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Preview: - A better way of looking at mutual funds.


Favorite Funds Update - Small Cap Growth Category

Wed, 12 Oct 2011 17:12:56 +0000

Mutual funds that invest in smaller cap stocks are a frustrating breed. Just when they start looking good, they attract loads of investor money and get too big to keep it going. 

When we first picked Janus Triton (JATTX) in May 2007, it had just under $300 million in assets. As a fund family, Janus had fallen far out of favor by then, having lorded over mostly larger cap growth funds that all owned the same nifty-fifty, high P/E growth stocks in the tech bubble, only to see most funds and assets under management fall hard in 2000-2003. 

By 2007, most fund investors were also favoring value and dividend-oriented funds (after getting burned in growth in 2000, probably in Janus funds, with a smattering of PBHG, Firsthand, and Van Wagoner funds thrown in for diversification…). This was not long before the banks collapsed and the so-called Great Recession began.

Fast forward to today, and growth stocks beat value stocks (remember banks were value stocks with high dividends). Most relevantly, Janus Triton has killed the typical fund in its fund category, the S&P 500, and small cap value. Of course, good performance doesn’t go unnoticed. Earlier this year, Triton tipped the scales at about $2 billion. Imagine trying to place that into fifty small cap stocks. Each holding would need $40 million – or 10% of the outstanding shares of a small cap $400 million dollar company. Keep in mind most funds don’t equally weight stocks. They own maybe 5% of fund assets in their top picks. That’s a $100 million dollar stake. Now the two managers running this fund own 85 holdings. The top pick is SBA Communications (SBAC), a nearly $5 billion dollar market cap stock prior to the 2011 stock slide. That’s a small cap fund pick?

At this point, you'd do better over the next three years in a small cap growth index (though not until now), and save on the higher active management fees (although Triton fund is not that expensive). Triton’s days in the top 1% of small cap growth funds, where  it has been in recent years, are likely over. Note that index funds tend to have slightly more downside during down markets than similar actively managed funds.

At $214 million in assets, our replacement, Nicholas Limited Edition Class N (NNLEX), is still small enough to pick good companies. The established company behind the fund has had a good record with their other similar funds. This fund also carries a bit less risk than Triton, which  we recommend until smaller cap growth is better positioned to beat the market. Keep an eye on the MAXfunds category rating for small cap growth.

To view the complete list of small cap growth favorites, click here.

Favorite Funds Update - Small-Cap Value Category

Tue, 05 Apr 2011 18:24:53 +0000

Royce PA Mutual Fund (PENNX) is out, Homestead Funds Small Company (HSCSX) is in as our favorite open-end and top overall favorite in the small-cap value category.

We’ve been using and recommending Royce funds for most of the 2000s – the decade of small-cap. We’ve had great returns with our current small-cap value favorite PENNX and several other Royce funds that have appeared both in our model portfolios and as favorites. However, we’re making a broad call on Royce as a family similar to the one we made in 2000 on Janus: it’s time to move on.

Royce has too much money under management and is focusing too heavily on stocks we think are in for a lousy few years. In 2000 this over-allocation was Janus’ love of larger cap high P/E growth and tech stocks. In 2011 that is Royce and smaller-cap gold mining stocks. This fund and many Royce funds have too large a stake in gold mines. I’m sure the stock experts at Royce would beg to differ, but then so could Janus managers about our take on large cap growth stocks in 2000. 

To view the complete list of our favorite small-cap value funds, click here.

Revamped Our Favorite Funds List

Thu, 17 Dec 2009 20:11:10 +0000

Please check out our newly revamped and updated Our Favorite Funds section. In it you'll find a complete list of our single favorite fund in each of 24 fund categories, as well as our favorite exchange traded fund, low minimum, and no transaction fee options for each category.

Give it a look by clicking here, and if you have a minute let us know what you think.

Take That Rick Santelli

Tue, 10 Mar 2009 04:33:55 +0000

CNBC reporter Rick Santelli recently had his 15 minutes of fame when he went on a rant about having to pay for the mistakes of 'losers' through a recently announced government mortgage payment subsidy program. He then made the very big mistake of standing up the Daily Show with Jon Stewart. Payback was delivered in the form of a mini-documentary of bad CNBC advice and commentary spanning the Dow's slide from over 14,000 to under 7,000.

Surprisingly the Daily Show doesn't note that the parent company of CNBC, GE, has received government support in the form of over a hundred billion in taxpayer backing of GE debt, without which GE could have failed during the commercial paper panic of 2008.

As the Great Real Estate Bubble deflates, those without sin should cast the first stone.

Leverage - Some Funds Are Hurtin' For Certain Too

Thu, 29 Jan 2009 23:31:42 +0000

While Buffett warns against the use of leverage, Wall Street and the banking system decided that leveraging up into high return, low risk assets (like real estate...) was a great idea.

Mutual funds that use leverage - primarily closed end funds but also newfangled 130/30 funds, had a crummy 2008.

In recent years, more mutual funds have used borrowed money to juice returns and lure investors. Now, they are discovering the downside of leverage, and some are cutting back.

Early last year, Wall Street was heavily promoting several new types of funds that rely on borrowing money. These include so-called 130/30 funds that aim to amplify market returns by betting against some stocks, as well as "leveraged index" funds, which promise to double the return of a market index or double its inverse.

At the same time, closed-end funds, many of which have used leverage for decades, were growing rapidly until 2007.

While borrowing money can improve returns in good times, it also widens losses in bad times, and that is what happened in 2008. Some of these funds ended the year with even greater losses than the market as a whole. For instance, of the 15 mutual funds that apply the 130/30 strategy for U.S. stocks, only a third beat the Standard & Poor's 500-stock index in 2008, according to Morningstar Inc. Some of the laggards fell behind the index by five percentage points.

We remain amused by the mutual fund industrial complex's ability to generate new ideas to sell shortly before the market takes a long trip south.


Eighth Annual Mutual Fund Turkey Awards

Fri, 28 Nov 2008 07:07:13 +0000


It's Not an Honor Just to be Nominated.

Not exactly a rare breed even in the best of times, the Fund Turkey multiplies exponentially when the market turns south.

A bear market is a high-powered headlight bar across the top of your fund research pickup truck, shining a spotlight on bull market excess. Tis the season to hunt Fund Turkeys (squawking all the way about investing abroad or in commodities), and thin this breed.

So without further ado, it's high time for our 8th annual Fund Turkey Awards!

The "Audacity of Hope" Award
Winner: Bear Stearns

At the top of the list of suckers for the real estate bubble is was Bear Stearns, the century-old Wall Street investment bank that collapsed well before the other leveraged "Masters of the Universe” suffered similar fates. What started innocuously enough with leveraged mortgage debt hedge funds didn’t end until the entire firm lay in ruins.

But failure's no reason to give up! You have to give Bear props for launching the first actively managed ETF, Bear Stearns Current Yield ETF (YYY). So what did this innovative new fund invest in? Mortgage securities. Naturally.

Bear's final hurrah didn’t last long. In September , the fund's Board of Trustees unanimously approved its liquidation "in the best interests of the Fund and its shareholders.”

read more

Stocks Get Less Risky

Tue, 25 Nov 2008 03:27:09 +0000

A blog at the Wall Street Journal notes that investors tend to think of risk as something that falls as prices rise:

If the history of the financial markets and the psychology of investing have anything to teach us, it is that present emotion and future returns are inversely correlated. Today’s feelings of pain and fear are the building blocks for tomorrow’s wealth. Eras of good feeling are terrible times to buy stocks.

The corollary is that perceived risk and actual risk tend to be polar opposites. When did your house feel like the safest investment? Just as its appraised value hit an all-time high, of course. The Dow felt safe when it was at 14000, and it feels risky as hell now that it is clinging to the edge of 8000 with its fingernails. That’s perceived risk: low when prices go up, and high when prices go down."

Investors often could do better doing the opposite of what they think will happen.


Ask MAX: Why Is My Gold Fund Down?

Fri, 31 Oct 2008 21:42:39 +0000

Stacey Asks:

Why did Evergreen Precious Metals A (EKWAX) tank so badly? Is there a bright side?"

After Monday’s drop, Evergreen Precious Metals had fallen about 68% since its peak in March 2008. That's more than the S&P 500, Dow, Nasdaq, MSCI EAFE Index, junk bond market, emerging market bond market, classic car market, housing market, and subprime loan market. Okay, maybe not more than subprime, but you get the point.

What's most surprising, and probably the root of your question, is that the fund has fallen far further than gold itself, that shiny metal that comprises the core of the precious metals funds. If you compare this fund to the Gold ETF (see streetTRACKS Gold Trust ETF [GLD]), you won't be impressed with your fund's performance. But if you compare it to other gold funds, you might feel a bit better. Popular gold funds like Vanguard Precious Metals And Mining (VGPMX), Fidelity Select Gold (FSAGX), Oppenheimer Gold & Special Miners (OPGSX), Franklin Gold And Precious Metals (FKRCX), and USAA Mutual Funds Precious Metals (USAGX) are in equally rough (or worse) shape.

As it turns out, gold-related companies are no more magical than any other commodity-related companies you'd find in a natural resource fund. We've just witnessed one of the fastest drops in broad commodity prices in history. The fact that the nosedive followed the launch of dozens of commodity funds inspired by investor fascination with 'hard assets' should come as no surprise.

read more

Death Spiral In Risky Stocks Takes Spotlight From....Death Spiral In Safe Bonds

Sat, 11 Oct 2008 19:44:29 +0000

With the Dow falling a few hundred points every single stinking day, you may not have noticed the carnage in almost all bond categories other than U.S. Government bonds. The nightly news doesn't show bond prices. Our guess is that this is what is really keeping some investors up at night.

Sure, the 40%+ drop from the peak in major market indexes is stunning, as is the performance of so many 'value' funds that seem to be falling faster than 'growth' funds did in the last bear market. Case in point Vanguard Capital Value Fund (VCVLX) is now down over 50% since the begining of 2008 after a manager change led to increased stakes in Russian stocks - the stock market than now routinely is shut down from panic selling - and energy picks, snapped up at pre-commodity bubble crash prices of course. Wellington Management Company was founded in 1928 so would think they would have learned their lesson about crashes...

But stocks are stocks, and investors almost have to expect 20%, 30%, even 40% drops every few decades - given the long-term upside and potential for one-year double-digit gains, it would be foolish to expect only big upside and no downside.

Bonds, on the other hand, are for adding diversification, stability, and regular income. You'll never get rich, but you wont lose much either. That is, until the great debt panic of 2008, which in its most recent form has hit safe debt categories like commercial paper (short term corporate borrowing), investment grade bonds, convertible bonds, and perhaps most stunningly - municipal bonds.

Municipal bonds are bonds issued by state and local governments. Some bonds not backed by the full taxing authority of the state are higher risk, but between the power to tax and the insurance that is frequently behind muni bonds, actually losing money by default is a fairly rare event. Muni bonds are typically sold to wealthier risk-averse investors who want steady, tax exempt income.

This is why the 10%-40% hits in muni bond funds in recent weeks is so startling. Over the last thirty days or so a conservative unleveaged fund like Vanguard Insured Long-Term Tax-Exempt Fund Investor Shares (VILPX), which "Invests primarily in high-quality municipal securities." and "Holds bonds covered by insurance guaranteeing the timely payment of principal and interest." is down 10%. Take a gander at more aggressive leveraged closed end muni bond funds - popular with brokers who sell them at IPO - and you'll find dozens in which the underlying holdings of the fund are down 20%-30% - which when you add in the widening discount to fund price means investors are seeing hits of around 50%. Recently some of these funds are moving up and down (mostly down) 10%-20% per day, much like leveraged junk bond funds have done of late. California muni bonds are acting like emerging market bonds.

It's bad enough when Internet fund drops like a rock but when 'safe' assets like your house and muni bonds start to act like stock,well you can see why investors have become a little unnerved of late.

Your Stocks Are Down More Than The S&P 500. Admit It.

Thu, 09 Oct 2008 17:03:55 +0000

The stock market is having its worst stretch since the 1930s, but as bad as it is, foreign markets across the board are faring much worse.

Those who have viewed MAXfunds' fund data pages or Our Favorite Funds lists from time to time over the last year may have wondered why most emerging market funds have negative forecasts for future performance and lousy metrics (or why we sold our emerging market fund picks from our Powerfund Portfolios in recent years).

Long time readers will remember we had similar negative ratings on most tech funds in 2000. The rationale then and today was the same.

Our fund metrics are designed to help fund investors avoid funds that are likely to fall - the very funds attracting the most money after posting big returns. Most fund ratings and rankings only direct attention to the overvalued - they encourage performance chasing.

The reason we have used this anti-performance chasing methodology is to help you avoid the inevitable result of buying into popular funds and categories: below-market returns.

An article that appeared this week in the Wall Street Journal describes the carnage experienced by the throngs of fund investors who flocked into international markets in recent years. The only difference between this after-the-fact article and the ones published in 2002 is then it was tech and growth funds that were falling faster than the S&P 500 - the very funds that brought in the most money before the drop.

The average diversified foreign stock fund, which invests primarily in developed markets, is down 33% since the start of the year through Friday, versus a 25.5% decline for the average diversified U.S. stock fund, according to Morningstar Inc.

It's even worse in less-established foreign markets. The average emerging-markets stock fund, which includes funds dedicated to China, India and Latin America, is down 42.5% so far this year.

This is a sharp reversal from the heady gains of recent years. In 2007, the average emerging-market fund gained 40%, while the average foreign developed-market fund gained 12%.

On Monday, some European markets had their worst decline in 20 years. Britain's FTSE 100 index fell 8%, while France's benchmark CAC-40 index fell 9%, the largest one-day declines for both markets at least since 1987. Also on Monday, stock trading was halted repeatedly in Russia and in Brazil, where shares registered declines of 19% and 5.4%, respectively. Asian markets fell as much as 6%, but they have been hit worse than European markets since the start of the year.

Mutual-fund investors have piled into foreign markets in recent years partly to diversify their portfolios. Some $463 billion in net contributions poured into these funds from 2003 to 2007, boosting assets to $1.48 trillion at the end of 2007, according to Morningstar."

The more things change, the more they stay the same...