THE NO-LOAD FUND INVESTOR
P.O. Box 3029, Brentwood, TN 37024.
Monthly, 1 year, $139.

Honesty in the fund industry

       Sheldon Jacobs: "There are a number of basic principles you need to follow to become a good investor. Certainly, these include proper diversification of your portfolios, asset allocation to determine the right risk level for you, and keeping a tight lid on the costs of investing.
      There is a fourth rule, equally important, that you need to guide you - only this principle is rarely noted in financial literature: Only deal with honest fund groups and financial advisors. For obvious reasons, this is pretty basic. Yet it is seldom discussed. Unlike the first three principles, this one is hard to pin down with simple guidelines. We shall endeavor to go down this seldom traveled path.
      Dishonesty among fund groups and financial advisors, we think, comes in two flavors. The first is pure fraud or illegality, against which there is seldom an effective defense. The only defense, and it is far from foolproof, is the old maxim, "If it's too good to be true, it usually isn't true." Heeding this warning can keep you away from advisors and newsletter publishers who grossly exaggerate results from fund groups who seek mainly to line their own pockets.
      The second type of fraud can be legal but occurs when a provider of investment services places its own short-term interests above the well being of its clients. It is possible to defend yourself against this.
      Notwithstanding last year's mutual fund scandals, most of today's fund groups have survived with their integrity intact. That is certainly true of the three largest no-load fund groups: Fidelity, Vanguard and T. Rowe Price.
      The fund groups and executives who were caught profiting at the expense of their shareholders not only paid huge damage awards to government regulators but also were punished by investors. The Strong funds have been sold for a fraction of the value they might have commanded before the scandal. At Janus, there has been a turnover of executives. And even though Janus' funds are doing reasonably well, they aren't collecting significant assets.
      Of course, you want to invest with fund groups that not only maintain the letter of the law. You want to own funds that make a positive effort to put your welfare first. Here are some questions to ask when looking for these kinds of funds:

• Does the fund have a below-average expense ratio? If a fund group contains its cost rather than living large and passing the costs on to you, that's a powerful indication the fund group is working for you.
  
• Will the group close a fund when it gets too big? The willingness to forego profits is a clear sign of honesty.
• Does the fund manager own shares? He doesn't have to, but it's a plus if he does.
• Is the group investment-oriented or marketing-oriented? You want a group that's investment-oriented, and not one that attempts to ride every investment fad. If the group launched an Internet fund in late 1999, that's not a good sign.
• Does the annual report try to whitewash bad news, or does it list failures as well as successes?
• What is the average tenure of a fund group's portfolio managers? A short tenure on a fund doesn't necessarily mean it should be avoided, but groups with long-tenured managers are most likely doing something right.

      Keep in mind that many abuses are at the broker level, and not with the fund themselves. The existence of various fee structures within load funds provides ample room for dishonesty. For example, there is a practice, which now thankfully seems to be subsiding, of brokers pushing shares with back-end loads and higher annual expenses ("B" shares) when the investor would have been better off paying the load upfront ("A" shares) and having lower annual expenses going forward.
      If you are concerned about investment newsletters, the recognized watchdog is The Hulbert Financial Digest. This newsletter, which monitors other newsletters, can be obtained on the Internet at marketwatch.com.
      Finally, don't let concerns about honesty in the fund industry or Corporate America stop you from investing. Headlines aside, things are as fair now as they've ever been."

(Back to Index)

PINNACLE Client Letter
Greystone Court West, 573 Hopmeadow St., Simsbury, CT 06070.
Published for clients of Pinnacle Investment Management Inc.
www.Pinnacle-Investment.com.

Diversified portfolio of bonds

      John Eckel: Investment Strategy: The potential for rising interest rates suggests that bond investments be made cautiously since rising rates will result in declining bond prices. FPA New Income and Pimco Total Return, which are taking as very cautious approach in anticipation of rising rates, offer a good opportunity to invest a very cautious approach in anticipation of rising rates, offer a good opportunity to invest in a diversified portfolio of bonds. Bond funds which have an allocation to foreign bonds include American World Bond, and Pimco Foreign Bond and should benefit if the US dollar continues to decline. Eaton Vance Floating Rate fund and other funds which invest in floating rate loans should provide positive returns in a rising rate environment.
      Foreign stocks still remain slightly undervalued compared to US stocks and international value funds such as First Eagle Sogen Global and Overseas, Longleaf International, Tweedy Browne Global, Third Avenue International Value and Franklin Mutual Discovery should perform well with limited volatility and may benefit from a falling dollar. Emerging markets funds such as Oppenheimer Developing Countries and Matthews Asian Growth and Income can capitalize on the rapid growth of developing countries in Asia and Latin America.
      Small cap stocks are no longer undervalued compared to large cap stocks and it may no longer be advantageous to over-weight them."

(Back to Index)

THE INVESTOR'S EDGE
774 Mays Blvd., Ste. 10, Incline Village, NV 89451.
Monthly, 1 year, $149.

A Mutual Fund for Aggressive Growth

      Joseph Shaefer: "It's been awhile since I visited the aggressive growth mutual fund sector for you. After spending a few hours poring over the latest offerings as well as the old standbys, I think I have uncovered yet another that you may do very well in. Harbor Intl Investor (HIINX) invests anywhere legendary fund manager Haakan Castagren chooses. While his largest position is currently in Royal Dutch (RD), (yes!), the rest of the portfolio is in a plethora of smaller names mostly in Europe and the Pacific Basin. He tends to stick with the more highly developed emerging industrialized countries. The fund has returned 26% a year since its inception in late 2002 and has very low (by international fund standards) expense ratio of just 1.3%. I see it as a great way to diversify beyond US shores without undue risk."

(Back to Index)

THE FINANCIAL REPORT CARD
P.O. Box 7173, Kensington, CT 06037.
Monthly, 1 year, $129.95.

Get the most for your risk

      Dr. Robert Valuk: "Risk is a concept at the heart of stock and mutual fund returns. Most investors believe that in order to obtain high market returns you must purchase risky (high Beta) stocks and funds. Risk can be reduced in a variety of ways, but before we examine how that can be done, we must state for the record that exceptional returns can be generated over time with low-risk investments. To achieve this goal, keep at least 30% of your money in secure investments at all times, such as GNMAs, municipal bond funds, short-term bond funds, CDs, inflation-protected bond funds, etc. This reserve allows you to endure short-term sell offs without panic and also allows you purchasing power on major sell offs.
      Maintain a diversified portfolio. This concept is tricky for value investors, especially market cycle specific value investors, who often "load up" on a sector that represents value. Oil stocks, trusts, and funds are a prime example. Diversification to value investors means keeping high Beta stocks as only a small part of their portfolio. Having a diverse group of dividend paying large cap stocks and of holding a high-income portfolio with a variety of high-income players. A high-income portfolio made up of all REITs, for example, will subject you to a lot more risk than our standard mixed portfolio.

• Hold funds that pay dividends; reinvest all dividends
• Use dollar cost averaging to purchase funds and stocks; increase payments on market declines
• Write covered calls on your portfolio
• Sell a stock or fund if it underperforms and its prospects look bleak
• Sell a stock or fund when it or the market seems overvalued; do not become blindsided by taxes, only consider value; investors have lost millions simply to avoid paying Uncle Sam
• If you trade, place stop loss orders on all your trades and have a profit sell level you stick to like glue; traders die broke and greedy traders are usually broke before they die
• Individual stocks outperform funds over the long haul; use both in your portfolio
• When in doubt, raise cash; runaway market may happen once or twice a lifetime - most markets trade in a fairly predictable range; the summer months (May through October) are most often weak
• Spread and stagger stock covered call purchases as described in Emerging Value and Fallen Angels portfolio

      This list is the cornerstone of the philosophy we live by in our daily investment life. To read it is easy, to follow it is harder. How many of these goals can you achieve?

(Back to Index)