Tag Archives: mutual fund managers

Investing in Mutual Funds: Your Ballot Has Been Cast

  By petillo | November 3, 2011 - 5:04 am | financial planning, Mutual Fund Investing, Paul Petillo, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025, socially responsible investing
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From afar, or even perhaps from your own city, the legions of disgruntled citizens taking to the streets flying banner of OccupyWallStreet has caught our attention. Perhaps you agree and may even be wondering what you can do to help. Perhaps you disagree and feel as though what these folks are trying to accomplish will never bear any fruit. One thing is for certain, your mutual fund manager could care less about their ideals or even their muddled message. He or she is voting with the companies they own by proxy – a proxy you gave them.

As people drill down into their portfolios in greater numbers to look for the reflective values their investments represent, they are increasingly supporting the very businesses that these rogue protesters are vilifying. Keep in mind, some investors have taken the next step in this soul-searching process and moved much if not all of their portfolios into socially responsible funds that do reflect whatever core values they profess. And in doing so, they have made a collective statement that many companies are beginning to heed.

Yes, businesses are getting greener and yes they are attempting to treat their foreign workers better. And investors have begun to cull the good from the bad with the help of some international organizations that have laid guidelines to do so. Some investors in the SRI funds have used their faith as a guide. Others have avoided businesses that deal in liquor, tobacco and firearms and in doing so, embraced some of the Quaker-like ideals that first gave birth to this industry centuries ago.

And some of you have simply not noticed that you may feel one way, even empathetically so. But your mutual funds are doing exactly the opposite and in doing so, they cancel out your feelings about what Wall Street is. Your mutual fund manager is only doing what you hired him to do.

But suppose you feel otherwise? What you may have unwittingly signed up for when you bought into that mutual fund, either individually or from with a company sponsored plan is the proxy. You invest and the manager votes (on the underlying shares of the companies in the fund) on your behalf. They may vote in favor of the current corporate pay rates. They may agree with boards that chose profits over environmental safety even lobbying to dismantle the very agency that you as a taxpayer fund to protect you. And they may vote to keep the current policies in place that are focused less on job creation and more on the short-term bottom line.

In numerous situations, the investor simply sits by and ignores the problem, focusing their attention on the manager’s ability to either keep costs low or generate returns and with luck, both. The fund manager often relies on recommendations when voting these proxies. Those recommendations come from International Shareholder Services (ISS). And who is this entity?

According to their site: “Founded in 1985, ISS is the world’s leading provider of proxy advisory and corporate governance solutions to financial market participants. ISS’ services include objective proxy research and analysis, end-to-end proxy voting and distribution solutions, turnkey securities class-action claims management, and reliable governance data and modeling tools. More than 1,700 clients rely on ISS’ expertise to help them make informed corporate governance decisions.” Those clients are your funds.

And depending on the size of the institution, larger ones offer their own input into the process with smaller firms following the recommendations, your vote is cast. They do offer you the opportunity to comment on the process (voting your thoughts ends on November 7th – comment here). And sitting back and allowing this to occur is the ICI.

According to Marla Brill, writing in Reuters, the trade organization Investment Company Institute “found that funds approved some 90 percent of proposals on a variety of issues from management and about half of those put forth by shareholders, and that votes often fell along the lines of recommendations made by independent proxy vote advisory firms.” While individual shareholders can enlist help via sites like MoxyVote, the mutual fund shareholder has only the prospectus to consult. And few do, with even fewer doing so when they buy the fund.

The problem is not easy solved. Company sponsored plans often look the other way. Historically shareholders in mutual funds do so as well. Some believe that the underperformance of actively managed funds will improve with a change in their current follow-the-leader voting practices. It also requires that fund managers look longer-term, beyond the next quarter’s earnings.

Socially responsible funds do vote according to the underlying wishes of the shareholders the invest for and because many have taken a longer range approach to the problem, their performance has improved over the long-term. Chances are though, your fund has not. To see how your fund family voted, this pdf may tell a story you don’t necessarily want to read.

Mutual Fund Investing: Managers Matter Most of the Time

  By petillo | February 22, 2011 - 6:07 am | Mutual Fund Investing, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025
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One of the single toughest problems facing any investor is research. The information we seek is mostly conflicting, mostly difficult to understand and worse, readily available for the taking. The trouble is, access doesn’t make the choices we need to make about where to put our money any easier.

You might consider the grocery store analogy. You may want to cook a whole chicken for dinner tonight but when standing at the meat counter you find three perhaps four different types of whole birds to chose from ranging from the very pricey organic variety to the very cheap store brand. They look alike, perhaps even clucked alike at one time. But what they are, besides all being chickens, different somehow.

Now mutual fund managers can hardly be compared to chickens. But in some ways, we have the same sort of conundrum facing us when it comes to a mutual fund selection. How much is the fund the manager and does it matter?

Mutual fund managers do have some appeal to certain investors. The longer the term some managers have, the more likely they will remain with the same investment style. Consider the long-term managers at these funds: Parnassus Fund (PARNX) which has had  Jerome Dodson as the fund’s lead for 26 years,  Richard Aster Jr. of Meridian Growth (MERDX) has also put in just as many years and the grandfathers of the industry are people like Albert Nicholas who created his namesake Nicholas Fund (NICSX) and has managed it since its 1969 inception and perhaps the oldest fund manager Bernard Klawans who at 89 years old still runs the small Valley Forge Fund (VAFGX).

But is the same investment style still in style? Yes and no. Markets have remained essentially the same since they were conceived. And although we often consider them as impersonal entities, much like a Watson, they are not. Instead they are made up of people who, for want of a better term, want you to lose. There are two sides to every transaction and good will doesn’t enter into the equation. Hiring a professional such as a mutual fund manager – and this is what you are doing – offers you box seats in the battle of who will win and who will lose in the marketplace.

Understanding the nuances of the markets is a timeless venture that involves understanding the players involved. Sure, computers have made the world smaller and faster and more efficient. Companies have broaden their customer bases and in the process made the oceans that separate the world seem like nothing more than a small pond. The world is at our doorstep.  But the people at the heart of every investment haven’t evolved one iota since the markets were conceived.

It is still not about chasing the next new thing; it is about finding the things that no one really sees as bright and shiny, old investment ideas that have never changed. This is what older managers bring to the conversation. So that would be yes.

On the other hand, the reason these fund managers have remained at the helm for so long has more than a lot to do with who owns the fund family., The four above mentioned fund managers can’t be fired from the positions they created. They can only step aside. So too long is perhaps too long.

Each fund manager must do three things. One they must create a portfolio that is sustainable and worth holding. Fund managers generally have ideas about how this is done and new fund managers will come on board and switch things around, selling one security in favor of another. So they initial year is generally a wash in terms of comparisons. By the five year mark, they should have settled in with their strategies in place. So five years is a good judge of turnover – a term that references how much of the portfolio has changed in the previous year. Less is better.

The second thing they must do is create returns that are better than an index and enough to pay the bills. If the expenses are low, this shouldn’t be too much of problem provided the markets cooperate a little bit during those initial years in the lead position. Returns are tricky though. Weighed against fees, risk and a host of other obstacles, the number the fund posts can mean the difference in whether investors stay invested or turn a look for something more suitable.

Each exiting investor, aside from a no-confidence vote is a sale which forces a sale which in turn, creates some disruption to the investment plan. Get a lot of investors headed toward the door and no matter how good you think you are, you will not be able to sell enough to make ends meet for the remaining investors. This cascade effect was seen best in late 2008 when numerous investors ran rather than staying put and allowing the fund managers to keep the level head they were hired to have. So they must contend with investors and the markets.

The last thing a fund manager needs to contend with is the shareholders in the fund company. Many mutual fund companies are publicly traded entities which puts the manager in the middle of two sets of shareholders. One demands returns and the other demands returns and both consider themselves the most important part of the equation.

There are more than a handful of mutual funds that circumvent this one manager stewardship by using teams or even people and computers, the former to take the blame should things go awry. But some rules do apply across all mutual funds. New anything is not worth buying. A new fund, a new fund manager and new investment strategy are all worth giving a little time and latitude to before you invest. Let the folks who don’t know any better buy first.

Three years is barely enough time to make a performance call on a mutual fund manager; five is better but ten tends to be best. Remember, the three parts to a fund manager’s skill: the markets, the investors and the shareholders. Mastery of those masters is never done in a short period of time.

Mutual Funds, Bonds, Interest Rates and Bubbles

  By petillo | January 29, 2011 - 8:29 am | 401k, bonds, debt, financial planning, mortgages, Mutual Fund Investing, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025
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Almost every investor in the country owns a bond. This ownership might be via bond mutual funds, investments in individual bonds be it corporate, government or municipal, or through the widely used target date funds. Each is prone to its own troubles.

Bond mutual funds, even though they are managed by expert managers, may be so burdened by the underlying investments as to hide or mask the trouble that may be brewing in this market.

Individual bonds are influenced by the health of a company, the ability of the government to retain its high credit rating or in the case of the municipality, pay off the debt it is owed to those who invested.

Target date funds, the darling of the auto-enrolled 401(k) participant may contain the most trouble in part because you don’t have a good bead on what is owned and in many cases, in what proportion.

There are some essential elements of a bond that many simply do not grasp to its fullest. Not the least of which is the effect that interest rates have on these investments. In short, bonds are loans and the way these borrowers pay you back is with the agreed upon interest. Many bond issuers simply refinance those bonds to pay that interest. But what if the interest rate isn’t favorable to such financial restructuring?

So let’s talk interest rates for a moment and some of the assumed beliefs you may have.

The trickle up effect

We often put a good deal of the emphasis on the Federal Reserve bank and their presumed control over all interest rates. They lend to the largest banks in what is called an overnight rate. Banks increase that rate to consumers at each level of lending, the last rung being the consumer loan for a mortgage or a personal loan.

Those rates are determined by demand, the market forces at play and in many instances, inflation and/or governmental budgetary needs (deficits). The Fed looks at money supply, the other half of the demand equation and depending on how much is circulating – too much and the interest rates remain low, too little and they increase. Sometimes.

Sometimes fear increases those rates as well. Growth forecasts and a strengthening economy normally lead to more demand for capital which leads to higher interest rates. Add to that the increasing possibility that inflation will rise as well. gives everyone who borrows the jitters. They know, should these things happen, the Fed will raise interest rates in the name of stabilizing the economy.

The emerging market conundrum

The world is global – while an oxymoron as a stand alone phrase, it represents a growth not previously seen in the decades prior to this one. Emerging economies are building at a pace that is much faster than anyone anticipated. Much of this growth is coming from China but there are numerous other economies doing the same thing on a slightly smaller scale.

The flip side of that growth is investment and investment needs money and countries, faced with growing populations who no longer worry about saving, instead shifting to spending, force borrowing. This will increase interest rates – probably sooner than we expect. many of us have experienced low interest rates for so long, we consider it to be the norm.

Consumers: should you save or should you spend?

The most common answer is to spend. Popular economic theory is that if consumers fail to spend, the economy will languish. This is actually not the whole truth. If interest rates are low, it would pay for infrastructure improvements much more cheaply than otherwise – and these improvements are necessary if corporations expect to become more efficient in their production of goods and services.

The bottom line, a healthy savings rate actually adds to the improvements that need to be made. It doesn’t suggest that folks won’t spend. But it does prompt companies – at least in theory to do a better job enticing you to do so.

Is mortgage deductibility important?

Possibly but the impact is lower and more specific than many suggest. Lower interest rates on home loans entice borrowers to buy more house than they need, refinance to increase their debt and those actions pour more money into the economy. Yet at the same time, estimates of lost revenue to the federal government have been estimated to be as high as $104 billion a year.

Raise those interest rates

No doubt, we expect interest rates to remain low. But they should be inching up. According to Richard Dobbs, director in McKinsey’s Seoul office and a director of the McKinsey Global Institute (MGI) and Susan Lund is director of research at MGI, higher interest rates would “also limit financial bubbles, restraining speculative and heavily leveraged investment while encouraging more investment that would actually raise the economy’s potential growth rate, such as expanding the country’s broadband network, developing new green technologies, and rebuilding aging infrastructure.”

The authors of that report also suggest, a rightly so, that “higher rates would also focus executives’ attention on the return that companies earn on their capital, prodding them to make sure they get more bang for each buck. This could boost the nation’s productivity, which is the key to raising standards of living over time.”

Does this point to a bond bubble?

Not necessarily so. What it does however is seduce investors into thinking that all is well and bonds do not come with risks. Gus Sauter, chief investment officer of The Vanguard Group, the largest U.S. bond mutual fund manager with $413.6 billion of fixed income assets as of Dec. 31 wrote that he is “increasingly worried that people aren’t aware of the risks in the bond market. The problem is that when you’re at historically low rates, as we are now … yields aren’t likely to go significantly lower, and at some point when the economy does strengthen, they’re likely to push higher.”

This does suggest that bond investors are overbought, denying the risks involved and ignoring the potential, even probable readjustment in this corner of the market. Will it burst as a bubble might? Not likely but the slow hiss will take the least experienced investors by surprise and it may be too late by the time it happens for them to do much of anything.

With one exception, possibly two. Increase your equity exposure is one. The other, buy short maturities. This last one might make it difficult for individual bond holders to ladder their portfolios. But at least you won’t be stuck with bonds that are worth less in an inflationary period.