FundAlarm - Highlights & Commentary Archive

Highlights and Commentary

By Roy Weitz

(Originally posted March 1, 2006) [Archive Table of Contents]

We've been writing about mutual funds for almost ten years, and it occurred to us that there's one major fund topic we've never covered: How much does it cost to buy these things?.....We're not talking here about expense ratios.....Rather, we're asking how much you must pay in brokerage commissions to put a given number of no-load mutual fund shares in your account.....If you purchase your no-load shares directly from the sponsoring fund company, the answer to this question is easy: You won't pay a penny.....Likewise, if you purchase no-load funds through a broker's no-transaction fee (NTF) program, you won't incur any brokerage commissions (more about this later).....But for various reasons, mostly having to do with convenience, you may not wish to purchase no-load shares directly from a fund company.....For other reasons, mostly having to do with choice, you may wish to buy a fund that isn't on a broker's NTF list.....In the latter case, you should expect to pay a commission when you buy your fund shares, which brings us to the following table:

Broker name	Commission to buy a fund*	Commission to sell a fund*	Commission to exchange two funds*
Ameritrade ameritrade.com	$17.99	$17.99	$17.99
Brown & Co¹ brownco.com	$5.00	$5.00	$5.00
ETrade us.etrade.com*	$19.99	$19.99	$19.99+$19.99 ($39.98)
Fidelity Investments fidelity.com	$75.00	$0	$75.00
Firstrade firstrade.com	$0	$0	$0
Harrisdirect Gone (acquired by ETrade)*	NA	NA	NA
Muriel Siebert & Co. siebertnet.com	$35.00	$35.00	$35.00+$35.00 ($70.00)
Schwab schwab.com	Sliding fee schedule Minimum=$49.95 Example:$10,000=$56.00 Example:$25,000=$100.00 Example:$65,594 and up=$164.95	Sliding fee schedule Minimum=$49.95 Example:$10,000=$56.00 Example:$25,000=$100.00 Example:$65,594 and up=$164.95	Sliding fee schedule Minimum=$49.95 Example:$10,000=$56.00 Example:$25,000=$100.00 Example:$65,594 and up=$164.95
Scottrade scottrade.com	$17.00	$17.00	$17.00
TD Waterhouse² tdwaterhouse.com	Sliding fee schedule Minimum=$30.00 Example:$10,000=$30.00 Example:$25,001 and up=$75.00	Sliding fee schedule Minimum=$30.00 Example:$10,000=$30.00 Example:$25,001 and up=$75.00	Buy commission + sell commission, per fee schedule
Vanguard vanguard.com	$35.00	$35.00	$35.00

* Flat fee, unless otherwise noted. The amount indicated for the commission assumes an unassisted online transaction for a no-load fund,
not included in the broker's NTF (no-transaction fee) program. The data for this table was taken from the respective broker's Web site, and is current as of February 26, 2006. Thanks to "Green," who posted an abbreviated version of this information on the FundAlarm Discussion Board.
¹ Brown & Co. has been acquired by E*Trade ² TD Waterhouse has been acquired by Ameritrade

For the table above, we've attempted to list the major online brokers, as well as a couple of large fund companies that have brokerage subsidiaries.....Given the fierce competition in the brokerage industry, and how easy it is to comparison shop online, we were surprised at the tremendous range of commissions, all the way from free fund trades at Firstrade to a potential high of almost $165 per trade at Schwab.....As you might expect, however, this table doesn't tell the entire story.....For example, you might be willing to pass up a low-commission broker in exchange for a more costly broker with a larger selection of funds.....In fact, a broker's pricey commission schedule might be irrelevant if that broker also has a broad selection of no-transaction fee funds, since the NTF offerings may be all you ever need.....In the following table, we've repeated the commission information from above, and we've added information about each broker's overall fund menu as well as its NTF menu.....Note, too, the "redemption fee" column.....NTFs aren't entirely a free lunch: If you sell an NTF fund within a certain number of days (90 or 180, depending on the broker), you'll be required to pay the indicated short-term redemption fee (for example, at Brown & Co. -- shown in the table below as "$75/180" -- you'll be charged a short-term redemption fee of $75 if you don't hold an NTF fund for at least 180 days):

Broker name	Commission to Buy/sell/exchange	Total # funds available^a	# NTF funds^a	Redemption fee (amt/days)^a	Comments
Ameritrade	$17.99/$17.99/$17.99	11,000+	None	NA	Does not allow non-customers to view list of available funds, which seems to ensure that non-customers will stay that way. And, yes, you are reading that correctly: Ameritrade has zero NTF funds (i.e., all fund purchases incur a commission)
Brown & Co	$5/$5/$5	7,000+	800+	$75/180	Has been acquired by ETrade, and we're guessing that the days of $5 mutual fund trades are numbered*
E*Trade	$19.99/$19.99/$39.98	6,000+	1,000	$49.99/90 days	Only broker on our list to offer a rebate (50%) of 12b-1 fees
Fidelity Investments	$75/$0/$75	4,500+	1,100+	$75/180	All Fidelity funds available on an NTF basis
Firstrade	$0/$0/$0	9,000+	1,800	$19.95/180	Vanguard funds come up in Firstrade's online fund screener; we asked a phone rep about a couple of them and we were told they "weren't available," which may mean that no Vanguard funds are actually available
Muriel Siebert & Co.	$35/$35/$70	13,600+	1,400	$35/90	A surprise: Fidelity funds are available on an NTF basis
Schwab	Varies/varies/varies (per sliding fee schedule)	5,800^b	4,400^b	$74.95/90	Hard to believe this is the firm that pioneered discount brokerage for individual investors -- the fund you want better be NTF, or the commissions will kill you
Scottrade	$17/$17/$17	8,939^b	850	$17/180^c	Roy picked this broker for his market-timing account, because ProFunds are exempt from short-term redemption fee
TD Waterhouse	Varies/varies/varies (per sliding fee schedule)	10,000+	1,300+	Varies/90^c	Ameritrade is acquiring TD Waterhouse, and we would expect the combined entity (TD Ameritrade) to go with a flat rate rather than a sliding commission schedule. It's not clear if TD Ameritrade will offer NTF funds, but we doubt it.
Vanguard	$35/$35/$35	2,600	900+	1%/180	As far as we know, the only place to get all Vanguard funds on an NTF basis

^aData obtained from respective broker's Web site, and current as of February 26, 2006, unless otherwise noted; ^b Per Barron's survey of online brokers, March 6, 2006; ^cFee applies to redemptions of either all funds or all no-load funds, not just NTF funds; certain fund families designed for active trading (Rydex,ProFunds, Potomac) are or may be exempted

Based on this table, Firstrade seems like a good deal, Siebert, Fidelity, and E*Trade are strong, and Schwab's commission rates don't seem quite as exorbitant, given Schwab's extensive NTF program......What these tables don't capture, at any broker, are intangibles such as service and continuity, account features such as bill paying and cash management, client-friendly account statements, and Web site tools such as portfolio analyzers......In the end, these things may be more important than all of the numbers combined, but these things are almost impossible to list or quantify.

FundAlarm reader "JT" forwarded the following photo, which was "sent by someone at Janus, supposedly a church here in Denver":

We desperately wanted this photo to be genuine but, alas, it isn't.....It was produced at a fun little Web site, called churchsigngenerator.com.....On the other hand, we've heard that the following sign really does exist

Coming up with the value of a stock portfolio seems like a pretty easy task: On any given day, you multiply the number of shares you own by the closing price per share, you repeat that calculation for every stock in your portfolio, and -- voilà -- you have the value of your entire portfolio.....Except that the majority of mutual fund companies appear to use a different procedure for valuing their stock portfolios: They multiply today's closing price per share by the number of shares that were held yesterday, to come up with today's portfolio value.....(Example: A mutual fund owned 100 shares of ABC Stock, which closed at $6 per share yesterday. Before the start of trading today, the fund sells all of its ABC stock at $6 per share, and ABC closes today at $7 per share. For purposes of valuing today's portfolio holdings, the fund will show that it held 100 shares of ABC stock, at $7 per share, for a total ABC value of $700. In reality, the fund should report zero shares of ABC, and $600 of cash).....It's difficult to measure the overall economic effect of this bizarre pricing methodology, which is actually allowed by the SEC, and is probably a holdover from pre-computer days (it's called "trade-date plus one" or "T+1" accounting).....At a minimum, however, it appears that about $100 million is unwittingly being transferred among fund shareholders due solely to net asset values that don't reflect economic reality.....Mutual fund companies would undoubtedly incur some costs if they were required to scrap their T+1 accounting systems, but the alternative is allowing fund companies to continue producing daily net asset values that are wrong, and that could be presented properly if the fund companies simply tried.....Oh, and did we mention this: A fund insider, who knows which securities were bought and sold on any given day, could easily exploit the T+1 accounting system to make trades with a guaranteed profit.....Even an outsider, who knows of major fund transactions, might be able to game the T+1 system and make consistently profitable trades.....Will the SEC sit on its hands, and allow this scandal-in-the making -- or, for all we know, this full-blown scandal -- to continue?
"Uh-Oh. Something Else Is Stale at Mutual Funds," Mark Hulbert, The New York Times, February 12, 2006; the academic study referenced in Hulbert's article can be found at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=881615#PaperDownload

It doesn't happen often but, when it does, it looks like FundAlarm has made a mistake: One class of a fund appears on our Honor Roll (i.e., "NO-ALARM" list) while another class of the same fund appears on our 3-ALARM list.....How can the same fund be both a winner and a loser in the same month?.....To answer that question, let's take a look at the data tables (from last month) for the "A" and "B" classes of Sentinel Balanced:

The returns of the "A" and "B" funds aren't separated by much, and some readers have already figured out why they are separated at all: The "B" class fund has a higher expense ratio than the "A" class fund, and it's those higher expenses that explain the entire difference in performance.....(Currently, Sentinel quotes a total expense ratio of 1.17% and 1.99% for the "A" and "B" class, respectively, and the 12b-1 fee accounts for almost all of the difference between the two: The "A" class charges a 12b-1 fee of 0.25%, while the "B" class charges 1.00%).....In dollar terms, the difference between the two funds is more dramatic: From January 1, 2001 through December 31, 2005 (five-years), a $10,000 investment in the "A" fund would have been worth $479 more than the same investment in the "B" fund ($12,143 versus $11,664).....Fund investors often dismiss talk about expense ratios as "worrying about pennies"......In this case, those pennies mean the difference between a top-rated and bottom-rated fund.....And in every case, over time, those pennies add up to real money.

Millions of pixels, and many gallons of ink, have been devoted to the recent Merrill Lynch/BlackRock deal, so our contribution to this word fest will be brief: If you're an investor in a Merrill Lynch mutual fund, this deal portends almost nothing positive, and more than likely something negative.....The Merrill Lynch funds will be owned by the "new" BlackRock and, on the plus side, its possible that new BlackRock will be able to create a more successful money-management culture than Merrill Lynch ever could.....On the minus side, this deal is largely about vacuuming up more investor dollars for the Merrill Lynch funds -- in other words, developing better "distribution" channels, which (if the effort is successful) usually leads to bloated funds and a marketing-driven organization.....The new BlackRock (like the old BlackRock), is a public company, and its stock has performed extraordinarily well since its IPO in 1999 (about 45% per year compounded return).....We have a feeling that owners of BlackRock stock will continue to do better than investors in Merrill Lynch funds, because that's what this deal ultimately is about.

When William Foulk Jr. went from being run-of-the-mill trustee at Alliance Bernstein to chairman of the independent trustees, he got a raise of $216,600 (from $248,650 a year, to $465,250)*.....If we assume, generously, that Mr. Foulk will spend an additional 10 hours a week on his new "job," that works out to an additional $417 an hour.....Here's a question for owners of AllianceBernstein funds: What is the likelihood that Mr. Foulk will provide an additional $417 of value during the entire year, let alone for each hour that he clocks?
* "Seven Surprising Insights About Funds You May Own," Karen Dolan, morningstar.com, February 16, 2006

The $128-billion Growth Fund of "America" recently held 18.5% of its assets in non-U.S. stocks.....In other words, the foreign part of this "American" fund, by itself, would be the fifth-largest foreign fund in the U.S., behind three other offerings from American funds (EuroPacific Growth, Capital World Growth and Income, and New Perspective), and one fund from Fidelity (Diversified International).

Roy's Excellent Market-Timing Adventure:
Month Five: I went down, down, down...

On January 29, the Intelli-Timer system issued its only signal for the month, and I dutifully exchanged my short bet on the market (ProFunds Short OTC Inv, or SOPIX) for a long bet (ProFunds OTC Inv, or OTPIX).....The bet did not work out, and my account lost a hefty 3.57% during February:

Month	Date of signal (1)	Type of signal	Fund bought/held (2)	Acct value (beginning)	Acct value (ending) (3), (4)	Change in acct value for month	Change in acct value since inception
October, 2005	10/16	Long	OTPIX	$5,000.00	$5,080.09	+1.60%	+1.60%
November, 2005	No new signal	Long still in effect	OTPIX	$5,080.09	$5,484.89	+7.97%	+9.70%
December, 2005	11/29	Short	SOPIX	$5,484.89	$5,381.32	-1.89%	+7.63%
January, 2006	No new signal	Short still in effect	SOPIX	$5,381.32	$5,378.51	-0.05%	+7.57%
February, 2006	1/29	Long	OTPIX	$5,378.51	$5,186.30	-3.57%	+3.73%
Notes: (1) Signal was executed (i.e., fund bought) on the next business day. (2) OTPIX=ProFunds OTC Inv.; SOPIX=ProFunds Short OTC Inv. (3) Cut-off for valuation is 26th day of the respective month. (4) Account value includes value of fund shares only. Cash in the account, as well as interest earned on the cash, is ignored. Brokerage commissions are paid out of this free cash, and commissions are not included in return calculations. Dividends are reinvested.

Intelli-Timer's weekly e-mail explanations were not enlightening: On February 3, after a losing week for OTPIX (down 2.72%), I was reminded that Intelli-Timer remains a "mid-term system," and "each trade has to be given enough time to develop"....On February 10, after a week that went essentially nowhere (down 0.06%), I was assured that an important "bullish reversal" had occurred "intraday today," and the anticipated bullish move had begun (bulls are large animals, but this one had apparently slipped right by me).....On February 17, after a slightly positive week (up 0.69%), Intelli-Timer anticipated that the "uptrend" would continue.....On February 24, after another slightly positive week (up 0.06%), Intelli-Timer was anticipating a "bullish breakout" from a tight trading range.

Meanwhile, each of the usual FundAlarm benchmarks posted positive returns for February, and the performance of my market-timing account (since inception) has now fallen to the bottom of the pack:

	Current month (1/27 thru 2/26)	Since inception (10/17/05)
Vanguard Small Cap Index (NAESX)	1.57%	14.62%
Schwab International Index Inv (SWINX)	0.80%	10.53%
Dreyfus Mid Cap Index (PESPX)	1.27%	8.91%
Vanguard 500 Index (VFINX)	1.44%	8.53%
Vanguard Balanced Index (VBINX)	0.89%	5.78%
Roy's market-timing account	-3.57%	3.73%

Sorted by return "Since inception"; benchmark returns assume that dividends are reinvested

We're only about four months into this year-long experiment, but my account is already in a deep hole relative to these benchmarks.....With one good timing call, the Vanguard 500 Index fund could be in reach, but that isn't saying much, since the Vanguard 500 Index fund is always in reach just by opening a mutual fund account.....We shall see what happens.

To be continued...

The following is an e-mail scam, which was bouncing around cyberspace during the month of February:

Source: Sophos.com
As for the e-mail below, we're not quite sure what to make of it:

An SEC filing for Columbia Asset Allocation lists 25 portfolio managers, and not a single manager has so much as a penny invested in the fund.....If anyone knows of a more dramatic vote of no-confidence by a fund's managers, please tell us.....We'd also like to hear from you if you invest in this fund, especially if you can tell us why.

In Charles Dickens' novel Bleak House, the philanthropic Mrs. Jellyby is so busy performing good works that she neglects her duties at home.....Something similar, perhaps, was going on at Pax World Balanced: While the fund was busy making ethically-correct investments, the directors (and other folks) who are supposed to oversee the fund failed to notice that Pax World Balanced had "inadvertently" sold more shares to investors than were legally authorized in the fund's Certificate of Incorporation.....By the time you read this, the problem should be resolved, thanks to the magic of an emergency shareholder meeting.

Could it get any more cynical than this? (Sure it could, but play along for a minute): Ameriprise recently merged RiverSource Stock, a 61-year old fund with $1.8 billion in assets, into RiverSource Disciplined Equity, a $186 million fund that doesn't yet have a three-year track record.....Can you guess which of the two funds was the stunning loser?

Lance Armstrong is an immensely admirable person and he should make a great celebrity spokesperson for American Century funds, which signed Armstrong to that role in early February.....But perhaps American Century is trying a bit too hard to make the relationship work.....The firm has started running ads suggesting that Armstrong-like "focus," "discipline" and "determination" are needed to invest in mutual funds, which is exactly the wrong message to send to fund investors.....Let's face it: If mutual fund investing required even one-tenth of Armstrong's focus, discipline, or determination, there would only be about a dozen mutual fund investors in the entire country and we'd never hear about them, because they wouldn't have time to leave their computers.....The truth is, mutual fund investing is (or should be) relatively easy, and American Century does a disservice to itself and its investors by forcing this hyped-up Armstrong connection.

Maybe American Century gets the point after all: To make the most of new spokesman Lance Armstrong (above), American Century plans to roll out a line of LIVESTRONG Portfolios.....These funds will be simple, no-brainer, target-date portfolios -- focus, discipline, and determination definitely not required.

Can a line of Oprah funds be far behind?.....Poster "x," from the FundAlarm Discussion Board, thinks it's a possibility, and we agree with him......Oprah will, of course, need to exercise somewhat greater due diligence with her investment managers than she does with her book club authors.....Life stories can be made up, but fund holdings need to be real.