Archive for January, 2010
The only thing more intimidating than investing for the first time may be trying to make heads or tails of a mutual fund prospectus. So why bother? Because that’s where you’ll find a lot of the information that tells you if this is where you want to invest your hard-earned cash. Here are a few key sections to consult:
The fund’s in vestment objectives and strategy. This is where you’ll find what the fund invests in (e.g., stocks, bonds, cash-equivalents, or a combination) and how it plans to make money. You might see a statement like “seeks long-term capital appreciation by investing in stocks of U.S. small-cap companies.” Be on the lookout for ill-defined or risky strategies such as options trading.
• Risk factors. This is where you’re apprised of any special risks inherent in the fund’s holdings or strategy. If the fund’s approach is especially volatile, it will be indicated here.
• The fund’s financial history Here you’ll see the fund’s performance for the last ten years, as well as how it compares to a given benchmark. (You need to make sure that this benchmark is the most appropriate one.) In the “Financial Highlights” table, you’ll find other essential information such as the fund’s total return for the last five years (the bottom line) and the portfolio turnover rate for the last five years.
• Expenses, which can include:
—Sales charge (front- or back-end load), a onetime commission.
—Operating expenses, which include management fees, distribution (12b-1) fees, and other operating expenses. All of these expenses will then be tallied so that you can see a total operating expense ratio (often called OER).
• Management If management has changed recently, you’ll want to evaluate the new team or manager.
• Other useful information such as how to purchase and redeem shares and initial and subsequent investment minimums.
Posted in 
A load is onetime sales charge imposed by a fund. It can be charged when you either buy a fund (front-end load) or sell a fund (back-end load). It is important to understand that if you pay a load, only part of your investment actually gets invested. (Share classes indicate how a load is charged. In general, A shares indicate a front-end load, B shares indicate a back-end load, and C shares indicate a small back-end load and the maximum 12b-1 fees—see below.) No-load funds, on the other hand, do not incur sales charges, so all your money goes to work for you. By and large, if you have a choice between a load fund and a no-load fund, be sure to explore the less expensive no-load fund.
• Both load and no-load funds incur annual operating expenses. But these expenses, which cover things like management fees, administrative fees, and 12b-1 fees, vary considerably from fund to fund. (Small-cap and international funds tend to carry higher costs than large-cap funds, and load funds tend to have higher costs than no-load funds.) Together all of these fees make up the fund’s expense ratio, or expenses expressed as an annual percentage of the fund’s net assets, which is a good way to compare costs between funds. In general, you should be able to find a good large-cap fund with an expense ratio no higher than 1%, unless it’s a highly specialized fund that requires greater (and more costly) research and management. In general, small-cap and international fund expense ratios should run below 2%.
• 12b-1 fees are included in the expense ratio (see above) but are worth thinking about separately. Even some no-load funds include these annual fees, which are used to pay for advertising and distribution costs. The regulatory cap on 12b- 1 fees is 1%, but as soon as they exceed 0.25%, the fund is no longer considered no-load.
• Brokerage fees are incurred when a fund buys and sells securities. In general, this fee is less significant (and more difficult to find—you have to look in the annual report) than other fees.
As we’ve mentioned earlier, international stocks can play an important role in your portfolio, providing you with extra diversification that can reduce volatility without reducing your expected return (and it may even increase your return). Somewhat understandably, however, many American investors tend to shy away from international stocks—perhaps partly because we’re less familiar with foreign companies, and partly because it can be much more difficult to analyze and purchase foreign stocks.
Our advice is to persevere. Like so many other aspects of investing, however, it’s a matter of balance. Just because we recommend that you have international exposure, it doesn’t mean that you should go overboard. In general, most investors will derive the greatest benefit from having approximately 20% to 30% of their stock portfolio invested in international companies.
So how to best go about adding international stocks to your portfolio? For the largest foreign companies, you can buy ADRs, or American depository receipts, which are traded on the U.S. stock exchanges. But when it comes to smaller companies 1 trading is much more difficult. In addition, it is difficult enough to research a stock that is traded on a U.S. exchange and followed by financial institutions. But for smaller companies you not only need to speak the language, you also need to know the accounting rules and politics of the country, and understand the competitive landscape.
Therefore, unless you have special expertise, the best way for most Americans to invest overseas is through international mutual funds. And although you can certainly do this by buying an international index fund, statistics tell us that you are likely to get superior results by buying a well-managed actively managed fund.
Of course, whenever you invest you are assumin9 a certain amount of risk — and when you invest overseas, you are subject to additional risks such as currency fluctuations, political and economic instability, and the country’s legal and regulatory structure. This is why the fund manager’s experience is so crucial, and why in the last ten years, actively managed international funds have outperformed the indexes 80% of the time. You’ll pay a management fee, but when it comes to international investing, it is usually well worth the extra expense.