Tag Archives: mutual funds

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 )

The Big, Bad Floating NAV Is Coming Your Way

Summary Prime money market funds are going to be reporting their net asset values on a floating basis due to recent SEC rules. The effect will be to render these funds costlier, both on an accounting and a tax basis, and might lead to an outflow from these funds. However, the weighted average maturity of these funds, one measure of their riskiness, is well within SEC guidelines. The big, bad floating NAV is coming your way In 2014 the SEC adopted amendments to rules that govern certain types of money market funds. In particular prime money market funds – those that invest in corporate debt securities will have to report floating Net Asset Values (NAVs) instead of posting fixed NAVs as has hitherto been the case. Thus at any given time, capital appreciation or depreciation will have to be reported, leading to a move towards money market funds with a Treasury or municipal bond focus. Instead of assuming a fixed NAV of $1.00, investors will have to confirm the posted NAV price. There will also be liquidity management issues, since the use of these money market funds for intra-day liquidity management will be much diminished, given the uncertainties about the NAVs for these funds. Companies would have to monitor the marking-to-market value of these funds on their balance sheets. Finally, all sales of money market fund shares would become taxable events. Rule 2A-7 risk limiting provisions amended Traditionally SEC’s Rule 2A-7, adopted in 1983, allowed money market funds to use amortized cost to value the funds so long as they kept within very strict parameters. Since money market funds are not insured by the FDIC, they have traditionally had to keep within limits about the three primary risks they face. Of course, the first was interest risk, credit risk and liquidity risk (the risk that a borrower will not pay its obligations when due). Of course, the first two kinds of risks do not affect money market funds which invest in Treasuries or municipal bonds. But all three risks affect prime money market funds. With a fixed NAV based on amortized cost, investors did not need to track their capital gains and losses, since all of the return of a money market fund is paid out in dividends. In addition, a stable NAV allowed these funds to offer such services as check-writing and the other general features available to deposit accounts, while allowing investors to have access to some upside features. The daily dividend on the fund is based on the accrued interest based on amortized cost. At least that was the situation before the recent amendments by the SEC. On Weighted maturities and interest rate sensitivities. Given the above mentioned advantages of the stable NAV for money market funds, it was imperative to keep the funds within certain risk bounds. One way to do this was to limit the maximum weighted average maturity (WAM) of the funds. An increase in interest rates would decrease a fund’s shadow price. One measure of the sensitivity of any fund with respect to a change in interest rates is the fund’s weighted average maturity (the WAM). The WAM is the measure of the average maturity of the bonds in the fund’s portfolio, and the SEC rules provided that funds, in order to use amortized cost, could have a maximum WAM of 60 days. The higher the WAM, the more sensitive the shadow price of the fund would be to changes in interest rates. When redemption of funds is high, especially in times of crisis, (as was the case between 2007 and 2008), then shadow prices will fall below $1, and the WAM is especially helpful to understand the riskiness of these funds. Recent measures of WAM show relatively low riskiness. Money market funds are obligated to disclose their net assets, 7-day interest rates and WAMs on a monthly basis. Extracting some of this data from the SEC web site for four representative prime money market funds (those of BMO, BNY Mellon, Legg-Mason and Fidelity) show that all of these funds have WAMs well below 60 days. The shadow prices (not shown) are $1 for BMO and BNY Mellon, $1.002 for Fidelity and $1.0001 for Legg Mason in the period shown. Legg Mason, with a WAM over the period for its prime funds of 6 days, carries a 7-day rate on average of .23%. (The figures below come from the N-MFP disclosures on the SEC website). Does this mean there is no cause for concern? The above-mentioned trends do not mean that there is no cause for concern. Shadow prices of these funds are notoriously resistant to reflecting trends in markets. In September of 2008, 90 percent of prime money market funds had shadow prices within 5 basis points of $1, as reported by the ICI. Nevertheless, when floating NAVs become part of the investor’s framework, it is likely that they will not be as volatile as feared if current trends in the weighted average maturity are any indicator. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

4 Zacks Buy-Ranked Technology Mutual Funds

More often than not the technology sector is likely to report above par earnings than other sectors as the demand for technology and innovation remains high. However, technology stocks are considered to be more volatile than other sector specific stocks in the short run. In order to minimize this short term volatility almost all tech funds adopt a growth management style with a focus on strong fundamentals and a relatively higher investment horizon. Investors having an above par appetite for risk and a fairly longer investment horizon should park their savings in these funds. Below we will share with you 4 buy-rated technology mutual funds . Each has earned either a Zacks Mutual Fund Rank #1 (Strong Buy) or a Zacks Mutual Fund Rank #2 (Buy) as we expect these mutual funds to outperform their peers in the future. The USAA Science & Technology Fund (MUTF: USSCX ) seeks capital growth over the long run. USSCX invests a lion’s share of its assets in equity securities of companies that are believed to gain from technological development and advancement. USSCX may invest a maximum of half of its assets in securities of companies located in foreign lands. The USAA Science & Technology fund has a three-year annualized return of 20%. USSCX has an expense ratio of 1.24% as compared to category average of 1.47%. The Northern Technology Fund (MUTF: NTCHX ) invests a major portion of its assets in securities of companies primarily involved in technology sector. NTCHX invests a minimum of one-fourth share of its assets in securities of companies engaged in manufacturing and selling of computer hardware or software and peripheral products. NTCHX invests in securities of companies irrespective of their market capitalizations. NTCHX may also participate in IPO markets. The Northern Technology fund has a three-year annualized return of 12.1%. As of June 2015, NTCHX held 66 issues with 5.32% invested in Apple Inc (NASDAQ: AAPL ). The Fidelity Select Technology Portfolio (MUTF: FSPTX ) seeks long-term capital growth. FSPTX invests a large chunk of its assets primarily involved in manufacturing, development and distribution of products and services related to technology sector. FSPTX focuses on acquiring common stocks of companies located throughout the globe. FSPTX considers factors including financial strength and economic condition before investing in securities. The Fidelity Select Technology Portfolio is non-diversified fund and has a three-year annualized return of 11.3%. Charlie Chai is the fund manager and has managed FSPTX since 2007. The Matthews Asia Science and Technology Fund (MUTF: MATFX ) invests a majority of its assets in securities of technology companies located in Asia. According to MATFX’s advisors, companies that earn maximum share of their revenue by carrying out operations related to technology domain are considered as technology companies. MATFX primarily invests in common and preferred stocks of companies. The Matthews Asia Science and Technology Investor fund has a three-year annualized return of 11.8%. As of June 2015, MATFX held 57 issues with 9.08% invested in Baidu Inc. (NASDAQ: BIDU ). Link to the original post on Zacks.com Share this article with a colleague