Bt Investments Blog

I’ll be the first to admit it, index funds are about as exciting as listening to Ben Stein recite Shakespeare. Not only are they boring, but after a decade in which many indexes (think S&P 500) went basically nowhere, some financial professionals I know are pretty dour about their future prospects.  The pessimistic ones believe poor past performance means the future is going to suck as well, and that one lost decade means many more to come.  I took a screenshot of the 10 year history of the SPY, which is an index ETF (exchange traded fund) that tracks the S&P 500.

Doesn’t look too pretty, does it?  Still, there is a reason that the guys at Google recommended index funds to their employees after making it big.  Let’s take a look at why index funds are STILL worth your consideration.

The Same Benefits As Before

“Poor Man’s Diversification” How feasible would it be for you to buy shares of 500 widely held large cap stocks or a basket of investment grade bonds?  Index funds do what they’ve always done- track something.  Whether it be emerging markets or US small caps, TIPS or municipal bonds, index funds allow you to track a benchmark and spread your cash over a variety of components.

Avoids Active Management Studies show the majority of mutual fund managers underperform year after year by trying to pick the “right” stocks. Many in fact are closet indexers, meaning they have a stated strategy but really just track an index while charging more.  Index funds offer a passive alternative that helps you avoid human error.  Again, there are a few great mutual funds (and fund managers) out there, but overall this is a significant advantage.

Dollar Cost Average Instead of trying to predict where the market is going, you can simply invest a set amount of money each month without playing “Psychic”.  Say, for example, you have 5 index funds and $500/month to invest in them.  Simply place $100 monthly in each fund without thinking twice. Along with reinvesting any dividends (see DRIPS), your money will buy you more shares when prices are cheaper and less when the market is riding high.

One of the Few Investments I Can Recommend to My Grandmother Last year, my 85 year old grandmother caught her broker churning her account, meaning he was trading a lot in order to generate more commissions for himself.  Also, she hadn’t even heard of an index fund from him (probably because he makes less off ‘em).  Recently, we gave him the boot and are in the process of shaking things up.

Did I Mention Low Cost? In 2008, the average cost for a U.S. stock fund was 1.6%, 1.8 % for an international stock fund, and 1.3% for a taxable bond fund.  On the other hand, index funds typically charge from 0.15% (US Large Company Index) to 0.97% (International Market Index)!  Also, after your initial purchase, you can add as much as you’d like with no additional costs or commissions.

5 Index Funds To Start Off With

VBISX (Vanguard Short Term Bond Index)- 0.22% expense, $5.3 Billion in Net Assets, $3,000 required for initial investment, $100 for each additional investment, 10 year average return is +5.09%, 5 star rating from Morningstar

VBMFX (Vanguard Intermediate Bond Market Index)- 0.22% expense, $19.6 Billion in Net Assets, $3k initial investment, $100 additional investment, 10 year average return is +6.06%, 4 star rating from Morningstar

VEIEX (Vanguard Emerging Market Index)- 0.39% expense, $7.8B in assets, $3k initial investment with $100 additional, 10 year average return is +9.79%, 3 star rating from Morningstar

NAESX (Vanguard Small Cap Index)- 0.28% expense, $5.8 Billion in net assets, $3k initial investment with $100 additional, 10 year return is +4.36%, 3 star Morningstar rating

SWPPX (Schwab S&P 500 Index)- 0.11% gross expense, $9.4 Billion in net assets, $100 required for an initial investment with $0 additional, 10 year return is -1.01%,  3 star Morningstar rating

One Last Note

You might have noticed that the last fund from Schwab had a lower expense ratio than the equivalent Vanguard fund, as well as only requiring $100 to start investing!  For those of you who are starting with smaller amounts of cash, it’s okay to shop around for funds with lower initial requirements and expenses.  Just be sure the manager has been around a while, the fund tracks the index closely, and it has a decent Morningstar rating.

Hasta pronto,

Jon

Oliver Kratz, who has run  DWS Global Thematic since late 2003 along with funds sold in Europe and Asia, will take his entire team with him, and the new firm will be owned by its staff. Investment ideas will be generated solely within that team, rather than utilizing Deutsche Asset Management's global analyst network.

Janet Campagna, who leads Deutsche's quantitative strategies group, will also establish a separate firm, along with the group's head of portfolio management, Robert Wang, and other senior team members. The group hopes to retain 40 staff members at the new firm, although details are still being hammered out. The quant team is responsible for running several equity and alternative strategies funds and comanages a number of the firm's asset-allocation funds, including the DWS LifeCompass target-retirement series.

The two teams were housed in Deutsche's institutional-focused DB Advisors unit, which now plans to concentrate on fixed income and cash management. Deutsche is providing legal, compliance, and operational support to the new shops during the transition, and a firm spokeswoman said this change will not impact fund fees.

Fidelity Suspends Two
As we noted last week, Fidelity recently replaced the portfolio managers on  Fidelity China Region and Fidelity Advisor Emerging Asia .

This week, it was reported that Fidelity recently suspended two Hong Kong-based portfolio managers for suspected ethics breaches. The fund family confirmed that it is conducting an investigation but that no criminal conduct is alleged, and that the suspended managers' funds had been reassigned. Given the ongoing investigation and employee confidentiality issues, Fidelity would not confirm the names of the two suspended managers.

Eaton Vance's New Commodity Fund Helmed by PIMCO Vet
Eaton Vance recently filed with the SEC to launch Eaton Vance Commodity Strategy. The new fund will be managed by John B. Brynjolfsson via Armored Wolf, the investment management firm he started in 2008. He'd managed  PIMCO Real Return from its 1997 inception through the end of 2007. Brynjolfsson was a member of the PIMCO management team that won Morningstar's Fixed-Income Manager of the Year honors in 1998 and 2000.

The new fund's I share's expense ratio will be 1.35%, and the filing indicates it won't invest directly in physical commodities but will invest in commodity-linked derivative instruments (including commodity index-linked swap agreements and structured notes, as well as commodity options, futures, and options on futures) backed by a portfolio of long and short positions in fixed-income securities.

Manager, Strategy, and Name Changes at Delaware
The team led by Marshall Bassett on  Delaware Trend ,  Delaware Growth Opportunities , and Delaware American Services has been replaced by Jeff Van Harte's "Focus Growth" team, which currently runs  Delaware Select Growth and  Delaware US Growth . The management changes went into effect on Jan. 21. Bassett's team remains with Delaware but does not currently have any direct portfolio management responsibilities.

On Jan. 19, the board of trustees for the fund approved a name change for Delaware Growth Opportunities, which will become Delaware Smid Cap Growth. Christopher Bonavico and Kenneth Broad have assumed primary management duties. The fund's objective and strategies have also changed to focus in the small- and mid-cap growth space.

Delaware Trend, which will retain its name, has also been assigned to Bonavico and Broad. The fund will be repositioned as a focused small/mid-growth strategy, generally holding 25 to 30 stocks in the portfolio, making it a far more aggressive strategy.

Delaware American Services will become Delaware Growth Equity. Van Harte will be a named manager on that fund, along with Bonavico, Broad, and the other managers on the Focus Growth team, including Christopher Ericksen, Patrick Fortier, Gregory Heywood, and Daniel Prislin. The fund will no longer be required to invest in service and service-related companies and will focus on growth firms of any size or market capitalization.

These name changes and objective changes will go into effect on March 22, 2010.

Overall, the changes appear to be positive. Bassett's team struggled over the past few years, whereas Van Harte's team, which joined Delaware from Transamerica in 2005, posted competitive returns with average volatility since joining the firm, and their performance at Transamerica was strong. They are value-oriented investors in the growth arena and run portfolios with relatively low turnover, focusing on companies with high cash flows, low debt, and wide moats.

Adding three mutual funds to the team's list of responsibilities would have been an area of concern, but the team has experience investing in companies up and down the market-capitalization spectrum. In addition to Select Growth (focused on mid- and large caps) and U.S. Growth (focused on large caps), the team has successfully managed Delaware Pooled Focus Smid-Cap Growth Equity (concentrated on small- and mid-cap stocks), which is a more compact portfolio with fewer holdings and a strong record.

Two New Nuveen Funds
This week, Nuveen Investments announced the launch of two new funds: Nuveen Tradewinds Emerging Markets and Nuveen Tradewinds Global All-Cap Plus . The former's benchmark will be MSCI Emerging Markets Index while the MSCI AC World Index will serve as the latter's benchmark. The Emerging Markets fund arrives on the heels of a particularly massive rally. The diversified emerging-markets category surged to a 73.8% return in 2009 after losing 54.4% the previous year. The world-stock category's gain wasn't as outsized, although it returned 35.3%. In contrast, the S&P 500 Index returned 23.4% last year.

The Global All-Cap Plus fund employs the strategy of  Nuveen Tradewinds Global All-Cap , though it also can short stocks.

Lord Abbett Drops Some Fees
Lord Abbett has reduced expenses on two international equity funds. The net expense ratio on the A share class of Lord Abbett International Core Equity dropped from 1.43% to 1.12%. The net expense ratio on the A share class of Lord Abbett International Dividend Income dropped from 1.35% to 1.12%. The reductions took effect Dec. 31, 2009.

The fund family also announced 12b-1 fee reductions (from 0.35% to 0.20% for A shares) for a range of fixed-income funds: Lord Abbett Floating Rate , Lord Abbett Core Fixed Income , Lord Abbett Total Return , and Lord Abbett Income . The reductions will go into effect Feb. 1.

Etc.
The Needham Funds announced that effective Jan. 1, John Barr has replaced Bernard Lirola as co-portfolio manager of Needham Growth , joining Christopher Retzler, and as portfolio manager of Needham Aggressive Growth . Lirola has left the firm.

Ron Fielding, the former OppenheimerFunds senior vice president and portfolio manager who ran Oppenheimer's Rochester division until he retired in May 2009, has joined the board of Saturna Investment Trust, which includes the six Saturna funds.

On Jan. 29, the Brazos funds will become the PineBridge funds. Brazos Micro Cap will change its name to PineBridge US Micro Cap Growth, Brazos Small Cap will be renamed PineBridge US Small Cap Growth, Brazos Mid Cap will be renamed PineBridge US Mid Cap Growth, and Brazos Growth will be renamed PineBridge US Focus Equity.

Several Pioneer funds will merge by March 5, 2010.  Pioneer Tax Free Income and Pioneer Intermediate Tax Free Income will both merge into Pioneer AMT-Free Municipal . Also, Pioneer Growth will merge into Pioneer Fundamental Growth .

The board of DFA approved a merger of DFA US Large Company into DFA US Large Company Institutional Index .

Pending shareholder approval, several Evergreen and Wells Fargo Advantage funds will merge: Evergreen Core Plus Bond will merge into Wells Fargo Advantage Income Plus , while  Evergreen Core Bond , Evergreen Short-Intermediate Bond , and Wells Fargo Advantage Diversified Bond will merge into  Wells Fargo Advantage Total Return Bond .

Delaware Small Cap Growth will liquidate all assets by March 22, 2010.

Rafi Zaman of DuPont Capital was added as a subadvisor to Alternative Strategies .

Nathan Strik joined the portfolio management team of Fidelity Balanced and  Fidelity Advisor Balanced .

Jonathan Beinner and Tom Kenny are off the portfolio management teams of Goldman Sachs US Mortgages ,  Goldman Sachs High Yield , and Goldman Sachs Emerging Market Debt .

Following its recent purchase by Macquarie Group, Delaware Investments has launched Delaware Macquarie Global Infrastructure.

Associate directors of fund analysis Miriam Sjoblom and Dan Culloton and mutual fund analysts Jonathan Rahbar and David Falkof contributed to this report.