Mutual Funds

The September/October 2013 issue of Journal of Indexes includes interviews with a number of well-respected investment experts. Shown below are edited versions of two of those interviews.

John Bogle, founder of The Vanguard Group

Even if current P/E ratios see a small decline, 7% is a very rational expectation for annual stock returns (2% dividend + 5% earnings growth).

There are five different ways to invest in a MLP; each investment vehicle has different ramifications. There is no perfect way to invest in a MLP; the type of investor and the desire for current income will steer the advisor toward the best MLP asset and vehicle.

[1] Individual MLP Units

A number of financial publications believe that when a mutual fund manager leaves a fund, fund investors should immediately become concerned. These scare tactics help sell publications and software. The reality is quite different.

An established ETF operator can make a small profit by offering a new ETF that brings in as little as $100,000 in annual revenue because those established firms can spread out a number of operating costs across many other funds. Companies just entering the business will need to generate at least $250,000 in annual fees.

The major selling point of “risk parity” funds is they are designed to make money in most environments. These funds typically have their assets evenly divided into three broad categories: stocks, bonds, and commodities. Risk parity funds use leverage to increase returns on bonds so that the bonds have returns similar to stocks.

Over the 30-day period May 23 through June 23, 2013, high-yield closed-end funds (CEFs) dropped 10.7% vs. 3.4% for its open-end counterpart (source: Morningstar). The primary reason for the large disparity is the use of leveraging by many high-yield bond CEFs. As interest rates rise, bond prices decline while the price of borrowing increases.

A number of online brokers offer free ETF trading for their clients for select funds: Schwab has at least 105 ETFs, Fidelity has 65 iShare ETFs, TD Ameritrade has 101 funds and ETNs, and Vanguard has 65 of its own ETFs.

Research by Sharpe in 1992 showed that style and size explain roughly 80-90% of mutual fund returns. A more recent study by Morningstar (domestic equity funds from 1/1991 to 12/2011) confirms Sharpe’s general analysis. According to the Morningstar study, the average correlation of the respective fund to its Russell index (either the Russell 1000, Russell Mid Cap, or Russell 2000) was 0.94; this translates into an R-squared (coefficient of determination) of 86%. However, the correlation has not been constant.

According to Mark Hulbert, editor of the Hulbert Financial Digest, one of the best methods for picking mutual funds ignores long-term results and focuses only on returns over the previous 12 months, with an emphasis on one-, three-, and six-month trailing returns. In a April 2013 WSJ article, Hulbert Financial Digest stated that of the dozens of stock fund advisory services it tracks, this short-term strategy (used by No Load FundX) had the highest returns. Over the past two decades, No Load FundX, edited by Janet Brown, averaged 11.0% a year vs.