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: How Can I Get Timely Data on My Fund's Holdings?
Are there any timely data available on the Web concerning current holdings of mutual funds? Most of what is available seems to be half a year old, which is a lifetime in this market. -- Brent Armstrong
You are supposed to be able to find the most up-to-date information on the Internet, but reading some fund family Web sites feels like you're looking at a newspaper from 1969.
The problem is that fund companies are required to release the complete holdings of their funds only twice a year. These same rules apply even to the fast-moving Internet.
Fund companies must disclose each fund's holdings in the annual and semiannual reports. The annual report gets mailed to shareholders within 60 days after the end of the fund's fiscal year, while the semiannual is sent 60 days after the end of the fiscal half-year, says Pamela Wilson, a lawyer with
Hale and Dorr
in Boston. But by the time you can get your hands on that information, it is already as much as 60 days old.
It's frustrating, and I empathize. But I can't hold out much hope that the Internet will solve the problem. The trend among fund companies is against releasing more up-to-date information.
"No one is against fund shareholders being well informed," Wilson insists. Rather, firms are concerned about abuse of these data. Some people might use that information to attempt to mimic the performance of a fund or trade behind a manager. And the data could be quite valuable to a firm's competitors.
But more importantly, how would you use this information if you had access to it more frequently? "Benign neglect is often how you avoid overtrading your funds," says Wilson. "To respond to every little movement in a fund is not really letting the manager do his job."
Financial adviser Robert Levitt of
Levitt Novakoff & Co.
in Boca Raton, Fla., says, "We look at portfolio's holdings occasionally to do style analysis." If you are curious about a fund's rapid run-up, you may want to look at its holdings to see which stocks are driving this dramatic climb. But frankly, having a current list of a fund's holdings is of questionable value to the average fund investor.
That said, some fund companies do divulge more than others. For example,
releases quarterly reports for its mutual funds, which include the total holdings for each fund.
You should also be able to find top-10 lists that aren't quite as ancient as the total-holdings reports available on many Web sites. "Top-10 positions tend to have stability and continuity to them and can give the average shareholder a pretty good idea of the orientation of a fund," says Wilson.
updates the top-10 lists for its funds on a quarterly basis.
T. Rowe Price
releases the top-25 holdings for its funds 15 days after the end of the calendar quarter. Generally, you should be able to retrieve that information from a company's Web site or through its 800 number.
updates its Web site every month, although there is a 30-day lag on the top-10 holdings. For example, "somewhere around the beginning of February, you will be seeing the Dec. 31 holdings for the funds," says a Janus spokeswoman.
If you are looking for an answer to a specific question, you can always try calling your fund company's customer-service line. (On the other hand, I have been more than frustrated with some of those 800 numbers as of late, which I detailed in
a recent column.)
Tuesday's Topic: Can I Trade My Rydex OTC Fund During the Day?
Can I trade the (RYAOX) Rydex OTC fund for intraday movements in the Nasdaq 100? My broker doesn't allow trading of options, and I'd like to be able to trade the daily swings of the Nasdaq 100. -- Jim Young
I am afraid not.
Most mutual fund companies process purchases and redemptions based on a fund's net asset value, or NAV, at the close of each trading day. And the Rydex OTC fund is no exception.
Certainly you can call your fund company at almost any time and place an order if you like. But for most open-end funds, that transaction is only executed once a day after the fund's NAV has been priced. That also is true for the Rydex OTC fund, which is priced just once a day.
Shares in a mutual fund don't trade like shares of stock. Unlike a stock, the price of an open-end mutual fund's shares is not based on supply and demand. Rather, an open-end fund's NAV -- the dollar value of a single share -- is based on the value of all the fund's holdings divided by the number of shares outstanding. And the shares don't trade on an exchange.
Instead, a fund's shares are bought and sold directly with the fund company, and new shares are issued when investors want to purchase them.
However, "some funds are set up to be bought and sold more often. Those are set up to be more specialized trading vehicles," says Kathleen Clarke, an attorney with
Seward & Kissel
in Washington, D.C.
Select funds probably are the best examples. All the Select funds are priced on the hour from 10 a.m. to 4 p.m. Eastern time, says a Fidelity spokeswoman. If someone makes a purchase between one hour and the next, the investor will receive the next closing price, she says. The Select funds do carry short-term trading fees, but that money goes back into the fund to compensate longer-term shareholders for the trading costs, the spokeswoman adds.
These Select funds are truly a different breed. Most fund companies, Fidelity included, try to discourage investors from frequently trading in and out of their funds and will try to limit the number of "round trips" an investor can make over a certain period of time.
, for example, is "looking at taking steps toward limiting the time in which an investor can make a round trip and the number of round trips they can make in a year," says an AIM spokesman.
It can be particularly difficult for a manager to run a portfolio that is experiencing massive inflows and outflows every day, says Clarke. A fund that investors are buying and selling frequently may incur hefty trading costs to meet redemptions, costs that are shouldered by the fund's remaining shareholders.
You may not be able to buy and sell the Rydex OTC fund during the day, but that fund company, unlike many others, will not try to dissuade you from frequent trading.
If you want to trade the Nasdaq 100 during each day, there is an alternative on the horizon. As I have
mentioned in this column before, the
Nasdaq-Amex Market Group
is getting ready to launch a Nasdaq 100 investment product sometime this quarter.
The vehicle, structured as a unit investment trust, will trade like a stock on the
American Stock Exchange
and resemble the existing
Standard & Poor's Depositary Receipts
, or SPDRs. Investors will be buying into a trust that holds a portfolio consisting of Nasdaq 100 securities
You will be able to purchase these securities at any time during the trading day, and you also will be able to short them. I suggest you check the Amex's
Web site. You should be able to find a prospectus there soon.
Wednesday's Topic: What Is a Fund Buying? Investors Want to Know
In this space, I usually avoid expressing my own opinion. But this time is going to be different.
Monday's column, I talked about how frequently fund companies deliver holding information to shareholders.
Fund companies are only required to reveal their funds' complete holdings twice a year. Sure, some fund firms will update their lists of top-10 holdings more frequently, maybe at the end of every quarter. But I don't see any harm in at least giving shareholders top-10 lists dating back to the end of the previous month.
It's a way of informing shareholders and basically letting them know that you are not hiding anything. And if a fund experiences an unexpected pop or drop in value, the shareholders will have a place to look for a possible explanation.
readers offered some additional sound reasons for wanting timelier access to these data.
"I do believe it would be valuable if mutual funds updated their holdings more frequently. Increasingly, the best-performing funds are 'concentrating' their holdings," writes
. "Also, I want to know if the reason a fund appreciated 20% in the month of January was its holdings in
. If my fund is going to own the Internet, I want to know it so I can anticipate the volatility that is sure to follow. When one position can make a fund's performance, it matters to the shareholder."
"When choosing a fund, it would be nice to know the most recent holdings to help inform my decision," says
. "And don't downplay the curiosity factor. Sometimes I just want to know what my fund manager is doing!"
writes, "It helps with diversification and also lets me see if the manager is on the ball and fast on his or her feet."
"While I understand the primary arguments that funds present for not providing timely holdings information, I do believe that having that information serves important purposes," says
"The mutual fund is a tool that lets us buy a portfolio of stocks rather than each stock separately. Given this fact, don't you think that we would like to know what we are buying into?" he asks. "On the other hand, being forced to make decisions using two- to six-month-old information is simply absurd, especially considering the importance of timely information for this particular activity -- investing."
Kiyak continues, "Similarly, there are cases where you would want to avoid certain stocks. For example, with the Internet craze out there, I would surely want to closely follow my mutual-fund investments to ensure that none of them are buying bunches of
with the hopes of putting some impressive returns on their next magazine ad."
Still, some investors are satisfied with the status quo.
"I am happy with current regulations that require biannual postings of fund holdings. It works to the disadvantage of everyone, including the individual investor, if funds were to show every trade they make. All that matters is the end result," writes
"I realized the point of investing in a mutual fund is to take some of the pressure off the individual investor. Do your homework, look at the manager, expense ratio and his or her goals and philosophy. If the profile works for you, have faith and invest with them. If you are not comfortable with this concept, don't. Go ahead and make your trades on your own," Wright says.
"I personally use a fund's top-10 holdings to help watch what the fund manager is increasing or decreasing, especially in sector funds. Also, I use that info as an added check in my purchasing and selling decisions," writes
. "Fidelity does a great job in its Mutual Fund Guide. The January 1999 issue that I received in the mail about the 8th or 10th of the month has updated top-10 holdings dated Dec. 31, 1998."
Thursday's Topic: Are There Funds That Specialize in IPOs?
Are there are any mutual funds that specialize in initial public offerings? -- Josephine Francis
When you say IPO, most people's thoughts turn right to
. The stock of that Internet auction house has climbed 1,446% from its September offering price of 18. And no, that's not a misprint.
But if you look at the IPO market as a whole, the picture is not as breathtakingly glorious. For 379 domestic IPOs in 1998, the average percentage rise was 19.95% through the end of the year, according to research firm
. That is a far cry from the numbers many investors remember reading in the paper.
Returns of the
IPO Plus Aftermarket fund look more like the national average than the likes of a sizzling Internet stock. This fund, the only one I know of that invests exclusively in newly public companies, returned 18.4% last year and has climbed 10.4% in 1999, according to
When you compare the fund's performance to the
, its numbers look good. The Russell index returned -2.6% in 1998 and is up only 0.4% (price only) this year. However, the IPO fund's returns pale when compared to say an Internet-stock fund.
Munder NetNet, for example, was up 98% last year and has climbed 39.6% this year.
The IPO Plus Aftermarket fund was started around the end of 1997 by Greenwich, Conn.-based
, an institutional research firm opened by Kathleen Shelton Smith, Linda Killian and William Smith in 1991. The firm was founded on researching IPOs, and the three bring that expertise to running their only fund. The three managers buy newly public companies during the offering phase and in subsequent trading, called the aftermarket or the secondary market. Making purchases in the aftermarket allows the managers to build positions in a stock. "The key issue for us is to find the right positions in the aftermarket," says Kathleen Smith.
Not surprisingly, the IPO fund does have a large allocation to Internet stocks. About 40% of this tiny $11 million portfolio is in Internet-related stocks, says Kathleen Smith. They did buy eBay at its IPO, but they sold it at 50 when the stock met their valuation targets, she says. (The stock, now trading around 246, was off about 11% in early trading Thursday during a
you value an Internet IPO? "It's hard," she sighs. The managers set price targets for all their stocks, although they will adjust those targets if necessary. "When a stock is really high, we think it's best to dispose of it and move on." With Internet stocks, it's also difficult to get them on the offerings because the demand is so great, she adds.
In the non-Internet world, the IPO fund owns
Fox Entertainment Group
, which the managers bought on the offering in November and in the aftermarket. The managers also own shares of
, a spinoff from
. Those stocks are up 18.6% and 48.3%, respectively, from their offering prices.
(For the fund's top holdings, you can visit Renaissance's
Web site, which also includes reams of information about the IPO market.)
Smith admits a lot of people ask why the fund's returns are not paralleling the performance of eBay and its ilk. She says one reason is diversification. The fund currently owns about 25 stocks, although the managers are planning to grow that number because of a heavy IPO calendar. And the managers will get out of a stock if it hits their price cap.
But there may be a greater reason. The fund has a "narrow investment focus in an area that is very hard to assess in a narrow way," says Gail Bronson, a senior analyst in Palo Alto, Calif. for IPO Monitor. It is like "trying to evaluate all different modes of transportation as opposed to only cars," she says.
If you absolutely have to own IPOs and don't have the time or a way to buy them on your own, this fund might be an option for you. As Smith puts it, "If you have a life that does not involve day trading, the fund is very convenient."
That said, there are certainly other broader mutual funds that also buy IPOs. But that's another column altogether.
Friday's Topic: Isn't Buying a Mutual Fund Easier Than Creating a Bond Ladder?
I think that I understand the bond ladder philosophy, but why can't I spread it evenly over bond mutual funds -- say, Vanguard bond funds -- having different average lengths and forget about reinvesting every year? I can get low expenses, diversity and liquidity. Can you think of reasons not to do this approach to retirement sanity? -- Arnie Rabinowitz
Glad you understand how the bond ladder works; readers who don't can see a previous
Fund Forum for a explanation.
The strategy you propose certainly has its merits, and you named them -- low expenses (in the case of
funds), diversity and liquidity.
Even so, depending on what type of bonds you want to buy, your goals and how much money you have, it may not be the best strategy for you.
I can think of four reasons why you might not want to pursue this strategy.
Bonds may be better suited to your goals than funds. The best argument against bond funds is that they don't offer the very things that investors buy bonds for. A bond is a promise to make fixed interest payments according to a schedule and to repay principal upon maturity. A bond fund promises neither of those things. Its dividend may fluctuate, and its principal may not be worth as much when the investor wants it back. If you are buying fixed income in part because you know you are going to need money for a specific purpose at certain times, it may be better to buy bonds that will mature on or around those dates.
You may want only Treasury bonds. If you want only Treasury bonds, its hard to beat
Treasury Direct on the cost front, even if you're Vanguard. The program lets you buy Treasury securities directly from the Treasury at auction. The only expense is a $25 annual fee on accounts over $100,000. That's 0.025% or less. The only reasons you might want to buy a Treasury fund instead are if you really need the liquidity (although Treasury Direct will solicit bids and sell your security to the highest bidder for a $34 fee) or if you want automatic reinvestment of dividends. You can't automatically reinvest the income that bonds held in Treasury Direct will throw off, but you can automatically reinvest fund dividends.
You may have enough money so that it makes more sense to buy municipal bonds directly. (If you have enough money, it's very likely you'll do better in munis than in taxable bonds.) With Treasuries, just about anyone can save on expenses by going through Treasury Direct. But with other types of bonds, which you have to buy from a broker, you may do better in a fund unless you're investing enough that you can buy at a good price. With bonds, the yield you get on a purchase depends a lot on how many you're buying at a time. How much do you have to spend to get a good price? "You really need at least $1 million," says Jim Cusser, manager of
Waddell & Reed's
United Bond Fund. That's $1 million per bond. Assuming you don't want to sink your whole nest egg into one bond, Cusser says, "you need at least $10 million to pull it off." Dan Peirce, a bond specialist at
BancBoston Robertson Stephens
adds: "Even if you have a lot of money, it's difficult to get good prices on your own."
You might be able to take more risk than a fund can. Funds, Cusser explains, aim to consistently top the performance charts. To do that, they may pursue strategies that are less risky -- but ultimately less profitable -- than an individual investor could afford to take on his or her own. "No matter what fund you buy, whether it's short, intermediate or long term," Cusser says, "the investment manager has a limited time horizon, which may or may not jibe with the time horizon of the investor." It gets back to the first question: What's the goal? If the goal is to have $50,000 come due each year for four years starting in18 years to pay for the college education of someone who's currently an infant, an investor should think about buying zero-coupon bonds. Yes, they are the most interest-rate-sensitive bonds you can buy, and few funds would load up on them for that reason. But if they suit your purpose and you're sure you won't need to sell before maturity, who cares?
I am intending to build a bond ladder of California municipal bonds not subject to the AMT. I will be investing approximately $8 million. How many steps should the ladder contain? I am assuming an equal dollar distribution among the various steps. -- Mel S. Goldsmith
I talked to David MacEwen, who manages just such a portfolio for
. (The firm's California funds, except for the high-yield fund, don't hold bonds subject to the alternative minimum tax. For more on the AMT, see our recent
primer on the subject.)
He says you shouldn't have any trouble restricting your portfolio to non-AMT-subject bonds since the majority of California issuance is non-AMT. (Last year, just $2.1 billion, or 6.2%, of the $33.9 billion of new issues in California was subject to the AMT, according to
MacEwen has six points of advice.
Don't be hasty. "There hasn't been much issuance of Cal paper lately," he says. "We're seeing lots of demand from
big brokerages who want to buy our bonds and sell them to retail, so we know there's a scarcity of paper out there. So he's going to have to be patient. I would think it could take as long as a month" to invest $8 million wisely, MacEwen says.
Stick with insured bonds. "Spreads are tight. You're not really being compensated to buy anything but insured bonds," the manager says. There's good value in some high-yield issues, but you should assume that anything a dealer shows a retail investor has been rejected by an institution that employs a staff of analysts to spot problem bonds.
Figure on buying blocks of bonds no smaller than $400,000 in order to get them at a decent price. You don't need to spend more than $1 million per block to get good pricing. MacEwen thinks an $8 million ladder portfolio should have 10 to 15 positions.
When you go to buy, ask your broker to show you scales for recent pricings. If you're thinking about buying an insured bond due in 2013, you want to know what yield investors recently got on a similar bond.
Consider setting up something a little different from a conventional ladder. MacEwen says the California yield curve has a nice positive slope out to 20 years, meaning that yields on bonds due in 15 to 20 years are high relative to short-term yields. "He might want to consider pushing out to the 20-year area to capture some of the yield there," he says. That doesn't mean you have to have a 20-step ladder, which is going to give you a longer average maturity than you might want. Instead, think about building a five- to 10-year ladder with two-thirds of the portfolio and sinking the final third into the 15- to 20-year area. How you manage the portfolio over time depends on whether the yield curve continues to reward you for tying up your money for up to 20 years.
Look out for calls! Most muni bonds are callable 10 years after they're issued. You shouldn't necessarily avoid calls, since noncallable bonds are very expensive. But don't let yourself be blindsided by them.
Thanks to everyone who sent a question in response to last week's plea. The response was overwhelming. Unfortunately, that means some questions are going to have to wait a while for answers. Please be patient. I'll tackle them in order of how time-sensitive they seem to me to be. (This week's first question was in my mailbox before the plea went out.)
Please continue sending your stock fund or bond fund questions to
email@example.com and remember to include your full name.
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.