The ease of adapting Drach’s methods to closed-end funds is based on the similarity of scanning for relative discounting. The essence of the timing technique is to attempt to expand common stock investment when the overall market is relatively low, confining investment interest to stocks that qualify for the Master List, which appear relatively discounted to the others.
Scanning for the most appropriate closed-end fund based on discounts has the same objective: isolating the cheapest. In Drach’s objectives, he is searching for specific stocks that are overly discounted. In Herzfeld’s closed-end fund analysis, he is searching for the most discounted fund. The focus of both techniques is to isolate excessive discounts relative to historical/statistical norms.
A significant differential between Drach’s concentration on specific stock and Herzfeld’s concentration on specific funds is that the funds, by their structure, involve diversity in the number of different positions. Read the rest of this entry »
In the common stock investment techniques, the most obvious hedging strategy might be to be long the stocks that are relatively discounted and sell short those that appear most overpriced. However, the process is not so simple.
Because of the composition of the Master List, the stocks as a group tend to do significantly better than the market as a whole. Consequently, although the long positions have significantly outperformed the broadly based market, the short positions, if sold, will likely provide lesser returns than the overall market.
It is because of the Master List’s positive bias that in hedging accounts Drach utilizes writing index call options as a substitute for the short side. This substitution both eliminates the effect of the Master List’s upside bias that would be experienced in attempting to short Master List stocks and provides added profitability for the short side because of premium capture. As discussed in Chap. 9, the method of going long the selected Master List issues and proportionately shorting (selling) index call options is a lethargic process, which has so far produced a constant annualized return of about 15 percent irrespective of overall market conditions. Read the rest of this entry »
A group of 10 investors decide to form a limited partnership to trade futures, but none of them has the time or experience to act as general partner (GP). Nor does anyone want to assume the unlimited risk that falls on the shoulders of the GP. They take this challenge to a commodity pool operator (CPO).
A CPO is an individual, corporation, or organization in the business of operating and promoting commodity pools. On occasion, a CTA can also be a CPO who promotes his or her own trading programs. In this case, our investors seek a CPO independent of CTAs. They take this approach to get an unbiased analysis of potential traders. Read the rest of this entry »
Client research by Benefits, Inc. shows that plan participants may be usefully grouped into three major segments based on their attitudes toward, and sophistication with, investment concepts. Plan sponsors should consider positioning options to relate to the needs of each segment.
Insecure investors usually compose the largest single participant group. These individuals describe themselves as “beginner” investors. They express a lack of confidence and understanding in matters related to investing and doubt their ability to accumulate enough assets to retire. Their lack of confidence has pushed them into relatively safe investment choices such as money market, fixed income and stable value options. They tend to be the least well diversified. Some avoid participating in a 401(k) plan altogether because of their lack of confidence. Read the rest of this entry »
In an industry that has seen its share of fads, Vanguard has long stood as a symbol of low costs and plain-vanilla products. Founded by John Bogle in 1975, the Vanguard Group is now the second largest mutual fund complex in the United States and has inspired a loyal following among many of its shareholders.
Low-cost funds have been Vanguard’s hallmark— and one of its main rallying cries within the industry. Its ability to provide funds with low expense ratios depends on the company’s unusual business model. In the Vanguard Group, the management company is actually owned by shareholders of its member funds. Read the rest of this entry »
Despite the huge growth of mutual funds, the marked shift in fund types and the creation of new distribution channels, the concentration of market share within the fund management industry remained remarkably stable during the 1990s. The industry has continued to be led by 10 fund managers with 45% to 55% of all mutual fund assets under management and 25 managers with 70% to 75% of all mutual fund assets under management. But many of the leaders changed places over the decade—some because of strong performances and others due to mergers and acquisitions. At the same time, the number of fund complexes overall has continued to increase as new fund managers have taken advantage of the mutual fund industry’s low barriers to entry.
1. Overall industry concentration and turnover In 1990, there were 464 mutual fund complexes, of which the top 10 managed 56% of total industry assets and the top 25 managed 76% of total assets. By the end of 2000, the mutual fund industry was modestly less concentrated at the top. There were 654 complexes at that date, with the top 10 accounting for 46% of total assets and the top 2, accounting for 71% of total assets.The list of top 25 fund complexes has changed significantly, with some complexes dropping out and others stepping in. Read the rest of this entry »
Earlier this year, two mutual fund management companies, American Guardian, Inc. and Best Management, Inc. entered into an agreement under which American Guardian would purchase all of the issued and outstanding stock of Best Management and merge Best Management into American Guardian. Although the companies are now combined, there are still two separate boards of directors for the funds. Each fund complex retained the same independent board members previously elected by the shareholders, but company-appointed directors were reevaluated and will be consistent for both boards. The combined entity, Best American Management, is now in the process of reviewing existing products and services and looking for opportunities to leverage its increased size.
American Guardian was a 30-year old Boston-based mutual fund complex. This fairly staid, conservative company was well known but had not been particularly innovative in fund distribution or shareholder servicing. It had historically chosen to distribute mainly through broker- dealers and outsourced its transfer agent process. The relatively new CEO of American Guardian firmly believed that in today’s highly competitive environment, mutual fund complexes must “grow or die.” He saw an acquisition as a necessary step to ensure that his firm’s products and services would be attractive to investors and their advisers in the future. Read the rest of this entry »
The Class B structure creates challenging financial issues for the fund sponsor This structure carries inherent risk in that the fund’s NAV could decline substantially, decreasing the amount of 126-1 fees and CDSCs received by the sponsor, possibly below the amount it advanced to the broker-dealer. This is especially a risk for an equity fund sponsor, since equity assets are more volatile than other asset types. In recent years, many fund sponsors have sought relief from the risk that the CDSC arrangement entails by taking advantage of new methods of financial engineering developed by banks and investment banks. These methods enable fund sponsors to reduce or eliminate this risk by securitizing and selling the future cash flows from 12b-1 fees and CDSCs. For example, consider a fund sponsor that has just paid a broker a 4% commission for selling Class B shares of a growth find. Rather than wait to recoup this commission via 12b-1 fees and/or CDSCs, the sponsor may sell the rights to these future cash flows to an unrelated party in exchange for a modestly lower payment today. This sale effectively protects the sponsor against the risk associated with a possible downturn in the equities market and consequential decline in cash flows from 12b-1 fees and CDSCs. Read the rest of this entry »
In addition, the composition of equity funds changed during the 1990-2000 period. According to Strategic Insight, broader investment objectives such as growth and growth & income experienced a decrease of 7.7 percentage points in share of equity funds during the decade. The decrease was offset by an increase in more specialized funds, with higher management fees, such as sector funds and international funds. In particular, emerging market and country funds went from a half-percent share of funds 110P available in 1990 to almost 3% in 2000. At the same time, there was a substantial increase in lower management fee products such as index funds, which were almost nonexistent in 1989.
2. Number of funds During the 1990s, fund choices grew alongside assets at a rapid pace as the number of mutual funds increased from around 3,000 to over 8,000.
Implications of this tremendous increase in the number of funds for management fees depend on the resulting trends in average and median fund size, as shown in Table 2 (which defines a fund to include each class of a multi-class fund). Read the rest of this entry »
1. Asset growth In 1990, the mutual fund industry was a relatively small industry among financial intermediaries, with just over $1 trillion in assets, or 12% of the total sector (see Table 1). By contrast, depository institutions had almost five times the assets, or 56% of the sector (of which commercial banks accounted for $3.3 trillion or 38%, and assets of life insurance companies equaled $1.4 trillion or 16%).
By the end of the 1990s, the mutual fund industry had become a major player among financial intermediaries, with almost $7 trillion in assets and 39% of the overall sector. Although mutual fund assets slightly lagged those of all depository institutions taken as a whole-at $7.6 trillion, Read the rest of this entry »
James M. Clash
A wave of consolidation is washing over the mutual fund business. So far this year funds totaling more than $125 billion in assets have changed hands. To hear the consolidators tell it, mergers are good because they bring fund investors economies of scale and breadth of choice within a fund family. Will these promises be fulfilled? It is instructive to consider some of the bigger recent mergers. The results are not encouraging.
Take the Dreyfus funds, purchased in December 1993 by Pittsburgh’s Mellon Bank. In the three years before the merger, the 12 domestic stock funds at Dreyfus performed, on average, on a par with the S&P 500 index. In the three years since, these funds, on average, have underperformed the index by a stunning seven percentage points a year.
Then there’s the American Capital/Van Kampen merger in August 1994. In the 26 months prior to the marriage, the 11 stock funds here outperformed the S&P 500 index by an average of two points annually. In the 26 months since the merger, the funds have underperformed, Read the rest of this entry »
As mentioned above, one group of activists has social rather than primarily financial agendas for U.S. companies. In the view of these activists, U.S. companies should help achieve social goals such as saving animals, protecting wilderness or alleviating poverty. Let’s consider whether these social goals are appropriate for most mutual funds and then for the subset of funds specifically geared to socially responsible investing.
Social activists who attempt to change corporate policies or challenge corporate practices take many different tacks in pursuit of their goals, but all are motivated by one fundamental principle: corporations shouldn’t be solely profit-maximizing entities; rather, they have an obligation to take into account their impact on social issues. Activists seek to influence companies through a variety of means—including litigation, picketing and public relations offensives—in an effort to encourage a company to alter its social policies in some fashion. Read the rest of this entry »
Realistically, greed is such a powerful force at times that it’s difficult to find that coolly rational place that allows you to stop your investing reflex. You come across a stock that you’re convinced is going to take off, and you feel every second you delay represents many dollars lost. In these situations, it’s all you can do not to sell the house and use the proceeds for this investment.
Developing a disciplined mindset can help you deal with these tempting situations. By disciplined, I mean you must be in a highly conscious, analytical state when you make an investment decision. Even as your greed is pushing you to rush forward or buy more, your discipline provides you with more rational alternatives. How do you develop discipline? I’ve suggested a few techniques earlier, such as imposing a 5 percent limit and gathering sufficient information before acting. Here are some additional ways to do so:
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USE A METHOD OR A PROCESS BEFORE MAKING AN INVESTMENT DECISION
Whether it’s going through a mental checklist of things you need to do before taking action or employing a series of questions that must be answered to your satisfaction, a process ensures that you won’t act based only on an overwhelming desire to make money quickly. Read the rest of this entry »
The good news about this investing sin is that you have a number of ways to reduce its negative impact. Here are some steps you can take to reduce your gluttony and find a more healthy balance between active trading and watchful waiting:
A. Reserve 5 to 10 percent of your portfolio for aggressive trading.
Just as a diet isn’t designed to eliminate all food—or even all junky food—a good regimen for the investing glutton isn’t to cut trading entirely. For whatever reason, you enjoy and need the action of buying and selling. What you don’t need is for this need to eat away at your portfolio. Therefore, reserve a small percentage to feed this habit. If you only actively trade 100 shares instead of 1,000, you probably won’t do much damage.
Remember, though, that this 10 percent high-end percentage is absolute! Invariably, a time will come when the actively traded 10 percent will be performing well, and the inner glutton’s voice will say, “Don’t be a sucker; you’re a much better investor now than before; up the percentage to 20 percent?’ Do not heed this voice. It is the same voice the dieter hears after losing ten pounds, the voice that says, “Another slice of chocolate cake won’t hurt you? Read the rest of this entry »
Gluttons are addicts, only instead of being hooked on food they cravethe action of trading. While people who eat a lot may grow large, people who invest a lot often see their portfolios shrink. This type of investor sells bad stocks in the hope of finding good ones and sells good performers in the hope of finding better ones. Read the rest of this entry »
BACKGROUND AND PURPOSE
The primary purpose of regulations is to protect investors, and the roots of governmental regulation of mutual funds in the longer-established markets are often associated with major scandals and market crashes.
In the USA, the stock market crash of 1929 prompted an extensive investigation by Congress into the securities industry. It revealed that overselling, or ‘ramming’ of shares, particularly radio company shares, had created unrealistic expectations and false, overvalued markets. The investigation resulted finally in the Investment Company Act 1940, which established the Securities and Exchange Commission (SEC) – this Act remains the cornerstone of US mutual fund regulation – and the Investment Advisers Act 1940. Along with two Acts passed into Federal law in the 1930s – the Securities Act 1933 and the Securities Exchange Act 2934 – these four Acts provide the bulk of federal powers over the activities of US investment companies. In fact, the only addition to US legislation affecting all companies since 1940 is the Sarbanes-Oxley Act of 2002 and that has only an indirect bearing on mutual funds themselves, being more concerned with accounting, auditing and disclosure practices of trading companies, following the Enron and Worldcom scandals. Read the rest of this entry »
Australia – the first unit trust to be offered in Australia was named just that – Hugh Dalton’s Australian Fixed Trusts offering units in the First Australian Unit Trust in late 1936, when the funds industry was largely unregulated. The Australian retail funds market is now fully regulated under the provisions of the Managed Investments Act (MIA) and, more recently, the Financial Services Reform Act of 2001, which changed the licens ing and disclosure requirements. The MIA requires managers to take on the duties and obligations of the single responsible entity, whereby they are obligated under statute law to uphold unitholder rights. Under this arrangement, trustee duties have been fused with manager duties, but whilst external custody is not mandatory, the majority of managers use independent custodian services. Superannuation funds also gain the regulatory protection of the MIA, as approximately 90% of these savings are invested in wholesale and retail MIA vehicles. Read the rest of this entry »
Each mutual fund has one or more investment objectives. For example, to provide an above-average and increasing income and a yield about 50% higher than the relevant index. It is the investment manager’s task to achieve these objectives, by pursuing a stated investment policy. Each investment management company will adopt an appropriate policy for each of its funds hut will tend to have an overall ‘house style’ or strategy. Two contrasting approaches are:
- Bottom up’. Known as stock-picking. The manager looks for outstanding individual companies. They can be identified from research reports or from personal knowledge of their products, services and management.
- Top<down’. Starts with asset allocation. The manager reviews world or national economy trends first, determines his asset allocation model in terms of geographic and industrial spread, then examines industries in detail and finally selects companies that will benefit from the trends.
Another contrast in styles between different houses is between passive and active management. passive management occurs when portfolio changes are made cannot be breached by the investment manager, Regulations usually will specify also that the investment objectives and policy as set out in scheme documents cannot be changed materially without approval by vote of the share- or unit holders. Read the rest of this entry »
Investors should routinely review the performance of their investment in a mutual fund; there are, however, some factors that need to be considered and understood, as regards both the preparation and the use of statistics. The most readily available performance statistics are compiled to generate a’league table’ based upon the value of an investment after given time periods since the date of initially investing a particular sum of money, say 1,000.
The numbers are calculated assuming the initial investment is made at the buying, or offer, price and the number of shares thus acquired are valued at the current selling, or bid, price. To avoid distortions caused by different patterns of income, the numbers are adjusted on the assumption that any income entitlement is reinvested at each date during the period when the fund made an income distribution. This overall approach is cited as being on the basis of ‘offer to bid, income reinvested’. Read the rest of this entry »
The investment management of a mutual fund’s assets is subject to compliance with the aims and policies stated in the prospectus (or equivalent offering document or explanatory memorandum) and to limitations imposed by regulations or, if more constraining, by the terms of the fund’s constituting deed or instrument of incorporation. This is the case if the investment management is carried out by the fund’s own sponsoring manager or management company, or by a third party appointed under contract to be portfolio manager or investment adviser.
Investors must be protected from unexpected and undesired changes in the purpose and practices of their chosen investment vehicle. Regulations therefore impose both a fiduciary responsibility and prescriptive rules on the operators of mutual funds to ensure there are no unauthorised or imprudent dealings.
Normally, investment is restricted to transferable securities that are listed on a recognised stock exchange, and, for funds that are to be marketed to the general public, investment in gold, oil, sugar and other physical commodities is generally not permitted but investment in property may be. The regulations usually reflect the general principles of collective investment, which are that the fund and its management should have the following characteristics: Read the rest of this entry »
