Mutual Funds

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.

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.