| Highlights and Commentary |
| By Roy Weitz |
 From bottomless pit |  | to |  blue skies
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| Benchmark | NAV on Feb. 26 | 5-day decline | Feb. 26 NAV surpassed on: |
|---|---|---|---|
| Dreyfus Mid Cap Index (PESPX) | 31.45 | 6.3% | April 10 (31.53) |
| Schwab International Index (SWINX) | 22.61 | 7.3% | April 3 (22.63) |
| Vanguard Balanced Index (VBINX) | 21.73 | 3.1% | April 10 (21.76) |
| Vanguard Small Cap Index (NAESX) | 34.47 | 7.1% | April 13 (34.71) |
You may not think that you've been enjoying a "tax holiday" over the past four years but, at least in the mutual fund world, you have been.....Now, the party is largely over: Losses that funds accumulated (and carried over) from the sale of stock earlier this decade have mostly been absorbed by capital gains.....As things stand now, funds have few losses left to shelter future capital gains, which means those gains will be distributed to shareholders.....In fact, according to one recent study, the amount of tax you pay on your fund distributions, as a percentage of your fund investment, may be higher than your fund's expense ratios.....In effect, taxes are becoming a second, stealth expense ratio, and it's an expense that hasn't been on many radar screens for several years now*.....What can you do to avoid the coming tax storm?.....Time to dust off some well-worn advice: Utilize tax-deferred retirement accounts as much as possible, since taxable distributions aren't a concern.....Favor managers who have always managed tax-efficiently, even if tax efficiency isn't officially part of their fund's name or mission.....Investigate funds that are officially tax-managed, but remember that it never makes sense to buy into a poor track record just to save a few tax dollars.
Something else you can do about the mutual fund tax situation (above): Contact your Representative in Congress, and ask him or her to support HR 397.....This bill, again introduced by Rep Jim Saxton (R-NJ), would allow investors to defer capital gains taxes on reinvested mutual fund distributions.....Then, after expressing support for this bill, you might want to go bake some snow in your oven.....To give you an idea of this bill's prospects for passage, it didn't even warrant a press release on Saxton's Web site when it was introduced last January.....Here's the kind of event that did warrant a press release, a few days after Saxton introduced his mutual fund tax bill: Funds that invest in U.S. government securities should be some of the leanest fixed-income funds around: The universe of government securities is relatively small, and the default (credit) risk is even smaller, which means that there shouldn't be a lot of high-priced analysts on staff driving up the management fees.....But try telling that to the folks who run Van Kampen Government Securities.....That fund, with just over $1 billion in assets, charges a management fee of 54 basis points (0.54%).....A sibling fund, Van Kampen Corporate Bond, has a smaller asset base (about $640 million), a vastly larger investment universe, and major credit issues to research, yet Corporate Bond carries a lower management fee (40 basis points)......Van Kampen is not alone in this seemingly bizarre world of inverted management fees: Putnam, Legg Mason, and Columbia each have a government securities fund that charges the same or higher management fee than a diversified bond offering from the same family.....We could work on FundAlarm for a hundred years, and still not understand how or why this happens.....If you're a director of one of these government funds, and you don't mind interrupting your nap, please feel free to drop us a line and explain the rationale for this fee structure.
The Chairman of the Securities and Exchange Commission doesn't often accuse America's financial services industry of "skimming" assets from 401(k) retirement plans, but that's exactly what Christopher Cox did in a recent speech.....Cox also had a lot to say about 12b-1 fees, and his comments in that area were, if anything, even more out-of-character.....Hey, mutual fund industry, are you sitting down?
| Quoth Chairman Cox: Now, with nearly three decades of experience under our belts - and with today's uses of 12b-1 fees barely recognizable in the light of the rule's original purpose - it is high time for a thorough re-evaluation. The considerable distance that 12b-1 fees have strayed from the rule's paradigm isn't just occasion for the Commission to take a hard look at current practices. It's also a reason for independent directors to take a fresh look at the way this use of investors' funds has evolved. |
| For all of these reasons, the original premises of Rule 12b-1 seem highly suspect in today's world. If ever it was justified...that time surely has passed. Collecting an annual fee from mutual fund investors that is supposed to be used for marketing is no more consumer friendly than forcing cable TV subscribers to pay a special fee of $250 a year so the cable company can advertise HBO and Showtime to lure potential new customers. |
Big oops: The Claymore MACROshares Oil Up Tradeable Shares, an exchange-traded fund (and a mouthful) that is supposed to increase in value when oil prices increase, actually dropped 25 cents a share on a day when the price of oil went the other way (the "Up" share, and its "Down" counterpart, have also recently traded at around 10% above or below the underlying share value, something that is not supposed to happen).....To capitalize on the erratic behavior of its oil ETF, Claymore is reportedly planning a new Heads or Tails ETF, which will go up or down in value based on a coin flip.....Meanwhile, Victoria Bay's U.S. Oil Fund, a hot ETF, has recently declined 1500 basis points (15%) more than the index it's supposed to track.
If you're hoping to have a pot of money during retirement -- whether it's a small pot or a big one -- perhaps your biggest challenge is figuring out your "withdrawal rate" -- in other words, how much of that pot you can tap each year for retirement living expenses, and still have something left at the end......These days, thanks to some fairly sophisticated mathematical modeling techniques, the consensus seems to be that a withdrawal rate around 4% is optimal (this also assumes a well-diversified portfolio that includes equities)......The problem is, planning for a 4% retirement withdrawal rate means that you also need to plan for a fairly large pot: If you want to withdraw "X" amount during each year of retirement, your starting pot needs to be at least twenty-five times "X" (for example, if you need to withdraw $50,000 a year in living expenses, your pot must be at least $1,250,000).....But what if there was a financial advisor who said that you could plan for a 5% withdrawal rate, or a 6% rate, or even a 6.6% rate?......As your projected retirement withdrawal rate goes up, the size of your required retirement pot goes down, which means that you need to save less currently, which means you can spend more today on things that are fun.
Get the money while the getting is good: Ed Haldeman runs the Putnam fund family, and last year he was paid $22.5 million for his efforts.....Also last year, under Haldeman's leadership, Putnam lost another $15 billion of assets under management.
According to a recent survey by the Investment Company Institute (ICI), the mutual fund lobbying group and trade association, a mere 15% of fund investors care about "information about the fund board of directors," while an impressive 74% of fund investors care about a fund's "fees and expenses"*......The ICI uses this survey to argue that investors don't care whether the chairmen of the their funds are independent, but let's think about these two findings for a moment: If fund directors really did their job, and negotiated lower fund fees and expenses, then fund directors would be doing exactly what investors say they are most interested in......In other words, empowering fund directors is a terrific way to improve investor satisfaction with their funds, especially when it leads to lower fees.....If the ICI really cared about funds investors, the ICI would be doing everything possible to increase the power and autonomy of fund directors......So why does the ICI continue to lead the fight against more powerful fund boards?.....All together now: Follow the money.....Fund investors don't cut the checks for ICI membership dues, and they will always come in second.
The SEC has launched an investigation into this company's stock option practices.....The company is late with its first-quarter financial report, and could be delisted from Nasdaq.....In a little over a year, the company has lost its CEO, CFO, and chief accountant.....And, oh yes, the company's dual-share-class structure gives public shareholders absolutely zero voting rights (the one-percent of shares owned by corporate insiders has all the voting power)......The company in question is the Apollo Group Inc (APOL), which runs institutions of adult higher education (including the University of Phoenix), and it may be the worst-governed company included in the S&P 500 index*.....Index funds that track the S&P 500 have an excuse for owning Apollo Group stock, but actively-managed funds that hold this stock presumably have waded in with their eyes open.....Fidelity Growth & Income recently owned about $629 million worth of Apollo Group stock, which represents about 7.5% of total APOL shares outstanding, tops among all mutual funds (APOL shares represent about 2.1% of total assets at Fidelity Growth & Income).....Funds that are more heavily exposed to APOL, on a percentage basis, include Dreyfus Premier Select (4.7% of fund assets), Oak Value (4.5%), and Wasatch Heritage Growth (3.8%).