Monthly Archives: January 2016

Types of mutual funds: cost structure

Sales Charges
Some funds (load funds) sold by brokers, insurance agents or investment advisors have a front-end sales charge which is paid by the investor and passed along to the seller for his services. The charge is deducted from the amount being invested.

Other mutual funds (no load funds) are offered directly to the investing public by fund companies, or they are offered to investors by financial intermediaries who have a compensation arrangement (hourly, flat fee or a percentage of assets) with the purchaser. In this case, a sales charge is not involved, and the investor fully invests his or her available money into funds sponsored by a no-load fund company.

There are several other arrangement by which load mutual fund companies compensate sales people that are less obvious than front end sales charges in a variety of fund share classes – A, B and C. Many fund families offer special no-load share classes (F-1, F-2) for fee-based advisors who want to use their funds but do not want their clients to pay a sales charge. Before anyone invests in a mutual fund it is important that the investor understands how the broker, salesperson or investment advisor is compensated.

Expense Ratio
A mutual fund’s expense ratio is the amount of money that the fund charges for running the fund. It is usually shown as a percentage of the fund assets. All mutual funds charge investors a fee for their services. In general, passively managed index funds have a lower expense ratio than actively managed funds and bond funds have a lower expense ratio than stock funds.

Redemption Fee
Many mutual funds are charging a fee if the investor withdraws his money from a fund within a certain specified time of making an investment. This is designed to discourage market timing which can complicate the process of managing a fund.


Wall Street down following Fed comments

From Reuters:



This morning Art Cashin predicted :

That, I think, will make them [the Fed] very reluctant to say anything that might look like a full mea culpa or a rethink. Therefore, I think the statement will say they remain flexible and data dependent and that they are aware of crosscurrents. Let’s see if that’s enough to boost the bulls.
Art was absolutely right about the Fed’s announcement but the market didn’t see it as a bullish sign.


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Types of mutual funds: passive vs. active

A passive mutual fund invests in a portfolio that mirrors the component of a market index. For example, an S&P 500 index fund is invested in the 500 stocks of Standard & Poor’s 500 Index. There is no attempt made to try to determine which stocks are expected to do well and which are not.

Actively managed funds are managed by an individual manager, co-managers, or a team of managers. The mangers try to buy stocks that they think will outperform the market.

The costs associated with passive investing are lower than the costs of active management. Active managers attempt to justify their higher costs by doing better in either up or down markets.


What are mutual funds?

A mutual fund is an investment vehicle that is made up of money contributed by many people for the purpose of investing in stocks, bonds, real estate or other kinds of investment vehicles including money market instruments.

Mutual funds are operated by money managers who make the actual investment decisions and who attempt to provide capital gains and income to the investors.


When a mutual fund sells a security like a stock or bond, or collects income such as a dividend or interest payment these are passed along to the shareholders of the fund.


A quick market roundup – January 25, 2016 @ 10:00 AM

The U.S. eastern seaboard is still digging out from a weekend blizzard that knocked out power for several hundred thousand customers, grounded more than 13K flights, and shattered snowfall records in Washington and New York City.

Oil and stocks are heading lower this morning on oversupply concerns and profit taking after Friday’s surge in prices. Iran has made its first sale after sanctions were lifted and Iraq’s production is up while the Saudis are continuing to invest in new production.

McDonald’s Corp reported better-than-expected quarterly same-restaurant sales as the launch of all-day breakfasts proved to be a hit with diners in the United States and demand continued to recover in China. The company plans to open more than 60 new stores in Russia 2016.

Russia’s economy contracted the most since 2009 last year as the price of oil sank and sanctions over the conflict in Ukraine curbed access to international financing. According to preliminary estimates, gross domestic product fell 3.7% after growth of 0.6% in 2014.

Johnson Controls and Tyco International are in advanced talks to merge, in a deal that could value the latter as high as $20B and signal that companies are still willing to embark on large mergers despite the recent market volatility. The combined company would be headquartered in Ireland.

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A quick market roundup – January 22, 2016 @ 10:00 AM

January 2016 has been challenging for investors. The DJIA had been down about 8% year-to-date. But even as we post this there is a major relief rally going on across the globe.

European Central Bank President Mario Draghi hinted at more stimulus at the World Economic Forum in Davos, Switzerland, saying that he had “plenty of instruments” and was willing to use them.

The price of oil has bounced around wildly, starting the year at $37.95, dropping as low as $28.35 (a 25% drop) before rebounding. It’s up to $31.57 as we write, up over 6% just today. This despite an excess of supply.

Oil is causing problems for Venezuela with a $120 billion in foreign debt. The country gets 96% of its export earnings from oil and is facing both an economic and political crisis.  This could have an impact on foreign banks that have lent them money.

All this is going on while a massive winter storm is barreling toward the Mid-Atlantic and Northeast. An inch of snow snarled traffic so badly in Washington DC yesterday that many abandoned their cars and some slept in hospitals, unable to get home.  The storm that’s in the forecast has already shut down a great deal of air traffic in the region.

Have a safe weekend.

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Thoughts From Around the Investment World – 2


Goldman Sees 11% Upside in S&P 500 After an `Emotional’ Selloff

The plunge in U.S. stock markets are an “emotional response” obscuring expansion in both the American economy and corporate profits, said Abby Joseph Cohen, president of Goldman Sachs Group Inc.’s Global Markets Institute.
“The underlying performance of the U.S. economy is actually quite good ” Cohen said. “We see economic growth, we see the economy continuing to expand. We also see corporate profit continuing to grow.”

We’ll bring you more commentary from major investment firms on a regular basis. Feel free to contact us with your own questions.

Note: We are passing this information along for educational purposes only; it is not an endorsement of the profiled company or their views.

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A Reflection on Risk

The beginning of 2016 was, we are told, the worst first week of the year in the history of the stock market. How bad was it? The DJIA was down -6.13%. While there’s no denying that it was an incredibly unpleasant start to the year, in a broader sense the magnitude of the decline is not unprecedented when you consider that since 1997 we have had 6 single-day drops that have been larger than that. In fact, during our own investment career we’ve experienced much worse. Some of you will remember October 19th, 1987, the day that the market dropped 22.6%. In one day. Within 14 months of that day, the market had recouped all of its losses, and then went on to far greater heights (remember the bull markets of the 1990s?).

However, extreme market volatility usually causes people – especially those who have been complacent, or who have not paid attention to the amount of risk they are taking – to let emotion take over and cloud their thinking. The price of oil has plummeted in the last year, and while that has been great news at the pump, it has caused the majority of oil-related stocks to decline. Railroad stocks have come under pressure as coal shipments have declined. Technology stocks have been affected by a cutback in production of Apple phones.

We are not in the business of predicting the future. However, we will say that we have faith in the strength of free enterprise to overcome economic obstacles. We are in the business of creating diversified portfolios designed to reduce risk so that whatever market conditions we may face, we will be able to take advantage of market advances and cushion market declines.

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How does your financial advisor get paid?

No one expects their professional service provider to give their services away for free. Doctors don’t, lawyers don’t, CPAs don’t nor do financial advisors. However, in the financial services industry often what you actually pay is not clear.

Cerulli Associates surveyed investors and found that most investors wanted to understand how their advisors were getting paid. They wanted “transparency.”

“Helping investors understand the full extent of an advisor’s potential revenue streams has been a persistent challenge for both advice providers and advisors, and has become even more complicated with the ongoing evolution of integrated wealth management conglomerates,” Smith explains.
“The financial industry was built around the premise that investors understand the fees they pay and sign documents affirming their awareness,” Smith continues. “Cerulli’s research indicates that investors who truly comprehend the entirety of their costs are more the exception than the rule. The overall expenses of pooled investment vehicles, including management fees and other embedded fees such as 12b-1s, are essentially nonexistent to many investors-if they do not see a line item deduction from their accounts, they do not recognize a transfer of wealth from themselves to their advisor or provider.”

Even that last sentence can add to the confusion if you aren’t very familiar with the terminology of the investment industry, with terms like “pooled investment vehicles,” “embedded fees,” and “12b-1s.” To better understand how (and from where) financial advisors are paid, here’s a brief list:

“Commissions:” when you buy of sell a stock, bond, or fund, you pay the broker a commission. This also applies to insurance products such as life insurance and annuities. Broker commission formulas for stocks are often based upon the stock’s price and trading volume. Commissions for insurance products and annuities are generally a fixed percentage of the size of the policy being sold, but they can be as high as 10%-15% for some products. Commissions for bonds are discussed below.

“Mark-up” or “mark-down:” this typically applies to the purchase or sale of bonds, and is the difference between the market price of a bond and what an investment firm offers an investor. In other words, it is the difference between what the bond is actually worth and what you can buy or sell it for. The mark-up or mark-down formula is based upon the number of bonds being bought or sold, their price and their bond rating.

“Load:” a sales charge that is assessed when purchasing a mutual fund. Some load fees are charged up front (referred to as a “front end load,” often seen with A share class mutual funds bought or sold via a broker), when sold (referred to as a “back-end load,” often seen with B share class mutual funds bought or sold via a broker), or as long as the fund is held (referred to as a “level load,” often seen with C share class mutual funds bought or sold via a broker). The load you pay is passed along to the broker. Front end loads are usually between 3% – 8%, with 5% being fairly typical. Back end loads are the most confusing, and (thankfully) are being eliminated by many fund companies. In very general terms (for the sake of this article), they don’t charge you a front end load, but if you want to sell the fund within 5 or 6 years of purchasing the fund, they will hit you with a fee (called a “deferred sales charge”) of between 1% – 5%, depending on how soon you sell it (with the higher fee coming the earlier you sell it). Oh, and on top of that, they typically also charge you a 12b-1 fee (discussed next) of 1%. Level loads typically don’t charge a front end load or a back end load, but they do maintain a 1% 12b-1 fee for as long as you own the fund.

“12b-1 fee:” an annual fee, usually 0.25%, paid by the mutual fund to the broker to help the fund market its products. It’s often referred to a “trailer.” As mentioned above, for B and C share class mutual funds, this fee is typically a much higher 1%.

“Management fee:” this is the fee that an investment manager charges for creating and managing a portfolio of securities.

A “Fee Only” investment advisor’s only compensation is the management fee. This eliminates the conflict of interest inherent in the other types of compensation such as commissions, loads and trailers. It provides an incentive for the Fee Only advisor to shop for the lowest cost investment products for his clients.

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Thoughts From Around the Investment World


Thoughts on the global economy:

U.S. money and credit markets will be on the path toward normalization after seven years of abnormally low rates. This is a sign that, despite the weakness in other developed and emerging economies, the U.S. is back on the road to normal growth.

On U.S. Growth Stocks

As we look forward, considering today’s evidence, we believe the bull market will continue, but is likely moving into later stages. As sales continue to grow, profit margins remain high, and valuation growth slows, annual equity market returns in the mid-to-high single digits seem more likely than outsized gains.



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