This Saturday piece compiles our Fund Forum Q&As from throughout the week. (They appear every day around noon.) Remember, you can send your question, with your full name, to firstname.lastname@example.org
Monday's Topic: The High Cost of Owning Convertible and High-Yield Bonds in One Fund
I bought Putnam Convertible Opportunities & Income Trust (PCV) , a closed-end fund, because it gives me exposure to both high-yield and convertible bonds in one investment. But after reading the annual report, I found that the expense ratio is 1.71%. I had hoped for an expense ratio of closer to 1%. Of course I should have checked that before I bought it! I still like it for the yield, currently 7.85%. Is 1.71% high for this kind of fund? -- Bruce Koopmans
Yes, that expense ratio is quite high. In fact, it's hands down the highest expense ratio among convertible closed-end funds, which is how
classifies your fund.
But your question is complicated because your fund, and another Putnam fund that also combines convertible and high-yield bonds in a single product,
Putnam High Income Convertible & Bond
, seem to be the only closed-end funds of this type. The seven other funds in the Lipper category all focus pretty exclusively on convertibles.
You say you bought the fund because you wanted exposure to convertible and high-yield bonds in a single product. If you're going to insist on a single product, PCV is your fund. But you're paying through the nose for it.
Maybe you'd be happier in PCF. It has a much lower expense ratio of 1.03%. The biggest differences between the two funds are as follows: PCV strives for capital appreciation and income, can invest entirely in high-yield bonds and can invest up to 15% of its assets in foreign securities. PCF strives mainly for high income. High-yield bonds make up between 60% and 70% of the portfolio at all times. Also, PCV can use leverage; PCF can't. Leverage can enhance a fund's performance, but it can also magnify its losses.
PCF's long-term performance isn't as good as PCV's, however. Over the three years ended Dec. 18, PCV returned 8.37% a year on a net-asset-value basis, while PCF returned 8.02%, according to Lipper. (On a market basis, which takes share price changes into account, the returns were higher: 14.22% a year and 10.77% a year, respectively.)
You also might consider selling PCV and buying a combination of a straight convertible fund and a straight high-yield fund with more reasonable expense ratios.
Have a look at these numbers. You're paying 1.71%. The category average is 1.12%, and the category median is 1.06%. The lowest expense ratio in the category is 0.76%. The next highest expense ratio in the category after PCV's is 1.19% -- 52 basis points less than you're paying!
Putnam declined comment.
Maybe some funds can justify high expense ratios with out-of-sight performance, but not this one in its fairly short life (it started trading in June 1995).
Looking at NAV returns, which tell you how the fund manager is doing (as opposed to market returns, which mix the share price into the equation), PCV is down 5.17% for the year, more than all but one of its peers. Granted, the fact that it invests in high-yield bonds, which tanked this year, was a major handicap. But the fund didn't really distinguish itself before this year either (hard to do when the fund company is charging so much). During the three years ended Dec. 31, 1997, it returned 33.21% to rank fifth of the nine funds in the category. (PCF ranked seventh, returning 30.36%.)
Back to index
Tuesday's Topic: Which Fund Firms Need to Put the 'Service' Back in Customer Service?
Investors rely on mutual fund firms' toll-free customer-service centers to cull information and collect vital data on funds and company policies.
But dealing with these phone reps can be like taking a trip to the dentist. You know, the one with the rusty instruments.
Some customer-service operations are consistently helpful and easy to reach, staffed with well-informed, articulate representatives who are always ready with the latest fund information and policy changes. Then there are the others.
I am sure that everyone has at least one irritating customer-service experience to recount. But I want to hear about the firms whose service centers are consistently bad.
Tell me which fund company has the worst customer service -- the one with the reps who struggle to answer even the simplest questions.
Email me at
email@example.com and please send along your horror stories.
Back to index
Wednesday's Topic: What Caused My Bond Fund to Do 'The Chicken'?
What happened to (MCHIX) Merrill Lynch Corporate High Income Portfolio C on the first of August? No other fund seems to have been knee-dropped like that and made to do "The Chicken." -- Pat Wilson
! Virtually every fund in the universe of high-yield bond funds was, as you put it, knee-dropped and made to do "The Chicken" in late summer and early fall, as investors fled all kinds of risky assets.
From July 31 to Oct. 19, the fund you ask about, MCHIX, saw its net asset value drop from $8.03 to $6.70. Over that period, its total return was negative 14.69%, and its principal-only return was negative 12.93%, according to
The total return figure is worse than average; the average high-yield fund returned negative 11.24% over the period. But the principal-only return's a tad better than the average of negative 12.95%.
I thought it might be useful to chart MCHIX's net-asset-value change over the past year against both the best- and worst-performing funds in its category. As you can see if you click
here, MCHIX looks pretty bad alongside
Strong Short-Term High-Yield Bond, the fund with the second-highest total return for the year through Nov. 30 (the best performer,
UBS High-Yield Bond
, isn't big enough to have a Nasdaq symbol). But compared to
No rthstar Total Return; A, the worst of the bunch over that period, it's the belle of the ball.
More on TIPS
The discussion of Treasury Inflation-Protected Securities, or TIPS, on Dec. 18 prompted reader
- Would one ever want to own TIPS in a nontax-deferred account?
Could there be trading gains in TIPS if inflation were to heat up?
Could a change in supply/demand for regular Treasuries make TIPS less attractive?
Regarding taxes: I pointed out that investors buying TIPS outside of a tax-deferred account should be aware that, as with zero-coupon bonds, they'll owe taxes on the accrued principal each year.
If you don't mind paying taxes on money that's not actually being paid to you -- a problem that regular bonds don't present -- there's no reason not to own TIPS in a nontax-deferred account.
Having to pay tax on TIPS is less inconvenient than having to pay taxes on zeros because, unlike zeros, TIPS pay interest that can be used to pay the taxes. It's possible, however, that if the rate of inflation as measured by the
consumer price index
were to shoot up, the coupon income wouldn't be enough to cover the tax bill on the accreted principal, says Will Lloyd, head of market strategy at
. Of course, Lloyd adds, if the CPI were to shoot up, you'd be glad you owned TIPS instead of regular Treasuries.
Regarding trading gains: I explained the basic principle that if inflation outpaces the rate implied by the difference between TIPS yields and regular Treasury yields at the time of purchase, the TIPS investor will come out ahead. That's true, but remember that if inflation is rising, no bond is likely to perform well. If inflation's rising, TIPS should outperform regular Treasuries, but that might mean only that you'd lose less in TIPS than in regular Treasuries.
David Schroeder, manager of
, gave me this example: Suppose you bought the 10-year TIPS today at a yield of 3.80%. If the annual rate of CPI inflation were to shoot up to 3% from 1.5%, the annual income return on the bond would be about 6.80%, the sum of 3.80% and 3%. But if that increase in inflation were accompanied by a 50-basis-point rise in the TIPS yield to 4.30%, the bond's price would fall by a little more than 3%, eroding its total return and wiping out the possibility of a trading gain.
"Over a short investment horizon, it's the direction of yields that will have the big impact on the returns of these securities," Schroeder says. "An investor looking at these should be looking at them over a longer horizon. The longer you hold a bond, the less impact changes in price have on a return."
Of course, there's no guarantee that a rise in CPI inflation would cause TIPS yields to rise, Schroeder says. They might even fall, as demand for them -- currently close to nonexistent -- increased. But you can't count on that.
In the meantime, the relative illiquidity of TIPS makes it doubtful that individual investors can squeeze trading gains out of them. The small number of buyers for TIPS means wide spreads between bid and asked prices, especially for small lots. In a market where guys like Schroeder complain about the difficulty of selling $16 million lots at a good price ("The markdown wasn't huge, but it was substantially larger than for a regular Treasury security," he says of a recent transaction), individuals don't stand a good chance of salvaging much of a gain from the bid-asked spread when they trade.
"There are potential price gains, but because the market's illiquid, you might not get as much of a price gain as you'd expect if inflation were to pick up," Schroeder says.
Regarding supply/demand dynamics: With the federal government running a budget surplus, issuance of regular Treasuries has fallen off sharply, and with inflation in retreat, there's been very little demand for TIPS. Those trends have benefited regular Treasuries massively, while TIPS have underperformed. The question is: Do you think the supply/demand dynamics can get any better for Treasuries? Because if those trends reverse, TIPS should outperform regular Treasuries. Again, that doesn't mean they'll do well. "In a rising rate environment, the total returns of TIPS will, without a doubt, be better than nominal Treasuries' of the same maturities -- they won't be as negative," Schroeder says. In other words, if you want to bet that interest rates are going to rise, forget TIPS and buy yourself some short-maturity instruments.
Back to index
Thursday's Topic: Resolve to Improve Your Financial Well-Being in 1999
At the beginning of each year, people always vow to quit smoking or hit the gym.
But what about your financial well-being?
I asked several financial advisers -- and a few members of the
staff -- to help me construct a list of financial resolutions for the New Year. Some are personal and some are general, but all should help produce a healthier financial you by the end of 1999.
Don't Forget That IRA
You may hear this reminder every year, but it's certainly worth repeating: Open an IRA or contribute to the one you have.
Ron Roge of
R.W. Roge & Co.
is telling clients who have 401(k)s without matching contributions to put their first $2,000 into the Roth IRA and then contribute to their 401(k)s. In a Roth, you get greater flexibility and greater control than in a 401(k). The money grows tax-free and you don't have to pay taxes on the money when you withdraw it at retirement. "With the Roth, it all belongs to you," adds Roge.
For those whose have 401(k) plans
matching contributions from employers, Roge suggests that investors maximize that tax-deferred investment vehicle first. Matching contributions are basically free money.
Reduce Your Paper Trail and Simplify
If you are having trouble keeping track of numerous bank, brokerage and mutual fund accounts, it's time to consolidate.
Roge recalls one client who came to his firm with a particularly heavy burden. "We had a retired widow with 53 separate accounts. There were no IRAs. It was just straight money. The woman was so confused," he recalls.
By rolling all your investments into a single account at a financial supermarket, your record-keeping should be less cumbersome and confusing at the end of 1999.
This term is about as stale as a
movie. Nevertheless the exercise is essential.
Spread your investments across asset classes: domestic equities, international equities, bonds, even real estate, perhaps. "They don't all march to the same tune at precisely the same time," says Roge. This diversification should help mitigate some volatility over a three- to five-year period.
Don't Hold Too Many Funds
Make sure your funds are not invested in same securities, says Robert Levitt, a financial adviser with
Evensky Brown Katz & Levitt
. If there is a lot of overlap, this may be the time to trim the number of funds in your portfolio.
If you own five or six growth-and-income funds, for example, look at their top 10 holdings to check for duplication. Any significant overlap may mean that you are not getting the diversification that you think you are.
Count Every Cent
Now is the time to
start keeping track of what you spend every day, which should certainly help you start saving more. Robert Levitt says, "Write down everything you spend every day and record your expenses in
to see where your money is going."
In particular, Mutual Funds Editor David Landis resolves to keep a better record of his cash expenditures. To that end, Landis plans to start using his credit cards more. That way he has precise statements of what he is spending. "Everything I put on the credit card I put into Quicken," he says. "We pay off our cards every month, so interest charges are not a problem."
Drive Past That Outlet Mall
Avoid making frivolous purchases and succumbing to the temptation of items that have been marked down. "Remember that even though it's on sale you are still spending money," says Robert Levitt.
If overspending is a problem, some professionals also suggest spending cash rather than using your credit card. "It's much easier to spend more money when using your credit card," Levitt adds.
Think About Your Heirs
Jim Lee of
Lau & Associates
in Wilmington, Del., says he "will review my estate plans and have my will drafted before I go to Uganda in the spring. It's on my very short list of things to do before leaving."
Everyone should review their estate plans every three years. Or get one if you don't have one. Even if you're not going to Uganda.
Comparison-Shop For Insurance
Lee suggests going through your insurance to see if you can find better rates out there, and the Internet is the perfect tool for comparison shopping.
Lee himself was paying $216 a year for $150,000 in term life insurance. Within the last few months, he went on the Internet and (using
www.rightquote.com) found $250,000 in term insurance (10 years with a level premium) for himself for $110 a year. He also bought $100,000 in term insurance for his wife for $108 a year. "We just doubled our insurance coverage and paid the same premium." Lee did the same with his auto insurance.
Keep Your Bank from Nickel-And-Diming You
Staff Reporter Joe Bousquin is going to try to reduce the fees he pays his bank every month. He estimates that he gives up about $30 a month in ATM charges alone. "I plan to build up a minimum balance to avoid the ATM charges and do little things like using the Internet to order replacement checks. I can order replacement checks for as little as $2.99 online, while my bank charges more than $30."
Stop Putting Money in a Losing Fund
Executive Editor Jamie Heller is planning to stop making automatic investments to the
FBR Small Cap Financial fund. (It's not that simple, either. You have to write a letter to the fund company.) "Forget that whole dollar-cost-averaging thing for a fund that's in the red in 1998," she laments.
Teach Your Children Well
Senior Writer Alison Moore plans to start teaching her children about financial planning. "My two children, ages 12 and 7, really got into the Christmas giving spirit this year, saving their allowance and budgeting to buy gifts for family and friends. For the first time money was a tangible issue for both of them as they watched how fast it disappeared," she says.
"This year I'm planning to get them interested in growing their savings by getting them started on a mock stock portfolio of their own choosing. (Though, as a
reporter I can't actually buy the stocks.) We've already begun exploring some of the possibilities, and their questions about different companies show a lot of insight and interest. I'm hoping success on paper will give them the confidence to make the leap into investing later on -- preferably a lot sooner than their mother did."
Please send me your own financial resolutions for 1999. Email me at
firstname.lastname@example.org and include your full name.
Back to index
TSC Fund Forum aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.