The amount of evidence stacking up that…mutual funds…do not provide value for their investors is just staggering…While there are certainly signs that the public’s tolerance of excessive fees and executive pay is falling, the likelihood of significant structural change in the finance industry is still remote. Given such a backdrop the probability remains that investors in funds will, on average, continue to underperform their benchmarks. So what is an investor to do? [Read on!] Words: 830

So says Edward Croft (www.stockopedia.co.uk) in edited excerpts from his original article* which Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Croft goes on to say, in part:

We still believe that individuals who have the time and discipline to do their own research and think outside the box should look to invest the equity portion of their own funds directly in the stock market. We appreciate that not every investor has the interest or inclination to do this but a few more might be likely to if they seriously considered how compromised the alternative is.

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Here follows a rundown of ten key reasons why investing in managed funds is such a losers game and then we propose a few alternatives:

1. Underperformance. It has been shown that 75% of investment funds under-perform the stock market averages over the long term, not least due to the compounding impact of high fees and trading commissions.
2. Hidden Costs. The real cost of owning a fund is not published – it is hidden away as reduced performance. Once transaction costs, tax costs, cash drag, soft dollar arrangements and advisory fees are added to the published expense ratios the total annual cost of owning a fund can be over 4%!
3. Agency Issues. Most fund managers typically get rich on fees rather than from making good investments skewing their incentives towards asset gathering and retention rather than investment performance…
4. Size Bias. Due to the above, institutions often get too big to invest meaningfully in smaller companies which much research has shown offer the best opportunity for outperformance.
5. Career Risk. Fund managers’ careers may be at risk if they don’t report consistent quarterly results. This bias promotes short termism, over-trading, ‘herd’ behaviour and the chasing of momentum stocks which can often end catastrophically.
6. The ‘Star’ Issue. Evidence is growing that traditional ‘star’ stock picking fund managers like Bill Miller and Anthony Bolton are struggling to adapt to the evolving ‘risk on, risk off’ market structure. Many have been registering significant underperformance in recent years.
7. Time Weighting of Performance. The average dollar invested in a fund radically underperforms the reported return. This is primarily due to the fact that funds report their returns in a time weighted rather than dollar weighted fashion – a statistical trick chosen to inflate apparent returns to potential investors.
8. Mean Reversion. Are you attracted to a fund with strong historic returns? Don’t be! Returns have a tendency to mean revert and underperform in the future. A recent study showed that “when managers were compelled to invest extra cash from investor inflows in stocks, they were unable to beat the market.”
9. Redemption Delay. It can often take days or even weeks to sell a fund. As many investors found out to their great cost in the credit crunch, in times of poor liquidity the possibility of getting your money out of less liquid funds at all can be significantly reduced!
10. Lack of Transparency. While some funds do publish their ‘top holdings’ many funds are clothed in secrecy begging the question of what is it that you actually own? The Bernie Madoff saga clearly showed how such a lack of transparency can end disastrously.

As we’ve discussed elsewhere, the reason fund managers can’t beat the market is NOT because the market is unbeatable but, essentially, because the fund management industry shows evidence of institutionally bad decision making, herd behaviour and excessive compensation.

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What Are the Alternatives?

If investors are looking for long term security, then they should take matters into their own hands by learning to invest their portfolio themselves. If you can’t find the time and discipline to dedicate to stock market investment (which is probably likely!), we still recommend investing in the stock market, but you should focus on the very lowest cost passively managed funds. ETFs and Index funds are the best bet and have been shown to beat 75% of actively managed funds. Warren Buffett has been quoted as saying “If you have 2% a year of your funds being eaten up by fees you’re going to have a hard time matching an index fund in my view.” In fact, Warren Buffett believes so strongly that index funds will beat hedge funds over the long run that he’s even put a $1m bet on the S&P500 beating a fund of funds over a 10 year basis.

Conclusion

The good news is that the growing social clamour over high fees and excessive pay is leading to an increasing number of low cost ETFs and quantitatively managed funds hitting the market for investors.

The future certainly is looking a lot brighter for investors in funds, but stay vigilant, always think of the costs and think before you act!

*http://www.stockopedia.co.uk/content/10-reasons-why-investing-in-actively-managed-funds-is-a-losers-game-63776/

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6. Check Out THE Number to Watch for Market Direction

 

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7. These are the Top 10 Stocks Based on Yield and Payout Ratio

 

 

I have identified 248 stocks with histories of 10+ years of raising dividends…and ranked the yields and payout ratios of each…to create an average overall rank for each stock. Here are the top 10 on the list. Words: 325

 

8. Size Does Matter: A Look at Market Capitalization and What It Means for Investors

 

 

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9. Which Stocks Trade at a Discount to the “Graham Number”?

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11. Forget the EMH: Motivated Stock Pickers CAN Beat the Market!

 

 

What hope can there be for motivated stock pickers – no matter how much they sweat and toil – to outperform the low-cost index funds that simply mechanically track the market? Well – in spite of the absurd rise of the Nobel-acclaimed, and highly promoted, Efficient Market Hypothesis that claims that individual investors can’t beat the market – it turns out there is plenty! Just ask Warren Buffett, for one. [Let me explain.] Words: 1574

 

Now that Q4 is underway, investors are scrambling to find the right asset class for this rocky environment. Last quarter wreaked havoc on a number of investments and portfolios alike, as the global economy seems to be on a downward spiral. Given the current environment, various investors have flocked to their favorite safe havens to wait out the storm. Gold is perhaps the most popular safe haven in troubled markets, though its actual use as a metal is relatively low. As such, there has been much speculation over whether or not the metal is overvalued, scaring a number investors out of gold and into another precious metal, silver. Words: 3422

So says Jared Cummans (www.CommodityHQ.com)  in an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

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Cummans goes on to convey the following:

Gold, As An Asset Class, Should Be In Your Portfolio – Permanently!

It is no longer a matter of whether or not you should buy gold and/or silver but, rather, which type of investment(s) and how much. You don’t need a lot but you do need some – and here is a primer on just what type of investment vehicles are available and recommendations on just how much you should buy.  Words: 1086

So says Lorimer Wilson (www.FinancialArticleSummariesToday.com) and editor of www.munKNEE.com. Please note that this paragraph must be included in any article reposting with a link* to the article source to avoid copyright infringement. Wilson goes on to say:

Gold is the best hedge against uncertainty there is and it is also a useful thing to have in your portfolio if inflation is rising, as some foresee, or if the U.S. dollar were to decline further, as expected. Don’t take my word for it but instead read this [1] article identifying 90 gold analysts who think the environment is such that the price of gold will go parabolic to $5,000 or more!

How Much Gold Do You Need?

The U.S. firm Ibbotson Associates, in a study for Canada’s Bullion Management Group, found investors can potentially improve their balance of risk and reward with a precious metals weighting of 7.1 per cent in conservative accounts, 12.5 per cent in moderate accounts and 15.7 per cent in aggressive accounts. Precious metals can include silver and platinum, but it’s a term that primarily means gold.

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Another U.S. firm, Wainwright & Co. Economics Inc., looked at the need for gold in one’s portfolio from an inflation protection point of view and concluded from their research (see here [2]) that “a U.S. equities portfolio in which 15% of the assets are diverted to gold bullion would be effectively immune from damage due to a rising gold price and that is, we believe, equivalent to immunity from inflation.”

Which Vehicle Should You Choose?

a) Physical Gold and Silver

Gold in bars or coins makes sense if you are concerned about the complete breakdown of society but you will have an asset that needs to be securely stored. Read this [3] article with suggestions on how to go about buying and storing physical gold and this [4] article on why silver looks to have even greater upside potential than gold.

b) Individual Gold and Silver Stocks and/or Their Long-term Warrants

Gold and silver stocks have an added degree of risk because you not only need gold prices to rise (and gold stocks and gold bullion don’t always move in unison) but you also need your precious metals company to be a well-run business. For greater leverage on your invested dollars consideration should be given to an investment in commodity-related long-term warrants. This [5] article spells out the details on currently available warrants that warrant your consideration.

c) Precious Metals Mining Mutual Funds

PM funds hold the stocks and/or warrants of gold, silver and platinum companies involved in the producing, developing, exploring or buying (via royalty payment arrangements) of such metals. While they are among the most expensive in terms of the fees they charge they have a long history of bringing the benefit of rising gold prices to individual investors (and the opposite, of course).  Go here [6] for specific stock and mutual fund recommendations.

d) Exchange-traded Funds
There are two kinds of gold ETFs:

1. One tracks the price of gold bullion and is thus a clean, convenient proxy for holding physical gold (e.g. the iShares Comex Gold Trust, which trades on the TSX under symbol IGT (IGT-T) and the New York Stock Exchange under IAU (IAU-N) and the NYSE-listed StreetTracks Gold Shares ETF (GLD-N). Go here [7] for a primer on the types of ETFs offered for sale in Canada and the U.S.
2. The other tracks an index of gold mining stocks like, for example, the iShares CDN Gold Sector Index Fund (XGD-T), which follows the S&P/TSX Global Gold Index and Market Vectors Gold Miners ETF (GDX) which tracks the large cap producers in the AMEX Gold Miners Index and the Market Vectors Junior Gold Mine (GDXJ) of mid-cap producers. For more information on GDXJ read this [8] article.

e) Closed-end Funds:

According to Rob Carrick in an article [9] he wrote last year for The Globe and Mail closed-end funds are conventional mutual funds that trade like a stock and thus can be bought or sold any time during the trading day (mutual funds can only be sold at end-of-day prices). Closed-end funds differ from ETFs in that they can trade at significant discounts or premiums to the net asset value, whereas ETFs will veer away from their net asset value only temporarily and mildly. Several closed-end funds offer a way to hold actual gold, including the new Claymore Bullion Trust (CGL-T) and Central Gold Trust (GTU.UN-T).

Two key questions to ask:
1. Am I investing in gold stocks or gold bullion?
2. Am I exposed to Canada-U.S. currency fluctuations?

Remember, gold is priced in U.S. dollars and a rising Canadian dollar will undercut your gains. This won’t be a problem if you own a precious metals fund that holds TSX-listed gold stocks, but it might be if you have a fund tracking gold bullion prices.

f) Gold and Silver Coins:

Owning gold and silver coins are another alternative to consider and this [10] article advises you of the pros and cons of doing so and the types of coins available and preferred.

Conclusion

Gold’s rise past $1,500 (U.S.) per ozt. For an excellent article on the significance of the designation of ozt. go here [11]) has created a lot of excitement and raised expectations of more gains to come but as Carrick said in his article, “You’re not buying stocks for a quick score, though. The reason why gold’s a legitimate asset class for investors today is its potential to shine when all else is bleak.” I couldn’t have concluded this article any better other than to ask: 

 How much gold and/or silver do you have in your portfolio?

 *http://www.munknee.com/2011/05/which-gold-investment-should-you-buy-and-how-much/

[1] Take Note: These Analysts Believe Gold Will Go to $5,000 – or More!
[2] How Much Gold Bullion Should You Have In Your Portfolio?
[3] Rules to Follow When Buying Physical Gold
[4] Why Silver at $398.52 is a Realistic Parabolic Peak Price
[5] The “Secret” World of Gold & Silver Company Warrants
[6] Why Gold Could Go To $5,000 – and How To Capitalize On It!
[7] Gold Bullion ETFs: A Primer
[8] GDXJ: A Small-Cap Gold Miner ETF With Big Potential
[9] Buying gold: An investor’s guide
[10] The Pros and Cons of Buying Gold Bars, Ingots and Coins
[11] What’s the Difference Between 1 Gold Karat, 1 Diamond Carat and 1 Troy Ounce?

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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Gold

I usually tell you about opportunities I see in exchange-traded funds (ETFs) and how you can grab them but today I want to give you a list of some ETFs I think you should absolutely NOT buy! Words: 1158

In further edited excerpts from the original article* Ron Rowland (www.moneyandmarkets.com) goes on to say:

In fact, if you own any of the ETFs mentioned below, you should probably consider selling them as soon as possible. As you’ll see, your money could be much better off elsewhere.

Sell Target #1: Long-Term Bond ETFs

While I’m a big fan of bond ETFs and glad investors can now get access to different parts of the fixed-income markets in ETF format not every bond ETF is a good bet all the time and I think now is a bad time to own long-term, Treasury bond ETFs.

One ETF in this category is especially dangerous during the current environment: Vanguard Extended Duration Treasury (EDV). EDV specializes in long-term U.S. Treasury bonds, 20-30 years and as you probably know, bonds with long duration/maturity are more sensitive to changes in interest rates. This means that for every 1 percent rise in long-term interest rates, EDV could lose 20 percent of principal. So you should consider getting ahead of the crowd and selling EDV now.

Sell Target #2: High-Expense ETFs

Running an ETF isn’t cheap. Hence, every ETF has some level of built-in operating expenses. No surprises there — the sponsors are in it to make money. ETF sponsors also compete against each other. Therefore when someone else offers a more-or-less equivalent ETF with lower ongoing costs, you might want to take a serious look at the cheaper alternative.

Smart sellers lure customers with bargains. For instance, suppose you want a U.S. “total market” ETF — one that covers the whole domestic equity market. iShares S&P 1500 (ISI) might be a logical choice. It seeks to capture the spectrum of large-cap, mid-cap, and small-cap stocks. ISI isn’t a bad fund but Vanguard Total Stock Market (VTI) is just as good and has an annual expense ratio of just 0.09 percent — less than half the ISI expense ratio of 0.20 percent. VTI also holds more than twice as many stocks: around 3,400 vs. only 1,500 in ISI. If you want to own a fund of this type, VTI could make a lot more sense than ISI.

Sell Target #3: ETNs with ETF Alternatives

Some exchange-traded notes (ETNs) are worthwhile because they offer access to markets you can’t buy otherwise — or at least not easily – but when you have a choice between an ETN and an ETF you can eliminate “counterparty risk” by going with the ETF.

Here’s a good example: If you think platinum prices are going up, you might be considering iPath DJ-UBS Platinum ETN (PGM) or E-TRACS CMCI Platinum TR ETN (PTM). Both are exchange-traded notes that leave you exposed in the event the issuer runs into trouble. PPLT is a better way to trade platinum.

You can accomplish almost the same thing through ETFS Physical Platinum Shares (PPLT) without worrying about counterparty risk. PPLT is legally a stand-alone entity that doesn’t depend on the issuer’s credit rating. PPLT delivers the same platinum exposure as PGM or PTM, without the unique risks of being an ETN. In fact, it seems to track the spot platinum price even better than either of the platinum-based ETNs. So if you like platinum, consider avoiding PGM and PTM and going with PPLT instead.

Sell Target #4: Illiquid, Low-Volume ETFs

With hundreds of ETFs and ETNs now covering many different market segments, it’s no wonder there is some overlap. New players have rushed to launch dozens of me-too funds but there’s no way they can all survive. I think a big shake-out is coming.

Which ETFs will drop out of the race first? The truth is they’re already going fast. Just in calendar year 2009, some 56 ETFs and ETNs were closed and delisted. I expect as many, and maybe more, to bite the dust this year. There’s no need to panic if you own an ETF that closes down. The sponsor will simply liquidate your shares and send you a check — but you’re much better off not having to deal with such a headache in the first place.

I have an early-warning system that I call “ETF Deathwatch.” I simply rank funds based on their average daily dollar volume. Those that can’t manage to trade even the small amount of $100,000 daily after an initial shakedown period are probably doomed. Some go days or weeks with no volume at all. Don’t buy them, and consider selling if you own any such funds.

As of last month I had 99 ETFs and ETNs on my Deathwatch. The top five (or the five least-active ETFs) were:
1. Elements Ben Graham Large Cap Value ETN (BVL)
2. E-TRACS CMCI Livestock Total Return ETN (UBC)
3. Elements Spectrum Large Cap US Sector Momentum ETN (EEH)
4. E-TRACS CMCI Short Platinum Excess Return ETN (PTD)
5. Barclays Asian & Gulf Currency Revaluation ETN (PGD)
You’ll notice all five are ETNs — another reason these hybrid securities deserve extra scrutiny. View the full Deathwatch list by visiting my site.

Sell Target #5: Unexpectedly Risky ETFs

All ETFs have risk. There are no guarantees. I think most investors understand this. At the same time, we should expect ETFs to at least meet their objectives, broadly speaking. If a fund is supposed to have a below-normal risk profile, we should ask some questions when it doesn’t. Investors should always know what to expect.

Dividend ETFs, for example, were all the rage a couple of years ago when the stock market was topping out. Conservative investors were enticed into funds like First Trust Morningstar Dividend Leaders (FDL) in the hope steady dividends would balance out market volatility. Unfortunately, FDL plunged more than 65 percent in the recent bear market, even including dividends — not at all what most investors had anticipated. Since other ETFs with similar objectives performed much better, the FDL methodology is obviously flawed in some way. It’s lightly traded and illiquid to boot. If you own FDL at a loss, now is probably a good time to take the hit and switch into a better alternative. Vanguard Dividend Appreciation (VIG) is worth a look.

Seasoned investors know that the “sell” decision is just as important as the decision to buy. Today I hope I’ve given you some food for thought about your ETF choices. Consider using it to review your portfolio and see if you can improve your results.

*http://www.moneyandmarkets.com/five-etf-targets-to-consider-selling-now-37842 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil.)

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