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THE NO-LOAD FUND INVESTOR
410 Saw Mill River Rd., Ste. 2060, Ardsley, NY 10502.
Monthly, 1 year, $139.
Sheldon Jacobs: "Every year at this time, we do an article cautioning you to be very careful when investing in the fourth quarter because you could be liable for year-end capital gains distributions you didn't benefit from. Last year, though, we said forget about it, and it turned out year-end 2002 distributions were so low they weren't worth planning for.
This year's payouts may be somewhat higher, but even though we've had eight months of rising prices, we doubt that they will be high enough to worry about in most cases. So, if there is a correction between now and December 31, we would view it as a buying opportunity that would more than compensate you for any unwanted taxes you might incur on year-end distributions. We believe it would be unwise to wait until January to avoid a possible December capital gains distribution.
The year ends on October 31 for purposes of computing the mandatory capital gains distributions. So, we won't know definitively until next month which funds will be making December distributions, but we have accumulated some preliminary data.
Of the 54 equity funds in the various Best Buys portfolios, two-thirds have realized and unrealized capital gains, according to the latest Morningstar data. In most cases the gains are moderate; the median gain is 11%. Some of these funds will pay capital gains distributions this month or next.
The best data so far comes from T. Rowe Price. This year they anticipate that 24 of their equity funds will pay a capital gains distribution; 29 equity funds will not. By way of comparison, last year only 11 Price funds paid a year-end capital gains distribution. The average distribution will be about 55% higher this year than in 2002. Furthermore, two-thirds of the capital gains payouts will be long-term, taxable at the new 15% rate; one-third will be short-term, taxable at ordinary income rates. Exact payouts, of course, vary considerably from fund to fund. Details can be found on their website.
The following table shows the average mutual fund capital gain payout each year since 1996, as a percent of assets. Clearly the fat distributions of the bull market years are long gone. Last year the average payout, of the funds in our database making payouts, was only 2% of assets.
November - December capital gains distributions
as % of assets |
| 1996 |
6.0% |
| 1997 |
7.7% |
| 1998 |
4.7% |
| 1999 |
5.4% |
| 2000 |
9.6% |
| 2001 |
2.8% |
| 2002 |
2.0% |
Our guess is that for those funds making 2003 year-end capital gains distributions, the average payout will be around the 2001 level, perhaps in the 2.8 - 3.0% area.
In the case of the Price funds, which may or may not be typical, 15% (the long-term capital gains rate since May) of a 3% distribution is only .45% of n.a.v. That's often less than a day's price fluctuation. If 1% of that 3% were subject to ordinary income taxes, that would be only .35% of the highest Federal rate. Again, with any gains at all in the final weeks of this year, you would finish ahead on an after-tax basis by buying now rather than waiting until January.
Vanguard has gains data only through September. Only two Vanguard equity funds had realized gains through September: Energy $0.81 and Equity Income $0.36. Several bond funds had realized gains. The two largest were Long-Term Treasury $0.15 and Long-Term Bond Index $0.17. The actual distributions can differ from the realized figures. Fidelity says that they will have distribution data around November 15."
Roger Conrad's UTILITY FORECASTER
1750 Old Meadow Road, Ste 301, McLean, VA 22102.
Monthly, 1 year, $129.
Roger Conrad: Six months ago, Vanguard started a trend by converting its utility mutual fund into a more generic "dividend growth" offering. But while the number of sector funds has shrunk, the best have stayed in there, with great results. Recommended in the January UF, MFS Utilities (MMUFX 7.85, 800-637-2929, 4.75 percent load, $1,000 initial minimum investment/$50 thereafter) is up 24.2 percent year-to-date. That's right inline with 12-year manager Maura Shaughnessy's showing in prior utility bull markets and it portends good things for the future. MFS is one loaded fund that rates a buy up to 8.
Investors will do even better with direct purchase plan DRIPS. Consolidated Water (877-390-3093, $250 initial minimum investment) is the latest UF Portfolio favorite to offer a plan. There are transaction fees and Consolidated is currently trading a lofty level. But the plan is a solid way of buying into the rapid growth of sea-to-fresh water conversion.
My favorite plans now include: Atmos Energy (800-382-8667, $200), BP Plc (877-272-2723, $250), ChevronTexaco (800-842-7629, $250), Dominion Resources (800-552-4034, $250), Energen (800-654-3206, $250), Entergy (800-333-4368, $1,000), KeySpan Energy (800-482-3638, $250), MDU Resources (800-813-3324, $50), Peoples Energy (800-228-6888, $250), Philadelphia Suburban (800-205-8314, $500), Piedmont Natural Gas (800-937-5449, $250), Southern Company (800-565-2577, $250), Verizon Communications (800-631-2355, $1,000), Vodafone (888-BNY-ADRS, $200) and Xcel Energy (877-778-6786, $1,000)."
Forbes/Lehmann INCOME SECURITIES INVESTOR
6175 NW 153 Street, Suite 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
Richard Lehmann: "The current revelations of mutual fund misdeeds are an opportunity for re-examination of the entire industry. Mutual funds were created to level the playing field for small investors by pooling their funds so that they too could benefit from professional money management. From the outset, this concept is flawed in that the investment goals and risk levels of the various holders of the same fund are different. Fixed income investors, on the other hand, can generally find a fund that follows an investment policy with which he can be comfortable. This comfort will decline, however, as you move down the quality scale to junk bond funds. Most fund managers are highly focused on getting new investors into the fund. True, dividend reinvestment is an important source of capital, but it is new money with the commensurate fees that fund managers strive for. To this end, short-term performance is paramount since that is what puts a fund at the top of the quarterly performance rating tables. Unfortunately, this is how all too many investors pick a fund.
But in fixed income funds unlike stock funds, portfolio managers can actually buy this short-term performance. Just lower the credit quality a bit, extend maturities and increase the portfolio's leverage and chances are performance will excel. Long-term, you will most likely lag in performance, but who's watching long-term. A fixed income fund manager who achieves 7% annual growth from four quarters which are up 5%, down 10%, down 5% and up 19% is a much happier fellow than one who achieves the same result, but grows a steady 1.75% a quarter, because two out of the four quarters he looks like a star. Never mind the added risks he took, the fund holders will never know. And the more the fund falls behind, the more scrambling goes on in the background to regain lost ground in the next quarter. Hence, when you see a fixed income fund falling behind, hold off new purchases unless you are prepared for a high risk/reward play.
There are other reasons why I generally don't like fixed income funds. Did you know that the typical fixed income fund turns its entire portfolio over at least once a year? This is inconsistent with the goals of the fund holders. Moreover, these funds invest to a great extent in Reg. 144A securities that they can only trade with other funds. Hence, when bad news comes out, such securities become very illiquid. This brings about another problem, namely the daily pricing used to value the portfolio and, therefore, the price of fund shares bought or liquidated. This daily pricing is often derived from a pricing matrix based on the price of similar securities since many holdings don't trade on a daily basis. In fact, so called 'bad news' securities may stay valued at out of date matrix levels for some time because no one is buying or selling them in an effort to avoid undermining the valuation of an unsold position.
Mutual funds have Boards' of Directors who are supposed to exercise oversight of the management fees, the fund manager and what he buys. This is hard to achieve when a management company executive is also the Chairman. The current scandals may result in fund Boards taking a stronger interest in seeing that the trading practices of the fund stay in harmony with its stated goals and investor profile.
If there's one new disclosure I would suggest for fixed income mutual funds, it is disclosing the demographics of current holders to the portfolio manager. People who are 70 and retired have different financial needs from those at age 55. In fact, I'd like fixed income funds to define their investment goals in terms of the age and level of risk they aim for rather than some rigid formula often focused on securities ratings like BBB or higher. This way, I can shop for a fixed income mutual fund the way I would shop for an investment advisor."
ALL STAR FUND TRADER
P.O. Box 203427, Austin, TX 78720.
Monthly, 1 year, $249.
Ron Rowland: "We generally try to avoid making predictions about the market. This is because we have found that predictions can interfere with an objective evaluation of what is taking place in the market at any give time. However, today we are going to make some predictions, not about the market itself, but about an industry that controls nearly $7 trillion in market assets - the mutual fund industry. We predict:
1) The mutual fund scandal that began on September 3, 2003 will continue to widen and get much worse before it gets better.
2) There will be many more firings in the industry and many new job openings in compliance departments.
3.) Fund prospectuses will be followed and rewritten so that there is less room for inequitable application.
4) The trend toward adding short-term redemption fees will accelerate to the point of being ridiculous.
5) The cut-off time for placing mutual fund trades will move from 4:00 to 2:00 (or earlier) at many brokerages and retirement plan sponsors in order to have order roll-ups completed by 4:00.
6) Firms that already have late-day order roll-up technology in place will prosper.
7) Exchange Traded Funds (ETFs) will thrive.
8) A definition of "market timing" will remain elusive.
9) Abuses of "fair value" pricing will be revealed.
10) Some international funds will implement next day pricing.
11) There will be knee-jerk proposals that may cause more harm than good. The proposed mandating a minimum 2% redemption fee on all mutual funds held less than five days is prime example.
12) Hedge funds will become less "loosely regulated."
13) The industry will be stronger and more transparent.
14. Spitzer will ascend to a higher office.
Technology: After a shaky September, the technology sector came roaring back in October. Early in the month, we stated that we believed the strength in the technology sector would shift from components (electronics and semiconductors) to end products (computers and networking gear). October produced excellent one-month gains like +12.3% for Fidelity Select Computers (FDCPX) and +14.1% for Goldman Sachs Networking iShares (IGN), but those gains did not come at the expensive of electronics, as Rydex Electronics (RYSIX) surged 17.9%.
Gold: Gold funds pressed higher in October. Rydex Precious Metals (RYPMX) gained 7.9%, and funds with a large exposure outside of North America faired even better.
Energy: Misery loves company, but not even the lackluster performance of the health care sector can compare to the rotten performance of the energy sector. For most of the year we have heard the energy bulls talk about the great fundamentals that are in place for this group. However, the stocks tell another story. Energy services funds, like Merrill Lynch Oil Services HOLDRs (OIH), are entrenched in intermediate-term downtrends."
THE FINANCIAL REPORT CARD
PO Box 7173, Kensington, CT 06037.
Monthly, 1 year, $129.95.
Dr. Robert Valuk: "Fidelity and Vanguard offer funds that provide a diversified portfolio of stocks (and, in some cases, bonds) in a single fund. This approach to investing can be very successful if we select funds at both fund groups and target your risk tolerance. If you want to be a little aggressive, Fidelity Four-in-One Index (minimum $10,000) and Vanguard Life Strategy Growth (minimum $3,000) would be your choices. You could also make them a percent of your funds in your All-Seasons Portfolio. If you are age 65, for example, you might want 20% of your money in these two funds and 80% in the more conservative choices that follow. Vanguard Star would be a moderate risk choice (minimum investment $1,000), and Fidelity Freedom 2010 ($2,500) and Vanguard Life Strategy Conservative Growth ($3,000) would also offer reduced risk investing. If you select a portfolio of these funds, we suggest that you do not employ a buy and hold strategy. If we examine these funds relative to value and market cycle appropriateness, they are perfect to own from market bottom-to-top bubble and should be sold or compacted at that time. The good news is that we believe that if these funds were purchased now, especially on market dips, they could be viable for years at this slow economy builds once again to a market top.
If you are wondering what we would be purchasing at the next market cycle peak/bubble stage, the answer is most often Treasury bond funds. We hope we do not see the bubble madness return for at least a few years. Currently we are in a "mini bubble," with stock valuations much too high. We would patiently wait for sell-offs of 200 - 300 Dow points to purchase or start a program in each fund with the fund's minimum requirement and add a set amount each month to employ the advantages of dollar cost averaging. It is interesting to note that all these "funds for all seasons" are up 10 - 20% year to date."
THE INTELLIGENT FUND INVESTOR
26106 Tallwood Dr., North Olmsted, OH 44070.
Monthly, 1 year, $179.
Dr. Gary Harloff: "Our timing signals are all bullish for the S&P 500, NDX, XAU (gold), and US10 year bond yields (bond prices are predicted to go down). We predict the US dollar to go higher in the short run. And, our timing charts show that the S&P 500 and NDX are on buys.
This month we like areas including: semiconductors (Profunds semiconductor SMPIX), electronics (Rydex electronics RYSIX), gold (Scudder gold SCGDX), and international (USGlobal China region USCOX) funds. In terms of the "style box", small is still stronger than large. As the recovery ages, at some point, large stocks will be stronger than small stocks."
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