Mutual Funds

According to 2012 research by The Leuthold Group, investing in last year’s 2^nd-best performing asset category is the “optimal price-based strategy, and has been over the last 40 years.” Based on this strategy, for 2013 advisors should be recommending the MSCI EAFE, which returned 18% in 2012 (vs. 20% for NAREIT Index). Looking at S&P 500 sectors, consumer discretionary stocks should be purchased for 2013 since they returned 24% (vs. 29% for financial stocks).

In 2006, no load fund shares accounted for 63% of all fund sales recorded by advisors (source: Strategic Insight). By 2011, the figure was 80%. Today, load shares account for 50% of mutual fund sales at Edward Jones and 35% at Morgan Stanley Wealth Management. B shares represented 1% of advisor mutual fund sales in 2008, 2009, and 2011; the figure dropped to roughly 0% in 2011.

As of the beginning of the second quarter of 2013, the six mutual funds with the largest percentage of their assets in Berkshire Hathaway were: Blue Chip Investor (32%), Midas Magic (21%), Cook & Bynum (11%), Sequoia (11%), Clipper (9%), ING Corporate Leaders Trust (9%).

The average expensive ratio for the 100 largest mutual funds that oversee U.S. stock portfolios is 0.6% a year; five of the 100 funds charge 1.0% a year. Two of the better performers over the past five years were Yacktman Focused (YAFFX) and Sequoia (SEQUX); both of these funds have an expense ratio of at least 1.0%.

Exchange-traded notes represent ~1% of the exchange-traded marketplace; ETFs account for the other 99%. Part of the huge difference in market share is that ETNs have structural risk ETFs do not; ETNs are notes issued by institutional investors such as banks and brokerage firms. If the issuer does not live up to its obligation (repaying principal plus any credited gains), the investor can lose part or all of his/her principal, even if the underlying assets of the ETN have performed well.

About a dozen mutual fund families rely extensively on outside managers. In most cases, the fund firm is the portfolio manager or “investment advisor,” and it then hires the outside manager as “subadvisor.” Each party receives part of the management fee the fund charges its investors.

In 2008, the typical high-yield municipal bond fund had a total return of > -25%; some of these funds lost > 40%. A large number of these bond offerings are from issuers too small to pay for a credit rating. This bond category is subject to large price swings.

Roughly $85 billion was invested in emerging markets bond funds and ETFs as of March 2013. There are two ways to play these types of bond funds: (1) invest in bonds denominated in the local currencies of the issuing country or (2) buy into a fund whose emerging bonds are denominated in a “hard currency,” such as dollars, euros, or yen. 

As of January 2013, three of the largest money market funds—Goldman Sachs, JPMorgan Chase, and Bank of New York Mellon—started to report the daily NAV of their money market funds on their websites. Prior to this, the industry standard was to report NAVs to the SEC monthly. The SEC would then report this information to the public 60 days later.

In the U.S., there are over 710 ETF sponsors. At the beginning of 2013, three companies controlled 84% of ETF assets (BlackRock, State Street, and Vanguard).