Tag Archive for: mutual fund

"Have mutual fund fees gone up or down?"

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Investment expenses have been on my mind this month, as you know, if you’ve read “Morgan Creek Capital’s Yusko on investing,” “Morgan Creek Capital’s Yusko riles up Tweeters with comments on investment fees” or you follow me on Twitter.


This prompted me to revisit my article, “Have mutual fund fees gone up or down? Are they fair or unfair? It depends on whom you ask.” 


Many of the points raised in this 2006 article still apply.

  •  For most advisors, it’s a no-brainer to pick the fund with lower expenses, assuming the fund’s style, market capitalization and other major factors are equal. 
  • Controversies swirl around several topics related to fees, including their fairness, their correlation with higher fund returns, whether they’re rising or falling, and whether fund firms are responding adequately to advisor demands.
  • Some financial advisors say both critics and boosters of mutual funds may be missing the point by focusing on disclosed expense ratios. 
  • One thing seems clear: Advisors will continue to gravitate toward low-cost funds that also meet their other investment criteria.

One change since my 2006 article: The Investment Company Institute’s research no longer shows that overall mutual fund expenses are dropping. The headline for its latest study says, “Mutual Fund Expense Ratios Ticked Up in 2009, While Total Fees and Expenses Remained Steady.” Morningstar Advisor put a more negative spin on fees in “Mutual Fund Expense Ratios See Biggest Spike Since 2000.”

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    Morgan Creek Capital’s Yusko riles up Tweeters with comments on investment fees

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    Mark Yusko, CEO and chief investment officer of Morgan Creek Capital, got off easy when he spoke to the annual meeting of the Financial Planning Association of Massachusetts (FPAMA) last week. Nobody at the FPAMA questioned Yusko’s opinions about investment management fees. But plenty of my Twitter followers took issue with Yusko. Still, nobody’s saying that one should always choose the cheapest fund.

    What Yusko said
    Yusko seemed to suggest that fees rise along with the investment manager’s ability to deliver performance.

    He made the following statements:

    • “If you pay low fees, you have your money managed by the worst people” 
    • “In what business does the best person not charge more?”
    • “The idea that you want to minimize costs makes no sense.”
    • People say they know that indexing beats hedge funds, but for a 20-year period, S&P 500 returned 6.5% vs. 13.2% for hedge funds.

    Disagreement
    @BillWinterberg was the first to weigh in on my tweets of Yusko’s comments.

     
    @MariposaCap agreed with Bill.

    @NathanGehring raised another issue, saying “By charging higher fees the manager may feel a need to take additional risk to justify the fee.” He also questioned Yusko’s hedge fund returns.

    Paul Puckett (@investiphobia) emailed me saying, “Disagree, over the long term the opposite is generally true. Expenses are one factor, not the only factor when choosing managers.”

    One lonely defender, but some room for higher fees
    Only one person tweeted in Yusko’s defense.

    Still, as Paul Puckett noted, nobody suggests that expenses suggests that expenses should be the only consideration when you’re choosing a manager. In fact, this theme came up later in the day at the FPAMA conference. 

    Fees matter, said Karen Dolan, Morningstar’s director of fund analysis, in “Beyond Stars: Using Fund Analysis to Improve the Investor Experience.” As her slide stated, “Advisors have responded by moving assets to cheaper funds, but there’s more we can do to close the gap.” 

    Stewardship and portfolio analysis are also keys to choosing good funds, said Dolan. The fund families on her list of “Top Wealth Creators” over the past decade–American Funds, Vanguard, Fidelity Investments, Franklin Templeton, and PIMCO Funds–have all been good stewards, she said.

    The great debate about what really matters in fund selection is likely to continue.


    Related posts
    * Morgan Creek Capital’s Yusko on investing
    * “Using Trading Costs to Identify Better Mutual Funds” in Advisor Perspectives (2007)

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    Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.  

    Copyright 2010 by Susan B. Weiner All rights reserved

    JP Morgan’s Eigen: Put your clients in non-traditional, long-short fixed income

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    Too many of your clients are over-invested in traditional fixed income, in the opinion of William Eigen, JPMorgan Asset Management’s director of absolute return strategies and portfolio manager of the JPM Strategic Income Opportunities Fund. He made a case for using fixed income funds that can go short and use synthetic financial instruments during his presentation to the Boston Security Analysts Society on March 15. 

    Why bond funds haven’t changed
    Fixed income funds really haven’t changed in 30 years, said Eigen. Their managers still basically rely on changes on interest rates to make money. In contrast, he said, managers of equities have driven the development of hedge funds.

    Fixed income hasn’t evolved because interest rates have been falling for 30 years, said Eigen. In other words, with falling rates driving capital appreciation, there was no need for new techniques.

    Can you imagine, Eigen asked, what would have happened to stock funds if the Standard & Poor’s 500 had gone straight up for thirty years? Clearly he believes this would have stifled innovation in the management of stocks. Instead, the stock market’s ups and downs spurred creativity. 

    The need to protect your clients’ capital 
    Traditional fixed income performed more or less okay for thirty years, with some rocky years here and there. But the interest-rate decline that drove bonds’ long-term positive performance will end. “I’m nervous with short rates at zero,” said Eigen, “yet investors are still piling in.”

    Indeed, Eigen managed traditional bond funds during his 12-year career at Fidelity Investments. He left because he felt he couldn’t protect his investors’ capital adequately under the limitations of traditional bond investing. “I won’t be held prisoner to duration,” said Eigen. He wanted to be able to short-sell and put on relative value trades using synthetic instruments.

    It’s important to earn positive returns in fixed income by taking advantages of factors other than falling interest rates. If not, asked Eigen, what happens when a long-term trend of rising interest rates takes hold? If you’re familiar with concept of duration, you know that bond prices fall when interest rates rise. Another negative: With interest rates at historic lows, there’s no “coupon cushion” of attractive interest rates to ease the pain of bond investors.

    It’s easy to see the appeal of short-selling bonds in a rising interest-rate scenario. Investors would profit by essentially betting on bond prices’ decline.

    Now Eigen can take advantage of short-selling as manager of the JPM Strategic Income Opportunities Fund, a long-short relative value fund that does not use leverage. The fund can use synthetic instruments. It can also hold cash because Eigen’s top priority is not to lose money. That’s a challenge for which cash is sometimes the only solution.

    The fund is managed as an absolute-return fund with a target of t-bills plus 2%-8%. “You don’t need duration to generate solid fixed income returns,” Eigen said. Another potential benefit of his approach: it has “zero correlation to traditional fixed income,” Eigen said. 

    Outlook: Rising rates, risky sovereign debt, relative value
    Eigen thinks interest rates could rise faster than most pundits expect. Investors might get scared once rates start rising. Then they might quickly bail out of bonds to cut their losses.

    Eigen is also scared about sovereign risk. Look at what’s happened in Europe and Dubai, he said. His fund is taking advantage of that on the short side.

    Synthetic instruments such as credit default swaps are a good way to take advantage of the relative value opportunities that arise in times of low volatility in bond markets. For example, investors seem to perceive a solid company such as Berkshire Hathaway as on a par with lesser insurance companies. Synthetic instruments are sometimes the only economical way to invest in this disparity.

    What do you think? Is the end near for traditionally managed fixed income funds–or have they still got some life left in them?

    Related posts
    *  Fund using alternative strategies gain steam
    * I LOVE this fixed income presentation
    * Strong words from editor of Financial Analysts Journal

    Poll about overweight, but not the stuff of New Year’s resolutions

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    I grapple with “overweight” at the end of every year and every quarter. 

    It’s the kind of overweight measured in percentage points, not pounds. That’s because I’m writing performance reports for institutional mutual funds that may overweight or underweight sectors relative to the funds’ benchmarks.

    I haven’t found any guidelines about how to write about these statistics, so I’d like to find out which wording you prefer for talking about a fund that has above-benchmark holdings in a sector.

    1. Our overweight in
    2. Our overweight position in
    3. Our overweight to
    4. Our overweighting in
    5. Our overweighting to

    Please answer the poll that will appear in the right-hand column of this blog until some time in February. I’ll report the results in my March newsletter.

    If you can give a compelling reason why you favor specific wording, I’d also like to hear about that.

    Investment management job outlook for 2010

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    There are glimmers of hope in the investment management hiring outlook for 2010, especially for job applicants who help to generate revenues or who are in an area where cuts have been too deep. That’s what I gathered from exchanges with three observers, Michael Kulesza, managing director of Horton International‘s Boston office; Bob Gorog, partner in CT Partners’ Boston office; and Michael Evans, president, FUSE Research Network in Boston. This updates my 2008 posts, “Three recruiters talk about hiring at investment management and mutual fund firms” and “Who’s hiring CFA charterholders.“

    “I do sense an uptick in hiring for 2010,” said Kulesza. “Many companies scaled back heavily, so now they and are planning to add people to their organizations.” That’s particularly true in the areas of sales, new business development, mutual fund wholesalers, and advanced sales support, he said.

    Smaller firms hiring to grow market share 
    Small- to medium-sized firms are hiring more aggressively than bigger firms, added Kulesza. They’re taking advantage of large-company layoffs to upgrade their staff and to increase market share. 

    Given the big banks’ involvement with mergers and TARP funds, some smaller banks see an opportunity to expand their  high-net-worth businesses. “Customers are gravitating toward more local or regionalized high-net-worth services,” he said. 

    Aside from these sales and marketing opportunities, Kulesza believes there may be additions to investment research and analysis. “Back office operations will stay lean,” he said. 

    Privately held and mutual companies are freer to take advantage of hiring and market share expansion opportunities, said Kulesza, because they aren’t answerable to the stock market. Meanwhile, it will take four to five years before investment management hiring returns to its previously high levels, he predicted. 

    Some niches offer more opportunities  
    “The better firms are coming back into the market,” said CT Partners’ Gorog. On the investment side, he sees more searches for international equities than for domestic equities. Opportunistic hiring is also happening in fixed income areas such as credit and distressed debt.

    Some hedge funds are beefing up their distribution. They’re trying to upgrade their clients to include institutions as well as the high-net-worth, fund-of-fund, and family office clients with whom hedge funds typically launch. Funds that have survived three years and delivered decent relative performance over that period figure they have a good shot at expanding their client base. 

    Hiring in product management
    Fuse’s Evans shared the hiring outlook uncovered by the firm’s recent research report on product management at asset management firms. His comments are reproduced below with his permission.

    Increased Activity – Two areas in which product leaders anticipate increased activity is improving web content and capabilities, and hiring of additional staff. A review of firm websites indicates that much of the research and marketing content is dated. In terms of the actions listed, improving web content and capabilities was among the least time-consuming and least expensive actions firms could take, but its impact could be great in that it would signal to advisors and investors that the firm is moving forward.

    In terms of hiring, firms indicated a strong desire to add back staff. Fully 50% of respondents indicated that they plan to hire in 2010. When asked the areas to which they planned to add staff, responses included:
    ·  Product managers
    ·  Marketing managers
    ·  Associates/analysts
    ·  Junior product managers
    ·  Manager research/due diligence

    This suggests that firms may be feeling the burden of carrying out new organizational initiatives using skeleton staffs. Recent analysis by Russell Reynolds Associates concurs that hiring should resume in 2010; particularly on the sales and marketing sides of organizations, as these were among the hardest hit in terms of headcount reduction.

    For wealth managers and financial planners 
    Wealth management professionals and employers should check out Bill Winterberg’s “Your Next New Hire: By Providence or Planning?” Bill lists some resources that may help both job hunters and those who are looking to hire. He also links to some trade publications suggesting that hiring in this arena will pick up in 2010.

    By the way, Winterberg hopes that operations hiring is more robust than Horton International’s Kulesza suggests. “If anything, firms need to support additional capacity ahead of growth, rather than hire after growth exposes bottlenecks in operations.” 

    Good luck to all of you job hunters out there!

    JAN. 12 UPDATE

    If you’re willing to be interviewed by a reporter–and you fit the criteria mentioned below–please contact Emma Johnson at the email address she provides.

    “Hey Wall St., what’s the job market really like? For a story, looking for those currently or recently employed in finance to comment on job outlooks. Anonymous sources OK. emma@emma-johnson.net“

    If you’re marketing to RIAs…

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    …email should be your top method for communicating with them. That’s the message I took away from “Marketing to Today’s RIA: What Every Asset Manager Should Know,” a webinar and report from Morningstar Advisor and Swandog Strategic Marketing. Their webinar and report are based on an online survey of 500 financial advisors that was supplemented by interviews.

    Their research suggested some lessons that may apply to everyone marketing to registered investment advisors (RIAs), even though the Morningstar-Swandog report focused on RIAs’ interactions with asset managers. 

    Lesson 1: Stay in touch via email rather than heavy-handed personal contact or expecting RIAs to visit your website. The graph on p. 13 shows a strong preference for email communications over web access, wholesaler visits, and phone calls.

    Lesson 2: Tailor your marketing materials to RIAs rather than using materials for registered reps. RIAs fall between registered reps and institutional investors in their sophistication. The Morningstar-Swandog webinar quoted one RIA saying, “Give me substance!” RIAs want meatier content than registered reps. Another telling quote: “Most info from investment managers is propaganda. Real objective analysis is rare and valuable” (p. 7).

    Lesson 3: Get your company’s thought leaders exposure in  arenas that confer apparent third-party endorsements. Print publications used to be the best method for this. But now, as moderator Leslie Banks pointed out, you can use Facebook, LinkedIn, and Twitter to push out your content AND get it endorsed by people whom RIAs respect.

    Take the time to read the report and watch the webinar on “Marketing to Today’s RIA: What Every Asset Manager Should Know.” I’ve barely touched on their content and each covers slightly different content.

    Dan Fuss: Bond investors have learned from experience…not

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    In some ways, famed bond investor Dan Fuss is pleased by how far the bond market has come during the last year. October and November 2008 made for a “horrific experience” he said. Since then, bonds have made an incredible recovery. However, their rebound has also brought back some of the behavior that fed their problems, said Fuss to the Fixed Income Management 2009 conference of the CFA Institute on October 1. Fuss is vice chairman of Loomis, Sayles & Company and co-manager of a number of institutional separate accounts for the firm’s fixed income group.

    Fixed income’s bleak months in 2008, when it was difficult to get bids for even the highest quality investments left an impact on Fuss. On paper, October and November offered a fantastic buying opportunity. He spoke of a “50-year opportunity in bonds”  in November 2008. Unfortunately, instead bond funds struggled last autumn to sell in response to mutual fund redemptions.

    As a result, now Fuss pays more attention to liquidity of his investments, even if it means that “I’m fighting the last war.” Compared to 18 months ago, “I’ll give up something to buy something more liquid,” he said.

    Until a few months ago, Fuss thought he wouldn’t see a repetition of the risky behavior that he illustrated with his fable of Colossal Corporation, the world’s largest maker of “colossals,” a product Fuss made up for the purpose of his story. Colossal Corp. began by dabbling in hedging the price of ore and the Australian dollar, and then went heavily into the carry trade. Eventually, it got burned by the credit crunch and decided to give up its speculative ways.

    For awhile Fuss thought that the Colossal Corporations of the world had learned the lesson that they should stick to their business rather than speculating in financial markets. “I thought that was all history,” he said. However, over the last three to four months, he observed that “By God, this thing is starting to replay…. The people who skate on thin ice when they shouldn’t are starting to skate on thin ice again.”

    Speculation is reviving because of the steep yield curve, said Fuss. There is an enormous incentive to go out the yield curve to pick up yield. He discussed a risky new product that made its debut in Japan in March 2009. The Japanese product is being copied by others. “I can’t believe this is happening,” said Fuss.

    Recently, traders at Loomis Sayles told Fuss that he should act quickly if he’d like to get in on a B- credit that would pay a special dividend. “I thought it was a joke,” said Fuss. But it was not.

    Bostonians, where will you be on October 1?

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    Several events in Boston are competing for financial professionals’ attention around October 1. The first aims at investment managers, while the last two target mutual funds.

    • Oct. 1-2, The CFA Institute’s Fixed Income 2009 conference, including presentations by James Grant and Dan Fuss
    • Oct. 1, NICSA’s East Coast Regional meeting, featuring keynote addresses by Robert L. Reynolds,   President and Chief Executive Officer, Putnam Investments, and Keith F. Hartstein, Director, President and Chief Executive Officer, John Hancock Funds, LLC
    • Sept. 30-Oct. 1, MFWire’s Thought Leadership Summit, billed as “Thought Leadership with …’40 Act Fund Distribution’s Most Influential People” 
      Where will YOU be on October 1?

    MFS Investment Management is using LinkedIn to circulate commentary

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    MFS Investment Management has set up a LinkedIn group called MFS Investment Commentary. 

    Its purpose? According to the group profile, it is “A group for financial advisors and investment industry professionals interested in getting updates on MFS’s outlook on financial markets around the world. James Swanson’s Chief Investment Strategist corner, the Week in Review, and the month Global Perspective are featured here. U.S. investment products offered through MFS Fund Distributors, Inc.”

    At a quick glance, it looks as if many of the group members are MFS employees. But perhaps they haven’t publicized it yet among the professionals whom they’re targeting.

    Have you noticed any other fund or investment management companies setting up LinkedIn groups? What about other uses of social networking?

    Related post: Eaton Vance, Evergreen, and FRC on “Communication Strategies for Good Times and Bad”


    Funds using alternative investment strategies gain steam

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    Alternative investments that are less correlated to major market indexes are gathering momentum in the advisor community. Two trends are fueling the movement. First, the sharp market declines since September 2008 have boosted the attraction of strategies that don’t dive along with stock market. “This year, people are looking to dial down risk in their portfolios,” says Bill Harding, director of research at Morningstar Investment Services in Chicago. Second, these strategies are increasingly available to those who don’t qualify as accredited investors (with investable assets of $1 million or more).

    Continue reading “Against the Grain,” my article in the March 2009 issue of Financial Planning magazine (free registration may be required for access).

    Also, here’s some information that didn’t make it into the article. It’s the list of funds used by the advisors whom I interviewed.

    Absolute Opportunities
    Absolute Strategies
    Arbitrage
    Diamond Hill Long-Short
    Direxion Commodity Trends
    Gateway
    Highbridge Statistical Market Neutral
    Hussman Strategic Growth
    Merger
    Nakoma Absolute Return
    PIMCO CommodityRealReturn Strategy
    Robeco Boston Partners Long/Short Equity
    Rydex Managed Futures Strategy