ALLSTAR FUND TRADER
P.O. Box 203427, Austin, TX 78720.
Monthly, 1 year, $249.
Ron Rowland: "We've been having a lot of flashbacks to the 1980s lately - the markets, not the music. For those who may not be old enough to recall, a great bull market began in 1982. Globalization was becoming a major force and the U.S. was running a large trade deficit with the rest of the world. In 1985 a meeting of finance ministers from industrialized nations was held in New York, and an agreement called the "Plaza Accord" emerged. The plan was for the world's governments and central banks to cooperate in driving down the dollar's value vs. other currencies in a gradual, orderly manner. This, it was hoped, would ease the trade imbalance without disrupting markets and economies.
The plan worked, but as always there were unintended consequences. Low interest rates in the U.S. spurred the bull market into the stratosphere, and in 2000 the party began to end. Now we are back where we started, with a big trade deficit and much discussion of the dollar being overvalued.
The currency fixation is most apparent in the gold market, which has been moving in a near-perfect inverse relationship to the dollar. Dollar up, gold down, Dollar down, gold up. In terms of other currencies, gold's climb of the last few years has not been nearly as impressive. What looks like a gold bull market could also be interpreted as a dollar bear market.
The key difference this time is that interest rates are rising, not falling, and Alan Greenspan's Federal Reserve shows no inclination to change that policy. Keeping the economy, the dollar and the trade deficit all in some kind of balance is a tall order. Various government officials have repeatedly said in recent weeks the market should set currency exchange rates, but there have also been rumors of coordinated interventions in the foreign exchange markets; again, just like the 1980s.
In the grand scheme of things, economic forces are more powerful than governments. The most the politicians can do is to slow down or speed up things that would have happened anyway. Our job isn't to outguess them. It's to watch the markets and follow the prevailing trends in order to preserve our capital and capture profits.
MUTUAL FUND MONITOR
1412 Spruce St., Berkeley, CA 94709.
Monthly, 1 year, $79.
Diversified Natural Resource Funds
In the previous issue, Larry Luce reviewed Price New Era (PRNEX), the granddaddy of natural resource funds. Below he continues his review of the natural resources sector.
"RS Global Natural Resource (RSNRX) seems to be the most promising fund for our purposes of long-term investment. However, it has had a problem with the SEC. CEO Randy Hecht, who was personally involved in the difficulty, remains in position for 12 months. We must let some time pass before pursuing this fund further.
Excelsior Energy and Nat Res (UMESX) is another fund, potentially most interesting, under an SEC cloud. This involves the fund's adviser, US Trust. We must pass for the present.
US Global Investor Global Resources. This fund, and its parent family, are a one-man show of Frank Holmes. He does have six analysts, unnamed.
In the fall of 2003, he raised the fee to 3.75%. Although he subsequently lowered it to 1.52%, the raising betrays outright stupidity in its disregard for shareholder interests.
There can be no assurance that he might do this again, and so we must pass.
Vanguard Energy (VGENX) seems to be everybody's favorite as an energy specialist fund. I'm not sure that we want such a specialist fund.
ICON Energy is another energy specialist fund, on automatic pilot using just numbers, no human intelligence.
PIMCO Commodity (PCRAX) is a unique fund, at least among those reviewed here. It does not invest in companies, but in commodities themselves. Well, not quite, but in derivatives that seek to replicate the performance of the Dow Jones-AIG Commodity Index.
First complete year was 2003.
This fund seems designed for traders, for purposes of hedging other positions. It's good to now that the fund exists, but I currently don't see a use for it in the long-term investing that we practice.
That's it. For the moment we're left with Price New Era, a decent but uninspiring choice.
It's not clear that we need a fund in either the Natural Resources or Energy areas. After all, any fund manager can buy stocks in either sector.
But stay tuned. Energy in particular will undergo a sea-change in our lifetime as we shift from oil to coal, plus other alternatives. I think it worthwhile for investors to pay particular attention to energy, along with all other natural resources."
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $259.
Six top fund picks for the year ahead
Richard Moroney lists six standout funds in their groups. All six boast above-average performance in recent years, moderate relative risk, and expense ratios below their peer-group average.
"Excelsior Value & Restructuring (UMBIX $42), the Forecasts' long-time favorite among large-company value funds, hold nearly one-half of its portfolio in small and midcap stocks. The fund invests primarily in companies that should benefit from restructurings or industry consolidations. At the end of September, consumer-discretionary stocks represented 24% of the portfolio, followed by financials at 23%. Excelsior Value ranks among the top 1% of its peer group for 10-year total return. So far in 2004, the fund has gained 17.2%, versus 12.4% for its category. Results have benefited from positions in energy and cyclical stocks.
Neuberger Berman Fasciano (NBFSX $44) pursues a disciplined strategy, investing in high-quality small-company stocks. Manager Michael Fasciano targets firms with established franchises that can generate sustainable cash flow and healthy profit margins. At the end of November, Neuberger held 74 stocks. The fund's turnover ratio is only 17%, which helps improve tax efficiency. The 1.22% expense ratio is below that of the average small-company fund. While Neuberger tends to underperform when speculative stocks are in favor, the fund ranks among the top 18% of its peer group for three-year returns.
T. Rowe Price International Discovery (PRIDX $31) has achieved solid results investing in small and midsize foreign companies. As of Oct. 31, 47% of the fund was invested in Europe. Major weightings include Japan (20% of assets), the United Kingdom (14%), and Australia (8%). The largest sector bet was consumer discretionary, at nearly 29% of assets. Third-quarter performance was aided by holdings in telecom-services and consumer-staples stocks. At 1.41%, the expense ratio is well below the category average of 2.08%. The fund's five-year annualized return of 2.3% ranks among the top 25% of its peer group. So far in 2004, the fund is up 17.5%.
Vanguard Short-Term Investment-Grade Fund (VFSTX $11) seeks to provide current income with limited volatility. The fund has had only one losing year over the last two decades. The fund invests mostly in short- and intermediate-term investment-grade corporate bonds, with most bonds maturing in less than three years. The fund yields about 3.5%. The biggest sector bets are industrial (33% of the fund) and finance (28%). At 0.21%, the expense ratio is below the peer-group average of 1.0%. The 10-year annualized return is 6.2%.
Vanguard Strategic Equity (VSEQX $22) is a top pick among midcap funds. Longtime portfolio manager George Sauter invest in both growth and value stocks, using a proprietary stock-rating system. On Sept. 30, the fund held 388 stocks, with a median market capitalization of $3 billion. Leading industry exposures include financial services (23% of assets), consumer discretionary (18%), and health care (11%). The fund ranks among the top 10% of its category for five-year returns. So far in 2004, the fund has climbed 18.6%. The fund charges a 0.45% expense ratio, compared to 1.46% for the category.
Vanguard Wellington (VWELX $31) is a good all-weather fund. Roughly 60% to 70% of the fund is invested in stocks of established mid-size and large companies, most of which pay dividends. The remaining assets are mainly in investment-grade corporate bonds, with some exposure to U.S. Treasury and other government bonds. On Oct 31, Vanguard Wellington held 108 stocks and 251 bonds. The bonds had an average maturity of 6.8 years. The fund ranks among the top 10% of its peers for three-, five-, and 10-year performance. The fund, which yields 2.7% charges a modest 0.36%."
EQUITY FUND OUTLOOK
P.O. Box 76, Boston, MA 02117.
Monthly, 1 year, $139.
Most appealing choice
for foreign exposure
Thurman Smith: "Vanguard Global Equity (VHGEX) has been run by one manager over its ten years, Jeremy Hosking, who started to outperform his benchmarks in 2000. Since the March 2000 high in the domestic market, Global Equity returned the annual equivalent of 11.1%, while the Vanguard Total International Stock Index (VGTSX), a good measure of all foreign markets, declined the annual equivalent of 1.2%. It has $1 billion in assets and a median market cap of $8 billion. Thirty-nine percent of assets is in the Americas, with the rest evenly spread over Europe and Asia. Of the ten global diversified funds in EFO, it has had the best performance over the last six months. It ranks third out of ten over the last three years. No global fund appears attractive at this time, but Vanguard "captives" will find Global Equity to be the most appealing choice for foreign exposure."
THE PRIMARY TREND
700 N. Water St., Milwaukee, WI 53202.
Monthly, 1 year, $80.
Hedge Your Bets
Barry Arnold: "Hedge funds are growing like weeds. They're Wall Street's version of steroids - certainly not for everyone and, without proper supervision, can do irreparable damage to one's financial health.
Hedge Funds, typically, are higher-risk investments that cater to wealthy individuals and institutional investors (i.e., pension funds). In recent years, the number of hedge funds has grown exponentially, only to be eclipsed by the assets that they've attracted into them. Hedge funds appeal to certain investors for a few basic reasons: 1) they are currently unregulated (or at least loosely regulated) and are not required to file with the SEC; 2) due to their very nature, hedge funds are marketed as "high octane" investment vehicles and sometimes deliver on those claims; 3) very often, due to strict "membership" guidelines, becoming an investor in a hedge fund is similar to joining an elitist country club.
The popularity of hedge funds has also changed the dynamics of the financial markets. Not all effects are negative, but our most recent memory is one of hedge-funds-gone-wrong. In 1998, due to over leveraging in the derivatives markets, Long Term Capital Management was caught in a backdraft that brought the financial markets to their knees (albeit temporarily) and LTCM to its grave.
The sheer size and growth of hedge funds make it imperative that, we "plain vanilla" investors, pay attention to their actions and market moves. Walter Deemer monitors the cash inflows and outflows in the Rydex bearish funds in order to gauge the market sentiment, whether bullish or bearish, of the big hedge fund players. According to Mr. Deemer, "the Rydex players, whom I am convinced mirror hedge funds in general, are just the tip of a huge iceberg." Currently, those Rydex players have been liquidating their bearish bets as the stock market has moved up - implying a growing bullish contingent among hedge fund players. This real-money sentiment (versus opinions or poll-oriented) makes contrarians such as Walt Deemer and ourselves very nervous.
One final note on hedge funds - it has come to our attention, courtesy of Walter Deemer, that a new hedge fund concept is in the incubator. Billionaire Mark Cuban, co-founder of broadcast.com (sold to Yahoo! during the dot.com frenzy) and now owner of the Dallas Mavericks, says he plans to start a hedge fund, managed by professional gamblers, to make bets on sporting events. Sadly, it will probably be a huge marketing success. When the sophisticated world of hedge fund investing seems so simple, the time has probably come to eschew them."
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