Archive for the 'Mutual Funds' Category

Page 3 of 4

MERs in the Globe & Mail

Published on 5 years, 3 months ago in Costs and Mutual Funds. 7 Comments

I sometimes wonder what it takes to be a reporter for the Globe & Mail these days. This article on MERs by Dale Jackson had an interesting final paragraph:

However, there is a tradeoff when it comes to ETFs versus mutual funds. Investors are exposed to the whim of the broader markets, without the benefit of an experienced portfolio manager to steer clear of danger.

That will be the day, when a portfolio manager of a Canadian equity fund “steers clear of danger.” And how are investors NOT exposed to the “broader markets” when they have the “benefit” of an “experienced portfolio manager.” I have yet to see any convincing evidence that mutual fund managers are capable of beating the passive indexes, after they have taken their expenses. In case you need any examples…

In one of the earlier paragraphs he said:

It’s important to keep in mind that the cheapest funds aren’t necessarily the best funds. The DMP Canadian Value Class fund returned more than 28 per cent last year even after the 4.11 per cent MER was subtracted – nearly doubling the average Canadian equity fund and the TSX. The United-Canadian Equity Value Pool fund, on the other hand, returned less than 10 per cent in 2006.

Way to pick out a return from a single year and talk about it as if it means anything. It also seems to be the only data point he uses to back up his sub-heading “Fund fees can add up. But sometimes, you get what you pay for.” That return is spectacular though and I like value investing. But that is only one year’s return. It will be interesting to see how it does in the coming years. Investing in the best performing funds of the previous year is definitely not a winning strategy.

Popularity: 5% [?]

Some Bad Advice on ETFs and Mutual Funds

Published on 5 years, 6 months ago in ETFs and Mutual Funds. 0 Comments

Just read an extremely shoddy article in a financial management company publication called “Understanding protected products and index funds.” (see page 7-8). It’s about ETFs, and here’s how it goes:

“Exchange-traded funds (ETFs) are mutual funds traded on a major stock exchange, such as the TSX. The investment strategy for each ETF is to align with a particular stock or sector index, such as the S&P/TSX Composite or one of its sub-sectors. Investments in each fund mirror the same proportions as the index that the particular fund tracks. This strategy is known as passive management or indexing.”

Well this introduction to ETFs is not stellar to say the least, but if directed at a very introductory audience, could be considered satisfactory. It is not true that all ETFs are passive, nor is it true that all ETFs “align” with an index (by market cap), but most are, so close enough. Here’s where it gets kind of crazy:

ETFs are perceived to offer three main advantages. First, since the funds are traded on exchanges, trading is done in real-time.

You stated a fact, but why is that an advantage? Actually it isn’t. How many people (by people I mean investors not speculators) out there are day-trading with ETFs? How many people should be concerned about the weekly, let alone daily activity of the market? How many people should be concerned about whether the security they buy has its price updated in real-time, or every night? The answer to all the questions is ZERO.

Second, ETF values rise (or fall) as the index rises (or falls).

Another fact but why is it an advantage? Was this article written by a 12-year old blogger? The fact that an ETF tracks an index is not an advantage IN ITSELF. So I guess having something that tracks an index is advantageous over something that doesn’t track an index… if what you want to do is track an index? I’m not even going to try to understand what is meant here.

Third, management expense ratios (MERs) are usually lower than the MERs for actively managed mutual funds.

Yes, ETFs can have lower MERs than actively managed mutual funds; however, is that really an apples-to-apples comparison? Sure actively managed mutual fund MERs are high (>2 or 3%). What about passively-managed mutual funds, like an index mutual fund? The Altamira index funds have MERs of 0.54%, at least for the Canadian Index Fund. Last time I checked iShares’ XIC ETF had an MER of 0.25% which is close and don’t forget that you have to pay your trading costs every time you buy and sell it. Anyways, what they were trying to do with advantage #3 was say that MERs are lower for ETFs, which in general, they are, which is the main advantage of ETFs (but don’t forget the commissions) over their competitors. Here’s where it gets really crazy (I mean wacko):

The primary disadvantage of ETFs is their inability to outperform the index.

This seems to conflict with the above advantage that the ETF value “rises (or falls) as the index rises (or falls)”? If it is a primary disadvantage that it can’t outperform an index shouldn’t it also be a disadvantage that is tracks the index? He/she does add that “on rare occasions, an ETF may slightly outperform its benchmark level–a phenomenon known as ‘tracking error’” which again is incorrect. Tracking error is defined as the total error between the index and the index-tracking ETF. Due to MERs it would be almost impossible for your tracking error to be positive except by some crazy fluke of timing. But let’s get back to the statement that “The primary disadvantage of ETFs is their inability to outperform the index.” Well this isn’t really a disadvantage as an ETFs goal is to track an index (modulo those tracking errors) not outperform it. So they must be referring to this as a disadvantage compared to some other financial instrument, which CAN outperform the index. With more risk though right? Nah, with less, because “in fact, investors assume additional risk [with ETFs] because passive managers are unable to take action to outperform the index or to protect the fund during a market decline.” What are these magical investments that can outperform index with less risk than an ETF. Fund managers to the rescue!

On the other hand, a mutual fund manager has the ability to surpass benchmarks – thereby strengthening a portfolio in the event of a market downturn. In other words, while investors can ride the index up, they will also ride it down with no protection from the fall-out.

A mutual fund manager has the theoretical ability to surpass benchmarks, but this ability is rarely manifested in the real world. We have been told countless times about the inability of the majority of mutual funds to beat their corresponding index benchmarks. It is difficult for fund managers to protect their investors from the “fall-out” anymore than a passive index. If it were easy, well, everyone would be in mutual funds. No one is inherently more “protected from the fall-out” with either a passive index ETF or an actively managed mutual fund. Finally,

Also, the low MER on ETFs may be deceiving. Most ETFs are bought through fee-based advisors who will add an annual asset allocation fee to their client portfolio, which in turn can significantly reduce the performance of these passive investments. Fund performance reporting services . . . do not take these fees into account when reporting the performance of these products. When these costs are factored in, ETFs are as expensive as some of the more actively managed funds.

This paragraph sounds like complete rubbish to me. I have an ETF in my portfolio as well as mutual funds. I pay nothing extra on top of the MER, just the commission to buy the ETF. I don’t think the situation would be much different if I had a fee-based portfolio.

Not surprisingly, the author of this embarrassment’s name is not given. Page 3 of the magazine reads “the material in Strategy, while obtained from sources believed to be reliable, is for information purposes only.” If only it were 2-ply, it could serve a more useful purpose.

Popularity: 6% [?]

Has Miller’s fund outgrown his touch?

Published on 6 years ago in Bill Miller and Mutual Funds. 1 Comment

Has Miller’s fund outgrown his touch? discusses whether or not Bill Miller can continue to beat the S&P 500 for much longer. Bill Miller is investment manager for Legg Mason Value Trust. I recently purchased shares in CI Value Trust (Value Trust’s Canadian dollar equivalent) and currently it makes up my entire US portfolio.

. . . don’t be surprised if the fund hits head winds. It barely beat the S&P 500 last year, nosing it by less than a percentage point. And Value Trust trailed the S&P 500 for the first quarter, falling slightly while the index gained 4 percent.

Miller himself notes that the 15-year beating-the-S&P record is just “a fortunate accident of the calendar,”:

he added, noting that there would be no 15-year streak if the investment year ended in any month but December; in some years, Value Trust trailed the index in the 12 months ending in January, February and so forth.

The author Jay Hancok argues (briefly) that it would benefit current investors if the fund was closed up to new investors:

Is it time to close Legg Mason’s flagship mutual fund, Value Trust, to new investors? A good argument can be made that the answer, at least for current investors, is yes.

But Legg Mason has no plans of closing it up just yet:

Its money-management team “believes the fund can comfortably manage substantially greater assets than those presently under management,” says Miller in his statement to me. Value Trust’s low turnover will help.

Miller himself pointed out that:

many successful “managed” (non-index) funds are bigger. Fidelity Investments’ Contrafund had $65 billion in assets last month when it announced that it would bar new investors, to focus on working for existing shareholders.

The author argues that “the more S&P 500 stock that Value Trust absorbs, the harder it’s going to be for Value Trust to outperform the S&P 500.” This is less of a problem for Bill Miller, however, who “makes big, bold bets on relatively few stocks. At the end of last year – the most recent information available – just 10 stocks made up 45 percent of Value Trust’s holdings.”

Popularity: 12% [?]

Mutual Fund Loads

Published on 6 years, 2 months ago in Advisors/Brokers, Costs and Mutual Funds. 5 Comments

When is a Front-End Load NOT a Front-End Load? Answer: when the front-end load is zero.

On a previous blog post of mine about my new portfolio allocation as proposed by my advisor, I received a comment from Average Joe in regards to the MERs and the loads on these funds (CI Value Trust fund, Templeton International Stock fund, and E&P Growth Opportunities fund):

These are all loaded funds as well (ie. they are not no-load funds). You will more than likely be locked in or have to pay a penalty to get out.

I had not looked into the loads of these funds before. In my reply to the comment above, I looked up the load options for 3 three mutual funds in question in their respective prospectuses:

I had assumed these funds were all no-load but they are not, as you have pointed out. I went and looked at the prospectuses (sp?) and here’s what I found:

-CI Value Trust can be purchased and sold after 3 years for free with the low-load option. If you sell before the 3 years are up, the sales charge is 3%.
-Templeton International Stock fund can be sold after 2 years for free with the low-load option. If you sell before the 2 years are up, the sales charge is 2%.
-E&P Growth Opportunities fund can be sold after 2 years for free with the low-load option. If you sell before the 2 years are up, the sales charge is 3%.

This does not concern me too much. I would much rather be locked in to something as it will force me to stay invested, at least on the 2-3 year time scale.

In the above, I am only quoting the “low-load deferred sales charge” option. There are actually three options for these 3 funds:

  • Front-end load (or initial sales charge) option: you pay a sales commission when you buy your shares. The commission is a percentage of the amount you invest and is paid to your financial advisor.
  • Deferred sales charge:
    • Standard deferred sales charge: varies depending on the fund, but usually higher initial penalty percentage than the low-load deferred sales charge option and a longer waiting period until the load disappears, and for some funds you may switch or sell some of your units every year. The penalty charge decreases every year you stay invested in the fund.
    • Low-load deferred sales charge: lower loads compared to the standard deferred sales charge option and shorter time until the load wears off. Usually the penalty is constant rather than decreasing, then after a short period of time, becomes 0%.

I had incorrectly assumed that the low-load deferred sales charge was the cheapest option for the investor. When I asked my advisor about this, he told me how Clearsight handles mutual funds. He said that all funds are available from Clearsight on a no-load basis. They do this by doing front-end loaded funds but with a load of zero. They do have a penalty of 2% if you want to switch or sell within the first 90 days to discourage silly trading. So essentially they have access to all funds on a no-load basis. Also, he told me they get paid a 1% trailer fee from the mutual fund company.

Anyways, that’s just a long-winded way of saying front-end load does not always mean front-end load. If your advisor or his company chooses not to charge the front-end sales charge then it is essentially no-load. After years of investing by myself in TD Mutual Funds through TD’s website, I have a lot to learn about mutual fees!

Popularity: 8% [?]

Must-Read Annual Reports

Published on 6 years, 3 months ago in Gurus, Mutual Funds and Warren Buffett. 0 Comments

Warren Buffett’s annual reports are famous. But there are many other value investors whose reports are must-reads. One of those is Martin Whitman:

Savvy value investors shouldn’t stop with Warren Buffett’s letter. Another renowned value investor’s reports are also well worth reading.

Martin Whitman provides his interesting take on value investing every three months in the Third Avenue Value Fund’s (TAVF) quarterly report. Whitman founded the U.S.-based Third Avenue Value Fund and is the author of Value Investing: A Balanced Approach (ISBN: 0471398101), which is one of the more insightful books on value investing.

Martin Whitman’s quarterly reports (from 1995 to 2004) can be found on the Third Avenue Fund’s web site. Whitman is a deep value investor and often buys distressed debt at deep discounts. For instance, last quarter he started investing in scandal-plagued Parmalat. Whitman said, “Parmalat, a massive fraud, is an Italian-based worldwide company essentially selling dairy products. The fund established a toehold position based on the view that Parmalat seems reorganizable because it is likely that many of its businesses are well entrenched and profitable.” If you think that such situations can’t have a suitable margin of safety, or result in a profit, then you should take a look at the Third Avenue Value Fund’s track record. According to Morningstar.com, the Third Avenue Value Fund beat the S&P500 by over 2% annually during the last ten years and it did so with below-average risk. Mind you, Whitman would likely have more than a few things to say about Morningstar.com’s definition of risk.

In Canada we also have our own value investing guru who writes excellent reports, Irwin A. Michael, manager of ABC funds. He provides monthly commentary, ABC Perspectives, and several other features available through the ABC Funds client page. Not to mention his excellent Value Investigator site.

Popularity: 7% [?]

Incorrect Mutual Fund Charting On My Site

Published on 6 years, 3 months ago in Mutual Funds and calculations. 0 Comments

I was just looking at a chart today at Yahoo that did not make any sense. The chart compares Fidelity Low-Priced Stock Fund (FLPSX) with Legg Mason Value Trust (LMVTX). The problem is that over this period the former should have beaten the latter by a significant margin. According to this article at Forbes.com which I have referenced twice already, FLPSX had an 18.4% annualized return vs. 16.55% for LMVTX. Either the Yahoo chart is incorrect or the Forbes article is incorrect. Then it dawned on me, Yahoo is obviously just plotting the NAV which doesn’t take into account distributions! I found an article, “A Call for Decent Fund Charting,” that cleared things up for me.

Morningstar is apparently the only site that shows plots of total return on investment (besides mutual fund company websites, which only show performance for their own funds). Compare the data here for LMVTX with the data here for FLPSX. It gives FLPSX’s 10-year annualized return as 16.82% vs. 14.71% for LMVTX. That looks more like it! Over the same period in Yahoo, 1996-2006, we see a completely different picture (the incorrect picture).

On Morningstar it is not possible to compare two different funds on the same plot, so charting is useless in my opinion, except for comparing with the indexes and fund categories. The best solution is to look at figures like “n-Year Annualized Return” (see the Trailing Total returns section on Morningstar’s fund pages) at sites like Morningstar’s or on the mutual fund company’s pages themselves.

My apologies, as I have presented a few plots comparing mutual funds from Yahoo in the past. I guess this technically applies to ETFs and stocks as well, basically anything with distributions. I will try to go back and fix some of the old posts that used plots from Yahoo to compare past performance.

Popularity: 3% [?]

Martin Whitman

Published on 6 years, 3 months ago in Gurus and Mutual Funds. 4 Comments

In yesterday’s post I mentioned an article which mentioned some funds that have not beaten Bill Miller’s Value Trust fund on an annual basis, but have done better if one looks at a 15-year time frame. One of those funds is Martin Whitman’s Third Avenue Value Fund. Apparently his fund had a 16.49% annualized return in the last 15 years and “did so with less than two-thirds of the volatility of Legg Mason Value Trust” while Bill Miller’s had a 16.44% annualized return. Whitman’s fund is heavy in financials and producer manufacturing whereas Bill Miller (supposedly a value investor) likes risky stocks like Google, Amazon, and eBay. His top two sectors are consumer discretionaries and information technology. I’m not going to second-guess Bill Miller’s stock picks as he clearly does well, but I think I would much more comfortable with Whitman’s fund than Miller’s. Surprisingly Whitman’s fund has an MER of only 1.12%.

Here’s an interesting interview with Whitman from July 1999: “The Public Be Damned – Martin Whitman of Third Avenue Value Fund.” It’s a good read. People were taking money out of his fund en masse, forcing him to sell off stocks rather than buy:

the 74-year-old Whitman is not comforted much these days by knowing he’s done better than many of his peers. Investors were taking money out of Third Avenue Value at a rate of about $55 million a month, and if this keeps up into fall, the fund could shrink to half its former size. That leaves Whitman always deciding what to sell rather than what to buy. “As for dealing with the public,” he says with undisguised relish, “you may quote me: Screw ‘em.”

That was in 1999. So how well would investors have done had they stayed with Whitman from 1999 to 2006? Take a look at this chart, going back to mid-1996. Third Avenue Value fund is shown in blue. It starts in mid-1999 below the S&P500 (in green) but would have ended up above the S&P500 by 2003. Investors who sold Third Avenue Value fund in 2000-2001 and bought the Nasdaq (shown in black) instead would be even sorrier.

Unfortunately his fund is only available to people in the US. The only Canadian company I found using Third Avenue for their sub-advisor is AIC Global Focused Fund. It is a new fund and it’s performance isn’t yet posted. Not managed strictly by Whitman, but Third Avenue “adheres to a disciplined value investment approach.” This fund doesn’t seem to match any of the funds on Third Avenue’s website.

Popularity: 5% [?]

Beating Bill Miller

Published on 6 years, 3 months ago in Bill Miller and Mutual Funds. 0 Comments

Ever since my advisor recommended Bill Miller’s Value Trust fund I’ve been following him closely. An article, “Beating Bill Miller” caught my eye. The article raises the interesting point, that while he has beaten the S&P 500 every year for the past 15 years, there are other funds that, while maybe losing to the S&P500 in any given year, have beaten his fund over the same time period:

We congratulate Miller on his fine performance, but we’d be remiss if we did not point out that while he has indeed outperformed the S&P 500 Index since the first Gulf War, there are funds (22 of them, in fact) that have outperformed Legg Mason Value Trust over the same time period, according to Morningstar.

Even though these funds may not have beaten the benchmark in each and every year, they have produced returns higher than the 16.44% annualized posted by Miller over the same time period (net of fees and reflecting reinvestment of all distributions).

Miller himself tries to play-down the emphasis on beating the market on a yearly basis and tries to remind investors to think longer term:

In a letter this week to shareholders, Miller said that investors buying into LMVTX because of its 15-year run of benchmark-beating may be setting themselves up for disappointment. “Our goal is to construct portfolios that have the potential to outperform the market over an investment time horizon of three to five years without assuming undue risk,” writes Miller. “If we achieve that goal, we believe we will be doing our job, whether we beat the market each and every year or not.”

In the next couple articles I’ll go over a few of the article’s suggestions for other value-oriented funds which have beaten the S&P500 and Bill Miller’s Value Trust in the past.

Popularity: 8% [?]

Bad Investment Advice

Published on 6 years, 3 months ago in Advisors/Brokers, Mutual Funds and RRSP. 2 Comments

Interesting story came my way today. A good friend of mine (the person who bought me the Intelligent Investor last year), and a loyal reader of my blog, got his brother to go out and put some money into RRSPs for the first time. Most likely he has a little bit of cash saved up from working and is saving it up for rainy day. My friend wrote up a suggested portfolio for his brother that went something like this:

  • TD Canadian index fund (40%)
  • TD US index fund (20%)
  • TD international index fund (20%)
  • Some TD bond fund (20%)

I’d say this was an excellent suggestion for a starting portfolio. It has a low overall MER and is diversified in terms of equities and bonds, but also diversified across several markets, By keeping the allocation rebalanced and by supplementing it with monthly contributions, you could expect to hold onto this portfolio for a long time and you might just beat a large fraction of the managed mutual funds out there.

But I am getting ahead of myself here. My friend’s brother may have walked into the bank with this suggested portfolio (typed up and printed I might add), but he didn’t walk out with anything resembling it.

The person at TD Canada Trust suggested instead that he invest in a 100% Canadian equity mutual fund because it has done so well in the last few years. My friend’s brother of course went along with it (I would too if I was in his shoes). After all, from the age of 17 to 20 my paltry savings were all invested in AIC Advantage Fund, a Canadian equity fund. Why? Because it had done so well in the previous years. This is probably one of the most common traps people fall into: chasing good performance.

There are so many reasons why the portfolio the TD person suggested (or lack thereof) is just wrong. The fact that this person at the TD Canada Trust branch would ignore the excellent suggestion the client came in with is not too surprising I guess, but it still makes me puke.

Popularity: 6% [?]

Bill Miller Beats S&P 500 for 15th Consecutive Year

Published on 6 years, 4 months ago in Bill Miller and Mutual Funds. 2 Comments

This is somewhat old news, but still newsworthy: Bill Miller’s Legg Mason Value Trust Fund has beaten the S&P500 for the 15th consecutive year. Canadian investors can invest in this fund through the CI Value Trust fund.

It is interesting that in the past two and a half years, he hasn’t been able to beat the S&P 500 Equal-Weight Index (^SPXEW) (as tracked by the Rydex Equal-Weight S&P 500 ETF (RSP)). This plot goes back a bit further. You can see that Legg Mason Value Trust has only beaten the S&P 500 Equal-Weight Index (^SPXEW) in the last 6 months. In 2005, 2004, and the portion of 2003 (the index’s year of inception), ^SPXEW has beaten Bill Miller’s Fund.

Popularity: 6% [?]