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Archive for April, 2012


Are you looking to increase yields?

There seems to be an increasing number of articles about how to increase returns.  Too many of the articles do not discuss the additional risk.  The March 2012 edition of the Morningstar Advisor looked at Tactical Funds.  Their conclusion in 2010 when they previously studied this topic was that “…these funds generally failed to deliver better risk-adjusted returns, or downside protection, than a traditional index portfolio split 60%/40% between stocks and bonds, respectively.”  This study, as of December 31, 2011, “…found that very few tactical funds generated better risk-adjusted returns than the Vanguard Balanced Index’s over the extended time period.”  That is, their”… extended study found scant evidence that these funds delivered on their goal of delivering competitive returns with a smoother ride.” 
Since their study only found a several tactical funds were successful in reaching their goal.  investors should be selective in considering such funds.
Another approach was the subject of an article in today’s The Wall Street Journal.  The article discussed some of the risks with different approaches.  The discussion consider retired investors.  “The best places to look for yield and safety…are long-term, high-grade bonds and certificates of deposits…”  “But long-term holdings pose problems for investors in their 70s or 80s.”
High quality bonds or CDs with “death puts” are getting increased interest.  The yields are significantly higher than shorter term investments.  “The biggest risk is that the issuer …defaults”.  Another risk is that some of these bonds are callable.  The put option on some issues are effective until the bond is held for 6 or 12 months.
When looking to increase your yield be sure to do your due diligence.  You should be sure to understand the risks.  Of course make sure that they are consistent with your needs.

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Do you consider Exchange-Traded Notes (ETN) the same as Exchange-Traded Funds?

Samuel Lee, an analyst at Morningstar, the research firm is quoted in Jason Zweig’s column in today’sThe Wall Street Journal.  “When it comes to expenses, I consider all ETNs to be suspect unless you’ve combed through every page of the prospectus.”  “Don’t even try that unless you have a couple of hours, a magnifying glass, a financial calculator and a few pints of strong coffee.”
One of the basics in inveting is that you should only invest it what you understand.  ETF are increasingly being used in portfolios.  There is concern that too many people think ETNs are the same as ETFs.
Costs are one factor that is different.  The costs are generally higher and more difficult to discover than ETFs and mutual funds.  Some are significantly higher.  The “…reported expenses, as high as they sound, might understate the costs.”
Tax efficiencies is one of the advantage of ETFs.  The taxation of ETNs is not as clear.  The income of many ETNs maybe ordinary income, taxed at ordinay income rates rather than lower rates that apply to capital gains.  
ETNs can trade at higher premiums than ETF.  Large ETFs tend to generally trade very close to the underlying index.  ETNs are “generally…structured as borrowings…regulated like bonds…”   
If you are considering ETNs and think you understand ETNs, make sure you understand how they would help your portfolio.  That includes a reasonable expectation that risk is being compensated with higher returns.

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Thinking about buying a “Dividend-Fund”?

Many commentators are telling investors to invest in a mutual fund or an exchange-traded fund (funds) that invests in companies that pay dividends.  Statistics indicate that there is a rush to buy such funds.  Jason Zweig gives some of the reasons in his April 7th article.  He cautions investors not to mistake such funds for bonds. 
“When you buy bonds you collect interest and get your money back (not counting inflation) when the bond matures.”  The values of stocks of dividend paying companies are not stable.  There is not a maturity or any other date that you know what the value will be of a stock of a dividend paying company. 
He also discusses that many funds have different criteria for picking dividend-paying stocks.  Examples of differences include: industries, length of time they have paid dividends, required growth in dividends.
An investor should know why they are interested in a particular fund.  Then see the fund hold stocks that are consistent with what they are looking for.  As important is how such funds fit into their existing funds.  Some funds they own that do not have “dividend” in their names may own primarily dividend paying stocks.  Many value funds and income funds hold such stocks. 

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Investor’s due dillegence is more important than ever.

In an effort to help entrepreneurs raise capital Congress passed the Jobs Act, (Jumpstart Our Business Startups) with bi-parisan support..  The law applies to businesses that have under $1 billion in revenue, that have been public for less than 5 years and have less than prescribed capitalization.
The law exempts these business from a variety of accounting and disclosure rules.  Investors that are considering investing in such businesses may want to spend additional time looking into such businesses.  For example, these businesses are not required to have their internal controls audited.  An analysis performed for The Wall Street Journal suggests that since 2004 there have been “…104 companies that had issues with there anti-error, anti-fraud  procedures… would have been exempt from auditors scrutiny of those procedures if the JOBS Act  been in effect at the time.” 
Anyone considering an investment in such a company should request information about their operations.  If they do not have audited statements or an internal audit of their internal controls additional information should be requested.  The business background of the operating personnel, professional advisors, bankers, etc should be undertaken. 
There have been many lessons learned from the Bernie Madoff escapades.  One is that you can not rely on how well known a person is or how likeable they are.  

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