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Archive for the ‘Mutual Funds’ Category

Mutual funds that use covered call strategy – Part 2

Sunday, December 5th, 2010

This post is an extension of Mutual funds that use covered call strategy that was published on Dec 2, 2008. Here are some more mutual funds that use covered call strategy apart from EROAX that was discussed earlier.

Goldman Sachs U.S. Equity Dividend and Premium Fund (GSPAX) uses covered call strategy to outperform S&P 500. This fund writes calls that cover from 15% to 35% of the portfolio. This fund writes covered calls mainly on S&P500 index options.

Eaton Vance Tax-Managed Buy-Write Income (ETB) is a closed-end fund that also uses covered call strategy. Its stock portfolio roughly tracks S&P 500 and writes covered calls on S&P500 index call options.

The idea behind covered call mutual funds is that portfolio can be hedged against the market swings using the covered call options. If the stocks go up, the stock portfolio’s gain will be up. If the stocks go down, the stock portfolio’s loss will be offset by gains in the covered calls.

However, this strategy can help only to some extent. Gains from covered call options are limited. If the stock’s price goes down dramatically, covered call options can’t completely offset the stock loss. In this case, stock portfolio would suffer serious losses. Covered call strategy would work for mutual funds only if the stock portfolio doesn’t suffer from violent swings. This is why most of the covered call mutual fund managers structure their stock portfolio to imitate S&P 500.

Disclosure: I do not own the mutual funds mentioned in this post.

Related Link: Mutual funds that use covered call strategy

Mutual Fund Red Flags, High Cash Reserves

Sunday, October 31st, 2010

When selecting a mutual fund there is an area that is commonly overlooked, and that is cash reserves.

Perhaps you have heard the saying, ‘Cash is king’, well that may be well and good but it’s not king when you are paying your mutual fund manager to sit hoard it. I can do just fine sitting on my own cash and I don’t think I need to pay someone two percent to sit on it for me.

With a historical return of 4% on cash why is my mutual fund manager sitting on so much of it. I am not talking about conservative income funds or the money markets; I am speaking of actively managed growth funds with ten percent of their holdings being cash. When you buy shares of mutual funds you are paying them to own stocks and you are not paying them to own cash instead.

There are basically two reasons for keeping so much cash on hand. The first reason is they are keeping the cash on hand just in case shareholders suddenly decide to sell of their shares of the fund. Should the end of the world be nigh, they have the cash there so they do not have to sell stocks when they are at the lowest prices ever.

In addition to that mutual fund managers keep some cash available is to take advantage of times when the market is oversold and there is a fire sale in the equities market. It the classic buy low sell high, timing the market. Obviously managers do this because they think they can time the market and actually get in at the low. No one else can do that but apparently fund managers can, or so they would have you believe. In theory this is great but in practice it has turned out the opposite.

Research shows that mutual fund cash reserves are at their low right when the market is at the high and at their highest levels when the market is at its lows. In other words, if there is anyone who knows how to time the market (probably not); mutual fund managers are not those guys.

Good luck and happy investing.

Mutual Funds — No load versus Load Funds

Saturday, October 23rd, 2010

If you know anything about mutual funds, I am sure you have heard the never ending debate regarding no load mutual funds versus load mutual funds.

Keep in mind that just because a fund does not carry a load (sales fee) does not mean it costs nothing to own it. All funds, load or no load have expenses that owners of the fund are charged. No one is going to manage a mutual fund for free. People sometimes assume that the load has to do with expenses of the fund as well as a sales fee, but that is not true. The load has only to do with the fee the investor pays to purchase the fund. If you put $100,000 in a load mutual fund, part of that 100k will disappear right off the top. Some funds are strictly back end loaded. If and when you sell any or all of the mutual fund, a percentage will come off the top before you see it.

Many people believe one should never buy a fund with a load, arguing there are enough no load funds so one never has to buy a load fund.

Having been a stockbroker, I sold both no load and load funds, and I have to say, what really accounts is your real return on your investment. If you are looking to purchase shares of a value fund do yourself a favor and compare load and no load funds. Right now you may be wondering why should I pay to own a fund if I don’t have too?

It’s all about the returns. Let me say it again, it’s all about the returns. Compare the top no load value fund with the top load value fund and factor out all expenses and sales fees (load) and see which gives you the greatest return. If the load fund still gives you the greatest return, all things being equal, then buy the load fund.

Let’s simplify it. If I were to give you .50 cents a day would you refuse? Of course not. What if I made a deal with you? If you pay me $2 a day I will give you $3 at the end of the day. Now which would you prefer, the .50 a day, or the $1 a day? I’ll tell you what, if you offered to give me $3 for every $2 dollars I gave you, I’d do that transaction all day long.

Now go back to your mutual fund selection. If fund A was a no load fund and the return after expenses and fees was a percent lower than the return of Fund B, the load fund, which one really pays you the most? It’s a no brainer; the load fund is the clear winner. Bear in mind I am just talking straight returns here and assuming both funds were similar in investments, risk profile, etc…

So before you ignore the entire universe of load funds, look to see what your real returns are after fees and expenses; you may be surprised.

Happy Investing.

Mutual Fund Red Flags

Wednesday, October 20th, 2010

If you’re thinking of investing in a mutual fund here are some important things to consider that investors sometimes overlook.

We all know that past performance does not guarantee future results, but past performance is much of what we have to go on. Perhaps you’ve found a mutual fund whose past results intrigue you, maybe they beat out everyone in its class for the last five years, or something similar. Here’s where you need to dig further and here are two important factors to consider.

You are going to want to know who the managers were when your proposed fund outmatched its rivals. Once you have their names check to see if any of them are still managing the fund today. If not, it’s a big red flag. Buying into a fund in these circumstances in almost like purchasing a brand new fund with no track record. Try to find a fund that has the same set of managers on board. Of course there is nothing guarantying the managers will stay after you buy into the fund, but it’s a good place to start.

The second thing to consider is, what investments was the fund holding when they got those fantastic returns that you are wanting?

You may be surprised to find that your income and growth fund was heavily invested in volatile tech stocks, maybe ones you do not own because of inherent risk. Do you really want to own a fund that relies on tech stocks to get their returns? Before you buy into a fund, find out what type of investments are allowed under its prospectus; it may surprise you.

If you find that your prospective fund has steady management and investments you can live with, then you have gone a long way into practicing the due diligence necessary before investing.

Good luck and happy investing.

Three Steps to Take Before Buying a Mutual Fund

Monday, August 2nd, 2010

A mutual fund is a great way to invest in the stock market without needing a large amount of cash to get started. A mutual fund also offers a terrific way to diversify your portfolio if you are an individual investor. Over the years mutual funds have multiplied and there are now thousands of mutual funds available for purchase. That isn’t necessarily a bad thing, but it does mean you need to do your homework before you purchase a fund.

Three Steps to Take Before Purchasing Mutual Fund Shares

  1. Determine Your Objective- If you don’t know what you are looking to do with your money, there is no way to research mutual funds properly. Consider your personal financial situation and what you need this mutual fund to accomplish before you even start researching where to put your money.
  2. Consider every single fee or expense that will be taken from your account-  There is a huge difference in the fee levels of mutual funds, and if you don’t find a fund with lower expenses you are really hurting yourself. Avoid funds with any kind of load, and make sure the annual expenses are less than the category averages. Remember, fees and expenses will quickly eat away from your earnings if you allow them to.
  3. Mutual Fund Performance- The upside to having so many different mutual funds to choose from is that you should always be able to find a solid mutual fund that has a great track record on performance. Many investors simply look at what the fund has done in the last few months or year, but I think it is much wiser to look at the three, five, and ten year averages for mutual fund performance.

Buying a mutual fund is a good idea for most investors, but before you jump in with both feet make sure you take these three steps. These steps will help ensure that the fund you purchase is the right fit for you.

How to Follow Smart Mutual Fund Management’s Money

Thursday, November 12th, 2009

Many investors use a wide variety of strategies to try to help them get insight from the best minds on Wall Street, but often they overlook a fairly simple way of following some of the brightest minds out there. Look for the top mutual fund performers, through a venue such as Yahoo’s Mutual Fund Search and try starting out your search there.

For example, if you are looking for large cap growth stocks go to the large cap growth section of top performers and look at the top performers for different time periods. If you are a long-term investor it is usually best to take the closest look at mutual funds that have done very well over the 3 and 5 year period rather than something as short as a 3 month period. After arriving at the list click on the desired mutual fund and then look at their top 10 holdings. Yahoo shows you these as a % of the overall mutual fund portfolio, which is helpful because it helps you know just how much of a stake the mutual fund has in that particular stock. Look at some of the top mutual fund holdings and write them down or keep them in a word document and do further research on these names yourself.

By using this kind of a method what you are doing is you are getting a great starting point and free advice from some of the best pros out there. There aren’t many other ways on Wall Street that you can get advice from the best without paying a huge amount. Keep in mind that these holdings aren’t released immediately so this is definitely a method for long-term investors and not traders to use.

Start incorporating the research from top mutual fund managers into your investment decisions and get yourself ahead of the game.

Why High Mutual Fund Turnover Is A Bad Deal

Monday, November 2nd, 2009

Before you purchase your next mutual fund make sure you take a look at the mutual fund turnover ratio. This ratio measures the annual turnover of the stocks inside a particular mutual fund. Recent numbers show the average domestic stock mutual fund turnover ratio sitting somewhere around 80-90%. This means that the average stock is being held less than 15 months by most mutual funds.

High mutual fund turnover ratios are concerning for several reasons. Number one they should concern you because they will make your fees much higher. Let’s be honest, it costs money to make trades and when a manager continues to churn stocks they won’t be the ones paying for it, you will be! Also remember, high mutual fund turnover ratios are going to be a problem come tax time. The inefficiency of churning stocks is seen not only at the individual level, but also at the mutual fund level. Also remember that if a manager is buying and selling a stock once every year or so it has to bring into question whether they really have a solid grip on what is going on. All investors should understand that predicting what will happen over the course of such a short period is very difficult to do, so why would mutual fund managers consistently take a gamble on what will happen over that period? It makes very little sense.

Not all mutual funds have high turnover ratios, and not all of the mutual funds with extremely low turnover ratios are the best funds out there, but you should definitely be wary of a fund with high annual turnover ratios. Avoid high turnover mutual funds since you will end up paying a lot more out of pocket and you likely won’t achieve great investment returns over the long run either.

Top Four Low Cost High Return Mutual Fund Families

Wednesday, August 26th, 2009

As an investor you should know that not all mutual fund families are created equal. Some mutual fund families are much more prone to loading their funds with extremely high fees and expenses, while others do their best to keep the fees and expenses low. The average performance of the mutual fund is also very important, so having taken these things all into account let’s take a look at the best mutual fund families.

Top Four Mutual Fund Families

  1. Vanguard- Vanguard belongs in the top spot because of the way they have pioneered the mutual fund industry. They have set the bar for low cost mutual funds and have forced other mutual fund companies to lower their expenses to compete with them. A wide variety in funds available and some impressive returns certainly don’t hurt their cause either.
  2. T Rowe Price- T Rowe Price has done a great job of bringing new and unique funds to the market such as retirement mutual funds that have specific target dates. The Maryland-based company has also done a good job of keeping their expenses lower than most. They have top performing mutual funds in many different categories annually.
  3. PIMCO- Hands down PIMCO is the best of the bunch when it comes to offerings for bond related mutual funds. Bill Gross of PIMCO has a reputation as the leader in this industry. The company has consistently performed better than its rivals and its costs are fairly reasonable.
  4. Bridgeway- This mutual fund company specializes in small cap mutual funds, and doesn’t handle as much money as the rest of the families on this list. It is tough to deny Bridgeway a spot after looking at the returns from some of their best mutual funds over the last several years. The Bridgeway funds also have a name for being very socially responsible. In fact, Bridgeway donates 50% of its investment advisory fee profits to charity!

While there are certainly top mutual funds from other mutual fund families, these four families are a great place to start your search for a highly ranked low cost mutual fund.

Top four reasons to avoid loaded mutual funds

Wednesday, August 5th, 2009

This is a topic I feel very passionately about because I truly believe that many investors are being ripped off by loaded mutual funds. There is absolutely no reason to be allowing a mutual fund company to take advantage of you by charging you a massive load (fee) just to own their fund. What are mutual fund loads? They are fees charged by the mutual fund when you make a transaction inside a particular fund. These fees are generally either right at the time of purchase (front-end loads), or when you sell the shares in the mutual fund (back-end loads).

Top Four Reasons to Avoid Loaded Mutual Funds

  1. They drastically drag down your overall return on investment- A fee of around 5% (which is the average mutual fund load), will drag down your overall return on investment in a hurry. Forgetting to include this fee in your overall return on investment is a major mistake.
  2. They perform no better than a no-load fund- It’s not as if you are getting a superior product here. The truth is loaded mutual funds perform no better on a year-to-year basis than no-load funds. In fact, some investors find that loaded funds do worse because they are more worried about selling their product to financial advisers than picking great stocks.
  3. There are tons of terrific no-load funds- There is no excuse such as saying there aren’t enough n0-load mutual funds to pick from. Indeed there thousands of no-load mutual funds which have a proven track record of outperforming the market.
  4. You don’t want to line the pockets of a salesperson- Let’s face it, a loaded fund is simply lining the pockets of a salesperson for this mutual fund. In this transaction what happens is the customer gets screwed and the salesperson gets rich. We don’t need any of that.

Make those loaded mutual funds a thing of the past because they certainly aren’t doing anything to help you.

The importance of reading a prospectus

Tuesday, May 12th, 2009

What is a prospectus? A prospectus is a formal legal document filed with the Securities and Exchange Commission that provides details about an investment offering that is available to the public. The goal of the prospectus is to provide notes and facts that make the investor much more informed.

If the whole point of a prospectus is to inform investors and help them make better investment decisions then why don’t more investors use a prospectus? It’s one of the things that I personally don’t understand, since it seems to make so little sense. The prospectus is there for you, free of charge, to help you make a better informed investment decision and many people decide that they do not wish to use it.

Both stocks and mutual funds are required to provide a prospectus at least once a year. This annual prospectus contains information about what the company or fund has done with their money in the last year and how things have gone, as well as information about expectations for the future. Generally a prospectus is broken up into categories that show past performance and recent achievements, then they provide an outlook for the near and long-term future.

A stock’s prospectus is essential to an investor who owns shares in that particular company or is seriously considering owning shares in that company. Financial information and words directly from the executives should help you in your decision making process. A mutual fund’s prospectus is very helpful for an investor that is simply looking to get inside the mind of a seasoned Wall Street money manager. The mutual fund prospectus is where that particular manager will talk about their outlook for stocks and the economy. The prospectus also has a full list of all the stocks the mutual fund owns, which should be of great interest to the individual investor.

The bottom line is a prospectus is there to help you profit. Use this important investment tool as often as possible!

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