Posted on Wednesday, April 8, 2009 - by Henry Walter
Weekly Roundup April 8, 2009
• The Money Market Funds Guarantee Program, originally set to expire on April 30, 2009, has been extended to September 18, 2009, as announced by the Treasury Department.

• While most of the media’s attention has been on the $65 billion Bernie Madoff Ponzi scheme, the SEC has brought charges in more than 75 other such schemes in the past two years.

• A nuclear-powered US Navy submarine, the USS Hartford, collided with another US warship, the USS New Orleans, in the narrow Strait of Hormuz on March 20, 2009. The nuclear-powered sub was severely damaged although the nuclear power plant was not affected at all, according to a Navy spokesman. Something like 40% of all the oil in the world that is shipped by tanker goes through the narrow strait. Don’t be surprised if one of these days there is a major accident choking off the transport of oil and sending oil prices into orbit.

• The average yield to maturity on the Fixed Income Fund at the close of business on March 2, 2009, was 4.29%. About 88% of the fund is invested in synthetic GICs yielding 4.02% and 12% in traditional GICs yielding 6.56%.

• To check on the world population open http://math.berkeley.edu/~galen/popclk.html

• On a longer term basis the exponential growth of the population is likely to put pressure on prices and availability of natural resources. This could lead to many undesirable outcomes like social unrest, wars, epidemics, etc.

• To check out the enormous growth in the U.S. national debt, open www.usdebtclock.org

• While the effect is debatable, it is probably safe to say it is not positive and will lead to inflation, higher interest rates and ultimately to a lower standard of living.

• Here are a couple of interesting ETFs that caught our attention. We recommend neither but will be following them with interest.

• The first is the IQ Hedge Multi-Strategy Tracker ETF (symbol QAI). Its objective is to replicate the returns of several hedge fund styles, including long-short, global macro, market-neutral, event-driven, fixed-income arbitrage, and emerging markets. The fee at 1.09% is high compared to other ETFs, but low compared to the 2-and-20 fee charged by many hedge funds.

• The other is the United States Gasoline Fund (symbol UGA) which directly tracks gasoline prices. So if you want to protect yourself against another surge in gasoline prices, this ETF could be for you.

The criteria for membership in the Standard & Poor’s Dividend Aristocrats Index is that payouts have increased each year for at least 25 years and the company is in the S&P 500. The number meeting the criteria peaked at 64 in 2001, and last year there were 52. With major companies like GE, Gannett, Pfizer, U.S. Bancorp and State Street dropping out, there is a danger the number will fall below 40 for the first time since 1992. S&P has indicated that to keep 40 companies they would lower the requirement for annual dividend increases to 20 years or fewer. The index is used as a basis for a number of dividend ETFs.*

*You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus contains this and other information about the fund, and should be read carefully before investing.

For questions or additional information on this blog entry, please contact us.

Posted on Tuesday, April 7, 2009 - by Henry Walter
Target-Date Funds - Oversold?
Participants in 401(k) and similar plans have significantly increased their investments in target-date funds for a number of reasons. They are simple and offer one-stop shopping. But a major reason is that employers have encouraged them to do so since the Department of Labor added target-date funds to the short list of approved default investments. From 2007 to 2008, the share of plan sponsors using money market funds or stable-value funds as their default option dropped to 19% from 35%, while the share of plans using target-date funds as their default jumped from 35% to 53%. (Source: Greenwich Associates’ “U.S. Defined Contribution Pension Plan Research Study”.) Kodak’s SIP uses target-date funds as their default, the one closest to the participant’s 65th birthday.

At last count there were over 260 target-date funds sold by 34 mutual funds, and during the recent bull market few questions were asked about the safety and risks associated with these funds, and their suitability for inexperienced investors. But now that we are in a severe downturn, and the funds have suffered large losses, many are questioning their basic structure and allocations, and whether they were oversold to unsophisticated investors saving for their retirement.

The issues, which we will describe briefly below, are judged important enough that Congress will hold hearings and likely new regulations and legislation will result. A number of fund families have issued statements defending their strategies, which is to be expected. They can’t exactly say that in hindsight they should have used a different strategy. That would be a recipe for class action law suits from disgruntled investors.

Here are some of the issues.

1. Target-date funds are attractive products for mutual fund companies. Not only do they generate fees and commissions, but investors tend to stay “in house” regardless of the sometimes high fees and poor performance of individual funds in the portfolio. As a result, there is an incentive for funds to adopt a more aggressive strategy to crank up performance and attract sponsors and investors. This strategy backfires in a long, drawn-out bear market such as we are in today. Stock allocations vary widely. For example, according to Morningstar, there are about thirty 2010 retirement funds. In 2008, the best fund lost 3.5%; the worst fund lost 41.3%. Quite a range for funds with only one year to normal retirement (www.http//morningstar.com).

2. The funds are inflexible. But one-size does not necessarily fit all. Even investors of similar age have different goals, risk tolerance and financial resources.

3. Buy and forget can be dangerous. Putting your savings plan on automatic pilot gives a false sense of security. Whatever arrangements you make to manage your money, you need to stay involved. Even if you don’t do it yourself, you should understand the strategy. Target-date funds encourage lack of attention.

4. Target-date funds may be the way to go for some investors. It is better to utilize an imperfect vehicle than not plan for retirement at all.*

If you have investable assets outside your S.I.P. Plan, take a look at the so-called Lazy Portfolios (just Google Lazy Portfolios). Don’t be put off by the name. Most of the portfolios are designed by prominent and successful portfolio managers, such as David Swensen at Yale, and utilize Vanguard funds. We will post an article on Lazy Portfolios in the near future.

*You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus contains this and other information about the fund, and should be read carefully before investing.

For questions or additional information on this blog entry, please contact us.

Posted on Friday, April 3, 2009 - by Henry Walter
HOW SAFE IS the FIXED INCOME FUND? An Update.
Last October we posted a Bulletin on this subject. To retrieve that article click on October 2008 in the Bulletin Archive on the right, and then click on the title under Wednesday, October 22, 2008.

In the article we noted that all investments entail risk, that the lack of transparency makes it difficult to assess risk, and that we were concerned that issuers providing wraps could withdraw from the business or have financial problems, among other issues. We also suggested that having all your eggs in one basket was not a prudent approach to investing.

In a recent issue of the Wall Street Journal (March 26, 2009), Eleanor Laise, in an article titled “Stable Funds in Your 401(k) May Not Be” discusses some of the issues facing investors in such funds. We strongly recommend you read this article if you have an interest in the topic. Your local library probably subscribes to the Wall Street Journal, or you can Google the title of the article.

Here are a few of the issues covered in this excellent article.

To smooth out fluctuations, stable value funds utilize “wraps” or contracts with banks and insurance companies. But many banks and insurance companies are growing reluctant to provide these “wrap” contracts. AIG is a big player in the wrap business. Although Kodak does not utilize AIG, as far as we know, insurance companies used by Kodak are not immune to financial problems.

A key measure of the health of a stable-value fund is the market-to-book ratio. Investors typically buy and sell at the book value. But the actual market value of the fund’s holdings fluctuates. The lower the market-to-book ratio, the more dependent investors are on the financial strength of the wrap providers. According to the Hueler Companies (www.hueler.com), which tracks such things, the average stable-value fund at the end of 2007 had a ratio of 99%, and at the end of 2008, 95%. Not a good trend. As Ms. Laise points out, stable-value funds whose underlying holdings are trading at depressed levels are especially vulnerable to layoffs and bankruptcies, which can lead to mass withdrawals.

For questions or additional information on this blog entry, please contact us.