Mutual Funds

The vast majority of ETFs are regulated as traditional mutual funds under the Investment Company Act of 1940. ETFs and index mutual funds, rarely make portfolio changes. A main difference between the two is how ETFs operate.

Stable-value funds are comprised of bundles of bonds coupled with an insurance policy and are found in some 401(k) plans. These funds have been around since the 1970s and oversee more than $600 billion. Investors in 401(k) plans have more money in stable-value than in bond funds. During 2008, these funds were up 2% for the year. DuPont has ~ 60% of its retirement plan assets in stable-value funds.

Over the past 5 years, some mutual fund companies have been hiring liaisons who have money management experience and people skills to provide advisors more detailed information as to the workings of the fund.

Morningstar now has a “forward-looking ranking system to supplement the company’s 1-5 star ratings.” The new system classifies a fund as a gold, silver, bronze, neutral or negative ranking, based on Morningstar’s prediction as to whether or not the fund will outperform its peers in the future.

The division of foreign markets into developed and emerging segments dates back to 1981, when Antoine van Agtmael, an economist at the World Bank, referred to third-world countries as emerging markets. In a 2011 performance study, the Aperio Group looked at 10 years of return data (12/31/2000 to 12/31/2010) from all active emerging markets mutual funds. 

In the typical adoption, a large mutual fund company takes over the management of one or more funds from a smaller firm, retaining the fund’s investment managers as subadvisors. There is usually a cash payment to the smaller firm based on the size of the fund, its track record, and the length of the track record. These “adoptions” are considered a prudent way for a fund family to expand its lineup.

An October 2012 article in The Wall Street Journal (WSJ) recommends the following approach for overseeing a mutual fund:

[1] Set realistic return expectations.

[2] Top managers often have mediocre returns in ~ 3 out of every 10 years.

[3] If a fund falters, give it at least two years to recover.

[4] Large fund inflows may result in poorer returns in the future.

Although rarely discussed, a diversified short-term high-yield bond fund may be the answer for advisors seeking to maximize return while staying somewhat conservative. For example, the Wells Fargo Advantage Short-Term High-Yield Bond Fund lost < 6% while the average high-yield fund was down > 26% in 2008.

Advisors often wonder what to do when a favored mutual fund manager leaves a fund or simply retires. According to studies, when a new manager steps in, subsequent returns are somewhat mixed. For example, an August 2012 study from the University of Rochester shows there is, overall, no difference in returns. However, funds that trailed their benchmarks tended to perform better after the management change—an enhanced performance may likely be due to any fund’s returns that revert to the mean after periods of ups and downs.

The returns on 20-year U.S. Treasurys have been amazing over the past decade (2002-2011) and over the past 30 years (11.03% vs. 0.05% for the S&P 500). This marks the first time that over any given 30-year period, Treasurys outperformed the S&P. For 2011, these long-term bonds had a total return of 28%; for 2008 the total return was 26%. These Treasurys have not seen a better year since 1995.