Fundmastery Blog

Kurt Brouwer June 29th, 2007

Jane Bryant Quinn has been on the personal finance beat for years. Her columns cover many topics, but they always feature solid information and tight, colorful writing.

In this Newsweek column, she writes that online banking has definitely come of age:

‘If you’re still picking your bank by whether there’s a handy branch nearby, you haven’t joined the 21st century…’

‘…You’re offered a limited range of low-cost, do-it-yourself financial options, available only online. ING Direct led the way, by creating a simple, high-interest savings account, with no fees and no minimum deposits, that’s federally insured. A true “people’s choice.” You can link it electronically to your regular checking account at any bank. With the click of a mouse, you move your money back and forth (the transfer takes two or three days.) You can bank by phone or mail, too…’

‘…What can you earn on basic savings today in online accounts? HSBC Direct, EmigrantDirect, Etrade Financial and Univest pay 5.05 percent. ING Direct pays 4.5 percent. That compares with 0.45 percent at the 50 highest-paying traditional banks, Informa Research Services reports..’

Now, the competitive landscape is changing. We are seeing that many traditional companies, such as Emigrant Savings Bank and Citi, have created a whole new online presence. We also are seeing pure Internet banks too. Shop around. It pays.

• Money , Personal Finance
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Kurt Brouwer June 29th, 2007

John Waggoner, personal finance columnist at USA Today, put together an interesting analysis. He looked at what would have happened to retirees in 1996 had they invested in some of the top mutual funds back then.

‘…Someday, you’ll have to take money out of your 401(k) rather than put money in it. But the rules for investing while you’re taking withdrawals are significantly different from the rules for investing while you’re still saving. Funds that guard against big losses in a bear market, for instance, might be better than those that post big gains in a bull market. And funds that seek dividend income might be some of your best friends in retirement.

To illustrate how dramatically withdrawals can change your investment strategies, we looked at how the 15 largest stock funds of 1996 would have fared after 10 years of withdrawals. These funds had been the most popular funds at the time, primarily because they were top performers in previous years. Had you retired in 1996, it’s a good bet you would have had some money in several of these funds.

We started with a $100,000 investment on Dec. 1, 1996. We used two initial withdrawal rates: 5% and 8%, starting on Jan. 1, 1997. We increased the initial withdrawal rate by 3% each year to account for inflation. And we sold shares each year to pay taxes on capital gains and dividend distributions.

The past 10 years are telling because the decade encompassed pretty much every type of investment phase imaginable. Stocks enjoyed an astonishing bull market from 1997 through 2000, endured a bone-jarring bear market from 2000 through 2002 and finally skated through a relatively mild bull market for the rest of the period.

The results were interesting because he just selected the largest 15 equity funds; there was no selection bias other than size. And, with one exception, the 15 funds did pretty darn well. Some better than others, but at the 5% withdrawal rate, 14 finished the decade with more money — after withdrawals — than they started with. The worst performance was turned in by an aggressive stock fund, American Century Ultra. This was also the only one that actually ended the decade with less money. One rung up from AmCent Ultra was Janus Fund. The best performer was Fidelity Contrafund, which ended the decade with $161,801, up considerably from the starting point, even after deducting 5% annual withdrawals.

But at the 8% withdrawal rate, all but one mutual fund lost ground. So, in this analysis, a 5% withdrawal generally worked. But an 8% withdrawal rate, probably does not.

 

• Mutual Funds , Retirement
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Kurt Brouwer June 28th, 2007

This is not surprising, but I still think it is a positive for stocks. The Associated Press reports that:

‘…The Federal Reserve left a key interest rate unchanged on Thursday, hoping that a yearlong economic slowdown will cause inflation to retreat further.

Fed Chairman Ben Bernanke and his colleagues voted unanimously to keep the federal funds rate, the interest that banks charge each other, at 5.25 percent, where it has been for the past year…’

‘…In a brief statement explaining its actions, the Fed continued to say that its greatest concern was that the risk of inflation will not moderate as expected.

However, it expressed some optimism about recent developments on inflation, saying “Reading on core inflation have improved modestly in recent months.”…’

Under Chairman Ben Bernanke, the Fed has done a very good job of restraining inflationary impulses without strangling economic growth. In my opinion, this is the right thing to do. Leave interest rates alone.

• Investing
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Kurt Brouwer June 28th, 2007

Murray Coleman, a reporter at MarketWatch has a piece on the upcoming Morningstar investment conference. In it, he covers the trend towards alternative investments in mutual funds.

‘…”A key theme we’ll be taking a look at is how people are moving away from traditional mutual funds to diversify their portfolios even more,” said Don Phillips, Morningstar’s managing director.

Financial advisers are increasingly finding that bond funds move more in sync these days with stocks than in the past, he added. “Rising correlations between stocks and bonds are creating an ardent search today for asset classes that will zig when stocks and bonds zag,” Phillips said…’

By way of background, the term ‘alternative investments’ covers a pretty broad spectrum of specialized investment strategies. Examples include: venture capital funds, hedge funds, buyout or private equity funds and so on. In particular, mutual funds are beginning to include hedging strategies such as those used by hedge funds. Even the term hedge fund is pretty broad because is includes high-risk, leveraged strategies as well as low-risk, ‘hedged’ strategies.

The first mutual funds invested in straightforward portfolios of stocks or bonds or a combination of the two asset classes. Later on, came money market mutual funds, gold funds, real estate funds and even funds of funds. But, mutual funds stayed away from more complex strategies such as traditional ‘hedged’ strategies such as long/short hedge funds. This approach seeks to profit when the market goes up or down. The fund buys some stocks they think will go up and shorts (or sells) other stocks they believe will go down.

After some regulatory changes a few years ago, mutual funds began moving into more complex and specialized investment strategies that we associate with hedge funds. Here are three very different funds that represent examples of this trend:

The Merger Fund (MERFX)

Legg Mason Opportunity Trust (LMNOX)

Wintergreen Fund (WGRNX)

We expect this trend toward more specialized investment strategies for mutual funds to continue over the next few years.

 

• Investing , Mutual Funds
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Kurt Brouwer June 28th, 2007

Eleanor Laise of WSJ Online has yet another interesting piece on their website. This one is on sentiment among thousands of money managers.

‘Amid rising interest rates, slowing economic growth and continued strong stock-market performance, a growing number of money managers believe U.S. stocks are overvalued.

In Russell Investment Group’s quarterly Investment Manager Outlook, set to be released today, 17% of managers say U.S. stocks are overvalued, the highest level in the survey’s three-year history. That is up from 13% in the first quarter and 8% a year ago.

For the survey, conducted between May 31 and June 7, 353 money managers answered questions about their outlook on the market’s direction, as well as investment styles and sectors. Russell, a unit of Northwestern Mutual Life Insurance Co., researches and selects money managers for investors, and markets the Russell indexes.

Managers’ more bearish views on U.S. stocks suggest that the current bull market, now almost five years old, is showing its age. Scott Sindelar, chief investment officer at Chicago Asset Management, is one of those managers who believe stocks are overvalued. Among his concerns: Consumers are getting hit by higher gas prices and a weaker housing market, inflation is rising, and growth is slowing. “The outlook may be less rosy than people think,” Mr. Sindelar says.

Just 7% of managers believe U.S. stocks will gain 5% or more in the next three months, while 45% say stocks will be flat or fall. Yet 62% of managers say the market is fairly valued, roughly in line with last quarter…’

I like it when institutional money managers are pessimistic although the highlighted quote is a little misleading. If 45% say stocks will be flat or will fall, then by the magic of heavy mathematical calculation, I conclude that this means that 55% think stocks will go up. So, I would say that money managers are turning a little more negative than they were-and that is good.

 

• Investing
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