Archive for June, 2007

Chuck Jaffe — Fund Costs Heading Down

Kurt Brouwer June 27th, 2007

Our good friend Chuck Jaffe, Senior Columnist at MarketWatch, penned a column on the trend towards lower mutual fund costs [emphasis added]:

‘…the most recent data available says that fees are on the decline; in 2006, the industry now claims they were at the lowest level in more than 25 years…’

‘…The Investment Company Institute, the trade association/lobbying arm of the mutual fund business, released its latest study on fees last week, measuring fees based on where the money is. Rather than looking at the average fund’s fees, which stand at roughly 1.4% for a stock fund, the ICI study gave more weight to funds with more assets. So rather than look at a fund with $1 billion in assets and one with $10 million the same way, the ICI study looked at what the typical consumer is paying, based on where the cash is.

For 2006, the average investor paid 1.07% in fees and expenses (including loads) on a stock fund, down from 1.11% in 2005. The average in bond funds was 0.83%…’

‘…”There’s a positive trend here, a virtuous cycle,” says Russel Kinnel, director of mutual fund research at Morningstar Inc. “Look at the top asset draws and they usually have pretty good performance and low expenses. That draws more interest in the fund … and more breakpoints kick in, and then the lower costs help the fund maintain its performance.”

As Chuck points out, average mutual funds costs could and should go down further. However, the last point from Russ Kinnel at Morningstar is also important. The cycle is a good one. Investors are starting to migrate to mutual funds that have both solid performance and reasonable fees.

Vanguard Goes For ETFs

Kurt Brouwer June 27th, 2007

Diya Gullapalli at WSJ Online posted a good piece on Vanguard’s move into exchange traded funds (ETFs), which are a relatively recent entrant into the world of mutual funds and closed end funds [emphasis added]:

‘…The Vanguard Group has made its second regulatory filing for actively managed exchange-traded funds, one of the most aggressive efforts from a top provider to launch the widely debated products.

ETFs resemble index mutual funds but trade on exchanges like stocks. Unlike current ETFs that passively track market indexes, actively managed ETFs would involve managers who select the securities that go in the portfolio.

The new Vanguard filing came in April for three actively managed Treasury-bond ETFs. The proposed ETFs are share classes of mutual funds Vanguard Short-Term Treasury Fund, Vanguard Intermediate-Term Treasury Fund, and Vanguard Long-Term Treasury Fund.

The filing is the firm’s second for active ETFs this year. In February, Vanguard filed for an active ETF as a share class of its Vanguard Inflation-Protected Securities Fund. Both filings are in early rounds of the regulatory approval process…’

We have not used ETFs much, in part because they are new and relatively complex. Our experience with Wall Street is that new and complex are terms that often spell out–DISAPPOINTMENT. Also, most ETF offerings have been ‘me too’ index funds in an already crowded field. However, if Vanguard makes a big push in this area, that could help actively-managed ETFs gain traction. We will keep looking at this.

Americans Gave More in 2006

Kurt Brouwer June 27th, 2007

You don’t see stories like this one from the Associated Press (via CNN) too often. Our media seem to present ‘ugly American’ type stories far more often than positive ones like this. Maybe I’m being a bit unfair. Nonetheless, it was great to see that ordinary Americans were again the most generous people in the world in 2006. What you didn’t know that Americans were the most generous people in the world in 2005 too [emphasis added]?

‘Americans gave nearly $300 billion to charitable causes last year, setting a new record and besting the 2005 total that had been boosted by a surge in aid to victims of hurricanes Katrina, Rita and Wilma — and the Asian tsunami…’

‘…”What people find especially interesting about this, and it’s true year after year, that such a high percentage comes from individual donors,” Giving USA Chairman Richard Jolly said.

Individuals gave a combined 75.6 percent of the total. With bequests, that rises to 83.4 percent…’

‘…[Professor Claire] Gaudiani said Americans give twice as much as the next most charitable country, according to a November 2006 comparison done by the Charities Aid Foundation. In philanthropic giving as a percentage of gross domestic product, the U.S. ranked first at 1.7 percent. No. 2 Britain gave 0.73 percent, while France, with a 0.14 percent rate, trailed such countries as South Africa, Singapore, Turkey and Germany…’

I think this is very interesting. Americans gave more than twice what Brits did, not in dollar terms, but as a percentage of our overall economy. So, the true disparity in dollars would be much more. There seems to be something special going on here.

Hat tip: Backtalk blog

Fund Managers Who Invest in Their Own Funds

Kurt Brouwer June 26th, 2007

Eleanor Laise, at WSJ Online had an interesting piece on a study released last year by the London Business School and the Georgia Institute of Technology on mutual fund managers who invest in their own funds. Her story came out last year, but it still is worth reading.

The study found that those who managers who do invest in their own mutual funds in a significant way, seem to have better performance. The correlation between a fund manager’s investment in the fund and the fund’s performance is very interesting [emphasis added]:

‘…Funds whose managers have a personal financial stake tend to reward individual investors with superior performance over funds that don’t have such close manager involvement, a new study shows. Investors can check up on their fund managers’ holdings now that the Securities and Exchange Commission has required funds since last year to disclose that information. Still, fewer than half of U.S. mutual funds included investments by managers, the study found…’

‘…The moves to encourage manager ownership could benefit investors. Researchers at the Georgia Institute of Technology and London Business School found that funds with managers who owned some fund shares at the end of 2004 delivered an average return of 8.7% in the following year. This exceeded the 6.2% average return by funds without manager ownership for the same period…’

‘…The study, which examined about 1,300 U.S. mutual funds, showed that manager ownership was highest in domestic stock funds and lowest in international bond funds. For every 0.01% increase in manager ownership, fund performance improved 0.03%, it found…‘

‘…Ajay Khorana, associate finance professor at the Georgia Institute of Technology and co-author of the study of management ownership, says managers personally invested in a fund may have greater incentive to maximize returns through such practices as keeping trading costs down. Also, because a manager can have a good sense of how well his fund is going to perform, he will invest when the outlook is favorable, Mr. Khorana suggests. Whatever the reason why manager ownership goes along with better fund performance, it’s “good news for the shareholder,” he says.’

 

I think this finding makes sense intuitively. If a portfolio manager has a big personal stake in his or her own mutual fund, it does make sense that this factor would impact the fund’s results.

Hat tip: Mutual Fund Blog

Interest Rates — Up or Down?

Kurt Brouwer June 26th, 2007

The predictions about interest rates going up are almost evenly balanced by predictions of falling rates. What’s up? Or, is it down? As we recently praised PIMCO’s Bill Gross and the success of PIMCO Total Return, it’s only fair that we kid him a bit about his interest rate predictions. He wrote this in his latest commentary[emphasis added]:

‘…Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months. And what happened to our glass half-full secular thesis of last month? We still believe in strong global growth, but…as we also suggested…that the U.S. housing downturn will affect growth and short-term yields over the next year or so...’

That seems pretty clear. PIMCO thinks the Federal Reserve will start lowering short-term interest rates later this year. But, in a report on the ’secular thesis’ that he mentioned, Gross wrote this [emphasis added]:

‘…And we also came to the conclusion that if we continue to see 4% to 5% global growth—admittedly with risks in a number of areas—perhaps this would exert some type of upward push in terms of inflation and ultimately in terms of interest rates..’

So, which is it? Up or down. Making predictions or prognostications about short-term events is a great way to learn a bit of humility because it is so easy to be wrong. At least Bill Gross has the right idea. Whatever happens, he’ll be right.

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