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Corporate growth is top of fund manager lists

 

Global fund managers are keen for companies
to invest in growth rather than shore up balance sheets, the latest BofA-Merrill Lynch survey has revealed

 

Global fund managers are urging companies
to use their cash to invest rather than pay off debt or return cash to
shareholders, according to the latest monthly manager survey by BofA Merrill Lynch. A net 55% of the portfolio managers
questioned said they believe companies are currently under investing and a net
15% take the view that corporate balance sheets are “under leveraged”—both
represent increases compared to the figures recorded in the December survey.

 

The desire to see greater investment in
corporate growth reflects increasing optimism about company earnings, with a
net 63% of global investors forecasting earnings to rise by at least 10% over
the next year—a notable increase compared to December’s 46%.

 

And global asset allocators are putting
their money where their mouths are. Average cash balances have fallen to 3.4%
in January—the lowest reading since mid 2007 and down significantly from 4.0%
in December, while appetite for equities is strong with a net 52% now of
overweight equities.

 

“This survey is one of the more
bullish we have seen and suggests that investors buy into the idea that this
recovery has legs,” said Gary Baker, head of European equities strategy at
BofA Merrill Lynch Global Research. However, his
colleague Michael Hartnett, chief global equities strategist, added: “We
are […] seeing early signs that might alert contrarians looking for a selling
opportunity—namely low cash allocations and possible complacency against a sell
off in stocks.”

 

For the first time in three years, the
monthly fund manager survey has shown investors are taking above average risk
relative to their benchmark. Last month a net 7% were taking “below normal
risk” but January’s results show a net 2% are now taking “higher than normal”
risk. And fewer investors are protecting themselves against a fall in equities.
Despite major stock indices having surged 30% and more since the March 2008
trough, a net 55% of global asset allocators surveyed have no protection
against a fall in equities the next three months.

 

Read our accompanying article to find out
which sectors and regions are in fund managers’ good books at present.

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How to select a mutual fund…..part 1

 

Here is part 1 of an article I wrote for
Money Mantra…

 

How to select a good
mutual fund.

 

Selecting a mutual fund for investing is a
very important step indeed. It is not just important it is crucial. However it
is the second step, not the first.

 

It is surprising at the number of people I
meet or hear from – they all have same questions. So when they ask me ‘How do
we select a mutual fund?’ for me it is an amusing question. So like all self
respecting advisors I start with the dreaded line- “well, it depends…..’

 

Then I ask them – “What are your financial
goals, if any?”. Now only if you have big long term
goals does the choice of a mutual fund really matter. If you are investing for
a short period of time – you are investing in say a liquid fund. It hardly
matters in which liquid fund you invest – the performance gap between two
liquid funds is not so high. Choose the liquid fund with a high AUM (assets
under management) – and one which gives good service in terms of redemption on
the phone or net, or such considerations.

 

However if you are looking for a longer
term investment – which means you are looking to be invested for at least 8 to
10 years, you are looking to invest in equity mutual funds. This article is
aimed at selecting a good equity mutual fund for a long term.

 

1. The most
important first step is to have an investment goal. A fantastic fund selection
done without having an investment goal is completely useless. You should know
the reason for your investment, how long you can be in the investment, at what
stage you will re-allocate, etc. before you make your first investment.

 

2. Your focus will lead to the correct
asset allocation – the very important factor which will decide how much money
you will put into an equity fund.

 

3. Do your homework: Buy large cap well
diversified good quality funds. Do not buy opportunities funds, international
funds, contra funds as a staple part of your portfolio.

 

4. All funds in India are no load funds – which means there is no sales cost. This is good and
it means all your money gets invested. For a large cap equity fund, it may not
make too much sense to pay somebody to pick the fund for you, try doing it
yourself.

 

5. Have a demonic watch on the asset
management charges. As a fund starts to do well, it should attract a lot of
investors, and as its assets increase it should keep dropping its asset management
charges. Look at well managed funds with charges below 1.9% p.a. – there are
many.

 

6. Look at the portfolio turnover ratio –
the greater the ratio, the more is your total cost. One cost which is not
visible to the investor is the brokerage that the fund scheme pays. This is a
function of the turnover of the portfolio. So a fund with a lower turnover
would be incurring lesser costs.

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How to select a mutual fund – Part 2

 

Continuing yesterday’s post

 

7. The asset management company’s team is
important too! Look for experienced teams where the managers have gone through
a few business cycles. Managers who have not seen a down market can be very
myopic, and those managers who have been through a prolonged slow down very
pessimistic. You need a nice blend in the team.

 

8. True to label: When you buy a large cap
fund, you are buying a large cap fund, simple. If a fund says it is a large cap
fund it should not be buying mid cap, small cap etc. just because large caps
are currently out of favor. It is your choice to be in a large cap fund and
your fund manager should respect it.

 

9. Philosophy matching: Some fund houses
are cooler and calmer compared to the others. See which philosophy suits you.
For example Templeton says Franklin India blue chip is a ‘growth’ oriented,
large cap fund, whereas Templeton India Growth fund is a ‘value’ oriented fund
– see what suits you. Hdfc mutual fund on the other
hand does not classify itself into ‘growth’ or ‘value’ labels.

 

10. Fund management is by a team or a star
fund manager: Fund management is a part science and part art. The fund manager
will surely leave a stamp, however, some fund houses have been able to create
teams and systems to handle the departure of fund managers – this gives you
greater peace of mind. A star fund manager could leave or even worse just drop
dead – and you keep wondering ‘now what’! Internationally and in the Indian
context well performing funds (over say 10 years) have seen very stable
management teams and CIOs.

 

11. Over extremely large periods of time it
is really difficult to beat a well managed index fund. Currently all fund houses
show schemes beating the index, but beware of mathematics! All fund houses put
a small * and say calculation does not include loads. Do a small calculation if
loads are included just too many schemes would have under performed the
indices. So if you are not looking for too much excitement look
for a index fund with fund charges south of 1% per annum.

 

12. Index funds with the sensex as a benchmark are at least theoretically supposed
to be more aggressive than an index fund with nifty as the benchmark. Frankly
it does not matter – if in doubt split your investment amount. The co-relation
between nifty and sensex is quite high.

 

13. When selecting a large cap equity fund
choose ones with as broad a benchmark as possible. It is better to choose a
fund with CNX 500 as a benchmark rather than say the sensex.
Fund managers may have a greater flexibility between large caps, small caps,
etc.

 

14. Do not chase performance. The fund
which has performed well in one quarter may not perform well in the next
quarter. Funds with a good long term top quartile performance
is far superior than to a fund scheme which has one top position and one
bottom position. Remember long term investing is like running a marathon –
stamina is more important than speed.

 

15. At the top in the well run large cap
funds are Hdfc top 200, Dsp
top 100, Principal Large cap fund, Franklin India blue chip, and Hdfc Equity fund come to attention. This list is not
exhaustive and many fund distributors and banks have their own favorites. This
list passes the test prescribed above – of good consistent returns, good long
term performance, team going through a bull phase and a bear phase, true to
label, etc. Importantly as the fund size has increased these schemes have
reduced the asset management charges and thus improved the total return to the
investor.

16. Invest only by the SIP mode especially
if you are investing for a period of say 5 years. If your investment horizon is
upwards of 7 years even a lump sum would do – but seeing ones portfolio hurts!

 

The most important thing, like John
Templeton said ‘Start with a prayer, it helps!’

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Looking for Tax Bombs and Bouquets in Your Mutual Fund

 

Know your fund’s tax position before you
buy.

 

There won’t be many years like 2009. Fund
investors earned returns in the range of 20% to 70% on equity and high-yield
bond funds. Even better, most didn’t have to pay capital gains taxes, either.
Funds had big losses on the books from 2008 to offset realized gains in 2009,
so they were able to avoid making distributions.

 

About the AuthorRussel
Kinnel is Morningstar’s director of mutual fund
research. He is also the editor of Morningstar Fund Investor, a monthly
newsletter dedicated to helping investors pick great mutual funds, build
winning portfolios, and monitor their funds for greater gains. Kennel would
like to hear from readers, but no financial-planning questions, please.

 

But if you’re buying funds today, you
ignore taxes at your own peril. A good chunk of those past losses have been
worked off, and income tax rates are set to rise in 2011. You might get by for
a year or two without being hit by capital gains, but stock funds are meant to
be held for 10 to 20 years. If you’re shortsighted about taxes, you could pay a
price down the line. Each year, funds have to distribute any realized gains
after subtracting past and current realized losses.

 

 

Here’s the current tax situation for mutual
funds: Morningstar estimates each fund’s potential capital gains exposure by
using a fund’s annual report on its net gains and losses, adjusting them for
appreciation or depreciation since then. It is expressed as a percentage of the
fund’s assets. You can find the figure on the Tax tab for each fund’s page, and
you can also screen on a certain PCGE level in the Premium Fund Screener. Not
many funds have released their year-end 2009 statements, so we’re still adjusting
from 2008 numbers. The figures aren’t likely to be exact but should be in the
ballpark. Typically, a fund will distribute a sum that’s smaller than its PCGE,
but there have been exceptions.

 

 

The picture is pretty good overall for the
fund universe. Diversified foreign- and domestic-stock funds have an average
PCGE between negative 20% and negative 40%. That’s not really a good picture of
the funds you might buy, though, because it includes some giant negative PCGE
figures from funds with terrible performance. I ran a second screen on the
funds in Morningstar Fund Investor’s 500 funds list as a proxy for good funds
that people should actually buy. As you can see from the table, that sliced the
figures drastically. Three categories are now just about neutral on PCGE, and
others are between negative 5% and negative 20%. If you place a heavy weighting
on past three- and five-year returns, you probably are looking at funds with
positive capital gains.

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TBailey taps into ETFs for new ‘passive’ growth fund

 

 

Analyse every fund and fund manager in Citywire’s
Fund & Manager Performance area. Build charts to compare funds and managers
and see see how successfully funds have controlled
risk while delivering returns.

Fund of funds expert T Bailey Asset
Management will roll-out a passive-only fund next week which will tap into
exchange traded funds (ETFs).

 

The T Bailey Growth fund Lit will mimic the
firm’s existing Growth fund in terms of asset allocation and is the first fund
of funds product from the firm to follow ETFs and
trackers.

 

By using passive funds, T Bailey is aiming
to keep costs lower, and TERs will be capped at
0.99%.

 

Citywire revealed in December that T Bailey was planning to launch a product
offering clients exposure to global stock markets via trackers, run by it’s multi-manager team led by Jason Britton.

 

T Bailey’s head of marketing and communications,
Philippa Gee (pictured), said: ‘We knew there was a
need among passive investment fans for a low-cost retail vehicle that delivers
an actively managed global portfolio of expertly selected ETFs
and trackers.’

 

Gee said the fund would not be right for
all clients, but did offer a solution for those investors interested in a
passive offering.

 

She added it would also help advisers meet
RDR rules as T Bailey did thorough research into trackers and ETFs which it invests in.

 

At launch the new Lite fund will have 25% invested in the UK, 25% in the US
and 15% in Europe (ex-UK). To meet it’s goal of providing global exposure, it will also have
17.5% in emerging markets, 7.5% in Japan,
and 10% in the Pacific
Basin (ex-Japan) region.

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Evaluating Mutual Fund Performance

 

Like Kyle, I’m a big proponent of index
funds. And I’m not shy about suggesting that investors steer clear of actively
managed mutual funds.

 

With 2009 recently concluded (and
performance numbers just posted), I received an email from an investor
informing me how misguided I am in my attempts to discourage people from trying
to pick market-beating funds.

 

The investor presented as evidence a fund
he’d invested in and the degree to which it had outperformed the S&P 500 in 2009. (For the moment, let’s set aside
the fact that one year of performance is essentially meaningless from a statistical
point of view.) Unfortunately for this investor, his–or his financial
advisor’s–fund-picking prowess isn’t quite what he’d thought.

 

His fund actually underperformed a
comparable index fund by just over 23% for 2009.

 

You see, the fund
in question (American Funds’ New World Fund) can most accurately be classified
as an emerging markets fund, not a U.S. stock fund. So it doesn’t make
any sense to compare its performance to that of the S&P 500.

 

And when you compare its performance to
that of Vanguard’s Emerging Markets Stock Index Fund, the fund has actually
underperformed over the last year, 3 years, 5 years, and 10 years. Not
particularly impressive.

 

Making Fair Comparisons

In attempting to determine whether a fund
manager has achieved his goal of providing above-market returns, it’s important
to compare his performance to that of an appropriate benchmark. Otherwise (as
in the example above) we may make the mistake of thinking he’s achieved
something impressive, when in reality, he was just in
the right place at the right time.

 

An easy way to find an appropriate
benchmark for comparison is to look up a fund at Morningstar. For example, on
this page, we can see that Fidelity’s Magellan fund is a “Large Growth” fund.
So, when making comparisons regarding Magellan’s performance, it’s important to
use a large-cap growth index.

 

Don’t Put Much Faith in Past Performance

However, even more important than making
proper past performance comparisons is to remember that past performance
answers the question “how did this fund do?” not “how will this fund do?” When
attempting to find future top performers, past performance has been shown to be
a very poor predictor. (There’s a reason that such a disclaimer is required on
mutual fund ads!)

 

Two far more reliable predictors of future
performance are low expense ratios and low portfolio turnover. And those point
us in one direction every time: low-cost index funds and ETFs.

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Mutual funds: Top Convertible Fixed Income Funds

 

Today we are featuring top-performing
“Convertible” fixed income mutual funds, which primarily invest in convertible
securities in search of growth and/or income because convertible securities
provide protection against market fluctuations, while providing a steady income
stream. However, these securities are often rather expensive and difficult for
the average and beginning investor to purchase. Mutual funds, however, offer
easier access to these instruments since they require lower minimum
investments.

 

Investors can find such Convertible funds
by checking out the entire list of theZacks #1 Rank
Convertible Fixed Income Funds.

 

3 Great Convertible Choices

 

Putnam Convertible Income-Growth A (PCONX) seeks both current income and capital
appreciation, with growth of capital as a secondary objective. It was incepted
in June 1972.

 

This Convertible fund invests mainly in
convertible securities of large and mid-sized companies. A large share of the
funds assets, at least 80%, is held in equity securities. In addition, a
significant portion of the convertible securities purchased by the Convertible
fund are below investment-grade.

 

The fund has an expense ratio of 1.06%
against a category average of 1.42%. As of October 2009, it has a portfolio
turnover of 74% against a category average of 83%. The funds top holdings
include Bank Of America Corp, Freeport-Mcmoran Copper
& Gold Inc and Safeguard Scientifics Inc. For the fiscal year ended October
31, 2009, this Convertible fund outperformed the average return for its Lipper
peer group, Convertible Securities Funds.

 

Robert L. Salvin
has been lead manager of this Convertible fund since December 2005. Salvin joined Putnam in 2000 and is a Managing Director and
Portfolio Manager on the Core Fixed Income High Yield team.

 

Franklin Convertible Securities A (FISCX) was incepted in April 1987. This Convertible fund
seeks to maximize total return by maximizing capital growth and current income
under varying market conditions.

 

A majority of the Convertible fund’s
assets, at least 80%, are invested in convertible securities. It may not invest
more than 10% of assets in securities rated below B or in unrated securities of
comparable quality.

 

The Convertible fund has an expense ratio
of 0.91% against a category average of 1.42%. As of October 2009, it has a
portfolio turnover of 47% against a category average of 83%. The funds top
holdings include WESCO International Inc, Mylan Inc,
and Microchip Technology Inc. As of April 2009, the fund had outperformed its
benchmark, the Merrill Lynch (ML) All U.S. Convertibles Index, for the
six-month period.

 

Alan Muschott has
been lead manager of the fund since July 2002. Muschott
is a Chartered Financial Analyst and is a vice president of Franklin Advisers,
Inc.

 

Calamos Convertible Fund A (CCVIX) seeks to
provide current income, with growth as its secondary objective. It was incepted
in June 1985.

 

The Convertible fund invests its assets in
a well-diversified portfolio of domestic and foreign securities. The
Convertible fund seeks to increase returns while minimizing risk by
diversifying across issuers and sectors and relying on in-house research rather
than published data for the purpose of selecting suitable securities.

 

The Convertible fund has an expense ratio
of 1.15% against a category average of 1.42%. As of October 2009, it has a
portfolio turnover of 45% against a category average of 83%. The funds top
holdings include EMC Corp, Teva Pharmaceutical
Industries Ltd, and Freeport-Mcmoran Copper &
Gold Inc. The fund has consistently outperformed the S&P 500 Index over a
10-year period.

 

John P. Calamos,
Sr. has been lead manager of the fund since June 1985. Calamos
is recognized as a pioneer in risk management and is the founder of Calamos Asset Management.

 

Discover Many More Funds

 

Learn more about the new Zacks Mutual Fund Rank and discover some of the best
market-beating mutual funds by browsing our mutual funds section. This part of
Zacks.com offers a variety of tools, including mutual fund research, a new
mutual fund screener, helpful answers to frequently asked questions and quick
access to prospectuses and other information.

 

By applying the Zacks
Rank to mutual funds, investors can find funds that not only outpaced the
market in the past but are also expected to outperform going forward.

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