Lowest Cost No Load Mutual Funds

Lowest Cost No Load Mutual Funds And Etfs

This inexpensive ebook will help you in three main ways: It will improve your understanding of investing by summarizing what the research literature actually says does and does not work when investing. It conveniently provides a directory of the lowest cost, diversified no load mutual funds and Etfs available to US investors for direct investing. The book lists over 200 lowest cost, no load mutual funds in 30 global, international, and US stock, bond, real estate, and money market fund asset category tables. It also lists the over 200 lowest cost Etfs in 29 global, international, and US stock, bond, and real estate asset category tables. All these low cost funds are screened from the universe of available funds using objective factors supported by university research and discussed in this ebook. This ebook helps you to put your investing strategy on autopilot. Increase diversification, lower risks, and reduce investment costs, so that you can save a lot of money and time year after year after year. Read more here...

Lowest Cost No Load Mutual Funds And Etfs Overview


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Stock Selection Based on Mutual Fund Holdings

Academics have investigated whether individual investors should consider the weightings mutual fund managers place on the stocks held in their funds when making stock selection decisions (Weigand et al., 1973). Specifically, they compare the performance of the stocks that are most heavily weighted in mutual funds vs. the stocks that are most lightly weighted. These studies find that the heavily weighted stocks in mutual funds perform no better than, and sometimes significantly underperform, the most lightly weighted stocks. These results contradict the idea that individual investors can earn excess returns by following the implicit stock selection picks of mutual fund managers, particularly, short-term and momentum investors who trade large-cap stocks. These findings rather suggest that individual investors should be wary of investing in stocks that are the top holdings in general equity mutual funds.

The Why and Hout of Mutual Funds

I take you through the investing basics. If you don't understand the different types of investments that funds are made of, such as stocks and bonds, you won't fully understand funds. Part I defines and demystifies what mutual funds are and discusses what funds are good for and when you should consider alternatives. Before you're even ready to start investing in funds, your personal finances need to be in order, so in Part I, I give you some financial house-cleaning tips. You also discover the importance of fitting mutual funds to your financial goals. After your finances are shipshape and you've identified your goals, you are ready to find out how to pick great funds, how to avoid losers, where and how to purchase funds, and how to read all those pesky reports (such as prospectuses and annual reports) that fund companies stuff in your mailbox. Part I touches all these bases.

Contrasting Mutual Funds With Hedge Funds

One definition of a hedge fund is that it is a mutual fund that doesn't have to follow any rules. This overly simple distinction may help the uninitiated get a rough idea of what a hedge fund can do. Of course, there are lots of rules that a hedge fund must observe, and hedge funds are organized differently from mutual funds. The distinction loses meaning as mutual funds have been given broader investment rules over time. Recently, U.S. regulators have been pressing to tighten the regulation of hedge funds. Nevertheless, there are some consistent differences between mutual funds and hedge funds.

Mutual Funds An Investment

At their most basic, mutual funds are an investment. I know that, but please bear with me. I don't want to make the mistake that I see so many investment writers (and financial advisors) make starting with the more advanced stuff on the assumption that you know the basics. So often I hear from people reading about mutual funds and complaining that a writer starts throwing around terms such as small cap value stock fund and asset allocation without explaining them, and before you know it, you're lost in the weeds and frustrated. You have every right to be. If you already understand what stocks and bonds are, their risks and potential returns, terrific. You can skip this chapter. Most people, however, don't really understand the basics of investments, and that's one of the major reasons that people make investment mistakes in the first place. If you understand the specific types of securities that funds can invest in, you've mastered one of the important building blocks to understanding...

Characteristics of Wall Streets Best Mutual Fund Managers

Unlike most portfolio managers, the Winner's Circle mutual fund managers stick to their disciplines, and never stray. Franklin Templeton's Jeff Everett, a disciple of legendary investor Sir John Templeton, maintains Sir John's disciplines, and when new circumstances arise does not hesitate to talk through situations with his mentor. Using hundreds of metrics, AXA Rosenberg's quantitative models follow strict instructions, never deviating from Bill Ricks and team's investment approach. Interestingly, each manager thinks independently. They are never coerced by current sentiments or newspaper headlines. They are trained to think differently for most of them, when the crowds are heading in one direction, they are going the other way. I recall a conversation with David Dreman in mid-2002 where he seemed excited at the opportunity to buy Tyco in the low teens, after falling from around 60 a share. While the newspapers and market commentators were predicting the company would go belly-up,...

Costs Of Investing In Mutual Funds Fee Structure

An individual investor choosing a mutual fund should consider not only the fund's stated investment policy and past performance, but also its management fees and other expenses. Comparative data on virtually all important aspects of mutual funds are available in the annual reports prepared by Wiesenberger Investment Companies Services or in Morningstar's Mutual Fund Sourcebook, which can be found in many academic and public libraries. You should be aware of four general classes of fees. Operating expenses Operating expenses are the costs incurred by the mutual fund in operating the portfolio, including administrative expenses and advisory fees paid to the investment manager. These expenses, usually expressed as a percentage of total assets under management, may range from 0.2 to 2 . Shareholders do not receive an explicit bill for these operating expenses however, the expenses periodically are deducted from the assets of the fund. Shareholders pay for these expenses through the...

Taxation Of Mutual Fund Income

Investment returns of mutual funds are granted pass-through status under the U.S. tax code, meaning that taxes are paid only by the investor in the mutual fund, not by the fund itself. The income is treated as passed through to the investor as long as the fund meets several requirements, most notably that at least 90 of all income is distributed to shareholders. In addition, the fund must receive less than 30 of its gross income from the sale of securities held for less than three months, and the fund must satisfy some diversification criteria. Actually, the earnings pass-through requirements can be even more stringent than 90 , since to avoid a separate excise tax, a fund must distribute at least 98 of income in the calendar year that it is earned. The pass through of investment income has one important disadvantage for individual investors. If you manage your own portfolio, you decide when to realize capital gains and losses on any security therefore, you can time those realizations...

Mutual Fund Investment Performance A First Look

We noted earlier that one of the benefits of mutual funds for the individual investor is the ability to delegate management of the portfolio to investment professionals. The investor retains control over the broad features of the overall portfolio through the asset allocation decision Each individual chooses the percentages of the portfolio to invest in bond funds versus equity funds versus money market funds, and so forth, but can leave the specific security selection decisions within each investment class to the managers of each fund. Shareholders hope that these portfolio managers can achieve better investment performance than they could obtain on their own. What is the investment record of the mutual fund industry This seemingly straightforward question is deceptively difficult to answer because we need a standard against which to evaluate performance. For example, we clearly would not want to compare the investment performance of an equity fund to the rate of return available in...

Personalized Mini Mutual Fund

Instead of agonizing over which stock will outperform in a certain sector, you can use ETFs as an investment vehicle that has certain stocks in a basket as one unit, listed as a sector fund. This allows individual investors to invest in a group of stocks in a sector, rather than relying on a mutual fund to do it for them. Moreover, many mutual funds charge management fees and at times do not fully invest all an investor's cash in the market. Because ETFs trade like a stock, the price of which fluctuates daily, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund. By owning an ETF, you get the diversification of an index fund plus the ability to sell short, buy on margin, and purchase as little as one share. Another advantage of an ETF is that the expense ratios for most ETFs are lower than that of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you'd pay on any regular order. ETFs allow...

Face Off Mutual Funds Versus individual Securities

According to a recent slew of books, newsletters, and magazine articles, (stock) mutual funds are not the place to be. They're boring, conservative, and totally unsexy. An amateur who devotes a small amount of study to companies in an industry he or she knows something about can outperform 95 percent of the paid experts who manage mutual funds, plus have fun in doing it. - Peter Lynch, Beating the Street

The Positive Side of Hedge Fund Taxes versus Mutual Fund Taxes

Many mutual funds have unrealized gains hidden in their portfolios, so that when you take money out, or when one of your mutual funds sells those positions while you are still invested, massive amounts of realized gains (far beyond what you have personally gained in your account) may need to be reported on your taxes, leaving you with a potentially enormous tax burden. These types of unfair realized gains tax flow-throughs rarely, if ever, occur with hedge fund investing. Many investors from 2000 to 2002 lost huge sums of money in their mutual funds and also ended up with outrageous tax bills. But it can happen at other times as well. For instance, suppose you are invested in a mutual fund, and were even losing money in your account. If the fund then sells long-held stock positions that had made great profits for the fund before you invested, you would be held responsible for a percentage of the long- or short-term capital gains tax from the sale of the stock. In other words, you...

Managed Investment Alternatives to Mutual Funds

The unbelievably wide variety of mutual funds enables you to invest in everything from short-term money market securities to corporate bonds, U.S. and international stocks, precious metals companies, and even real estate. Although mutual funds can fill many investing needs as I discuss in Chapter 1 you may be interested in and benefit from directly investing in things such as real estate, your own business, and many other investments. Other types of privately managed investment accounts exist that have some things in common with mutual funds.

Figure 66 Mutual Fund Shareholder Accounting Example

How dramatic can this injustice between shareholders be To answer this question we need to look back to 1987- During the correction of 1987, stocks rose significantly during the summer and early fall, but then they hemorrhaged in the third week of October. Many mutual funds h ave October 31 as their fiscal year-end. Therefore, there were cases where ind ividual inves tors p urchased shares in equity mutual funds, saw their investment drop 20 percent or so in value, and then got hit with a sizable capital gains distribution. Fortunately, the market gradually rebounded, but many of those investors were forced to sell shares at unfavorable prices to cover the ir tax bill the following year.

Figure 67 Mutual Fund Example Profit vs Capital Gains Distributions

Each individual an annual deduction from capital gains distributions.11 Also, Congressman Paul Ryan has introduced legislation (H.R. 1989) that would require individuals to pay taxes on capital gains only when they s ell fun d shares. 12 Both proposals are intended to make things easier fo r mutual fund investors. However, what is often ignored is that these bills would only exacerbate the problem of portfolio managers ignoring the impact of taxes . Moreover, as we will discover in chapter 9, there are already free market solutions that have solved this issue. Unfortunately, tax-aware s olu tions do not vote and the shareholders who use them still represent a small portion of the market. If Congress really wants to pro-vid e inves tors with a meaningful change, it should change the accounting co nvention for mutual funds to allow losses to flow through to investors. I t may take several years, if ever, for a fund manager to take advantage of the 1 oss position, whereas individual...

Closedend Mutual Funds

Closed-end mutual funds are somewhat similar to corporations because they issue fixed numbers of shares. This doesn't fluctuate, with the exception of when a new stock may be issued. The funds may issue bonds or preferred stock to support the common shareholders' positions. They then use their capital and other resources to invest in other companies' securities. Closed-end funds are not nearly as common as open-end funds. Closed-end funds' shares are bought and sold at market like other mutual fund shares and shares of stock. Their prices are dependent Net asset value The true value of a share of a mutual fund. It is calculated by taking the total value of all assets and other securities of the fund, less any of the fund's liabilities, and dividing that number by the number of the fund's outstanding shares. NAV is valued on a daily basis. Breakpoint The dollar amount at which the investor is entitled to a lesser sales charge. Rights of accumulation Amount of money already invested in...

Figure 610 Sample Mutual Fund Accounting Format

Mutual fund Mutual fund tax information is reported to the shareholder on Form 1099 DIV, which is shown in FIGURE 6.11 for 2003. As with all IRS forms, the format of Form 1099-DIV may change from year to year, depending n h n n h Sections 1 through 2a apply to most funds, whereas sections 2d and 3 apply to real estate investment trusts and section 6 applies to international stock funds. One of the problems with mutual fund tax reporting is that sho rt-term capital gains are lumped in with taxable income. Therefore, if an investor has short-term losses that could be used to offset the short-t erm gains from the fund holding, there is no way to obtain the info rmation.16

Accomplishing Goats With Mutual Funds

Mutual funds can help you accomplish various financial goals. The rest of this chapter gives an overview of some of these more common goals saving for retirement, buying a home, paying for college costs, and so on that can be tackled with the help of mutual funds. For each goal, I mention what kinds of funds are best suited to it, and I point you to the part of the book that discusses that kind of fund in greater detail. You'll start to see how important goal identification is in the mutual fund selection process. In most cases, only a few fund categories are appropriate for a specific financial goal. Once you've got your fund category, simply peruse Chapters 7 through 9 to find the best individual funds in that fund category. But time horizon is not the only variable. Your tax bracket, for example, is another important consideration in mutual fund selection. (See Chapter 6 for more about taxes.) Other variables are goal-specific, so take a closer look at the goals themselves....

Table 51 General Surrender Charges for Class B Mutual Funds

When an investor purchases Class B shares of a mutual fund, he or she does so at NAV thus ensuring that the entire amount of money is invested. However, if the shares are redeemed within the first six years, the investor will pay a surrender charge. The shares will be redeemed at NAV but then the applicable load will be subtracted. The surrender charge schedule for Class B shares is a declining one. After nine years, Class B shares revert to Class A shares, although no front-end sales load will be assessed at that time. Table 5.1 shows a sample of the surrender charges for Class B mutual funds. Although this is the standard for surrender charges, some mutual fund companies may charge on a different scale. The time frame will remain the same, but the initial CDSC may be less, and the corresponding years and CDSC rates may be different than what is listed above.

Varieties Of Mutual Funds

Just as you can categorize common stocks, you can classify mutual funds. Each individual fund has a specific objective or specialty however, many funds may all have some of the same underlying stocks as their investments. When choosing mutual funds in which to invest, it's important to do some research so you don't wind up buying four different mutual funds that each have the same companies' stock inside. That would defeat the purpose of diversifying your portfolio. Mutual funds don't have to invest just in common stock from corporations there are many funds that are bond funds, international funds, and hybrid funds. These are mutual funds that invest their assets in the common stock of corporations. There are different types of equity funds. Equity mutual funds are the most common type of fund traded and held. Special note It's important to distinguish between international and global mutual funds. Global funds invest in American companies, as well as foreign companies, whereas...

The Double Standard in Mutual Funds

Writing in Fortune magazine late in 1997, Joseph Nocera pointed out the obvious inconsistencies between what mutual fund managers recommend to their shareholders buy and hold and The obvious question becomes If investors are counseled to wisely buy and hold, why do managers frenetically buy and sell stocks each year The answer, says Nocera, is that the internal dynamics of the fund industry make it almost impossible for fund managers to look beyond the short term.2 Why Because the business of mutual funds has turned into a senseless short-term game of who has best performance, measured totally by price. Today, there is substantial pressure on portfolio managers to generate eye-catching short-term performance numbers. These numbers attract a lot of attention. Every three months, leading publications such as the Wall Street Journal and Barron's publish quarterly performance rankings of mutual funds. The funds that have done best in the past three months move to the top of the list, are...

Money Market Mutual Funds

One of the more widely held investment vehicles, money market mutual funds, or money market funds, provide the investor with a highly secure, liquid account that earns interest. These funds are gen erally used to stabilize a portfolio, as well as be the cash portion of the asset allocation. Money market funds are thought of as cash investments because the mutual fund company usually sells shares for 1 apiece, as well as usually redeeming the shares for 1 each. These accounts may also offer the investor check-writing privileges. While these accounts do earn interest, it's usually a far cry from what the investor may earn if the money were invested in the stock market or in bonds. However, the interest rates on money market funds are much higher than a regular savings account at a bank. These accounts are designed to be liquid, safe, and convenient. They, therefore, make an excellent choice to hold cash reserve money. Be aware, though, that the mutual fund companies may not redeem the...

Mutual Funds And Other Investment Companies

The previous chapter introduced you to the mechanics of trading securities and the structure of the markets in which securities trade. Increasingly, however, individual investors are choosing not to trade securities directly for their own accounts. Instead, they direct their funds to investment companies that purchase securities on their behalf. The most important of these financial intermediaries are open-end investment companies, more commonly known as mutual funds, to which we devote most of this chapter. We also touch briefly on other types of investment companies such as unit investment trusts and closed-end funds. We begin the chapter by describing and comparing the various types of investment companies available to investors. We then examine the functions of mutual funds, their investment styles and policies, and the costs of investing in these funds. Next we take a first look at the investment performance of these funds. We consider the impact of expenses and turnover on net...

Finding Information About Mutual Funds

As with common stocks, there are a number of places to find accurate, reliable information about mutual funds. The best place to look is the mutual fund's prospectus. A prospectus is a legal document prepared by the mutual fund company. It is filed with the Securities and Exchange Commission and lists the most recent information about the fund. These are produced once a year. However, some fund families put out revised prospectuses throughout the year. A prospectus will include an expense summary for the fund, the fund's investment strategy and risks, any minimum purchase restrictions, financial highlights of the fund, and many other useful bits of information. The prospectus will also disclose the different types of securities and assets that the particular fund is allowed to invest in. Each mutual fund has its own prospectus. Another good source of information is a mutual fund's semiannual or quarterly report. Often times, this is included in the prospectus booklet, but it can also...

Discount Brokers Mutual Fund Supermarkets

For many years, you could only purchase no-load mutual funds directly from mutual fund companies. If you wanted to buy some funds at, say, Vanguard, Fidelity, T. Rowe Price, and USAA, you needed to call these four different companies and request each firm's application. So you ended up filling out four different sets of forms and mailing them with four envelopes, four stamps, and four separate checks. Soon, you received separate statements from each of the four fund companies reporting how your investments were doing. (Some fund companies make this even more of a paperwork nightmare by sending you a separate statement for each individual mutual fund that you buy through them.) It wasn't until 1984 that someone came up with the idea to create a supermarket for mutual funds. It was Charles Schwab, the discount broker pioneer, who created the first mutual fund supermarket (which other discount brokers have since copied) where you can purchase hundreds of individual funds from dozens of...

Example 46 Conditional Probabilities and Predictability of Mutual Fund Performance

The purpose of the Kahn and Rudd (1995) study, introduced in Example 4-2, was to address the question of repeat mutual fund winners and losers. If the status of a fund as a winner or a loser in one period is independent of whether it is a winner in the next period, the practical value of performance ranking is questionable. Using the four events defined in Example 4-2 as building blocks, we can define the following events to address the issue of predictability of mutual fund performance

Figure 93 Traditional Mutual Fund Process

A tax st andpoint, the open-end mutual fund is very susceptible to daily shareholder purchase and redemption activity. with the lowest cost basis. This causes the average cost of the securities co mprising the portfolio of the ETF to trend upward over time. In ess ence, the in-kind transfer is a substitute for the tax-loss harvesting trade, that is, the ETF manager lowers the amount of embedded capital gains in the fund through the in-kind transfer, whereas the mutual fund manager takeslosses when availabletooffsetgains. Some advisers are fans of ETFs, while others prefer tax-managed open-end mutual funds. Unfortunately, neither ETFs nor tax-managed funds are the right choice or perfect solution for all situations. Therefore, tax-w e n w e n u n FIGURE 9.4 builds on a schematic utilized by Gary Gastineau in The Exchange-Traded Funds Manual to compare a typical mutual fund, ETF, and a holder, which is a portfolio of stocks.8 The evaluation system of the fi u e h m b u m d m p n m n d n...

Hedge Funds and Mutual Funds

AIM 76.2 Compare hedge funds with mutual funds. Hedge funds and mutual funds are both investment companies that have the same economic function. They both are businesses where investors entrust money with managers, and the investors hope to be able to withdraw the money in the future plus a return. Mutual funds offer two basic choices (1) active funds and (2) passive (or index) funds. Passive funds track a benchmark such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 stock index (S& P 500). Most mutual funds are actively managed, and the investors hope the manager's skill will earn a return higher than a passive strategy. All hedge funds are active. The major point where hedge funds and mutual funds differ is that hedge funds deliver complex strategies that mutual funds either cannot offer, because of regulation, or choose not to offer. In contrast to hedge funds, for example, mutual funds generally do not take short positions, do not borrow, and make...

Savings Rate Money Market and Mutual Fund Indicators

Money placed in mutual funds is not spent on consumerism. It is hoped to be deferred spending, but does little to boost immediate consumption. With change comes new terms of art. Although we do not see invested money enter the mainstream of Main Street or mall shopping, the Fed has identified the wealth effect that states people will allocate more income as disposable if their investments provide the perception of greater wealth. If I have 1 million in the stock market, I may feel more comfortable taking on a 500,000 mortgage because I feel wealthy. So even investing creates transaction velocity.

Mutual Funds and Commissioned Sales

MUTUAL FUND Mutual fund taxed at 15 Net after-tax mutual fund (if liquidated) Mutual fund estimated after-tax income (if the mutual fund performs as assumed) a myriad of rules and regulations in providing suitable mutual funds for their clients in taxable accounts. Some funds cost the consumer more and make the representative more money. As a result, a few representatives put their personal interests ahead of those of their clients. Regulators, fulfilling their duty to protect the consumer, write regulations and create forms and administrative procedures to try to make sure that registered representatives put their clients' interests first and sell only what's suitable and appropriate rather than what results in unwarranted sales charges or expenses. In selecting mutual funds for their clients, it's not unusual for advisers to consult Morningstar Principia for independent research, as well as whatever material they're able to obtain. There were 16,513 funds in the Morningstar...

Invest in taxfriendly stock mutual funds

Unfortunately, stock mutual funds don't have a tax-free version like bond and money market funds do. Unless they're held inside a retirement account, stock fund distributions are always taxable, period. If you're in a high enough tax bracket, these stock distributions can be a significant tax burden. Unfortunately, with stock funds more than any other type of fund, investors often focus exclusively on the pre-tax historical return, ignoring the tax implications of their fund picks. Index mutual funds, which maintain more stable investment portfolios, tend to produce fewer capital gains distributions because they hold their securities longer. (For more on indexing, see the index funds section later in this chapter, as well as Chapter 9 for more details on stock index funds.) v* Focusing on growth stocks. Some corporations that issue stock, especially older, larger, more established companies, typically distribute a portion of their annual profits in the form of dividends to their...

Difference in costs between ETFs and actively managed mutual funds

Difference in costs shown in Table 3.2 can be sensibly higher if ETFs are compared to actively managed mutual funds, which constitute the bulk of the mutual-fund industry. Technically, these additional fees, which can be quite significant, are levied to compensate managers for actively managing the portfolio, such as providing their skills in interpreting market information. According to the fund-tracking firm Lipper Inc., expense ratios for all equity mutual-funds average 1.5 . As mentioned in Chapter 1, the performance of actively managed mutual funds is, at best, equal to that of the market as a whole. Since management 9 A study that has investigated the impact of 12(b)-1 on mutual fund expense ratios was conducted by S. P. Umamaheswar Rao in Economic impact of distribution fees on mutual funds, American Business Review, 19 (1), January 2001, pp. 1-5. Box 3.2 Rule 12(b)-1 or the hidden costs within the mutual-fund industry With mutual-fund fees continuing to draw scrutiny from...

Pearson Type IV Distribution for Our Mutual Fund Data

We can see from the estimates in Table 2.1.2 that the normal distribution is not appropriate. Kurtosis is high, and the returns are negatively skewed. If we plot the observed point in a diagram with Pearson's skewness p1 on the horizontal and p2 on the vertical axis, as in Figure 2.1.1, we note that AAAYX mutual fund falls in the region of Pearson's type IV curve. This is not good news. Type IV is the hardest to work with since it involves imaginary roots of the quadratic in (2.1.6), so we expect difficulties in computing the quantiles for our VaR calculation. However, we can obtain an analytical expression (2.1.9) (the calculation is given in the Appendix at the end of this chapter and in Chapter 9) for its observed density using four moments (which are parameters of the underlying distribution)

Mutual Funds and Portfolios of Stocks

No mutual funds or stocks are predictable when trying to assess future volatility or growth. They are not the Rolls-Royce we are looking for in the risk reward spectrum of high-net-worth investing. It makes sense to remember two points 2. Diversifying with typical financial advisers' models based on modern portfolio theory only diversifies your growth. It does not protect you against potential severe losses during bear markets (which are historically frequent occurrences). In most world crises, and in almost all secular bear markets, ships either sink all at once, or one at a time over the course of years until all ships have sunk. Clients have said to me, My adviser diversified me with bonds and stocks and mutual funds and I lost only 20 percent during the bear market.

Smart Mutual Fund Price Tables that Tell Past Performance

Many prudent investors buy mutual funds. These unique tables may help you make sounder evaluations, because they show each fund's year-to-date total return plus the prior three years ranking of total results. Investor's Business Daily was the first newspaper to show performance data in its mutual fund tables. Six different graphs are also shown each day of outstanding funds and their most recent publicly available stock buys. The 10 which gained the most for the day are boldfaced in the tables.

Mutual Fund Diversification

A growing number of investment articles are now appearing regarding diversification with mutual funds. How many mutual funds are enough Since mutual funds are already diversified, how much more diversification is necessary Some articles will say no more than 10 mutual funds, others no more than five. Several advisers go the intellectual route and say one mutual fund in each asset class. At least one adviser is said to base the decision on how much paperwork an investor can tolerate. Dilution enters into this as well. It's possible that owning too many mutual funds may position an investor at a point of diminishing returns.

Investing in Chinese Mutual Funds

U.S. investors can benefit from China's growth by purchasing mutual funds that invest in the securities of Chinese companies. Many mutual fund companies offer funds that invest in securities traded in China while some purchase Chinese securities listed and traded in the United States. Investing in those funds adds additional risks such as currency risk and several other risks unique to developing countries. This chapter discusses advantages and disadvantages, fund structure, regulation, and listing samples of Chinese mutual funds.

Benefits Of Investing In Mutual Funds

One of the most important benefits of investing in a mutual fund is the diversification it offers. There is an old credo never put all your eggs in one basket. The same holds true when investing. It is foolhardy to assume that putting all money into one security would yield, in the long-term, the same or better results as a diversified portfolio. By investing in only one security, the investor is susceptible to both systematic and unsystematic risk. Systematic risk is the risk that cannot be diversified away, because it is a risk associated with the investing markets as a whole, nothing can be done to diversify it away. Unsystematic risk, however, is the risk associated with a specific firm, and can be diversified away by purchasing many securities in different industries. If a person is invested in only one security, the chances of a loss increase greatly, since they would have to deal with the ups and downs of their specific company and the risks associated with the market. With a...

Drawbacks Of Investing In Mutual Funds

There are drawbacks to mutual fund investing. One potential drawback to mutual fund investing is that when a person invests in a mutual fund, he leaves the managerial decisions up to the fund manager. While this usually is a benefit, as most fund managers bring with them a level of professional expertise in research and investing that the investor normally does not possess, it can conversely become a drawback if the fund manager is incapable of making the right decisions. Another drawback is that perhaps the fund manager is a capable manager, but his investment decisions are not the right fit for every investor. While this is not particularly the fund manager's fault, it is a drawback to someone who has not done his own research. Another possibility is that the manager is knowledgeable but employs an investment strategy that is not conducive to achieving the mutual fund objective. There are savings by investing in a mutual fund over a single security or building your own portfolio....

Structure And Regulation Of Mutual Funds

Mutual funds are highly regulated financial entities that must comply with securities laws and regulations. This section reviews the basic structure of mutual funds and the regulatory environment in which they operate. Basic Structure of Mutual Funds The structure of a typical mutual fund includes directors, investment adviser management company, principal underwriter, custodian, independent public accountants, and transfer agent. The directors or trustees of an investment company must perform their responsibilities with the care expected of a prudent person. They are expected to evaluate the performance of the investment adviser, principal underwriter, and other parties that provide services to the fund. Independent directors serve as watchdogs for shareholder interests. Investment advisory and distribution contracts must be approved by a majority of a fund's independent directors. The investment adviser is responsible for making portfolio selections in accordance with the objectives...

Types Of Mutual Funds

Mutual funds can be classified in a number of different ways depending on how the fund is managed and what types of securities the fund purchases. One basic distinction between funds is whether they are actively or passively managed. An actively managed fund attempts to add value by pursuing a strategy of actively selecting securities in an attempt to beat the fund's benchmark. A passively managed fund, often times referred to as an index fund simply tries to match the performance of some index such as the S& P 500 or the Russell 2000 index. These funds have advantages over actively managed funds because they incur relatively low expenses and, because of their low portfolio turnover rate, tend to be tax efficient. Funds can also be classified based on the types of strategies they follow. There are several issues that an investor should consider when deciding on the purchase of a bond mutual fund. First, when purchasing a bond fund, the maturity of the bond fund does not decrease...

The Fidelity Mutual Fund IRA Transfer Form

Use Oils form to authorize Fidelity to transfer your IRA directly from another IRA Custodian and invest it in a Fidelity mutual fund IRA. Please read the instruction on the back of this form before completing the Transfer Form. Mail your completed form in the enclosed envelope or to Fidelity Retirement Services, P.O. Box 660446, Dallas, TX 75266-0446. If you have any questions, call 1-800- 44-4774. Ml sections must be completed. Please type or print eiearty. J am opening a new mutual fund JRA. Attached is my completed ISA application. 0 I already own a Fidelity mutual fund IRA. B. Please list the name(s) of the Fidelity mutual fund(s) into which the transfer proceeds are to be deposited. Mutual Fund Name I If you do not indicate a mutual fund, your transfer proceeds will be invested in Fidelity Cash Reserves, a money market fund. Fidelity Will Complete This Section. I Letter of Acceptance and Instruction for Transfer to a Fidelity Mutual Fund IRA Account

Momentum in Mutual Funds

While there is little evidence that mutual funds that are ranked highly in one period continue to be ranked highly in the next, there is some evidence that has accumulated about the very top ranked mutual funds. A number of studies16 seem to indicate that mutual funds that earn above-average returns in one period will continue to earn above-average returns in the next period. Burt Malkiel, in his analysis of mutual fund performance over two decades, tests for this hot hands phenomenon by looking at the percentage of winners each year who repeat the next year in the 1970s and 1980s. His results are summarized in table 12.1 below

Salient Features of a Mutual Fund

When a mutual fund is created, the founders decide what market strategies to pursue and its investment objectives. A required prospectus is prepared for potential investors that details the company's objectives, expenses, fees, and management, so that an investor can make an informed decision about the mutual fund. When an investor buys the shares of the mutual fund, he becomes a shareholder of the company, with basically the same rights and privileges as a shareholder of any other company.

The washsale rule and mutual funds

Mutual funds also are subject to the wash-sale rule. Investors violate the wash-sale rule if dividends are reinvested by the fund within the wash-sale window. Keep in mind that reinvestment of dividends and capital gains is considered an acquisition. For example, if investors sell shares in a fund for a loss on December 2 and the fund manager decides to distribute dividends on December 20, the 30 mandatory days have not elapsed. As a result, the loss sale will be disallowed by the wash-sale rule to the extent of any dividend reinvestment.

Strategy 1 Harvesting losses from a mutual fund while maintaining exposure to the market through a broadbased ETF

Exchange-traded funds have also started to be used by mutual-fund investors seeking to turn losses into tax breaks. Suppose an investor owns shares of the Vanguard 500 Index Fund (VFINX) that have drastically dropped in value, as was the case in the early 2000s. During the third quarter of 2002, most major market gauges such as the S& P 500 or the Dow Jones Industrial Average turned in their worst performance in decades. From the IRS's perspective, this is certainly a hard ruling to make, considering that the VFINX and the SPY are issued by two different companies just as with Pfizer and Merck in our earlier example. These funds are also structured differently - the first is an open-ended mutual fund while the SPY is a unit investment trust. In addition, whereas the VFINX is bought or sold only at the end of the day, the SPY trades continuously throughout the day like a regular stock. Some experts warn, however, against swapping for tax purposes the VTSMX, a Vanguard mutual fund...

The Organization of a Mutual Fund

A mutual fund is organized either as a corporation or as a business trust that sells its shares to investors. Mutual funds have officers and directors or trustees. In this way, mutual funds are like any other type of company, such as General Electric. Unlike other companies, however, a mutual fund is typically externally managed it is not an operating company and it has no employees in the traditional sense. Instead, a fund relies upon third parties or service providers, either affiliated organizations or independent contractors, to invest fund assets and carry out other business activities. The process of setting up a mutual fund is performed by the fund's sponsor, typically the fund investment adviser, administrator, or principal underwriter. It must also register the fund under state law as either a business trust or corporation. In addition, in order to sell its shares to the public, the fund must first register those shares with the SEC by filing a federal registration statement...

Advantages of ETFs over Index Mutual Funds

A typical goal of an investor is to build and manage a diversified portfolio of stocks and bonds with the lowest possible fees and the greatest possible tax efficiency. ETFs offer several advantages over index mutual funds Lower cost ETFs can have lower expense ratios than the lowest-cost index mutual funds. The Barclays i-shares S& P 500 ETF, for example, charges 0.09 a year in fees, compared to about double that for the Vanguard 500 Index Fund. A diversified portfolio of index funds with a common asset allocation costs about 18 less in annual expenses using ETFs than using Vanguard index funds. A key advantage of ETFs is that since an investor buy them like a stock in a brokerage account, one can pick the cheapest ETFs from all those available. With index mutual funds, in contrast, the investor tends to be locked into a singe family of products. Vanguard, for example, does not offer its index funds via the fund supermarkets such as Schwab OneSource if one wants to avoid...

When ou Sett jfour Mutual Fund Shares

Besides distributions, the other way to make money with a mutual fund is through appreciation. If the price of your shares moves higher than the price at which you bought them, then your investment has appreciated. Your profit is the difference between the amount you paid for the investment and the amount the investment is currently worth. For investments held outside of retirement accounts, that profit is taxable. Of course, the other way to avoid taxes on appreciated mutual funds is to hold them inside retirement accounts then you don't have to worry about capital gains taxes at all.

Does the average mutual fund beat the market

Until the 1960s, the conventional wisdom that professional money managers did much better than individual investors was widely accepted but not really tested, partly because the data was not available and partly because the tools for testing the proposition were not developed. The development of the capital asset pricing model, in conjunction with access to data and statistical packages, allowed Michael Jensen to conduct one of the first studies of mutual funds in 1968. He examined the returns earned by mutual funds from 1955 to 1964 and compared them to what you would have expected them to earn, given their risk exposure. The expected returns for each fund were calculated using the beta that estimated for the fund and the capital asset pricing model. In fact, the difference between the actual return and the expected return from the CAPM is still called Jensen's alpha, reflecting the influence this study had on empirical finance for the next three decades. His findings, summarized in...

Hedge Funds Versus Mutual Funds

Hedge funds differ from the traditional investment vehicles like mutual funds in terms of the nature of strategies, return objectives, correlation of returns, co-investment opportunities, compensation structures, liquidity, and transparency. Most of the mutual funds are restricted in their investment options. In contrast, hedge funds have more flexibility in where and how they can invest. For this purpose, they can use leverage, sell securities short, and invest across different asset classes. Due to the flexibility of leverage, hedge funds can potentially multiply their returns (and risk) on the arbitrage opportunities in the market. The downside of the flexibility in investment is that it can reduce the ability of investors to monitor the activities of hedge fund manager. Some managers trade in and out of positions so frequently that direct oversight may not only be difficult but may also turn out to be ineffective. It can be exceedingly difficult to monitor whether the manager is...

Mutual Funds

Carhart, On Persistence in Mutual Fund Performance, Journal of Finance, vol. 52 (1997), pp. 57-82. 4. Carhart, On Persistence in Mutual Fund Performance. 6. Matthew R. Morey, Rating the Raters An Investigation of Mutual Fund Rating Services, Journal of Investment Consulting, vol. 5, no. 2 (November-December 2002), pp. 30-50.

Invest the largest percentagethe core holdings of your stock portfolioin highly diversified mutual funds with very low

The mutual fund industry offers investments, called index funds, which yield returns extremely close to those of the major market indexes, such as the S & P 500 Index. An index fund does not attempt to beat the market, but by holding a large number of stocks in the proper proportion, such a fund can match the market with an extremely low cost. For the largest of these funds the annual expense ratio is as low as 0.20 . A further advantage of indexed funds is that their turnover is very low and therefore are very tax-efficient for investors. Chapter 19 showed that the Wilshire 5000 has outperformed about two out of three mutual funds since 1976 and a far higher percentage over the past 15 years. By matching the market year after year, as you can with index funds, you are likely to be near the top of the pack when the final returns are tallied. Matching the market is sufficient to obtain the superior returns that have been achieved in stocks over time.

Mutual Fund Performance

There are not more than five funds that have beaten the S& P 500 by 2 points or more since the 1970s. Active mutual funds underperform a low-cost index mutual fund, on average. The typical active fund charges 140 basis points in expenses and the index fund charges less than 20 basis points. In addition, there are other transaction costs like the bid-ask spread that managers face when they buy and sell stocks. Consequently, a median active fund underperforms by 200 or more basis points. In order to evaluate funds better, we can look at the alpha coefficients from Capital Asset Pricing Model (CAPM) . Funds seem to have an almost zero mean (slightly negative in fact). But the problem is that indexes such as the S& P 500 might not be the most appropriate market index (as it consists of mostly big firms). The CAPM is based on the concept of market portfolio that includes all assets in the economy, not just stocks. Some studies of mutual fund performance have used multifactor index...

All these returnenhancing strategies should be pursued from your taxdeferred account using noload mutual funds SPDRs or

These strategies require shifting in and out of equities, which incurs transaction costs in terms of taxes and brokerage or front-load fees in mutual funds. For this reason, pursuing these strategies is best done using no-load mutual funds that do not restrict the number of switches you can make. SPDRs (S & P 500 Depository Receipts) and index futures are low-cost ways of taking a position in this major benchmark, and are discussed in Chapter 15. Investors who have been burned by picking individual stocks often turn to mutual funds in their search for higher returns. But choosing a mutual fund poses similar obstacles. Hot managers with superior past performance replace hot stocks as the new strategy to beat the market. As a result, many investors end up playing the same game as they had with individual stocks.

Figure 62 Sample Display of Mutual Fund After Tax Return Reporting

Both calculation methodologies provide useful information. Together they allow the taxable mutual fund investor to make better-informed investment decisions. There are cases where one calculation methodology o r type of after-tax return is more appropriate than the other. For example, the pre-liquidation after-tax return information is appropriate for individuals who will take advantage of the step-up in basis at death. For s o meone who is rebalancing a client's asset allocation, the post-liquidation methodology is more appropriate, because it takes into account the impact The SEC requires the highest federal tax rates to be applied when calculating after-tax returns. Although this may not represent the tax profile o f the average investor, it does provide the most conservative scenario. If your own tax situation or that of your clients is different, check the website o f your mutual fund provider, as some firms have created online calculate rs that allow investors to apply their...

The Evidence Stock and Balanced Mutual Funds

A review of the evidence presented earlier in this chapter shows that, in general, mutual funds performed worse than a naive strategy of random selection or mixing passive portfolios with the riskless asset. This conclusion is broadly consistent with the other mutual fund studies that we did not examine of McDonald 61 , Williamson 89 , Crenshaw 15 , Lehmann and Modest 56 , and Elton, Gruber, Das, and Hlavka 25 . There are exceptions. The Securities and Exchange Commission (SEC) study showed one period of superior performance, the Friend, Blume, and Crockett 30 study showed good mutual fund performance compared to certain types of random selection Connor and Korajczyk 13 found superior performance, as did Grinblatt and Titman 37 , As one might expect, the preponderance of evidence showing underperformance has not been happily received by the mutual fund industry. Is there any justification in light of these studies for an investor using mutual funds 15 Mutual funds do provide...

Performance of Equity Mutual Funds

Unfortunately, the past record of the vast majority of such actively managed funds does not support this contention. Table 19-1 shows that, from January 1971 through June 1997, the average equity mutual fund returned 11.68 percent annually, about 1 percentage points behind the market measured either by the Wilshire 5000 or the S & P 500 Index.3 The long-term returns on mutual funds is difficult to measure because of the survivorship bias that is inherent in the data. This survivorship bias exists because poorly performing funds are frequently terminated, leaving only the most successful ones with track records over long periods of time. This imparts an upward bias to these fund returns. Table 19-1 shows that the survivor funds did return 1.29 percent 3 Fund data provided by the Vanguard Group and Lipper Analytical Services. See John CJBOggeeo n Mutual FundBBurr Ridge, IL Irwin Professional Publishing, 1994 for a description of these data. Equity Mutual Fund and Benchmark Returns...

Example 71 Risk and Return Characteristics of an Equity Mutual Fund

You are analyzing Sendar Equity Fund, a midcap growth fund that has been in existence for 24 months. During this period, it has achieved a mean monthly return of 1.50 percent with a sample standard deviation of monthly returns of 3.60 percent. Given its level of systematic (market) risk and according to a pricing model, this mutual fund was expected to have earned a 1.10 percent mean monthly return during that time period. Assuming returns are normally distributed, are the actual results consistent with an underlying or population mean monthly return of 1.10 percent

Information On Mutual Funds

The first place to find information on a mutual fund is in its prospectus. The Securities and Exchange Commission requires that the prospectus describe the fund's investment objectives and policies in a concise Statement of Investment Objectives as well as in lengthy discussions of investment policies and risks. The fund's investment adviser and its portfolio manager also are described. The prospectus also presents the costs associated with purchasing shares in the fund in a fee table. Sales charges such as front-end and back-end loads as well as annual operating expenses such as management fees and 12b-1 fees are detailed in the fee table. With more than 8,000 mutual funds to choose from, it can be difficult to find and select the fund that is best suited for a particular need. Several publications now offer encyclopedias of mutual fund information to help in the search process. Two prominent sources are Wiesen-berger's Investment Companies and Morningstar's Mutual Fund Sourcebook....

Fees and Mutual Fund Returns

The rate of return on an investment in a mutual fund is measured as the increase or decrease in net asset value plus income distributions such as dividends or distributions of capital gains expressed as a fraction of net asset value at the beginning of the investment period. If we denote the net asset value at the start and end of the period as NAV0 and NAVj, respectively, then Although expenses can have a big impact on net investment performance, it is sometimes difficult for the investor in a mutual fund to measure true expenses accurately. This is because of the common practice of paying for some expenses in soft dollars. A portfolio manager earns soft-dollar credits with a stockbroker by directing the fund's trades to that broker. Based on those credits, the broker will pay for some of the mutual fund's expenses, such as databases, computer hardware, or stock-quotation systems. The soft-dollar arrangement means that the stockbroker effectively returns part of the trading...

Mutual Fund Return Calculation

Although the treatment of investment expenses and taxes is specific to the vehicle and investor situation, the calculation of returns for mutual funds forms a case study for calculating returns that include the effects of fees and taxes. Mutual funds are vehicles for commingled investment that are marketed to the retail investor. Mutual funds and other similar products require performance calculations that reflect the impact of unitized valuations, dividend distributions, loads and other sales charges, expenses and expense subsidies, and taxes. This section illustrates the calculation of returns adjusted for each of these factors. In the United States, the SEC has specified the calculation and reporting requirements for advertised mutual fund performance. The assumptions embedded in these return calculations are explored in this section to guide interpretation of these returns and modification of the formulas to meet the needs of a particular investor. There are several kinds of...

Just Buy the Best Which Does Not Include Most Mutual Funds

When you're selling ideas and services, consumers need convenient carrying handles so they can easily pick up what you offer. Thus, mutual fund and portfolio managers package their services as products with easy-to-remember descriptions a large-cap value fund or a small-cap growth portfolio. Packaged investment products more or less define conventional wisdom through market cap and valuation categories. Still, these semantic exercises spring from reasonably credible trends in general, small companies have more room to grow than giant companies, and, in general, large companies are less volatile than small companies. Of course, in general, actively managed mutual funds underperform when compared to the Standard & Poor's (S& P) 500. That's why we eschew the general in favor of the specific. A brilliant idea at their inception, mutual funds allow the little guy to buy shares of an already-diversified portfolio. The benefits of wide diversification are particularly attractive to...

Growth Of Mutual Funds In The United States

Mutual fund investing began to grow in popularity in the 1940s and 1950s, but the explosive growth did not occur until the 1980s. In 1960, there were 160 funds with 17 billion in assets. Ten years later, there were 361 funds with total assets of 47.6 billion. By 1980, the number of funds had reached 564, and the total assets under management were 134.8 billion. In 1990, U.S. mutual funds managed more than 1 trillion. By yearend 2006, more than 10 trillion was invested in mutual funds (Table 18.5). The enormous growth and diversity of the mutual fund industry have led to the development of new fund categories with various investment objectives. Funds can still be grouped into three general types money market funds, bond funds, and stock funds. Money market funds invest in short-term securities that are highly liquid and low risk. These funds seek to maintain a stable NAV of 1, while providing a current level of income to shareholders. Bond mutual funds invest in fixed-income securities...

Mutual fund accounting 101

If you understand the concept of basis for your fund investments, it's time to put that understanding to work. Here I'm going to walk you through the different ways commonly used by taxpayers and approved by the IRS to calculate your basis when you sell your non-retirement account mutual fund investments. If you sell all your shares of a particular mutual fund that you hold outside a retirement account at once, you can ignore this issue. (After reading through the accounting options that the IRS offers, you have more incentive to sell all your shares in a fund at once ) Be aware that after you elect one of the following tax accounting methods for selling shares in a particular fund, you can't change to another method for the sale of the remaining shares. If you plan to sell only some of your fund shares and it would be advantageous for you to, for example, specify that you're selling the newer shares first then choose that method. But, regardless of the method you choose, your mutual...

IShares offer tax benefits in relation to mutual funds

Now, let us assume that it's true that mutual funds routinely keep some of the dividends received as a cushion in case they face an unexpected and sudden high redemption rate, such as the one that characterized the early 2000s. Although the iShare 500, as an Open-end structure, also is entitled to reinvesting its dividends received, its similarities with a mutual fund such as the Vanguard 500 may stop there. Indeed, unlike the latter, it can behave like any other ETF when caught unexpectedly by a high redemption rate. The ETF creation redemption process precludes the need for maintaining cash balances for redemption purposes it redeems investors in-kind not in cash. This means that, theoretically, the iShare 500 manager does not need to maintain cash balances, since the redemption activities of departing investors are covered in kind. As we can easily imagine what would happen to these dividends when reinvested back into the portfolio in a declining market, we can credibly say that in...

How You Could Make a Million Owning Mutual Funds

Mutual funds are outstanding investment vehicles after you learn how to utilize them correctly. Most people, however, do not have a solid understanding or conviction about mutual funds. The first absolutely essential point to understand is that the big money in mutual funds is always made by sitting through several business cycles. Investors in open-end investment companies, as mutual funds are sometimes called, tend to buy the best-performing fund after it has had a huge performance year. The next year or two will probably show slower or poorer results followed by an inevitable economic recession. This is usually enough to scare out those with less conviction or the I want to get rich quick fund holders. I have sold mutual funds, known many top fund portfolio managers, provided research to hundreds of mutual funds, managed two mutual funds myself, and started the New USA Mutual Fund in 1992. In 1966, one of the funds was up over 10 , when the Dow was down 23 in a bear market. The...

Whats a Mutual Fund

A mutual fund is a collection of investment money pooled from lots of people to be invested for a specific objective. When you invest in a mutual fund, you buy shares and become a shareholder of the fund. A fund manager and his or her team of assistants figure out in which specific securities (for example, stocks, bonds, money market funds) they should invest the shareholders' money so they can accomplish the objectives of the fund and keep you (and your fellow shareholders) as a happy customer. Because good mutual funds take most of the hassle and cost out of figuring out which securities to invest in, they are among the best investment vehicles ever created Mutual funds allow you to diversify your investments that is, invest in many different industries and companies instead of in just one or two. By spreading the risk over a number of different securities representing many different industries and companies, mutual funds lessen your volatility and chances of a large loss. v0 Mutual...

Load Mutual Funds

Open-end mutual funds are either load or no-load funds. That means they either have some sort of sales charge, or they don't. However, just because you are investing in a no-load fund doesn't mean that, there aren't any types of expenses. Load mutual funds charged the investor a sales charge for purchasing the mutual fund. Loads may be charged either at the time of sale (front-end load) or when the mutual fund is redeemed (back-end load). There are three different types of load funds, and their share classes differentiate them A, B, and C

Noload Mutual Funds

No-load mutual funds are those that have no front-end or back-end sales load. Both purchases and redemptions for no-load funds are done at the fund's NAV Sometimes, the 12-b-1 fees associated with no-load funds have been higher than with load funds since there are no sales charges. In the past few years, no-loads have become increasingly popular with investors because they are easy to move around in. Without any associated sales charges, investors may stay in the fund for as long, or short, as they want.

Valuing Mutual Funds

We've discussed net asset value of a mutual fund. But what does this really mean to you, the investor Net asset value per share is the total value of all the securities and other assets held by the fund, minus any of the fund's liabilities. This resulting number is then divided by the number of outstanding shares in the mutual fund. The net asset value, or NAV is the price per share of the mutual fund. Just like individual stocks have a price per share, so do mutual funds. Let's assume that the XYZ Growth mutual fund has total assets of 52 million. Their liabilities total 14 million, and the fund has 1.4 million shares outstanding. The NAV of the XYZ Growth Fund would be 27.14 per share. The NAV isn't always the price per share the investor pays for the mutual fund. Any applicable sales charge (Class A shares only) will increase the price per share that the investor pays. However, for Class B and C shares, the investor would pay the NAV for the mutual fund.

Hedged Mutual Funds

These are erratic, relatively new, and unproven over time. But there are a few very unique and relatively successful funds out there, some volatile, some not. You may want to try to find the best of these hedged mutual funds and diversify some of your assets among what you consider to be the best two or three of them. But their lack of correlation with the markets, their usually low performance numbers, their limited history, and or in some cases their high volatility may eventually push you away.

Openend Mutual Funds

A mutual fund offers investors a simple and convenient method of investing in a portfolio of securities.4 The size of a mutual fund portfolio changes as new money comes in or investors redeem and as the value of the securities held by the fund rises or falls. Each mutual fund share represents ownership in all of the securities in the fund portfolio. Capital gains and dividends or interest income from these securities are paid out in proportion to the number of shares investors own. Therefore, an investor who invests 1,000 will get the same investment return per dollar invested as a fund shareholder investing 1,000,000. There are several advantages to investing in mutual funds. First, an investor buying shares of a mutual fund is buying an ownership interest in all of the securities the fund owns. Fund managers generally invest in a variety of securities, affording portfolio diversification. A diversified portfolio helps reduce risk because losses from some securities will be offset by...

Chinese Mutual Funds

An easy way to start investing in the Chinese economy is to find a Chinese mutual fund, a mutual fund managed by an experienced fund manager with a focus on growing Chinese companies. Morningstar is a good place to start researching Chinese mutual funds that meet the investment objectives. Using their Fund Screener, the investor can search the database using the set criteria such as fund type, ratings risk, and returns. In addition, the investor can read the prospectus to gain a better understanding of the fund that he or she is interested in investing. Mutual Fund Prospectus Before purchasing a mutual fund, it is prudent to read its prospectus. The prospectus is the fund's primary selling document and contains valuable information, such as the fund's investment objectives or goals, investment strategies, risks of investing in the fund, fees and expenses, and past performance. The prospectus also identifies the fund's managers and advisers and describes its organization and how to...

Mutual Fund Managers

Most equity mutual funds do not lay claims to market timing, but, in our view, they do try to time markets at the margin. We will begin by looking at whether they succeed on average. There are some mutual funds that claim market timing as their primary skill and these funds are called tactical asset allocation funds. We will look at the track records of these funds and pass judgment on whether their claims hold up. How do we know that mutual funds try to time markets While all equity mutual funds need to hold some cash - investments in treasuries and commercial paper - to meet redemption needs and for day-to-day operations, they collectively hold much more cash than is necessary. In fact, the only explanation for the cash balances that we observe at equity mutual funds is that mutual funds use them to signal their views of future market movements - they hold more cash when they are bearish and less cash when they are bullish. In figure 12.6 below, we present the average cash balance...

Reit Mutual Funds

As recently as fifteen years ago, only about five mutual funds were devoted to investing in real estate-related securities such as REITs. Today there are more than seventy such funds. Most of them are modest in size, but there were three giants, including Cohen & Steers Realty Shares ( 2.3 billion at March 2005), Fidelity Real Estate ( 4.6 billion), and Vanguard REIT Index Fund ( 5.7 billion). A great deal of information is available regarding REIT and real estate mutual funds through Morningstar (www.morningstar.com). While some may scoff at the modest size of most of these funds, they have generally done well during their relatively short histories. The Vanguard Group, which has a market niche in index funds, operates the Vanguard REIT Index Fund, a REIT mutual fund indexed

The Global Powerhouse

Large institutions can invest directly in China. Retail investors have other ways to get into the game as well. Part III describes the major vehicles investors use to indirectly invest in China by way of investing in Chinese stocks and funds traded outside China. Many Chinese companies list their shares in Hong Kong, London, and New York. Mutual fund companies have also established funds to specifically invest in China. Furthermore, exchange-traded funds representing the Chinese stock market or sector indexes provide foreign investors an efficient and liquid means to access the Chinese stock markets.

Unwavering Integrity and PrinciplesA Qualitative Approach

The mutual fund managers profiled in this book are truly champions.Yes, they have provided outstanding returns for their shareholders, all consistently beating their benchmark indexes and competing funds in their categories over the long term on a risk-adjusted basis. Perhaps what impresses me most is their dedication to their investors. After spending hours interviewing each of these champions, it became abundantly clear that they

Stock Market Opportunities

Several investment vehicles are available to foreign portfolio investors wanting to gain exposure to China. There are both closed-end and open-end mutual funds that invest primarily in the equity of companies whose principal business is based in China or the greater China region. These funds can be purchased either on the stock exchange or from mutual fund companies. Currently, many investors are pouring money into China private equity or venture capital funds. These funds typically make investments in companies in China that have not yet listed their shares on any exchange. Although this is potentially a high return possibility, investors should be aware of some degree of illiquidity and lack of transparency. Other than those funds, investors may consider purchasing stocks of Chinese companies in Chinese domestic market (A shares and B shares) or outside in Hong Kong, London, or New York.

Contrarian Research Beginnings

Hired as an analyst by Value Line in the mid-1960s, he was given 15,000 a year to pick stocks. His hard work and ability to spot value in the marketplace won him a spot picking stocks for a growth mutual fund. While he proved successful, he felt that he had not yet mastered his contrarian philosophy, and so he left the fund to do his own research. This research led to his first book, Psychology and the Stock Market Investment Strategy Beyond Random Walk (Amacom, 1977). At this point, David knew that New York the financial capital of the world was where he belonged.

Market Opening In Securities

Investment management industry started in China in 1998 when the CSRC approved 10 fund management companies for the first time. Unlike the United States, where the number of open-end funds dominates that of closed-end funds, there were no open-end funds in China until 2001. The lure of the Chinese markets lies in the country's high savings rate and low mutual fund penetration. In addition, the rising pension liabilities will also drive the growth of the fund management industry. U.S. fund managers have entered the Chinese markets. Merrill Lynch established a joint venture with Bank of China International (investment banking arm of Bank of China). It began to sell the first fund in late 2004, listed on the Shenzhen Exchange in the first quarter of 2005. Despite it being the second listed open-end fund, the fund raised 130 million, less than half the amount hoped for. China Southern Fund Management launched the first listed open-end fund in August 2004, raising RMB 3.54 billion. The...

Fundamental Investment Approach

However, choosing investments is only part of Bill's success. His allocation strategy within a portfolio also sets him apart. The Value Trust usually invests in no more than 40 to 45 stocks, quite a low number when you consider that most equity mutual funds generally invest in 100 or more companies.This relatively focused number of holdings enables Bill and his staff to conduct in-depth research of every stock represented in the portfolio and to stay in close contact with the management of each company.

Potential Vehicles For Investing In China

There are two different approaches to investing in China. As mentioned in a previous chapter, financial market investors use vehicles such as closed-end China funds, open-end mutual funds, private equity funds, listed stocks, and bonds to get exposure to the China market. There are also several vehicles for establishing operations in China, which include processing and assembling agreements, joint ventures, wholly foreign-owned enterprises, holding companies, representative offices, and branches. Local companies with foreign investments are called foreign invested enterprises. The last part of the book describes how to make an investment in financial assets related to China. This chapter examines approaches to setting up real investments in the Chinese market as well as how to take advantage of the special access that Hong Kong companies enjoy under CEPA.

Managing Money with Pride

Mid-Cap Mutual Fund Managers hen John Calamos was 17, he invested his parents' savings of 5,000 in five stocks. Under his management the portfolio grew over time, and his parents were able to use that nest egg for retirement. This story seems to be the norm for John, not an isolated incident in which he was able to change people's lives. After all, as the most successful mid-cap growth mutual fund manager in the business and one of the all-time-best managers he has had the opportunity to help hundreds of thousands of individuals reach their dreams, too. In the 10-year period ending December 31,2003, the fund returned an annualized 20.6 percent, far surpassing its benchmark, the Russell Midcap Growth Index, by 11.2 percentage points, and exceeding the S& P 500 index by 9.54 percentage points. The Calamos Growth fund was easily ranked number one among its peers during this timeframe.

Repurchase Agreements

Market participants use repos to invest cash or to borrow money. For example, a securities dealer purchases and plans to hold overnight 100 million of 4.00 percent March 2010 Treasury notes. Typically, however, the dealer uses the repo market to obtain financing, as it is generally the cheapest funding source. Suppose a customer, a municipality, a mutual fund, or an insurance company, has excess funds of 100 million to invest. The overnight repo rate is 2.75 percent. On the start date, the dealer delivers these notes to the customer for cash. In leg two of the repo trade, the dealer buys back the same notes at 100 million plus one day interest of 7,638.89. The result is that the customer has invested 100 million and the dealer has financed the position overnight at an interest of 2.75 percent.

Asset Management Business

China's asset management market is continuing to grow. Asset management is an important segment of the capital markets and has become an integral part of the investment banking business. Wall Street firms are buying into China's fund management because it is one of the most attractive segments of the financial services industry. This chapter describes the fund management business in China. This chapter also discusses the market trends and describes the structure and organization of a mutual fund. Furthermore, this chapter explains the structure of a hedge fund and the typical ranges of management fees and incentive fees.

Exchangedtraded Funds

There are a wide variety of mutual funds, with investment objectives ranging from sector to country to index. Many are actively managed, while some are passive, index type of funds. ETFs are mostly index type covering broad stock market, industry sector, international stock, and U.S. bond indexes. These ETFs add the ease and liquidity of trading to the benefits of traditional index investing. Examples of ETFs include Nasdaq-100 Index Tracking Stock, S& P 500 Index, Fortune 500 Tracking Stock, iShares Russell 2000, iShares MSCI-Brazil, iShares MSCI Emerging Markets, and iShares Lehman 1-3 Year Treasury Bond Fund. What ETFs do not yet offer are the actively managed funds that have been widely available in mutual funds. Thus, investors wanting the growth potential of an actively managed fund have to invest money in traditional mutual funds. It is worth noting that several ETF professionals have indicated that the introduction of ETFs with a certain degree of active management is under...

Investing in Chinese Exchanged Traded Funds Listed on US Exchanges

Another approach for U.S. investors to invest in China is to purchase U.S. exchange-traded funds (ETFs) tracking China indexes. Several ETFs are listed in the United States. Investing in those ETFs presents several advantages over mutual funds, including low costs, buying and selling flexibility during trading hours, tax efficiency, and a wide array of investment strategies. This chapter discusses ETFs, how they are created, advantages and disadvantages, arbitrage, and the market mechanics.

Global Diversification

The Oppenheimer Global Fund, the second-oldest global fund in the mutual fund industry, like all the funds under Bill's supervision, makes large bets on companies where the team's conviction is high, and generally owns those companies for a long time period, typically over three years. Many companies in the fund have been there 5 to 10 years or more. On average Bill typically invests in 100 stocks at any given point in time, although two-thirds of the fund is usually concentrated in the top 35 companies.It certainly simplifies the math when you own 100 companies, he points out. For example, with a 1 percent position in a particular company, I can easily determine how much money that would be relative to the size of my portfolio. I like to look for companies that are at least the size of my fund in terms of market capitalization. Then a 1 percent position in the fund is the same as a 1 percent ownership stake in

Involvement with Portfolio Companies

What does an all-star mutual fund manager, whose performance is extraordinary, consider a flop Without hesitating, he utters, Abgenix was my biggest failure.Why I ask myself why I didn't buy more. It rose so fast that I followed my discipline of selling it once it represented a high percentage of my portfolio.


Special gratitude is due to the mutual fund managers profiled in The Winner's Circle, all of whom I have come to admire and respect. I deeply value the friendships that have developed along the way.These portfolio managers need not seek publicity, for their immense success keeps them busy managing hundreds of billions of dollars for millions of investors worldwide. In virtually all cases, their motives for participating were altruistic and magnanimous. In most cases, the managers expressed to me their greatest satisfaction helping investors reach their needs, objectives, and dreams. John Calamos of Calamos Funds told me one of his favorite days The day a gentleman walked into our office to personally thank us for helping him comfortably reach his retire-ment.John walked him around the office to meet the team. R.J. Shook has chosen a diverse group of people from John Calamos of Calamos Growth Fund and Wallace Weitz of Weitz Partners Value Fund to Richie Freeman of the Smith Barney...


These outstanding mutual fund managers make investing look easy the same way we may watch a professional athlete make a great play or a great actor perform. With these mutual fund managers sharing their secrets, you may be tempted to do it yourself. I strongly encourage you to invest with them, not like them. I have a confession Prior to interviewing these mutual fund managers, I was devoted to managing my own stock and bond portfolios. After all, I was a financial advisor and an analyst on Wall Street for over a decade.Why pay unnecessary and ongoing fees when I can buy stocks and bonds with a onetime and often negligible commission. When appropriate, I would rebalance based on my feeling of where there markets were headed. I could control my own destiny. I was satisfied with my performance, even through the down markets in the early 2000s. That is no longer true. After interviewing these mutual fund managers, also referred to as portfolio managers, I realized that...

Selection Criteria

To qualify as a Winner's Circle mutual fund manager, each individual is subjected to intense scrutiny, based on several weighted criteria. The process begins by seeking lead managers, whether they are the sole managers or The Winner's Circle examines the best mutual fund managers in each of the following categories

Bond Fund Winner

I always emphasize the value of diversification. It is my belief that these Winner's Circle mutual fund managers are an excellent starting point when building a diversified portfolio. Large-Cap Mutual Fund Managers Richie's father,Ted, deserves the credit for having nurtured his interest in the stock market. In the early 1960s,Ted placed some of Richie's savings into a mutual fund, helping drive home the benefits of diversification to the young investor. In an oft-repeated expression, Ted would tell young Rich, One day you will work hard for your money. You should always remember to make your money work hard for you.While some relatives thought it wrong to allow a youngster to spend time hanging In fact, during the mid-sixties, the teenager spent almost as much time watching the local stockbroker's ticker tape as he did playing stickball in the schoolyards of Brooklyn. The financial pages of his father's New York Post continued to fascinate him. In addition to looking at closing stock...

China Stock Market

The involvement of investment banks and mutual funds can be used as the measurement of political connections in Chinese securities markets for several reasons. First, most investment banks are state-owned and only a few of them can be bookrunners in new securities issuance. Second, the government decides on who may go public, when, and the size. Investment banks are the underwriters as well as the intermediary between the authority and the issuing firm. Third, the allocation of new shares to mutual funds in IPOs makes investment banks more influential than before because they manage and or control many mutual funds.

On to Wall Street

My conversation with the president of the company got me to focus on what I needed to do in order to manage money. I didn't want to constantly call people for business, like most stockbrokers. That idea terrified me. But if I went to work for a firm that already had the assets, such as a trust department or a mutual fund company, I would have no control over the accounts. Wally couldn't figure out a way to create a money management subsidiary at his firm, so in 1983 he left to start his own. He was very fortunate to get a lot of support from the president of his firm before he left. He basically let me set up the business right from my desk so by the time I launched my firm, I was ready to hit the ground running.With his wife's encouragement, Wally approached several clients who said they would follow him. When they did, he pooled their assets in private partnerships and charged a flat 1 percent on their assets, like most mutual funds.

The Beginning

By 1984 his success managing individuals' money prompted him to open his first mutual fund, a no-load fund called the Meridian Growth Fund. In this fund, Rick seeks fast growing small- and mid-cap companies, but at a reasonable price. With this approach, he has shown that he can provide superior returns, but without the high volatility usually associated with these stocks. Over the five years preceding November 11, 2003, which encompasses both the peaks in the markets of the late 1990s and the lows in 2003, Rick led this fund to a five-year return of 16.37 annualized return, over 16 percentage points better than the S& P 500.

Trading Mechanics

Chapters 17 through 19 describe how U.S. investors can invest in various Chinese stocks, mutual funds, or exchange-traded funds in the United States. Thus, the following description focuses on trading mechanics in the United States. In wrapped accounts, the broker serves as a consultant who gives a full range of financial advice and executes the transactions, including the purchase of mutual funds managed by other companies. All costs are wrapped in one fee. Many large full-service brokerage houses such as Merrill Lynch and Smith Barney offer these accounts.

Brokerage Services

Organizing and operating a trading desk can be a complicated task. A typical equity trading room may handle trades in equities, convertible bonds, foreign stocks, and options and futures.14 Trades may be conducted for a number of mutual funds, pension funds, and other funds managed by the firm. Because of the differences in time zones, trading will take place around the clock.

Team Approach

Today, the Wasatch team numbers 60, including call center individuals. Wasatch outsources functions that are not directly related to pursuing investment ideas or personal interaction with investors, such as shareholder accounting-related activities. Everything investing related is a team approach, even the ownership of the company. We set up Wasatch just like the companies in which we like to invest, Jeff adds, with high inside ownership. Wasatch instituted a stock buyback program in the early nineties. Stock is given to employees, and the program directs the firm to buy back stock from those who leave. In other words, the company is 100 percent owned by its employees, leaving no room for outside ownership. An additional benefit, Jeff says, is that they are not distracted by outside parties interested in buying the company. Jeff also believes that inside ownership helps to attract strong employees and provides a solid career path. Maybe that is why employee turnover is minuscule, and...

Sell Discipline

Unlike many mutual fund managers who keep a close eye on risk measurements, such as beta, Jeff doesn't pay any attention.If a stock is volatile that tells me I have an opportunity to buy it low.When analyzing a company, we are already considering risk, he says. By constructing our financial models, we are considering risk by the fundamentals. If the fundamentals look risky, then we'll own less of the stock.When it comes time to place a trade, Jeff and team tend to be somewhat contrary, he says.We're not momentum players, chasing a stock when it's rising or selling a stock when it's falling. Because we tend to sell when the valuations get high, we're often selling when others are buying. The Wasatch Small Cap Growth Fund's turnover is currently around 40 percent, on the low side compared to its peers in the Morningstar category.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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