Junkie Notebook: Ah, the Beauty of Compounding

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Going for Brokers Giving Up on Janus

Wal-Mart and Kmart are vying for your tax rebate, but the best idea might be to toss it into a cheap, vanilla stock fund and forget about it.

Mutual fund brochures routinely urge you to hold fund shares for years and invest a set amount each month, touting the "power of compounding." Of course, this is more than a little self-serving because fund companies typically turn profits on long-term shareholders, not folks who hop in and out of funds each year. But there is a solid argument here, too, and this rebate gives us the chance to look it over.

Let's imagine you resisted the temptation of a nice dinner or a DVD player and plopped your $300 windfall into a broad stock fund with low expenses. As an example, let's use the no-load (VFINX)Vanguard 500 Index fund, which tracks the S&P 500 and levies only a 0.18% annual expense ratio compared with 1.43% for the average U.S. stock fund.

If you'd done that 20 years ago and not touched the account, it would've been worth $4,919.29 at the end of June. But if you'd started slugging $50 a month into the fund right after your initial investment and kept it up, you'd be sitting on a healthy mound of money. In sum, you'd have invested $12,350 over those 20 years -- $50 a month adding up to $600 a year -- and at the end of June, you'd have had $72,694.

If you'd invested $100 each month after your rebate, you'd have ended up with more than $140,000.

Now, that scenario is more than a bit rosy given that 1995 through 1999 were the stock market's best five-year stretch ever. But the folks at fund-tracker Lipper have run the numbers assuming the money went into funds returning about 11% -- the historical average annual return for big-cap stocks. Assuming that a couple put their $600 rebate in a fund that gave them an 11% average annual gain for 30 years, they'd end up with more than $14,000 without investing another dime.

Now the Vanguard 500 Index fund's minimum investment for regular accounts is $3,000, and it's $1,000 for tax-deferred IRA accounts -- a worthy choice for this money if you're not going to touch it until retirement.

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One fund you might consider instead is the no-load (TIGIX)TIAA-CREF Growth & Income fund. This firm has spent decades running retirement money for teachers and professors, but they've since branched out, and this fund's breadth and low expenses make it a solid choice. Manager Carlton Martin, who has run the fund since its 1997 inception and worked at CREF for more than 20 years, typically tracks the S&P 500 with half the portfolio and picks large-cap stocks with the rest.

The fund's 5.6% annualized gain over the past five years tops the S&P 500 and more than 70% of its large-cap blend peers, according to fund-tracker Morningstar. And its 0.43% annual expense ratio is just about one-third that of its average competitor.

The bottom line is that this rebate is found money and found money not invested is, well, lost.

Going for Brokers

John Hancock Funds is offering some brokers an incentive to sell their funds in August and September.

The Boston firm, perhaps best-known for the (FIDAX)John Hancock Financial Industries and (FRBAX)John Hancock Regional Bank funds, is offering brokers at participating firms a boosted commission for selling its funds, according to a July 30 regulatory filing.

The paperwork doesn't detail which brokerages are taking part in the promotion. Called full dealer reallowance, the time-tested sales tactic is fairly common and could become more so given this year's sagging sales industrywide. Over the past couple of years, we've let you know when fund companies like MFS, PaineWebber, Kemper, Oppenheimer and Pioneer have run reallowance promotions.

Fund-company executives say it's merely a way to gain some shelf space in a crowded market, but critics allege it can tempt some brokers to sell a fund for its payout rather than its quality.

Here's how it works. When you buy shares of a broker-sold fund and pay a sales charge or load, most of that money pays the brokerage and the selling broker's commission. A small portion, usually between 0.25% and 0.5% of the amount invested, goes to the fund company. But when a fund shop offers a full reallowance promotion, it pays its share to the brokerage for sales made in a specified month or two. Often the extra cash is shared with selling brokers, though not always.

For fund shares sold between July 30 and Sept. 28, brokers will receive an extra 0.5% for sales of Class A shares, an extra 0.5% for sales of Class B shares and an extra 0.25% on sales of Class C shares.

How much does a 0.5% bonus add up to? For every $50,000 worth of fund shares sold, that's an additional $250 -- not a small sum.

Giving Up

By and large, investors haven't given up on their sagging Janus funds. But at least one fund company has given up on Janus as a stock.

In the second quarter, Boston fund titan MFS liquidated its some $78 million investment in Stilwell Financial(SV), Janus' parent company. The sale was detailed on LionShares.com, a Web site that tracks institutional stock ownership. The stock is down 36% over the past year, while the average financial sector fund is up 13.6%.

Two weeks ago Jim Schmidt, manager of Hancock's Financial Industries fund, told TheStreet.com that he's avoided Stilwell in his fund because it will take a long time for Janus' assets and fee income to recover after the past year's losses.

"We don't own Stilwell," Schmidt said. "Things might get better for Stilwell's inflows later in the year, but it's going to take a long time to rebuild their assets to where they were at the peak last year."

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