Tag Archives: earnings-center

What’s The Point Of Mutual Funds? According To Standard And Poor’s There Isn’t One

By Valentin Schmid Leave it to the pros. That’s what mutual fund companies tell the layman when he wants to invest in the stock or bond market. After all they know better, right? Right. However, they don’t know better than the benchmarks they are supposed to outperform, according to a recent study by Standard and Poors, the parent of the famous S&P 500 index. For the period of June 30 2014 to June 30 2015, 65.34 percent of U.S. large cap equity portfolio managers underperformed the S&P 500, which was up 7.42 percent. They did even worse over 5 and 10 years, when 80 percent of fund managers didn’t manage to beat the benchmark. The same is true for fixed income and municipal bond funds as well as international stock funds-a large majority of them underperform their benchmarks over different periods. Why? Gordon Gekko from the 1987 movie “Wall Street” thought he knew the answer: “Ever wonder why fund managers can’t beat the S&P 500? Cause they’re sheep, and sheep get slaughtered,” he opined. Maybe it’s just the opposite. Of course, you can’t accuse fund managers of being greedy, which Gekko would have said was good, but it has to do with the fees they charge for their management. They are relatively modest, around 1.15 percent on average per year, but that amount alone is often enough to make the difference between being better than the index or not. On top, you have hidden trading fees (brokers usually charge funds 0.2 percent on stock trades, which is directly deducted from the fund’s assets), and market impact: this means the stock price goes up if the fund is buying in large quantities. The S&P 500 doesn’t have these problems. It just exists in a computer database. S&P collects the prices of the stocks and calculates the index in a massive excel spreadsheet. No trading costs, no market impact, and no fees. And it gets even better: By definition, companies that do poorly just get kicked out of the index (because their market cap declines) and strong companies on the rise get included, again at no cost, whereas the mutual funds have to turn over a good chunk of their portfolio to make the necessary changes. So what can you do? Obviously investing in the S&P 500 spreadsheet, which doesn’t have all the costs won’t do any good, but there are lower cost alternatives. John Clifton Bogle, former CEO of the Vanguard Group pioneered the concept of index trackers. They slash costs to the bone and just replicate the index. This will still cost you, but it will cost you much less than people charging more and failing to beat the index. Over 10 years, Vanguard is the winner : “For the 10-year period ended June 30, 2015, 10 of 10 Vanguard money market funds, 48 of 52 Vanguard bond funds, 18 of 18 Vanguard balanced funds, and 110 of 121 Vanguard stock funds-for a total of 186 of 201 Vanguard funds-outperformed their Lipper peer-group averages”-without even trying. (click to enlarge) An infographic showing the hidden fees in 401ks. ( Personal Capital )

How To Find The Best Style Mutual Funds: Q3’15

Summary The large number of mutual funds hurts investors more than it helps as too many options become paralyzing. Performance of a mutual funds holdings are equal to the performance of a mutual fund. Our coverage of mutual funds leverages the diligence we do on each stock by rating mutual funds based on the aggregated ratings of their holdings. Finding the best mutual funds is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available? Don’t Trust Mutual Fund Labels There are at least 871 different Large Cap Blend mutual funds and at least 5971 mutual funds across twelve styles. Do investors need 500+ choices on average per style? How different can the mutual funds be? Those 871 Large Cap Blend mutual funds are very different. With anywhere from 18 to 1347 holdings, many of these Large Cap Blend mutual funds have drastically different portfolios, creating drastically different investment implications. The same is true for the mutual funds in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Blend ranks last. Details on the Best & Worst mutual funds in each style are here . A Recipe for Paralysis By Analysis We firmly believe mutual funds for a given style should not all be that different. We think the large number of Large Cap Blend (or any other) style mutual funds hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many mutual funds. Analyzing mutual funds, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 1347 stocks, and sometimes even more, for one mutual fund. Any investor worth his salt recognizes that analyzing the holdings of a mutual fund is critical to finding the best mutual fund. Figure 1 shows our top rated mutual fund for each style. Figure 1: The Best Mutual Fund in Each Style (click to enlarge) Sources: New Constructs, LLC and company filings How To Avoid “The Danger Within” Why do you need to know the holdings of mutual funds before you buy? You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the mutual fund’s performance will be bad. Don’t just take our word for it, see what Barron’s says on this matter. PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND If Only Investors Could Find Funds Rated by Their Holdings… The Calvert Large Cap Core Portfolio (MUTF: CMIIX ) is the top-rated Large Cap Blend mutual fund and the overall best fund of the 5971 style mutual funds that we cover. The worst mutual fund in Figure 1 is the Harbor Funds Mid Cap Value Fund (MUTF: HAMVX ) which gets a Neutral rating. One would think mutual fund providers could do better for this style. Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Optimists Survive By Eating Bears

Yesterday (9/10/15) David Tepper came on CNBC for an hour. The whole discussion is worth watching, but one thing he said is missed time and time again by many investors. I’m not real comfortable being short stocks because there’s a bias for stocks to go up over time” – Tepper Tepper has been putting up 25-30% returns for over 20-Years with billions under management. He is one of the best traders in history, great at sizing up risk-reward, security selection, and timing… and yet he says, “I’m not real comfortable being short stocks because there’s a bias for stocks to go up over time.” One of the sub-segments of the investment/econ space that I enjoy are the “end of the world as we know it” genre. They are mainly published at market bottoms while the super bullish books are published at market tops (remember Dow 40,000?) but we also see a lot of them mid-cycle as well. For whatever reason, doom and gloom sells very well. The short argument always sounds like the intelligent argument. To make it worse, there is always a lot of data that shows real reasons to be worried. Look at any of the books in the picture below and they are filled with data and charts showing impending doom. If you look at the publishing dates, however, they either missed the crash or just got the entire thesis wrong. (BTW, I recently moved and have not unfinished packing or I could have shown a stack four feet high of end-of-the-world books. For whatever reason, I cannot resist the urge when I am in a used bookstore). (click to enlarge) The end of the world What the perma-bears get wrong is that over time, civilization has indeed improved its lot in life. Yes, there are downturns but more often than not stocks go UP and not down. If someone as smart as Tepper is wary of shorting, then what does that say about what you should be doing? Looking at US assets over time using data from the Credit Suisse Global Investment Returns Yearbook , we can see that stocks go up… a lot… over time. Even after taking into account inflation, you would have 1,396 times your money from 1900-2014. Bonds and bills are less explosive, but even there, they go up over time. Cumulative Real Returns USA Over the past 115 years, you would have been fighting a 6.5% annual upwards drift by shorting stocks. That means that you are fighting a 0.54% hurdle each month. And, of course, that doesn’t even include any borrowing costs, commissions, or taxes. Annualized Real Returns USA Now all of this is not to say that we don’t short because we do. We have had success going long and short across asset classes to include stocks. What I am saying is that you need to have a really good reason to fight long-term trends in markets. If you can’t figure out why you have an edge on any given trade, then you are probably better off not doing it. Oh, and in case you are wondering “stocks are overvalued” or “Because the Fed” are not sufficient answers. If you want more info on the long-term bias of stocks to go higher, or just want to get a lot smarter, pick up a copy of the book “Triumph of the Optimists” by Dimson, Marsh, and Staunton.