SmallCapInvestor.com: Mutual Funds and ETFs

Fund Profile: Thrivent Partner Small Cap Value A

Thu, 31 Jul 08 00:00:00 -0400

There are plenty of religious mutual fund families out there, with investment styles designed to meet the strictures of different sets of observers. Ave Maria funds (www.avemariafund.com) are designed for strict Roman Catholics, Timothy Plan (www.timothyplan.com) for conservative Christians and Amana funds (www.amanafunds) for Muslims. Thrivent funds are for Lutherans, but not because of their investment styles. Thrivent, formerly known as Lutheran Brotherhood, isn't directly affiliated with the Lutheran Church. Instead, it is structured as a fraternal organization for Lutherans offering a full range of insurance, investment and banking services. Thrivent funds have no social screens or religious requirements for their investments. The Thrivent Partner Small Cap Value Fund, one of the best-performing in the family, doesn't own lutefisk processors and General Mills (NYSE: GIS), maker of Jell-o, either.

I Read Academic Research So You Don't Have To: 10 Looming Issues

Mon, 21 Jul 08 00:00:00 -0400

In the June 2008 issue of CFA Institute Conference Proceedings Quarterly are notes on a presentation given by William H. Donaldson, CFA, to CFA Institute members on what he sees as 10 issues that could wallop financial markets but that no one pays much attention to now. By definition, unanticipated events have the greatest effect on market performance; when people expect something to happen, they can incorporate that expectation into their evaluation of when to buy and when to sell. Donaldson is the founder of investment bank Donaldson, Lufkin & Jenrette (now owned by Credit Suisse). He also co-founded the Yale School of Management and served as chairman of the Securities and Exchange Commission from 2003 to 2005. He's as smart as the smart money gets, so mutual fund investors might be interested in what he has to say.

Some of the 10 issues that he discussed are oldies but goodies. One key issue on his list is a mutual fund affliction: short-termism. Mutual fund investors too often chase returns rather than live through a short-lived drawdown, even on what is market-related (like right now) rather than due to the portfolio manager's skill. Portfolio managers want to boost their annual bonuses, so they invest where they currently expect good numbers. Corporate managers, wanting to keep shareholders happy (as they should), emphasize short-term earnings per share gains rather than long-term investments and strategic planning that might make for happier shareholders in the long run. Donaldson argues that investors need to think about long-term performance for their own investments and from the companies that they invest in.

Mutual Funds and 401 (k) Plans

Mon, 16 Jun 08 00:00:00 -0400

Private-sector employee retirement plans are regulated by the Employee Retirement Income Security Act of 1974, also called ERISA. Because the Federal government will guarantee certain employee pension arrangements, it has an interest in ensuring that pensions are run properly. A key provision of ERISA is that the retirement plan sponsor, usually the employer, takes on fiduciary responsibility and must act in the best interests of the plan beneficiaries, even if that is at odds with the best interests of the employer. Companies, looking to get out from under some of the most onerous of regulations under ERISA and other laws, have pushed the onus for making investment choices onto employees through 401(k) plans. In most of these arrangements, employees contribute to their retirement plan using pretax dollars, choosing the investment options themselves. Employers often match all or part of the employee's contribution, but they are under no obligation to do so.

So When Do You Sell, Anyway?

Mon, 05 May 08 00:00:00 -0400

Although the game is to buy low and sell high, it's really hard to know what's low and what's high because those numbers are relative. We're going through a rough market right now, and some people are selling out of panic. That's the wrong thing to do. But it may be a good idea to get out of mutual funds that are underperforming by a big margin in a bad market. How do you tell which is which?

Doug Fabian, a financial planner and president of Fabian Wealth Strategies in Costa Mesa, Calif., wonders why so many bad mutual fund managers are allowed to stick around. Each quarter, he publishes his Lemon List (www.mutualfundlemonlist.com), which is a list of mutual funds that have underperformed their peer groups for the last 12, 36, and 60 months. The goal is to separate out funds that are going through a temporary rough patch from those that are posting bad numbers year after year. "If you turned up on the Lemon List, then you didn't have a bad quarter," he says.

Hedge Funds Hiding in Mutual Funds

Mon, 14 Jan 08 00:00:00 -0500

Hedge funds have been private investment partnerships for two reasons: some fund managers and investors liked the lack of scrutiny, and the SEC restricted the marketing of funds to people who were not considered to be accredited investors (meaning they have a net worth of $1 million or an annual income of $200,000.) Many of the best-performing hedge funds are able to set very high minimum investments, in the millions of dollars, which means that they are closed to even most accredited investors. But just because you can’t get into a hedge fund doesn’t mean you can’t obtain similar strategies through mutual funds.

Hedge funds fall into two broad categories: absolute return and directional. An absolute return fund tries to offer a steady profit no matter what the market does. This return is usually higher than the return on bonds but lower than the return on stocks. It’s designed to be a core part of the portfolio. A directional fund has exposure to the market and it is designed to offer a higher return based on the amount of risk that it takes. (Some directional funds beat the stock market indexes handily.) An index mutual fund would offer a pure directional return, designed to match the market in both risk and return.

Many mutual fund investors are able to mimic an absolute return strategy through good diversification; others look for a directional return through investments in small-cap and technology funds. There are also several mutual funds that try to copy hedge fund strategies explicitly, as well as hedge funds that are structured as closed-end funds rather than private investment partnerships. The bottom line is that there is nothing magical about the private partnership structure; investors can profit from hedge-fund strategies without being in a hedge fund.

Bear funds are designed to make money when the market goes down. These are not the same as funds that hold up well in bad markets; instead, the portfolio managers look at what the market is doing and then do the opposite. These funds often have a huge short component, meaning that the fund managers borrow stock and sell the borrowed shares, hoping to buy the shares back cheap when they go down in price. These funds can be a nice hedge in a diversified portfolio. Two of the many bear funds out there are Prudent Bear (BEARX) and the Grizzly Short Fund (GRZZX). (Yes, mutual funds are allowed to short stocks; the tax laws that once restricted short selling were repealed about a decade ago.)

ETFs, Mutual Funds and Fee Questions

Tue, 13 Nov 07 00:00:00 -0500

The cheapskate mutual fund investor looks carefully at fees to make sure they match the value received. Some investors, in search of the best possible bargain, look to exchange-traded funds (ETFs) because they have a reputation for being so cheap. ETFs are not always the cheaper course, though. It all depends on the structure of the funds being compared and the value of those fees.

ETFs are set up as baskets of stocks held in trust. The fund manager buys the securities, then lists certificates on the market equal to the underlying value. These certificates trade in real time; investors looking to cash out either sell their certificates at any hour of the day or ask the fund manager for their share of the shares. Individual investors rarely ask for the stock, but large institutions do. This keeps the value of the certificates in line with market value; otherwise, an institution could buy an ETF trading at a lower value than the underlying index, demand the shares from the basket of securities and then sell the securities on the open market to lock in an easy, risk-free profit.

A mutual fund, by contrast, prices its securities only once a day. Trades happen only at the end of the day, and they always involve cash. If there are more redemptions than new investments, the fund sells some of its securities, which might trigger a capital gain. ETFs, instead, usually settle redemptions with securities, with no tax effect. However, ETFs sometimes have to sell securities. Effective Oct. 5, 2007, Standard & Poor's deleted Archstone-Smith (NYSE: ASN), a real estate investment trust that is being acquired, from the S&P 500 Index and replaced it with Noble Energy (NYSE: NBL). That means that everyone running an S&P portfolio had to sell Archstone-Smith and buy Noble Energy. The capital gain was passed on to investors, who have the fun of settling up with the IRS.

The Market for Mutual Fund Managers

Mon, 29 Oct 07 00:00:00 -0400

When the U.S. stock market is a mess and the dollar is even worse, investors start looking to alternatives, and this fund combines two of them: investment-grade bonds and international currencies. The Dreyfus Premier International Bond Fund's one-two punch has generated good performance for the year to date: up 8.23% (as of Oct. 19) compared to 5.80% for the S&P 500, 6.62% for the Lehman Brothers Aggregate Global Bond Index and -7.43% for the U.S. dollar relative to the euro. It can help investors generate income, diversify portfolio risk and take advantage of the decline in the value of the dollar.

The fund invests in high-credit international bonds, mostly those issued by foreign governments but including some from banks, utilities and other investment-grade borrowers. Its two largest holdings—other than cash—are euro-denominated bonds issued by Finland and the Netherlands. The fund also owns bonds issued by Japan, Brazil, South Africa and Sweden, among other nations.

The cash holdings are not trivial. Given that the U.S. dollar has been falling all year, an ordinary passbook account in another currency can be a low-risk moneymaker. It doesn't take a lot of extra performance for an international fund manager to post good profits when the dollar is weak. But what happens if it turns around, even slightly? A United States mutual fund, no matter where it invests, reports its returns in dollars, so a key decision for an international fund manager is whether to retain exposure to exchange rates or to hedge against fluctuations. The Dreyfus Premier International Bond Fund's prospectus gives the fund manager the right to determine whether or not to hedge the currency exposure. Right now, he appears to be hedging very little, and that's good. Had he been hedging, the benefit of the dollar's decline would have disappeared. The dollar can't stay at such crazy low levels forever, though, and when it turns, the fund manager needs to be able to hedge that in order to protect returns.

How to Read a Mutual Fund Prospectus

Fri, 21 Sep 07 00:00:00 -0400

Raise your hand if you read the fund prospectuses that your mutual fund companies send you in the mail!

I always ask my workshop attendees to do this and am never surprised when just a couple of hands go up. The reasons people don't even open the covers of these fascinating documents are simple: They can be intimidating and look pretty boring. Fortunately, neither of those assumptions are true.

Prospectuses only appear complicated and scary because the type is small and they seem to have a lot of numbers in them. In reality--just as with almost any other type of financial document--once you've read a couple, you see that they follow a standard format and can be scanned pretty quickly for the information you need.

I cannot emphasize enough that this process is absolutely critical. More than 90% of mutual funds in the marketplace underperform the S&P 500. You don't want to buy a fund that has a long-term history of lackluster returns, therefore, becoming comfortable with a prospectus is essential. It truly can make a difference between buying funds with so-so returns, or those that will perfectly meet your long-term investment needs.

How to Read a Mutual Fund Prospectus

Tue, 11 Sep 07 00:00:00 -0400

Raise your hand if you read the fund prospectuses that your mutual fund companies send you in the mail!

So just give me a few minutes of your time and I'll tell you how to quickly read these reports and go right to the nuggets of information you need to determine if the fund is the right one for you.

But first let me say this: When you buy shares in a mutual fund--by law--the fund must give you a prospectus, but you should read it before you put your first dollar into the fund.

Now, take out your prospectus and get ready to learn the tricks of the trade:

Date of Issue: This should be right on the front cover. If the date is more than one year old, don't bother with the prospectus; just get a new one.

Mutual Fund Investing: Overview

Wed, 09 May 07 10:48:22 -0400