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Showing posts with label mutual funds. Show all posts
Showing posts with label mutual funds. Show all posts

Thursday 20 September 2012

In USA too Funds Leap Beyond Their Benchmarks

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In USA too Funds Leap Beyond Their Benchmarks

In a world of shrinking bond yields, many mutual funds have found a way to make themselves look better.

Their secret: Invest in riskier bonds but continue to measure their performance against benchmarks composed of safer investments.

At least 187 bond funds, including those run by big asset managers such as Allianz SE's ALV.XE -0.78% Pacific Investment Management Co., Oppenheimer Funds Inc. and Putnam Investments, are handily beating the benchmarks against which they compare themselves, according to an analysis by investment-research firm Morningstar Inc. MORN +0.52% for The Wall Street Journal.

Many of them have done so by investing in high-yield corporate bonds, mortgage-backed securities and emerging-market debt, among other securities, according to Morningstar.

Of course, all active fund managers try to beat the benchmark. But concerns can arise when fund managers invest in bonds or other instruments in a proportion that is far off the benchmark. That makes it all the more important, experts say, for investors to keep tabs on their funds' holdings.

Jon Krause
Funds that stretch for higher yields could be at risk of steep losses if the market turns. In 2008, about 40 funds that held large positions in mortgage-backed securities and derivatives outside their benchmarks lost 10% or more, according to Morningstar.

"If they had been more closely tracking the index, a lot of those losses wouldn't have happened," said Eric Jacobson, Morningstar's director of fixed-income fund research.

Benchmarks are the main tool investors use to measure mutual funds' performance. But bond funds are free to choose—and change—their benchmarks.

The Securities and Exchange Commission requires funds to include in their annual reports a chart comparing their performance over a 10-year period with that of an "appropriate broad-based" securities benchmark. But there are no specific requirements, said SEC spokesman John Nester.

Bond mutual funds have boosted their performance this year, in part by deviating from the benchmark indexes they are supposed to resemble. Click on column headers to sort.

Fund prospectuses typically warn investors that managers reserve the right to invest outside their benchmarks as conditions warrant. At the same time, in marketing materials, funds often compare themselves against their benchmark as evidence of strong performance.

Lately, bond funds have been straying more than usual. The "tracking error," the term Morningstar uses for the amount that bond funds veer from their benchmarks, has averaged 2.20% for the 12 months through Aug. 31. (A reading of zero signifies perfect alignment with the benchmark.) The gap was 1.95% during the same period in 2011, according to Morningstar.

In the five years before the financial crisis, the deviation averaged 1.37%.

On average, bond funds beat their benchmarks in the year ended Aug. 31 by about 1 percentage point, according to Morningstar. During the corresponding period in 2011, they trailed their benchmarks by an average of half a point.

To be sure, other factors besides deviation from the benchmark can affect fund performance, such as the timing of bond purchases and sales. And not all funds that stray are rewarded for their daring: 102 of the funds Morningstar flagged had returns that lagged behind or matched their benchmark.

Still, many funds are holding much riskier bonds than their benchmark indexes would suggest—and for the moment are being rewarded.

Putnam Investments' Diversified Income Trust fund, with $3.4 billion in assets under management, has returned 9.4% in 2012, easily beating its benchmark, the Barclays U.S. Aggregate Bond Index, which has returned 3.5%, according to Morningstar.

Almost three quarters of the Barclays index is devoted to low-yielding U.S. Treasurys and securities issued or backed by U.S. government agencies. The Putnam fund doesn't hold any of those types of bonds.

Instead, the fund has 30% of its holdings in high-yield corporate bonds, 17% in emerging-market bonds from countries like Russia and Venezuela, and 16% in non-agency mortgage-backed securities.

Bill Kohli, co-head of fixed income at Putnam and manager of Putnam Diversified Income Trust fund, said the fund makes it clear in its marketing material that it invests in a "range of investment opportunities" including emerging-market debt, high-yield bonds and mortgage-backed securities.

Oppenheimer Global Strategic Income Fund, with $8.7 billion in assets, has seen its tracking error jump from 6.9% to 7.5% in the past year, according to Morningstar. It holds no U.S. Treasurys, and has 30% invested in high-yield bonds and 32% invested in emerging-market debt, according to the company.

The fund has beaten its benchmark, the Barclays U.S. Aggregate Bond Index, by about 7 percentage points this year.

Art Steinmetz, Oppenheimer's chief investment officer, said other indexes might be a more appropriate performance gauge at the moment. But he said the fund frequently changes its holdings, as allowed in its investment mandate, and that it wouldn't make sense to change its benchmark often.

Pimco Total Return, the world's largest bond fund with $273 billion in assets under management, also used the Barclays index as its benchmark. Its tracking error rose to 3.62% at the end of August, compared with 2.75% last year and 1.55% in 2010, according to Morningstar.

Pimco co-chief investment officer and founder Bill Gross has slashed the fund's holdings in U.S. Treasurys to 21% of the portfolio in August, compared with 33% at the end of July. Half of the portfolio is held in a mix of non-agency and agency mortgages. The fund has returned 8.7% so far this year. Pimco declined to comment.

Jacob Wolkowitz, an investment manager at Minnesota-based Accredited Investors, which has about $1 billion in assets under management, said he recently shopped for new bond funds to invest client money.

In each call with fund managers, he said, he brought up the issue of their benchmark. Mr. Wolkowitz said six or seven years ago, bond fund benchmarks better reflected a fund's investments.

Reliance Mutual Fund - Reliance Fixed Horizon Fund XX S12 Dividend PO ...
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ICICI Prudential Mutual Fund fixed-income head Chaitanya Pande quits
Economic Times
ICICI Pru Mutual Fund, which manages over Rs 73,000 crore and is ranked the third-largest fund house in the country, is learnt to have appointed Rahul Goswami fixed-income head. Goswami, who earlier had a stint with ICICI Pru, has over 17 years of fund ...
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3 investments to endure 3 more years of low rates
The Associated Press
Money-market mutual funds are likely to continue paying barely above zero, with 10-year U.S. Treasurys yielding less than 2 percent. That's the outlook after the Federal Reserve's latest move to stimulate the economy by prodding Americans to spend and ...
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Mutual funds join hands with PSU banks for rural reach
Hindu Business Line
With the SEBI regulations emphasising on higher participation from rural areas, mutual fund houses are further strengthening bank partnerships. In the last one month period, fund houses have been tying up with banks in a bid to increase their rural reach.
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Money fund assets fell $10.33 billion to $2.568 trillion in latest week
Washington Post
Assets of the nation's retail money market mutual funds rose $1.88 billion to $888.73 billion, the Washington-based mutual fund trade group said. Assets of taxable money market funds in the retail category rose $2.2 billion to $700.1 billion. Tax ...
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Know the restrictions on cash investment in mutual funds
There is a specific process that needs to be followed while investing in a mutual fund and one part of this deal is the manner of investing. There is a need to know the types of instruments that can be used for investment and, hence, this becomes an ...
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Top 5 Best Performing Utilities Mutual Funds Year to Date - Best Performing ...
During difficult economic conditions, the demand for essential services such as utilities remains more or less constant. Since this category of funds protects investments during a downturn, they are viewed as a defensive choice, and have gained ...
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Funds Leap Beyond Their Benchmarks
Wall Street Journal
Bond mutual funds have boosted their performance this year, in part by deviating from the benchmark indexes they are supposed to resemble. Click on column headers to sort. View Interactive. Fund prospectuses typically warn investors that managers ...
See all stories on this topic »

Reliance Mutual Fund buys 1.88 lakh shares of Supreme Infra
On September 18, 2012 Reliance Mutual Fund bought 188,607 shares of Supreme Infrastructure India at Rs 285. In last trading session the share ended at Rs 295, up Rs 9.95, or 3.49%. It touched an intraday high of Rs 301.35 and an intraday low of Rs 285.
See all stories on this topic »
Govt sets the ball rolling for PSU Exchange Traded Fund
Hindu Business Line
An ETF is just like an equity mutual fund scheme which consists of shares of many companies. It tracks an index and is traded on a stock exchange. Its constituent stocks are listed and actively traded. Since this fund has shares from various sectors ...
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Tuesday 28 August 2012

Mutual Fund Scams


Many financial planners sing about the virtues of mutual funds. They will tell you mutual funds are great long-term investments with high returns and very low risk. In reality, the only thing mutual funds are good for is lining the pockets of people who sell and run them. Before you invest in a mutual fund, consider the following.

There Are More Mutual Funds Than Stocks

At last count, there were over 17,000 mutual funds in the US. That’s more than all the stocks listed on the US exchanges.

Crazy High Fees

Mutual funds carry very high fees compared to other investments. You have purchase fee, redemption fee, exchange fee, account fee, management fee, fee for going to restroom, etc. Just buying a mutual fund puts you in the red from the get-go. The SEC does not limit the size of sales load a fund may charge, but the NASD does not permit mutual fund sales loads to exceed 8.5%. That is a crazy high commission. It means your mutual fund needs to increase in value by 8.5% just so you can break even!

Ah, but what about the backend loaded funds? They can be even worst. Sure, all your money goes into the fund but now you’re locked in for up to 10 years if you wish to avoid paying a load. If you need the cash before then, you have to pay a commission on not only the amount you invested but also on the gain as well! What about “no load” funds? There is no such thing. All funds have a load on it. The financial planner will get his commission for selling you the fund. If you do not pay the commission, then the fund pays it. Guess where the fund eventually takes the money from?

You Are Last In Line

Even before the fund makes one dollar, money comes off the top to pay the fund management company. It doesn’t matter if the fund makes or loses money, the fund company gets a percentage of the fund’s net asset value. Some funds have very high management fees – up to 2% of the fund value. That’s another 2% you have to make up to get back to square one.

Then we have the fund manager. This hot shot is supposed to turn your life savings into a fortune. For the work they do, mutual fund managers are among the most overpaid people in the world. Everyone on Wall Street makes far too much for moving money around, but mutual fund managers are the most reprehensible. Fund managers earn $500,000 to over $1 million a year including bonuses – but 70% of them can’t beat the market. In other words, you are paying them for a 70% chance of losing money. Oh, they will spin any profit as a gain but the question remains, if you cannot even match the market, are you making any real gains?

It Is Possible To Make A Loss and Still Pay Capital Gains Tax

During a crash or market correction, the mutual fund value will drop. This drop can panic many investors, who will then pull their cash out (fees and backend loads be damned). If the fund is fully invested, the fund manager will have to sell some of the holdings in order to pay off the people redeeming fund units. While a normal investor would sell their losers and keep the winners in a down market, the reverse happens in a mutual fund. The fund manger will sell off the winners to pay off the people cashing in their fund so he can look good at bonus time – fund managers don’t get big bonuses for selling holdings at a loss. While this is good for the fund manager, it triggers a capital gain to you. So you are paying capital gains tax on a fund that is declining in value! Talk about getting double screwed!

Still Want To Invest?

If you still want to invest in mutual funds then do yourself a favor and stick to the low cost index funds. Index funds are like mutual funds except the fund manager doesn’t decide what to invest in, the index the fund covers does. For example, an S&P 500 index fund would only hold shares in companies that make up the S&P 500. If S&P drops a company from their index and adds a new one, the index fund must sell the dropped shares and buy shares of the newly added company. This is one reason why Google had to do a 2nd $4 billion offering. They got included in the S&P 500 and the index funds needed to buy their shares in order to maintain their proper holdings. The fees and expense ratio on an index fund are lower and their fund manager isn’t paid as much as a mutual fund manager – any idiot can manage an index fund.

Mutual Fund investments are subject to market risks, please read the offer document before nvesting. Investors may note that securities, which offer higher potential return, will usually display higher volatility. Equity securities by nature are volatile and prone to price fluctuations on a daily basis due to macro & micro factors

Happy Landings ..........

Capt Shekhar Gupta
AeroSoft Corp
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Mutual funds must launch direct plans and offer higher NAV MUTUAL FUNDS MUST LAUNCH DIRECT PLANS AND OFFER HIGHER NAV


Big mutual funds split with management at Citigroup, JPMorgan
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Sebi directive sends small fund houses to small towns
Hindustan Times
Small fund houses are now eyeing smaller cities, following capital market regulator Securities and Exchange Board of India's (SEBI's) recent decision to let fund houses charge extra if they go beyond top 15 cities. At present, most small mutual funds ...
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A reasonable reform for money market funds
Washington Post
THE $2.6 TRILLION money market mutual fund industry functions much like commercial banking: Clients can access their funds readily and write checks while earning slightly more interest than they would on an actual bank account. This advantage is due in ...
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Top 5 Zacks #1 Ranked Fidelity Mutual Funds - Best of Fund Family
With over $1.5 trillion of assets under management and a wide variety of mutual funds spanning across a wide spectrum of sectors, Fidelity Investments is one of the largest mutual fundcompanies in the world. The company provides investment advice, ...
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Fidelity's Abigail Johnson to head all main operations
BOSTON (Reuters) - Fidelity Investments said Tuesday Abigail Johnson was promoted to run all of the company's main businesses, the strongest signal yet that she could be the next leader of themutual fund powerhouse founded by her grandfather. Abigail ...
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Investors add an international touch to their portfolio
Business Standard
According to the Association of Mutual Funds in India's half yearly data, more than 94 per cent of total folios in international feeder funds were owned by retail investors as on March 31. This number has increased from 93 per cent in the previous year.
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Paul Ryan's Jumbled Mutual Fund Portfolio
According to disclosure documents, the presumptive GOP vice presidential candidate and his wife Janna have up to $3.2 million in assets, and much of the portfolio is stashed in mutual funds. The couple's documents are posted at, a Web ...
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In a Harsh Climate, Funds Get Creative
To avoid potential legal issues, the typical mutual fund prospectus is remarkably broad (or, some would say, annoyingly vague). After slogging through pages and pages of technical details, an investor might conclude that the fund can do anything it wants.
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An Investor's Guide to Fees and Expenses
The priciest mutual funds are so-called "alternative" funds, which have an average asset-weighted expense ratio of 1.33 percent, according to Morningstar. Alternative funds buy up commodities or other assets that, in theory, will perform differently ...
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Sunday 26 August 2012

Why some Bankers MisGuide Investors for MF

Save their soul and Job

Is Mutual Funds safe 

Bernanke Warns That "Money Market Mutual Funds Not 100% Safe"

Federal Reserve Chairman Ben Bernanke was unusually candid yesterday at a Senate hearing when he admitted there were “still more risks” of a “run” in money market mutual funds” owned by investment giants  such as Fidelity, Putnam and T. Rowe Price. “It’s not true that money market mutual funds are 100% safe,” he told a Senate committee hearing.

“Some of the tools we used in 2008 to arrest the run on funds are no longer available,” Bernanke explained to an inquiring Senate committee hearing. He singled out the inability of the Fed  to guarantee 100% of the public’s  holdings  in these funds, or in other short term investments such as commercial paper, which was guaranteed in 2008 gto allow corporations to roll over their short term debts. Bernanke also mentioned the requirement included in the  proposed rules to Dodd-Frank Bill that  would require investors to leave 3% of their holdings in money market funds when they liquidate their positions. Bernanke and others have suggested this new rule may dissuade some investors from leaving their money in  these funds, which today hold $3 trillion in assets. Until the Lehman bankruptcy and the resulting meltdown in the financial markets  the public has always considered 100%  safe and secure.

Just last week SEC chairwoman Mary Schapiro also warned  that  a run on a single money market fund “could trigger a broad and destabilizing “  follow-on in the $3 trillion money market funds that hold the short-term savings and deposits of individual investors and are often considered their safety funds in case of  an emergency.

Bernanke was more sanguine about the Fed’s proposal to keep interest rates near zero until well into  2014.  As only 10% of household wealth is in fixed income securities, both short and long term, Bernanke suggested that any trend to higher rates won’t damage much of household wealth. “It’s better to have 90% (of household wealth, the value of homes, equities, small businesses) go up in value” rather than the price of bonds, Bernanke suggested.

“The benefits of lower interest rates until 2014″ should help economic activity” including the value of commodities, the Fed chairman said in making the case for his policy.  His theme was that the private economy should benefit more from lower interest rates than any damage they might doi to savers and retired pensioneers.

Shekhar GuptaCEO
Capt. Shekhar Gupta [ Pilot, DIAM, M.Ae.S.I., MAOPA [USA] ] 
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