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| THE ANSWER DESK . .
. ARCHIVES |
Volume 45: To submit a question to MFI's panel of
experts, please write to us.
Meet Our Q&A Panel:
 Ron RutherfordRonald K. Rutherford, MS, MBA, CFP,
CIMA, is Chairman & CEO of Rutherford Asset Planning, Inc. and is a
New York City-based fee-only financial advisor. He is registered as an Investment Adviser
with the SEC and a member of NAPFA, ICFP, and IMCA. Ron is the author of The Complete
Guide to Managing a Portfolio of Mutual Funds and has consistently appeared on Worth
magazine's Top U. S. Financial Advisor list. Ron is widely quoted in the financial press
and has appeared on national television to discuss a variety of financial topics. For more
information, visit Ron's website or call
(212) 829-5580 |
 Sidney BlumSidney A. Blum,
CFP, CPA/PFS, ChFC, is president of Successful Financial Solutions, Inc.,
a fee-only financial planning and registered advisory investment firm based in suburban
Chicago. Sid specializes in comprehensive financial planning with an emphasis on income
and estate taxes, retirement planning and investment planning. Sid has appeared on
national and regional television and is frequently quoted in many major publications on
financial planning and investment topics. He has been included the last three years in Worth
magazine's, "The Best Financial Advisors". For more information, visit Sid's website or call (800) 417-1141. |
Questions and Responses
Why doesn't my fund recover when the
market rises?
from Dan
Q: Why has Vanguard's Windsor Fund performed so poorly for
months --- getting battered when the market falls, but not recovering when the market
rises? I have invested in Windsor for years and can't remember a time when it
performed this way.
A (Ron): Vanguard uses
outside advisors to oversee most of its actively managed mutual funds. The advisor for
this fund is Wellington Management Co. The fund started in 1958. The manager was John Neff
until his retirement at the end of 1995. His replacement is Charles Freemen. Both use a
contrarian management style. That means that they buy stocks that are cheap, unloved, and
out of favor. The average market capitalization of the holdings is roughly $10 billion
putting it well into the large cap value category. There are many names in the portfolio
that you would likely recognize. This fund is quite large at over $22 billion in size.
There are almost 500 mutual funds using the large cap value
strategy. This fund is consistently in the top 10% of these funds and compared with all
equity funds in terms of performance. That includes both short term and long term periods.
Therefore, why does it underperform "the market?" Let us
use a sister fund, the Vanguard Index 500 Fund, as a representation of "the
market." This fund is an attempt by Vanguard to replicate the Standard &
Poor’s 500 Stock Index. The average market capitalization here is well over $40
billion. These are the giants of the large cap category. They also have much more of a
style tilt to the growth side. There is another consideration. This fund is second in size
only to Fidelity Magellan. It is first in terms of incoming investor cash. Demand helps to
drive price up. As this money comes in, Vanguard has to buy more of the stocks on the
S&P 500 Index.
Does this say that you should switch from Vanguard/Windsor to the
Vanguard Index 500 Fund? That would be an extreme at the other end of the spectrum.
Consider instead a balance between the two.
What can you tell me about the Timothy
Fund for Christian investors?
from Brent
Q: I understand the Timothy Fund was developed by and for
Christian investors who do not want their investments to support companies who are pro
abortion, pro gay rights, etc. What can you tell me about the fund. I searched the
Internet and was not able to locate anything specific.
A (Ron): There are
approximately 60 mutual funds out there that have a "socially conscious"
philosophy or objective. There is a variety of sub-objectives under this umbrella. For
example, some avoid companies that distribute alcohol or tobacco products. Some have a
"green" or environmentally sensitive bent. Among these funds, the management
style ranges from large cap to small cap and from value to growth. They also include fixed
income funds and a handful of foreign funds. As an aggregate, the equity funds in this
group underperformed their benchmarks by a substantial margin.
Timothy Plan A and B are two funds that use this approach. They
avoid companies involved with alcohol, tobacco, casino gambling, pornography, or abortion.
The "A" shares have a front load (brokers commission) and the "B"
shares have a back load. It uses a small cap value style. The funds started in March 1994.
Both funds have the same management team and use the same style. The "A" fund
underperformed its benchmarks by roughly 29% in 1995 and by 10% in 1996. The current
management took over in January 1997. That did not seem to help. The fund underperformed
its benchmark by 12%-14%. So far in 1998 the fund underperformed as well. The size of the
fund is $13-14 million.
How can I start off my 403(b) retirement
account right?
from Doug
Q: I am 27 years old and about to start my retirement account
where I'm employed. They offer a 403(b) and my choices for managing the fund I choose are
Fidelity, Prudential, or TIAA-CREF. Please shed some light on the funds you would choose
and why.
A (Sid): Congratulations on
beginning your 403(b) retirement account while you’re still young. Before selecting a
mutual fund family, first decide on the appropriate asset allocation for your age.
Assuming you can tolerate the stock market volatility, you should focus on long term
growth that has historically been achieved by equities. The easiest way to accomplish this
is to select a broadly diversified mutual fund. If this will be your first long-term
investment, I would recommend an S & P 500 Index Fund. Since index funds are very
similar between mutual fund companies, I would suggest you base your decision on whatever
company has the lowest management fees.
As your contributed balances increases over time, you may wish to
add funds with other characteristics, such as mid-cap and small-cap. A bond fund would be
another good addition, but keep in mind that at your age you probably want to be about 80%
in equities and 20% in bonds when all is said and done.
What's happened to Putnam Voyager Fund?
from Debra
Q: I would like your opinion on the Putnam Voyager Fund,
Class B. It does not seem to be doing well. What is it tied to?
A (Ron): Putnam Voyager
Class B started in April 1992. The current 3-person management team has tenure of roughly
3 years. Historically the fund has holdings consisting of stocks considered
middle-capitalization. This is in contrast to large capitalization stocks such as in the
Dow or the S&P 500 indices. The holdings also have a tilt toward growth rather than
value. Different segments of the overall stock market move in different cycles. To say it
another way, they have seasons with different times at being in fashion. Thus, large cap
stocks were more in fashion over the last few years than were mid-cap stocks such as those
held by this fund.
Putnam Voyager B outperformed its peer group and its mid-cap
benchmark over the last 1, 3, and 5 years but underperformed the S&P 500 over the same
period. At some point going forward, you may see a role reversal between large cap and
mid-cap stock categories.
A word of caution is in order here. This fund grew in size from
roughly $140 million in 1992 to over $7 billion now. It is ironic that success presents a
problem for fund management. The issue is how to deploy incoming cash so as not to dilute
the quality of the portfolio and cause a deterioration of the performance record. The
three most likely strategies are: (1) buy more of the same stocks (names), (2) buy stocks
not in the portfolio, or (3) shift styles and buy larger cap stocks. Management did some
of all of the above. The number of names in the average mid-cap growth fund is just over
100 stocks. Putnam Voyager B has roughly three times that number. In 1997, the average
market cap of the stocks in this fund exceeded $5 billion. (Market capitalization means
the price per share multiplied by the number of shares outstanding.) That put the fund in
the Large Cap category. Today the fund has an average market cap of over $10 billion.
Thus, the character and makeup of this fund is quite different than it was five years ago.
This alone is not a reason to sell the fund. It is something that any investor in the fund
should consider.
There is one other point of caution. Putnam Voyager B has a deferred
load charge. It is 5% at initial purchase and diminishes to 0% after holding for 6 years.
Before you sell you should consider this fact together with any capital gain implications.
Should I take money I have in a CD and
put it into a money market fund?
from Suresh
Q:I am 34 years old and married. I am currently
investing (dollar cost averaging) in the following funds: $100 per month in 1) JANUS
FUND, 2) JANUS MERCURY, 3) JANUS WORLDWIDE. and 4) JANUS GROWTH & INCOME; and $200 per
month in T.ROWE PRICE EQUITY & INCOME FUND (just started this a month back). Could you
provide some comments on my asset allocation and any other improvements or other funds you
may think of.
Also, I have a CD in a bank which is earning only 4.5 percent
annualized return. This is my the amount which I intend to use for my emergencies. Should
I shift the amount into a money market account with one of the mutual fund companies where
I have the flexibility of liquidity and get almost the same or even higher return?
If so, can you suggest some good money market funds?
A (Sid): You’re
correct to use dollar-cost-averaging to build your portfolio. Even though your fund
selection has been good, you’re heavily weighted in large cap growth within the same
family of funds and not as diversified as you probably believe.
If these funds are in taxable accounts, you may not wish to sell any
of them and create a taxable event. A better approach may be to freeze any new
contributions (and cancel any automatic re-investing of dividends) on several of your
current funds and select new funds to diversify your portfolio. I would suggest you
consider adding a good mid-cap such as Muhlenkamp and a small-cap fund such as Baron
Asset. By reducing your concentration in large cap funds you may provide yourself more
protection in a down market since large caps are more richly priced at the current time.
I would agree that you should switch your bank CD when it matures to
a money market mutual fund. Not only will it earn a comparable return (4.5% or better),
but it will provide better liquidity as your emergency fund. Since most money market
mutual funds pay fairly similar rates of interest, you may wish to consider opening this
account with one of the two fund families your currently using to reduce the number of
statements you receive.
Important Disclaimer
Investing in equities involves a serious principal risk,
and no assurance can be given that the techniques described here will be successful.
Returns vary and you may have a gain or loss when you sell your shares. Past performance
is no guarantee of future results. Index returns shown are historical and include the
change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged
and do not reflect the impact of transaction costs. Transaction costs would have reduced
the total returns.
International investments, especially those in emerging
markets, entail greater risks (as well as greater potential rewards) than U.S. investing.
These risks include political and economic uncertainties of foreign countries, as well as
the risk of currency fluctuations. These risks are magnified in countries with emerging
markets, since these countries may have relatively unstable governments and
less-established markets and economies.
Lastly, the questions and responses set forth here are for
general informational purposes only and are not intended to substitute for performing your
own independent research or contacting your financial or legal professional before making
any investment decisions. We make no guarantees as to the performance of any investment
strategy you choose and are not responsible for any losses you might incur.
 Comments? Criticism?
Suggestions? Talk to us.
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