Objective information about retirement, financial planning and investments

 

Are Mutual Fund Closures a Bad Thing?

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Road closed, farm road in Champaign County, Il...

You’ve been following a mutual fund for awhile and you’ve decided that this fund is a good fit for your portfolio.  You go online to make an initial purchase and you learn the fund has closed to new investments.  While you might be frustrated, overall I tend to view fund closures as a positive move in most cases.

Factors that might lead to a fund closing 

Typically the main reason that mutual funds close to new investments is that more money is coming in than the managers feel they can effectively invest.  Closely related to this is the rule that funds are only allowed to buy into the stock of a single company if that holding is 5% or less of the total value of the fund.  (Note a holding may constitute more than 5% of a fund’s value due to price appreciation).  Generally fund closures occur in actively managed mutual funds versus passively managed index products.

Fund closures benefit existing shareholders 

In my opinion, a fund closure is generally a sign of a fund company that values its shareholders.  A case in point is Artisan, a fund company based in Milwaukee.  Over the years I have used Artisan Mid Cap Value (ARTQX) extensively in several of the retirement plans for whom I serve as advisor as well in the portfolios of many of my individual clients.  The management team of this fund was named Domestic Manager of the Year for 2011 by Morningstar.

Artisan runs 12 funds, of which 5 are currently closed to new investors, including Mid Cap Value.  Even with the closure, fund assets have topped $8 billion a high for the fund.  The fund’s performance has lagged in 2011, though I don’t think that it is related to the increased size.  The fund ranks in the top 1% of all Mid Cap Value funds over the past 10 years.

The fact that Artisan is willing to close a popular fund like Mid Cap Value speaks volumes about the firm.  Shutting off the spigot of new money means that the firm will lose the fees it would collect on these assets.  Artisan is also in the process of going public.

Examples of large funds that didn’t close 

This can work both ways.  An example of a fund that in my opinion should have closed to new investment is Ariel (ARGFX).  This was an outstanding Small Cap Value fund run by John Rogers, a well-known Chicago-based value investor.  Fund assets ballooned from about $600 million in 2001 to over $4.7 billion in 2005.  The fund never closed its doors to new money and was forced to increase the market cap of the stocks held in the fund.

As a Mid Cap Blend fund, performance has largely been below average, the fund ranks in the middle of the pack for the trailing 5 years and in the bottom 25% of its category for the tailing 10 years.  Performance has picked up in recent years with the fund ranking in the top quarter of its category in 2009, 2010, and year to date in 2012.  In-between the fund ranked in the bottom 7% of its category in 2011.  This improved performance follows a significant decline in fund assets in recent years.

I haven’t followed this fund for several years and have no client money invested here.  Would shareholders have been better served had the fund closed its doors a number of years ago and stuck to the type of investing it was known for?  In my opinion yes, but I’ll leave that to others to decide.

On the flip side of this is Fidelity Contra (FCNTX).  Will Danoff manages about $85 billion in this fund and over $100 billion in this style (Large Growth) when you add in some other portfolios under his management.  The fund has placed in the category’s top 39% or better in every annual period since 2002 with the exception of 2009 (when the fund earned over 29%).  For the trailing 10 years the fund ranks in the category’s top 7%.  To be able to manage this much money as well as Danoff has year in and year out is a commendable and rare feat.

Asset bloat

While asset bloat can be a problem in any fund, it is generally a more serious issue in a fund that invests in small or mid cap stocks.  At some point there are only so many good places to invest new cash coming in.

While fund companies are in the business to make money, my experience has been that the fund companies that tend to close funds when they get too big also tend to run funds that are better performers over time.  At some point if a fund gets too big it might also become a “closet indexer.”  In those situations, why pay the fees associated with an actively managed fund?  Why not just buy an index fund or ETF?

What if my fund closes? 

Typically if you already own a fund and it closes, you be able to buy more shares if you wish.  This is not always the case, however.

If a fund that you were considering closes before you own it, look for an alternative fund.  This might be a good opportunity to consider a low cost index fund or ETF in the same asset class.

Feel free to contact me with questions about your investments.

For you do-it-yourselfers, check out Morningstar.com to analyze your investments and to get a free trial for their premium services.

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Mutual Fund Expenses – Where Real Holiday Savings Can be Found

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Blue Piggy Bank With Coins - Retirement

As I write this its Cyber Monday, the biggest online shopping day of the year.  Where to save a few dollars on this item or that has been the focus of many news stories and discussion.  While we all like to save money on the things we buy, these savings are “chump change” compared with the savings opportunities available by reducing your expenses on the mutual fund and ETFs in which you invest.  Here are 5 tips for reducing your investing costs for mutual funds and ETFs to help grow your investments for retirement, college savings, and other goals.

Index Funds are Not Created Equal

As an example the Dreyfus Mid Cap Index Fund (ticker PESPX) has an expense ratio of 0.50% which is pricey for a core index fund of this type.  The Investor Share Class of the Vanguard Mid Cap Index Fund (VIMSX) carries an expense ratio of 0.24% and the SPDR S&P Midcap 400 ETF (MDY) has an expense ratio of 0.25%.  An investment of $10,000 in each of these funds made on May 31, 1998 and held until October 31, 2012 would have grown to:

Dreyfus Mid Cap Index

$30,743

SPDR Midcap

$31,643

Vanguard Mid Cap Index

$31,770

The above information is via Morningstar and is based upon the earliest common inception date of the three funds and also assumes reinvestment of dividends and distributions.  Note that an investment in one of the lower cost share classes of the Vanguard fund would yield even better results.

ETF Price Wars are a Good Thing

There is a price war happening among several providers initiated by Schwab to offer the lowest cost ETF.  Vanguard has jumped on the bandwagon by changing the index provider on many of its funds and ETFs; Blackrock’s ishares unit has also joined in.  While I likely would not suggest switching from an already low cost index ETF product because it is not the absolute lowest in cost, I would suggest taking a look at the offerings of the “warring” factions.  You should also take any transaction fees into account as well.  Schwab and Vanguard allow transaction free trading of their own ETFs, TD and Fidelity offer a menu of transaction free ETFs as well.

Your Financial Advisor May be able to Save You Money

In many cases I am able to invest my client’s money in less expensive share classes of a given mutual fund than they might be able to purchase on their own.  As an example PIMco Commodity Real Return as a number of share classes as do most of the PIMco Funds.  I am able to invest client dollars in the Institutional Share Class (PCRIX) with its 0.74% expense ratio and typical $1 million minimum.  This compares to the no-load D shares (PCRDX) with an expense ratio of 1.19% and a $1,000 minimum initial investment.  Often the savings in expense ratios that I can provide to my clients can go a long way in covering a portion of my professional fees.

Ensure that Your Stock Broker or Registered Rep isn’t costing you Money

The flip side of the last point is to make sure that you are not paying more in mutual fund fees just so that your broker or registered rep can make additional fees and commissions.  Case in point is if your money is invested in a proprietary mutual fund offered by the rep’s employer.  While some of these proprietary funds can be decent, all too often they are under performers that are laden with fees and charges to generate revenue for the broker and their firm.

Read your 401(k) Plan Fee Disclosures

Some plans sold by commissioned reps and producing TPAs (Third-Party Administrators) may contain funds that are not very low cost.  Case in point might be a plan with an American Funds fund in the R1, R2, or R3 share classes.  This might also be the case with some Fidelity shares classes (typically the Advisor share class), as well as with some T. Rowe Price funds (the Advisor or the R share classes).  These shares exist typically to compensate a producer.  If you see these or similar share classes for other fund families in your plan it would behoove you to ask the person who administers your plan if it might be possible to move the plan into lower cost funds or fund share classes.

We all like to find a bargain when doing our holiday shopping.  If a fraction of the time and effort that people spend on this activity went into analyzing their investment portfolios, the potential cost savings alone would dwarf anything that you might realize from finding a couple of deals this holiday season.  These savings are not just one-time in nature, but they “keep on giving.”

Check out Morningstar to review the expenses for all of  your mutual funds and ETFs and to get a free trial for their premium services.

Please feel free to contact me with questions about your investments.

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Does it Matter Who’s Managing Your Mutual Fund?

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One of the analytical tools that I use in my practice is the fi360 Toolkit.  They rank mutual funds and ETFs on 11 criteria, one of which is the tenure of the fund manager.  In order to receive a top ranking here, the manager must have tenure of at least 2 years.  We generally use 3 years in our Investment Policy Statements.

Does this mean that you should dump a fund if you learn that the manager is leaving?  Not necessarily.

The Vanguard Example

As an example, for many years Gus Sauter was responsible for the management of most of Vanguard’s index funds.  Several years ago he stepped out of the day-to-day management of the funds into the role of the firm’s Chief Investment Officer.  In my opinion, Vanguard’s index products have not missed a beat.

Mr. Sauter is retiring at year-end after the transition to a new index provider for a number of their funds.  On both counts I suspect Vanguard will again not miss a beat.  Why?  People are a critical part of the investment management process.  But so is the process.  Based upon my experience Vanguard has both in place.

Fund manager changes – done well and not so well

In another example, I have used Columbia Acorn International Z fund for a number of years in some client portfolios.  It is an actively managed small/mid cap foreign equity fund.  The fund had been managed by legendary manager Ralph Wanger, he was then joined by his wife (an outstanding fund manager herself) Leah Zell; Zell then was the sole lead manager until May of 2003 after Wanger’s departure.  She was succeeded at the fund by her two top underlings.  I had notified my clients of the change and suggested a wait and see approach.  This was a wise move as the fund has continued to perform well and also to perform within my expectations for the fund.  Again an example of having solid people in place (including depth) and having a solid investment process in place.

Perhaps the ultimate example of the other side of this coin is the soon to be shuttered Janus Worldwide fund.  Janus was one of the hottest mutual fund shops of the 1990s Dot Com boom in the markets.  The fund was very ably managed by Helen Young Hayes and at its peak had over $44 billion in assets.  The fund was a top performer until the bear market of 2000-02 when the fund’s performance really sagged.  Hayes left the fund in 2003; there have been several managers since, in many ways mirroring the revolving door in the executive suite (five CEOs since 2003).  None of these mangers subsequent to Hayes have been able to duplicate the fund’s past performance, the fund ranks in the bottom 3% of its peer group for the past 10 years.  The fund is scheduled to be merged with another Janus fund shortly.

It does matter who is managing your mutual fund, but beyond that it is important that the fund have a strong investment process in place.  While the fund’s management might seem to be more important for an actively managed fund, in reality proper management of a passive index fund is just as important.

Please feel free to contact me for a review of your investments. 

Check out morningstar.com to analyze your mutual funds and all of your investments.  Get a free trial for their premium services.

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Mutual Funds – Are “Family Values” Important?

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My Investments from the last year or so

Over the years I’ve been asked whether there is a mutual fund family (or families) that I prefer.  My answer is generally along the lines that I choose mutual funds and ETFs based on screening and their fit in a particular client portfolio.  This is absolutely true but there are families that I do tend to use more than others.

For example, for the individual client assets which I custody at Schwab (which is the bulk of them):

  • Vanguard mutual funds and ETFs comprise about 22% of these assets.
  • PIMco mutual funds, ETFs, and closed end funds make up just over 10%.

In addition to Schwab I have individual clients with a smattering of assets at other custodians, including Vanguard.

A significant portion of my practice involves providing advice to several 401(k) plans, as well as a couple good-sized pension plans and foundations.  Both Vanguard and PIMco are well-represented, along with Fidelity.  In the case of Fidelity two of the larger 401(k) plans are administered by Fidelity and we do have a number of Fidelity funds in both plans (along with a number of non-Fidelity funds).

In the case of Vanguard I am drawn to their low cost index products, I rarely use their actively managed funds.  In the case of PIMco the bulk of the assets are in three of their funds. Their fixed income expertise and their research orientation are impressive.

A Sample 401(k) Menu

Beyond this a look at the funds and ETFs that I use would reveal no particular loyalty to any family or fund provider.  I am typically looking for something in a particular fund in a given asset class and I don’t really care which fund family they are affiliated with, unless I uncover some negative aspect about the fund company.  As an example, here are the fund families represented in one of the 401(k) plans for which I serve as advisor:

  • Vanguard (4 index funds plus their Target Date Funds)
  • American Funds
  • American Beacon
  • PRIMECAP
  • Artisan
  • BMO Funds
  • Northern Funds
  • Dodge and Cox
  • Oakmark

Red Flags to Look For

While I am fund family agnostic, there are however, some fund family red flags that might give you pause when considering an investment.  Here are three:

  • A sense of general turmoil.  Janus is a prime example of firm where this concern is prevalent to me.  The company is on its 5th CEO since 2003 and they have experienced a noticeable amount of manger turnover.
  • Refusal to close popular funds.  One of the things that I really like about Artisan (a relatively small fund firm in Milwaukee) is that they routinely close funds when they take on too much money for the managers to effectively manage.  Perhaps the “poster child” here is Sequoia who had reopened their lone fund in 2008 after being closed to new investment for over 20 years, feeling comfortable for the first time that they could effectively manage new money.  They just re-closed the fund once again in the past year.  It seems to be a rule that money follows performance.  A fund that has a couple of really good years will attract waves of new investors.  In my opinion it is irresponsible for the fund company to keep the fund open if they don’t feel they can effectively manage these inflows.  In my opinion this is the definition of greed overruling shareholder interests.
  • A commissioned or fee-based rep who pushes a particular fund family, especially if that family is also his/her employer.  A recent example involves a lawsuit against JP Morgan Chase alleging that their reps pushed the company’s proprietary funds over those from other families.  I suggest asking many questions of this rep if you like them, or better terminating the meeting on the spot if you are a prospective client.

As an individual investor I would caution you against loyalty to any fund family.  Rather start out with the overall portfolio allocation that you are shooting for and then pick the best funds/ETFs to fill those “buckets.”  Ideally this is an outgrowth of your financial plan.  As a practical matter you might be unable to buy some funds due to investment minimums and other factors.  However there are many custodians that offer access to a wide array of funds across many families.  I would generally suggest going that route vs. limiting yourself to a situation where you only have access to a single family or a very small number of fund families.

As is always the case, nothing published on this blog constitutes investment advice nor should you take it as such.  Please see the Disclaimer page for more.

Please feel free to contact me with your questions, comments or suggestions regarding the site.

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Mutual Funds-Should You Pay Extra for Active Management?

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I was recently quoted in the industry publication Investment News in an article discussing how many Large CapCommon Sense on Mutual Funds: New Imperatives ... domestic equity mutual funds have become very highly correlated with their benchmark index.

The article’s author cited the American Funds Growth Fund of America as an example with its three year R-squared to the Russell 1000 Index having increased to 98% from 77% just five years ago.  R-squared measures the strength of the statistical relationship, in this case between the fund and its benchmark.

Here are my two quotes from the article:

“If I buy an active fund in the large-cap space, I want somebody who’s going to do something over the long term to outperform,” said Roger Wohlner, a financial planner at Asset Strategy Consultants. “Why pay 70 or 80 basis points for active management that doesn’t give you much differentiation from the index?” 

“Downside protection is one of the reasons that led Mr. Wohlner to rush some of his clients into the $5.5 billion Sequoia Fund (SEQUX) when it briefly opened to new investors in 2008. As the S&P 500 fell 37% in 2008, the Sequoia Fund fell 27%.” 

Both quotes reflect my belief that an active mutual fund manager needs to add value beyond what you can find in an index mutual fund or ETF.

Index Funds Often Outperform Their Actively Managed Peers

Especially with Large Cap funds, quite often index funds out perform a large percentage of their actively managed peers.  Let’s look at an example:

Vanguard Growth Index Signal (VIGSX) – Large Growth Category

YTD

1 year

3 years

5 years

10 years

Fund Return

10.77%

6.49%

17.66%

3.06%

5.97%

Category percentile

24

8

14

17

28

# Funds in category

1,543

1,499

1,328

1,137

736

As of June 30, 2012 via Fi360.com

By way of explanation:

  • Category percentile represents its ranking among all of the mutual funds and ETFs in this Morningstar Category.  For example for the three years ended June 30 the fund ranked in the top 14% of the 1,328 funds in the category with a three year track record.
  • The fund delivered these results quite cheaply.  The fund’s expense ratio is 0.10%.  This compares to the average mutual fund/ETF in this category of 1.22% as reported by Morningstar.
  • While this share class may not be available to all individual investors, the Admiral Share class ($10,000 minimum investment) and the ETF version (which can be traded commission-free at Vanguard) of this fund also carry a 0.10% expense ratio.  Even the basic Investor share class is very cheap to own with a $3,000 minimum investment and a 0.24% expense ratio.  In addition there are many other excellent index ETFs in this category that are solid low cost choices.

Why Pick an Actively Managed Fund? 

A bit over half of the money that I have invested on behalf of my clients is in some sort of index product, across both mutual funds and ETFs.

That said I still use a number of actively managed mutual funds as well.  What am I looking for in an active fund?

  • A long-term track record of excellence.  There are still a number of active fund managers who in my opinion add value.
  • A manager who excels at controlling their fund’s downside risk when the markets drop.
  • Superior management in an investment style that is not well-represented by index products.

As we have seen especially over the market cycle of the past decade, it is increasingly difficult for actively managed mutual funds to add value to investors over and above what inexpensive index funds deliver.   This is especially true with equity funds.  If your financial advisor suggests a portfolio of pricey actively managed mutual funds ask why (especially if these funds are proprietary products of their employer).  What added value do these funds provide over less expensive index alternatives?  If you advisor is paid all or in part via commissions I’ll bet his/her compensation is part of the answer.

Please feel free to contact me with your investing and financial planning questions.

For you do-it-yourselfers, check out Morningstar.com to analyze your investments and to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

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Bond Funds Safe Haven or Risky Asset? – An Update

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The Frankfurt Bond Market

In September of 2009 I wrote Bond Funds Safe Haven or Risky Asset thinking that interest rates were headed up in the near future.  I wrote an update of this post in January of 2010 under the same premise.  This illustrates why I refrain from predicting anything.  As most of you are probably aware the Federal Reserve has continued its efforts to keep interest rates low.  At some point, however, rates are likely to rise (not a prediction).  Here are some of the factors to keep in mind if you own or are considering investing in a bond mutual fund or ETF.

Why are you investing in bonds?  Like any holding in your portfolio, you should have a reason to invest in bonds, whether via a fund or individual bonds.  Among the reasons to consider are diversification from stocks, yield, and the opportunity for growth via total return (price appreciation and income).

Using three Vanguard index funds as an example, the Vanguard Total Bond Market Index has a correlation of 0.05 to the Vanguard Total International Stock Index fund and -0.05 to the Vanguard Total Stock Market Index fund.  In both cases this means that the returns of the bond fund are virtually unrelated to those of the two stock funds over the past ten years.  A correlation of 1 between two funds would mean that they move in almost complete lockstep, a correlation of 0 means there is virtually no relationship.

Yields on investment grade bonds are down along with interest rates, many fixed income investors have moved into areas like high yield bonds (junk) or dividend paying stocks in search of current income.  Both moves will impact the risk profile of your portfolio.

Unlike individual bonds, bond funds do not mature.  If you buy a bond that matures in July of 2022, upon maturity you will receive the value of the bond (generally $1,000) and any interest payments that are made between now July and 2022.  Neither of these payments will be impacted by the direction of interest rates.  That said the price you would receive for the bond should you decide to sell it prior to maturity could fluctuate between now and 2022.  Other factors such as call provisions or a default by the bond issuer could also come into play.

On the other hand, bond fund portfolios are perpetual in nature.  Some of the bonds in the portfolio will mature, others will be sold by the manager for various reasons, and others will be added to the portfolio.  This fluidity makes bond funds continually sensitive to interest rate fluctuations.  The return on any bond fund will be a combination of interest payments received and the gains and losses of the underlying bonds in the portfolio.

Index funds track their index.  Rightly so, many advisors and financial journalists tout the benefits of investing in low cost index funds and ETFs.  For example, the Vanguard Total Bond Market Index fund ranked in the 31st percentile (top 31%) of its peer group of funds for the trailing 12 months; the 79th percentile for the trailing 3 years; the 44th percentile for the trailing 5 years; the 41st percentile for the trailing 10 years; and the 30th percentile for the trailing 15 years ended June 30.  As you can see this passively managed fund has beaten the majority of funds in the same Morningstar Intermediate Term Bond category over most trailing periods of time.

This cuts both ways.  In 2008 the fund ranked in the 10th percentile of its category due to its benchmark index having a significant allocation to Treasuries.  In 2009 the fund ranked in the 90th percentile and in 2010 in the 73rd percentile as corporates and other riskier bonds recovered from the flight to quality of 2008.

The point is that bond index funds may be constrained when interest rates rise; whereas an active manager might have more leeway within the fund’s investment policy to make trades to mitigate the impact of rising interest rates.

The future 

  • Total return of a bond fund is a combination of the price changes of the underlying holdings, gains or losses when those holding are sold, and the interest received from the individual holdings.
  • Bond prices are impacted by a number of factors:
    • The direction of interest rates.
    • Inflation, rising inflation is the enemy of most bond holders in that the interest rate payments they receive are fixed and lose purchasing power during periods of inflation.
    • The perceived ability of the issuer to make good on their promise to make periodic interest payments and to redeem the bond at maturity.
    • The time to maturity of the underlying bonds in the fund.  The longer the time to maturity, the more sensitive the bonds will be changes in the interest rate.
  • In the case of funds that hold foreign bonds, the relative value of the currency of the issuing country can impact the value of the fund if the fund does not hedge the various foreign currencies represented in the fund versus the dollar.
  • It is important to review any bond funds that you hold or are thinking of buying to try to get a feel as to the potential impact of rising interest rates on your fund.
  • A quick way to gauge the impact is to look at the fund’s duration.  This number can be found via Morningstar and certainly in other places.
    • For example, the Vanguard Total Bond Market Index fund has an effective duration of 5.11 years.  This means that the fund’s value would be expected to drop 5.11% should interest rates rise by 1%.
    • Of course the fund would still collect the interest paid on the bonds held in the fund.  Morningstar lists the fund’s current yield as 2.83%
    • The Vanguard Long-Term Bond Index fund’s duration is 14.19, indicating a significant drop in value should interest rates rise. 

Going forward it is imperative that you understand both the benefits provided by your bond fund investments and the risks inherent in the fund going forward.  The next ten years might look very different for fixed income investors than the last ten years.

Do you have questions about your bond funds or your overall portfolio?  Please feel free to contact me.

Should you Micromanage Your Mutual Fund Manager?

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I routinely receive a number of press requests via email during the course of the week.  I delete the vast majority of them because I either do not feel qualified to comment or I’m just not interested in being quoted.  However I did receive one today to which I did send a few thoughts to the reporter seeking input.

My Investments from the last year or so

He was seeking comments on:

“….financial planners who are surprised or have an opinion on some of the mutual funds that decided to buy Facebook stock in its first two weeks of trading. The monthly portfolio holdings for some fund families have been released in the last couple weeks.

Is it expected for some core mutual fund holdings (including those in 401ks) to participate in a volatile IPO like Facebook? Should Value or Dividend funds (have) picked up the stock, as a few did? Some funds have as much as a 5% to 7% allocation to the stock, is that worrisome?

Some of the funds that bought the stock between May 18 and May 31 include: …” 

My email response to this reporter was:

In the case of actively managed mutual funds such as the ones mentioned in the press request below, for better or worse you are buying into the judgment and skill of the manager or management team.  I would tend to evaluate the fund’s performance over time, their expenses, risk, adherence to a style, and other factors.  I wouldn’t necessarily look at their having bought Facebook during the IPO phase or any other singular holding.  Managers make some good bets and some that aren’t so good.  At this juncture it is a bit early to judge these purchases; however my focus would again be in the aggregate.  Have they made far more good bets vs. poor ones? 

The point of my response was that if one purchases an actively managed mutual fund (or separate account, annuity sub-account, closed-end fund, ETF, etc.) they are buying that manager’s skill and their ability to achieve some expected result.

There is a whole other debate about whether an investor should stick with lower cost index funds and ETFs vs. actively managed funds and that is not the point of this article.  For the record I am a fan of both, I use a high percentage of index products in my client portfolios but I also use a fair number of active funds as well.  As an advisor I have one advantage that many individual investors may not have in that I have access to institutional and other lower cost share classes for a number of the funds that I use both active and index.

In my opinion if you are looking at an actively managed fund you should evaluate the “whole picture.”  Typically when evaluating a fund, the starting points of my analysis include:

  • Track record relative to its peers.  It’s useless to compare a mid cap growth manager to one who invests in foreign large value stocks.  Note a stellar track record may not indicate success going forward so it is incumbent upon you to look further and understand what is behind that track record.  For example, how did this fund do on a relative basis in both up and down markets?
  • Expenses, how does the fund compare to its peers?
  • Alpha and Sharpe ratio.  These are measurements of the fund’s risk-adjusted return and to me are indicators of the value (or lack thereof) added by the manager.
  • Management tenure.  It is not uncommon for a successful fund manager to move on to greener pastures, especially if wooed by a competitor.  If the manager(s) who compiled the fund’s great track record are gone this is a big red flag, though not always a deal killer.  A number of years ago the long-time manager of a foreign fund that I like left.  Two of her underlings took over and frankly I think they have done an even better job.  Investing is about people, but it’s also about process.
  • Gain or loss of assets.  This is huge, especially if the fund invests in small or mid cap stocks.  Many funds have compiled a great track record with a low asset base.  One of the truisms of investing is that money chases performance.  Once a fund does well, new money can often poor in.  It can be tough for the manager to find enough good ideas in which to invest this new money.  Case in point is Fidelity Magellan.  This fund was managed by the legendary Peter Lynch and posted some fantastic numbers.  Money poured in, Lynch left, and the fund has been decidedly mediocre for a number of years.

These items are a starting point when researching an actively managed fund.  Overall my job is to develop portfolios for my individual and institutional (retirement plans, endowments, and foundations) clients that fit their needs.  Mutual funds and ETFs are the tools that I use.  I rely on the managers of these funds and ETFs and I judge them on their overall performance, not on any one individual holding or transaction.

If you need help evaluating your investments or with your financial planning  please feel free to contact me to discuss your situation.

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Vanguard and the Power of Twitter

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Two upfront disclaimers:

1.      Nothing in this post or on this blog should be construed as financial advice or a recommendation to take any action of any kind.  Financial decisions should be made only after a careful review of your personal situation and in consultation with your tax and financial advisor.
2.      I have a great deal of respect and admiration for the Vanguard organization.  Across my base of individual and institutional clients I use a number of Vanguard mutual funds and ETFs.
That said Vanguard recently made a decision to lower the investment minimums on its Admiral Share class of funds for investors in these funds who hold their shares at Vanguard.  The Admiral shares offer an even lower expense ratio than Vanguard’s Investor Share class which already has very low expenses.  This is a great gesture on Vanguard’s part because they are essentially earning less by doing this.  Other than the expense ratios, the fund portfolios are the same across all Vanguard share classes.
However, Vanguard did not initially extend this opportunity to Vanguard fund shareholders at other custodians such as Schwab or Fidelity.  Though this did not impact a large number of my clients, I viewed this as unfair to clients of many financial advisors.  Like many advisors, I use Schwab as my primary custodian for most of my individual clients and one of my larger retirement plan clients.  There we hold mutual funds and ETFs from a variety of fund companies, including Vanguard. 
The idea of Vanguard treating the clients of financial advisors holding their funds elsewhere differently (and worse) than shareholders who dealt directly with Vanguard really bothered me.  This seemed very “un-Vanguard-like.”  Most of my institutional clients are already in lower cost share classes; additionally I have tended to use Vanguard’s ETFs for most of my individual clients which carry a very low expense ratio that is generally comparable to Vanguard’s lowest expense mutual fund share class.
None-the-less I sent several Twitter messages to Vanguard saying in effect that it was wrong to treat our clients as second class shareholders and also asking them why they were anti-advisor.  Evidently so did a number of my fellow advisors and consultants because a short time later I received an email saying that a similar opportunity would be made available to advisor clients at other custodians.  The social media activity was mentioned to me in a conversation with a Vanguard rep.
The point is that Twitter and social media can be a powerful communications tool for financial advisors.  In this case it proved to be an excellent vehicle for us to pressure Vanguard to do the right thing for our clients.  Many mutual fund companies are using social media as a vehicle to engage advisors and shareholders.  That’s great, the more we know the better able we are to make intelligent investment choices for our clients.  The flip side is that the fund companies should expect to be called out when they do something as short-sighted as what Vanguard did recently. 
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