than mine and they require a $10,000 minimum to invest in. But its a lot less volatile, but with it comes a lower return.

I have a 401k from a previous employer. With only a dozen mutual funds to choose from, it doesn’t have very many investment choices. I’ve done the best I can from these choices and have selected 8 of them, with 75% of my 401k invested in just 3 funds. And I’ve managed to eke out a very respectable 17.4% for the first 3 quarters of the year.

On the flip side, my 401k with my current employer has about 3 dozen options. However, there’s less diversification amongst them than with the previous employer! It lacks a REIT fund (not that I’d invest in it, since I’m heavily invested in Real estate on my own), a health care fund, and a technology fund.

Instead, some moron set it up with 4 bond funds, 2 small-cap broad market funds, 2 small-mid cap value funds, 2 small-mid cap blend funds, 4 mid-large cap equity funds, 4 mid-large cap value funds, 3 international funds, and so on.

So despite the wide selection of funds, they’re less diverse than the 401k with only 12 options. Instead of choosing the fund with the least management fees, the lazy (or maybe inept?) administrator just included 3 or 4 similar funds so the participant can make his own decisions.

And despite having so many options, I only managed to make 14.05% in the current 401k for the same time period, which is basically a reflection of the broad market indices minus the management fees.

Sometimes fewer, more well-thought out options are better!