SMI Visitor's Weblog       

Welcome to the SMI Visitor's Blog where you'll find selected excerpts from our Member's Blog, plus occasional posts created especially for our visitors.

For SMI Web Members, click here to go to the SMI Member Blog.

« Blog Home

Why so many mutual funds have multiple share classes

In the early days of SMI, circa 1990-1992, I had to spend a lot of time in the newsletter explaining the mutual fund industry and the differences between load and no-load funds. As Morningstar explains, the old black vs. white distinction between the two methods of distribution no longer apply:

Until [the mid-1990s], many funds were only available with loads and through brokers. Others were sold without loads, and you had to buy them directly from their fund companies—no broker involved and no outside help given. There was really no overlap across those two worlds, and disciples of each actually refused to do business with each other in many cases. Here's the thing, though: The debate never made much sense to begin with, it's over, and nobody actually won.

Why is the debate over? Because a majority of funds are now sold both ways via multiple share classes. This Morningstar article provides a handy history of how this happened and what the landscape looks like today. A good read for those who find the variety of fund share classes bewildering ("Why are there so many ways to buy the same fund?") Here's the wrap-up:

For the most part, though, the 1990s world of pure load versus pure no load is no more. Nearly all funds are bought through some kind of intermediary, even if that intermediary is an online platform [Note: In SMI's world, that would be Scottrade, Fidelity, or Schwab.]... Most investors are just trying to decide what kind of intermediary to use and at what price for which services.

We still maintain that sticking with no-load share classes makes the most sense for SMI readers. And since we're doing the research for you to select the funds, you're free to gravitate to the broker who will execute your instructions conveniently and cheaply. We try to help you pick the one that's best for you in our periodic broker reviews ( Members Only).

7 Key Principles for Christian Investing

IRAs, 401(k)s and Social Security: A Retirement Planning Primer

Gold as an Investment: Will Precious Metals Continue To Shine?

Inflation History: The Rise and Fall of the U.S. Dollar

Posted by Austin at 5:02 PM | Comments (0) | TrackBack
Category(s): Mutual Funds
Tag(s): mutual funds, share classes

Email this post

Share |

Funds you can own forever? Ha!

When you have a constant need to create financial content, you read a lot. And you file a lot of what you read. You never know when a well-done interview, bit of research, or historical review might come in handy. (I just know that a week after I throw it away, I'll need it and won't remember the author or source.) Over time, it piles up, creating something of an organizational nightmare, requiring a periodic purging of the older material.

This is something I'm not particularly good at. I hate going through old files, looking for what might still be useful. It's very time-consuming because you have to briefly read the material you're sorting through. After a few hours you have a thinner, better organized file (one down, several dozen to go), which doesn't seem an adequate reward for the somewhat boring, unpleasant time invested. So, you may not be surprised to learn, I don't do it very often. No, not often at all.

Yesterday, the chaos reached the tipping point and I forced myself to begin the process. Almost immediately I got distracted. I came across a 1993 article from Kiplinger's Personal Finance magazine titled "Funds to Hold Forever" (a laughable idea if I ever heard one — that must be why I kept it). The article named six funds — four actively managed stock funds, one bond fund, and one Wilshire 5000 index fund.

I couldn't resist checking up on the four stock funds to see how investors would have done taking Kiplinger's advice in the late summer of 1993 and holding them the past 18 years (through May 31, 2011).

At first, they seemed to have done better than I expected. First, all four are still in existence, which is no small thing. And second, while they trailed the market, they didn't do so dramatically — they collectively returned, on average, 6.9% annually during the period compared to 8.3% for the market.

But of course, compounding over almost 18 years makes that seemingly small 1.4%/year difference into a pretty significant gap. $100,000 invested in the Wilshire 5000 would have grown to $412,000 compared to only $324,000 for a portfolio equally divided among the four funds. Hmmm...not so great after all.

As SMI readers know, we believe that attempting to pick good funds that can be held for the long haul is a fool's errand. That's why we "upgrade" among the current performance leaders. During the same almost-18 year period, SMI's Fund Upgrading portfolio returned 10.4% per year, which would have grown a starting portfolio of $100,000 to $575,000. That's $251,000 more than the portfolio made up of "funds to hold forever."

Not yet an SMI subscriber or web member? Learn more about SMI and sign up today!

A mutual fund posts a 1 million percent return

Columnist Steven Syre at the Boston Globe takes note of a mutual fund milestone: the first fund to have a 1 million percent lifetime return.

The Pioneer Fund, managed in Boston since it opened for business in 1928, had generated a total return of 1,073,300.43 percent by the end of last year, according to Morningstar Inc....

Some good news for anyone who stuck $1,000 in the fund at its inception: That account is worth a little over $10 million....

The fund crossed the 1 million percent threshold on Dec. 16, though no one noticed at the time. Pioneer Investments executives say they were alerted by mutual fund researchers at Lipper Inc., who had taken notice when the fund's seven-digit total return created a computer hiccup during routine number crunching. Programs that managed performance information weren't built to account for returns of 1 million percent.

Pioneer, a large-company value fund, is way out in front of the second place performer in all-time return. The second slot goes to a fund called The Investment Company of America (from American Funds), launched in 1934. That fund had returned 684,327.34% over its lifetime (through Dec. 31), according to Morningstar.

These long-term results bring to mind this bit of wise investing advice: "It's time in the market, not market timing, that makes the difference."

Update: On Monday (Feb. 9), I chatted with host Bob Crittenden of Faith Radio's The Meeting House about Pioneer Fund's 82-year(!) accomplishment and the lesson it holds for long-term investors.

You can listen to a portion of that conversation below (16 min.).

Bond funds take a beating

The Wall Street Journal offers an update on something SMI's executive editor Mark Biller warned about in our Oct. 2009 issue (as well as several times since): "safe" bond funds can suffer short-term losses.

Bonds are supposed to be safe, but the world's five largest bond mutual funds have all posted losses in the past two months — with three of them losing more in December than in November....

A selloff in U.S. Treasurys is spreading to most bond sectors, including corporate and municipal bonds. The yield on the benchmark 10-year Treasury, which moves in the opposite direction of price, has jumped about a full percentage point in the past month on fears that aggressive monetary and fiscal stimuli could trigger inflation and higher interest rates down the road....

While the five biggest bond funds are still up for the year, they have performed poorly of late. The $250 billion Pimco Total Return Fund, the world's largest bond fund, lost 3.42% from Nov. 4 through Dec. 17, compared with a 2.51% loss in the BarCap U.S. Aggregate Bond Index over the same period, according to Morningstar. The second- and fourth-largest bond funds, the $89 billion Vanguard Total Bond Market Index Fund and the $38.4 billion American Funds Bond Fund of America Fund, respectively, have lost 2.64% and 2.79%.

The losses were smaller in the $38.3 billion Vanguard Short-Term Investment Grade Fund, which lost 0.91% over the period in part because of the fund's shorter-duration securities, and $43.7 billion Templeton Global Bond Fund, the world's third-largest, which lost 1.29%....

Kenneth Volpert, head of Vanguard's taxable-bond group, attributes the losses in Vanguard's bond funds to the rising-rate environment.

The WSJ suggests that bond yields are rising because of the expected impact of "aggressive monetary [i.e., Fed] and fiscal [i.e.. White House/Congress] stimuli" that are pumping lots of money into the economy. That's one possible explanation, though as this post from last week suggested, some observers feel the recent rise in bond yields could merely be a return to more "normal" historical bond yields. As the economy eventually recovers to health, one would expect yields to rise from the record lows of the past two years.

Either way, as yields rise, bond values fall. No one wants to pay $1,000 for a bond paying 3% interest if there are new $1,000 bonds paying 5%, so the price of those older bonds has to drop to make them competitive with the new reality of the marketplace.

This is why long-term bonds suffer the most as rates begin to rise — and it is why we've been steering our readers away from long-term bond holdings for some time now. Shorter-term bonds, in contrast, suffer from rising rates for only a brief time, so they're better choices in times of rising rates.

We'll have more on this in our annual allocation article — coming soon in the January issue of SMI!

Policy change at Vanguard opens door to lower fees

Vanguard, now America's largest mutual-fund company, is making its lowest-fee fund class available to more investors. The Associated Press has the story:

[Vanguard] is reducing the minimum investment amount to qualify for its Admiral share class, which charges lower investment expenses than its Investor mutual fund shares.

The biggest cuts affect Vanguard's index funds.... Investors who previously needed to invest at least $100,000 to qualify for Admiral shares can now get in with just $10,000 for Vanguard index funds....

For example, Admiral shares of Vanguard's Total Stock Market Index Fund will charge $7 in annual expenses for every $1,000 invested, provided an investor has at least $10,000 in the fund. That's down from $18 in annual expenses for Investor shares....

For Vanguard's...actively managed funds, the new investment minimum for Admiral shares is $50,000 instead of $100,000.

The company "will be converting qualifying accounts to Admiral shares in coming months," the AP notes, a change that could affect almost 2 million Vanguard customers.

This latest policy change continues a series of pricing/availability modifications in the fund industry that have been good news for consumers. Earlier, Vanguard launched commission-free trades for Vanguard-branded ETFs and created new ETFs that mirror some of the company's top mutual funds, but with lower expenses. Schwab has made similar moves, as has Fidelity.

In this article, AP personal finance writer Mark Jewell refers to Vanguard as "the Wal-Mart of investing. It manages more money than any other mutual fund company, so it has tremendous pricing power. When it makes a move, competitors feel pressure to follow suit."

So stay tuned.

New regulations likely to add to money fund woes

In our March issue, we reported (subscriber's link) on new money-fund regulations advanced by the U.S. Securities and Exchange Commission.

Those regs took effect last week, and Marketwatch's Chuck Jaffe (right) says they're likely to make money-market funds — already scraping bottom on yields — even more unattractive to savers who are seeking yield as well as safety.

Under the new rules...money funds must hold more liquid assets and limit their investments to only the highest-quality securities. In addition, they must reduce the average maturity of the securities they hold.

Furthermore, retail or taxable money-market funds must now hold at least 10% of assets in cash or highly liquid securities — think Treasurys — that can be converted to cash within one day. At least 30% of a money fund's assets must be in cash or Treasurys that mature in 60 days or less, or that can be converted into cash within a week....

The top-yielding money market funds currently are generating almost nothing for shareholders, with the best individual money funds paying out less than 0.2% and the top tax-exempt funds generating about 0.25%, according to Crane Data, which tracks the money-fund business. If anything, the new rules will drive those rates even closer to zero....

[Meanwhile, t]he top-yielding bank savings accounts and interest-bearing checking accounts carry annual percentage rates four or five times higher, according to BankRate.com.

That may not seem like much difference, but every little bit counts. An investor with $100,000 in cash to park will earn about $3.50 per day in an online savings account paying 1.3%, but will earn just 35 cents per day on a money fund paying 0.13%. The returns are miserable in both cases, but the extra $1,150 — and the plus of having Federal Deposit Insurance Corp. protection — is worth leaving the money fund.

Jaffe concedes that the day may come when "the new safety measures...pay off and protect shareholders." But right now, by mandating a reduction in risk, the regulations will make it even more difficult for MMFs to climb out of the low-yield hole.

To learn more about various options for savers, visit SMI's Savings Accounts page.

Financial Literacy 101: The upside of index funds

Fifth in a series for
Financial Literacy Month

At Sound Mind Investing, we're doing our part for National Financial Literacy Month by featuring a series of posts on basic principles of investing and personal finance.

Here's post five: a quick primer on investing in index funds.

A stock fund investor faces a fundamental decision when choosing an investment strategy: "Will I try to beat the market or just try to match the market?"

Attempting to beat the market requires using actively-managed funds — that is, funds that buy and sell stocks regularly in an attempt to hold only those stocks that are the best performers.

In contrast, matching the market can be done using passively managed "index" funds. These funds make no attempt to discern how specific stocks will perform, opting instead to simply buy the entire group of stocks included in a particular stock market index, such as the Standard & Poor's 500. (The S&P 500 measures the combined performance of 500 of the largest U.S. companies.) The indexer is willing to accept the "market rate of return" for that index.

Even though SMI's actively-managed strategy (Upgrading) has strongly outperformed our indexing strategy (Just-the-Basics) since the late 1990s, an indexing approach is still a good choice for some investors. Here's why:

Simplicity. Index funds are great for beginners because they are the epitome of "low maintenance." You don't have to know anything about picking funds or about diversification strategies. Just buy a fund such as Vanguard's Total Stock Market Index and — presto! — you own a share in virtually the entire U.S. market.

And you don't have to do any monitoring or fine-tuning until it's time for your annual "rebalancing" (to make sure the stock/bond mix in your whole portfolio is what you want it to be).

Predictability. You can buy index funds and hold them for years because their performance is predictable — you'll get what the market gives. You know you won't outperform the market, but you also know you won't lag the market.

That's more than most fund investors can say, since studies have consistently shown that a majority of actively-managed funds — as many as 80% over some time periods — fail to outperform the market over time. (Even the pros have trouble predicting winners!)

Availability. Usually, index funds are included as options in company retirement plans. So if you're stuck with only a handful of actively-managed fund choices in your 401(k), an index fund can be quite appealing — especially given the likelihood that most actively-managed funds will end up trailing the market. [MORE...]

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

"Emerging markets" — handle with care

Our cover story on international investing (available to subscribers) in the March issue of the Sound Mind Investing newsletter spent some time discussing "emerging markets."

We mentioned that while there's so no precise definition as to what constitutes an "emerging" market, the term generally refers to nations that are "experiencing significant levels of economic development and reform."

David Callaway of Marketwatch opened a recent column on "eternal emerging markets" this way:

A fund manager at an emerging markets conference I covered more than a decade ago delivered a warning to investors infatuated with those markets that aged well.

"Did anyone ever notice that the emerging markets of the 1990s are the same emerging markets of the 1890s?" he said to a surprised audience.

It's an interesting — and valid — point. For all the chicanery that goes on in our own markets, the corruption and interference in many smaller foreign markets is an order of magnitude worse. Callaway writes that while our markets may be obstacle courses, at least they're not minefields.

In other words, there are good reasons why many of these markets stay perpetually emerging, but never quite emerge.

Emerging markets have been so hot for so long (20%+ returns every year since 2003, with the exception of 2008's big down year) that it's easy to be seduced by the easy returns they seem to offer. And, in fact, investors following our SMI Upgrading strategy have benefited from emerging markets in a significant way through many of the recommended international funds we've recommended in recent years, which often held above average allocations of emerging market stocks.

Just don't lose sight of the risks. The late 1990s offered a crash course in how contagion can spread from one emerging market to the next. And this year, surprisingly, has reminded us that the dollar can pivot quickly and unexpectedly, wreaking havoc with international returns over the short-term.

Emerging markets, for all their potential, are still volatile enough to carry a "handle with care" label. A little can be good, but this is definitely a case where more is not always better.

Not yet an SMI subscriber? Today's a great day to sign up!

How important are mutual fund expenses really?

You've probably seen articles explaining that mutual fund investors pay higher costs than they realize due to funds incurring "hidden" costs that aren't reflected in the published "expense ratio." Such articles (here's a recent example from Morningstar) usually disparage funds that do a lot of trading because they tend to incur higher levels of these "hidden" costs.

The argument is true to a point: Any investor who selects funds primarily based on their stated expense ratios probably isn't aware of potentially expensive trading costs or 12b-1 fees (i.e., marketing expenses) that aren't reflected in those ratios.

But is that the best way to select funds in the first place?

At Sound Mind Investing, we take a different approach to the issue of expenses. Brace yourself — we're not all that concerned about them. It's not that they don't matter — they certainly do. It's just that we're much more concerned about overall performance. If we wind up paying higher expenses as part of the price of obtaining better overall performance, that's a trade we're willing to make.

The types of articles mentioned above usually don't present it that way. They argue that if Fund A has high trading costs, Fund B has a high 12b-1 fee, and Fund C has neither, then you should invest in Fund C. That would be true if A, B, and C all generated the same performance. But if A and B strongly outperform C — so that you come out ahead even after expenses are subtracted — then, relatively speaking, the expense levels of A and B weren't all that important.

Fundamentally, this issue boils down to two competing belief systems. On one side, you have those who say it's virtually impossible to determine in advance which funds will outperform in the future. Therefore, the only approach that makes sense is to diversify and minimize expenses. This is the basic essential argument for indexing.

On the other side, there are people like us who say you can predict which funds will outperform in the future. Not every time. And trying to do so doesn't afford you the luxury of buying a fund and holding it for years or decades at a time. But over time, we do believe it's possible to get a market-beating result if you're willing to stick rigorously to a specific discipline of buying and selling funds. We call this discipline our Fund Upgrading strategy.

So how can you know in advance that A and B will perform better than C? You can't know for sure, not on any single fund choice. But research has shown that recent mutual fund performance tends to persist into the short-term future. In other words, superior recent performance tends to translate into superior near-term future performance. That's the basis of Upgrading.

It certainly doesn't work on every single fund selection. That's why we have to follow a vigorous selling discipline as well, to cut our losing trades short. But over time, the Upgrading process steers us towards enough funds that outperform their peer group.

That's how our Upgrading has been able to beat the market in 10 out of the past 11 years (in the graph below the light-shaded bars represent the performance of the overall market as measured by the Wilshire 5000; the dark-shaded bars represent Upgrading's performance).

Further, as noted in the current issue of SMI, Upgrading is a strategy that works remarkably well even when implemented on limited scale.

At the end of the day, our emphasis is not on expenses and costs, but rather on the final returns a fund produces after already accounting for all the costs of ownership. It's not that we don't care about expenses, it's that all of a fund's costs are already baked into the performance numbers we use as the basis of Upgrading. So if a fund can outperform in spite of higher costs, we're willing to overlook them.

Study: Average investors often trail average fund performance

Newly published data (PDF) from Morningstar reveal the fund categories in which the average investor is trailing average fund performance. For example, large-cap growth funds: Morningstar found that over the three years ending 12/31/2009, the average fund in that class lost 2.9%, yet the average investor in large-cap growth funds lost 3.6%.

Likewise, over the past three years average investors underperformed overall returns for mid-cap growth, large value, and mid-cap value funds, and also fell behind the average fund performance in sectors such as natural resources, utilities, and heath-care funds. (On the other side, average investors did better than average fund performance in small-cap growth and small-cap value funds.)

Morningstar's Russel Kinnel explains what's behind the numbers:

The gap between investor returns and total returns shows...how well investors timed their purchases and sales. (For all the details on the calculation, you can check out the two-page fact sheet here or the 10-page methodology document here.)...

A couple of years ago, doing this revealed that the average investor often did better than the average fund because, while their timing was off, they often picked bigger lower-cost funds. However, the whipsaw of the past two years has meant that, in most categories and in the aggregate, investors have done worse than the average fund....

The grand total for the average investor in all funds in the [period from 2000-2009] was a 1.68% annualized return, compared with 3.18% for the average fund.... In U.S. equities, the average investor earned a scant 0.22% annualized, compared with 1.59% for the average fund.

All that is interesting, but just how are investors supposed to do a better job of "tim[ing] their purchases and sales"? Only in hindsight can an investor see that it would have been wise to sell a particular fund earlier or hold it longer.

Trying to improve buy/sell timing decisions on a case-by-case basis, rather than simply following clearly defined decision-making parameters, is a good way to tie yourself in emotional knots!

This is why SMI's successful Upgrading strategy relies on non-emotional, mechanical signals for buying and selling. Upgrading works (as evidenced by the table at left) — and it's relatively easy on both the brain and the stomach!

Sure, once in awhile the mechanical signals mislead us. No system is perfect. But more often than not, the signals prove to be correct. That's why Upgrading has outperformed the market in 10 out of the past 11 years.

Fidelity one-ups Schwab on no-fee ETFs, stock-trading fees

Just weeks after Charles Schwab shook things up in the ETF world by introducing its own brand of commission-free exchange-traded funds, Fidelity has unveiled a commission-free model for 25 ETFs from iShares (managed by BlackRock). Schwab currently has only eight commission-free ETFs.

The no-fee ETFs from Fidelity include some of the most popular ETFs on the market, including the iShares S&P 500 Index, iShares Russell 2000 Index, iShares MSCI Emerging Markets Index, and the iShares Barclays Aggregate Bond fund.

A Reuters report characterized Fidelity's move into commission-free ETFs as a belated recognition that exchange-traded funds have gained a significant presence in the mutual-fund marketplace.

[Fidelity's] new alliance with BlackRock of New York marks a final acknowledgment of the growth of ETFs and their importance to retail investors, said Paul Justice, an analyst who follows the industry for Morningstar in Chicago.

Although the industry has more than doubled since 2005, to $1 trillion globally by BlackRock's count, ETFs will continue picking up market share, Justice said. Following Fidelity and BlackRock's move "you will see a great deal of competitive response," he added.

The rapid growth of ETFs offered by iShares, State Street Corp and others is in stark contrast with the skepticism investors have shown traditional stock mutual funds, which saw high outflows as stock markets sank.

Fidelity introduced a single ETF of its own in 2003, but never followed up with additional products....

Tom Lydon, editor of the ETF Trends newsletter, said he expects ETFs to continue to grow as investors realize their fee benefits. ETFs also have room to gobble more assets in 401(k) retirement-savings plans, where they have been little used to date, Lydon said.

Fidelity also announced it is replacing its current tiered-pricing model for stock trades with a flat $7.95 fee for online trades — $1 less than the stock-trading fee recently implemented by Schwab.

Neither Schwab nor Fidelity has announced any changes in their pricing structure for traditional mutual funds.

Keep your money fund or dump it?

It's no secret that interest rates for money market funds are scraping bottom. Even the top recommendation in our current money rates table (subscription required) is paying a scant 0.30%. Vanguard Prime, one of the best-known and most popular MMFs available, is yielding a barely noticeable 0.05%.

So is it time to abandon the money-fund ship and move your savings elsewhere?

Russel Kinnel, editor of Morningstar's FundInvestor newsletter (and director of the company's mutual fund research), is advising MMF investors to hang on rather than bailing on MMFs and moving to short-term or ultrashort bond funds.

We're still wary of ultrashort funds [following the implosion of several such funds in 2007 and 2008]. Short-term bond funds can work if some losses in the short run are acceptable — for example, if you are parking money between investments, plan to hold for a year or two, or just want a conservative bond holding in your long-term asset-allocation scheme....

But for other uses, such as emergencies or upcoming big-ticket expenditures, I'd stay with money market funds. Think about what will happen when interest rates start to rise. Bond funds will initially lose money because their superlow-yielding bonds will be discounted in the face of new higher-paying bonds. On the other hand, money market funds will quickly start to have higher yields, yet they won't lose money when rates go back up.

Kinnel concedes that MMFs aren't exciting, "but money market funds are there to serve in an emergency. Insurance always costs you money, and that's how I'd look at money markets."

Another practical matter is simply: Is it worth the trouble to switch? A Los Angeles Times story (titled, "Look, Ma, Nearly No Yield") quotes Peter Crane, head of money-fund research firm Crane Data: "My general rule is, if you're not going to make $100 more [in interest] by switching, don't bother."

Although 2009 was the toughest year on record for money funds, the MMFs recommended by SMI outperformed the overall field (for the 12th year in a row). Details are available for SMI web members in our February Level 2 article.

Huge disparity in performance among microcap indexes

Something strange is afoot among the indexes tracking the smallest company stocks (microcaps). Through the first half of the year, the performance of these indexes varied widely.

Here was the year-to-date performance of the various microcap indexes as of June 30:

• Russell 2000 (small stocks) 2.6%
• Russell Microcap (tiny stocks) 6.0%
• MSCI Microcap 22.5%
• Dow Jones Select Microcap -3.2%
• Zacks Microcap -5.0%

In the latest newsletter (PDF) from Perritt Funds (Perrit Micro Cap Oppportunity is our current top pick in Category 3), Perritt's portfolio manager Michael Corbett explains what's going on:

The substantial difference in the performance of the various microcap indexes is somewhat astounding.... [T]here is a difference of nearly 30% between the best and worst performing microcap indexes year-to-date, all of which are supposedly tracking the same sector of the market.

A closer look reveals that a possible explanation to this irregularity is related to the number of companies being tracked by each index and how they are chosen. In its entirety, the microcap universe is made up of approximately 5,000 names.

The Russell 2000 and the Russell Microcap Index each track 2000 companies, the Morgan Stanley MicroCap Index tracks 1,300 companies, and the Dow Jones Select Microcap Index and Zacks Microcap Index each track less than 500 companies.

This serves as a good reminder that when investing in an index fund, make sure you know which index the fund is tracking and what that index actually measures — especially when you get down to the small cap and microcap area.

We offered an overview of the most widely used indexes in our May 2009 Level 3 article.

Sad news for Upgraders

One of the bigger (and better performing) no-load fund families is abandoning the no-load approach. Janus funds will be adding loads this summer.

Disappointing, as we've often loaded up on Janus funds during past bull markets.

Say goodbye to money market funds?

The Obama administration may soon set its sights on radical changes in money market funds.

From MarketWatch:

When the Group of Thirty issued its proposals [last month] for reforming the financial industry [few observers noted a proposal about money funds].

Tucked into three paragraphs amid an 82-page report [PDF] was a suggestion that money-market funds should either let their net asset values float freely or convert to "special-purpose banks" - steps that fund-industry representatives say would effectively kill money-market funds in their current form.

"If the recommendations are implemented, there will be no more money-market funds, period," said Paul Schott Stevens, president and chief executive of the Investment Company Institute, the fund industry's trade group.

How likely is it that the new administration will push for MMF changes? The chair of the Group of Thirty study group is former Fed chairman Paul Volcker, chairman of President Obama's Economic Recovery Advisory Board. (Other members of the G30, a Washington-based group of international financiers and academics, include Treasury Secretary Tim Geithner and Lawrence Summers, Mr. Obama's chief economic adviser.)

During an appearance this month before the Senate Banking Committee, Volcker echoed the G30 recommendation that MMFs should be regulated like banks. "If they're going to act like a bank and talk like a bank, they ought to be regulated like a bank," he said.

But pro-money-fund observers argue that Volcker is overreacting to the brief run on money funds that occurred last fall after the Reserve Primary Fund "broke the buck."

"[T]he Group of 30's recommendations represent an overreaction that would force the reintermediation of a $2 trillion dollar commercial paper market, protect banks from their primary source of competition, and deprive investors of the ability to obtain reasonable returns with a high degree of safety and liquidity," writes investment attorney Steven Keen in Financial Week.

If you're invested in a money market fund, stay tuned.

UPDATE: The Wall Street Journal reports that MMF assets are "close to hitting a record $4 trillion." The story explains how MMFs, with some undergirding from the Treasury Department, have bounced back from the run of last September. Reporter Shefali Anand also touches on Mr. Volcker's idea of regulating money funds as banks.

Past managers of the year

This article following up on how past MarketWatch Managers of the Year fared in 2008 vividly reinforces what we say in SMI's Performance Momentum & Upgrading bonus report:

Upgrading is necessary because, as economic conditions and expectations change, market leadership rotates among large-, medium-, and small-sized companies. Furthermore, as this rotation takes place, it naturally favors some strategies over others. At times, a cautious value strategy is best; other times aggressive growth investors are rewarded. But although market conditions are constantly changing, fund managers rarely do. ...

That's why performance leadership among mutual funds is constantly rotating, and why numerous academic studies have shown that very few funds can consistently perform in the top ranks year after year. ...

The best approach, then, is not to try selecting one super-great fund in order to hold on to it for many years. Investing in a particular fund and staying with it for the long haul is unlikely to result in outstanding performance over the entire period.

Two of the past three managers of the year cited by MarketWatch lost at least 52% last year (the third manager took a leave of absence midway through last year - good idea, wish I'd thought of doing that!). While we were admittedly a bit disappointed with Upgrading's results in 2008, it's worth noting that these recent Manager of the Year funds lost a third again as much (an additional 13%) as Upgrading.

Don't misunderstand what I'm saying. These are likely all fine managers, running fine mutual funds. The problem isn't with the specific funds. The problem is with the idea of sticking with any "normal" mutual fund through the ups and downs of a full market cycle. Upgrading allows us to capture the best periods of each fund type, while shifting us elsewhere when their inevitable rough stretches arrive.

Last year reminded us that Upgrading won't always protect us as well as we'd like. But compared with other "top funds" of recent years, its performance looks a little better. More importantly, a longer view reveals that Upgrading has done an excellent job of moving us among funds of different styles and approaches in response to changes in the broader market.

'One fund in 1,700 made money in '08'

That unhappy headline from the Wall Street Journal is a memorable summary of the worst year in the market since the late 1930s.

What was the one diversified U.S.-stock fund that made money in 2008? The tiny ($50.2 million) Forester Value Fund, which posted a return of 0.4%.

A WSJ graphic showing the average total return of diversified U.S.-stock funds is here.

Powered by Movable Type  |   Subscribe  |   Email Updates