When is the best itme to buy a house?
It may have been 35 years ago according to this affordability index.
Then again the best time to buy a house is when you can afford it.
If you wait until the earth, moon and stars to line up then you'll never buy a house.
http://www.nytimes.com/2007/01/28/business/yourmoney/28count.html?_r=1&ref=yourmoney&oref=slogin
Libby Mihalka
The Financial Pragmatist
Wednesday, January 31, 2007
California Prepaid Tuition Program
California Legislature is considering a bill that would create a prepaid tuition program that is similar to the program that Washington State implemented. Here is an article that appeared on the front page of the San Jose Mercury and Contra Costa Times.
http://www.mercurynews.com/mld/mercurynews/news/16586532.htm
By the way I'm quoted in the article.
Enjoy!
Libby Mialka
The Financial Pragmatist
http://www.mercurynews.com/mld/mercurynews/news/16586532.htm
By the way I'm quoted in the article.
Enjoy!
Libby Mialka
The Financial Pragmatist
Tuesday, January 30, 2007
Are We Saving Too Much For Retirement
Are we saving too much for retirement? Well a group of economists think so. I am skeptical. They focused there study on the generation before the baby boom (the generation born between 1931 and 1941). This group of retires will not face the same risks that the baby boom will. The baby boom is a tidal wave that will swamp this countries social services. They may not receive full social security benefits. The cost of medical care is a big unknown. Medical costs are escalating at more than twice the rate of inflation. Who will pay?
The study also assumed that retires will sell their homes before retirement. Most seniors I know want to stay in their homes. The reality is that people will adjust their spending down to meet their economic realities. Most people don't lower their lifestyle because they want to. The study also assumes most people spend less during retirement. This is only true if the mortgage is paid off. Many baby boomers will not have their mortgages paid off at retirement. I find this study flawed but interesting.
Here is the link to the article in the New York Times.
http://www.nytimes.com/2007/01/27/business/27money.html?em&ex=1170306000&en=17eca0f82d2e08d8&ei=5087%0A
Libby Mihalka
The Financial Pragmatist
The study also assumed that retires will sell their homes before retirement. Most seniors I know want to stay in their homes. The reality is that people will adjust their spending down to meet their economic realities. Most people don't lower their lifestyle because they want to. The study also assumes most people spend less during retirement. This is only true if the mortgage is paid off. Many baby boomers will not have their mortgages paid off at retirement. I find this study flawed but interesting.
Here is the link to the article in the New York Times.
http://www.nytimes.com/2007/01/27/business/27money.html?em&ex=1170306000&en=17eca0f82d2e08d8&ei=5087%0A
Libby Mihalka
The Financial Pragmatist
Monday, January 29, 2007
A Worthy Small Cap and Mini Cap Manager
Forward Small Cap and Mini Cap Funds are both funds I use in some investment portfolios in my practice. Irene Hoover does a great job of managing risk while generating a great return. Her strength is in her firms ability to find stocks that no one else is following. This knack is more prevelent in her Mini Cap fund, which is the fund I use the most. Here is research report on her Small Cap fund which will give you some insight into her investment management style. Enjoy!
The Financial Pragmatist
Libby Mihalka
DUE DILIGENCE: Forward Hoover Small Cap Fund (FFHIX, Inst’l)
Category: Smaller-Cap Growth-at-a-Reasonable-Price Manager: Irene Hoover
We’ve recently completed our due diligence on Forward Hoover Small Cap Fund. Our research consisted of several face-to-face meetings with portfolio manager Irene Hoover both in our office and in her San Francisco office, where we also met with the team’s five analysts. As a result of our research, we are adding the fund’s institutional share class to our Approved list in the Smaller-Cap Growth-at-a-Reasonable-Price category. Below we provide an overview of Hoover’s investment philosophy and process, the investment team, and the reasons for our favorable opinion. We should note that because the fund is Approved, we have gone into less detail in this due diligence report than we would for a Recommended fund.
Investment Philosophy and Process
Hoover’s overriding objective for the fund is to generate high rates of return, but with low volatility and risk. In a nutshell, she wants to preserve capital and provide superior risk-adjusted returns over time. Her philosophy is somewhat contrarian in that she emphasizes businesses in out-of-favor industries, with minimal Wall Street coverage.
The bulk of investment ideas come from quantitative screens that highlight underperforming industries, but ideas also come from bottom-up research, sell-side contacts, and the identification of themes. Although Hoover looks for cheap stocks (those with at least a 25% upside), she emphasizes that she only wants to own profitable and growing businesses. To be considered for purchase, companies must have a growth catalyst (e.g., new product introduction, geographic expansion, or new management, etc.) that will lead to higher earnings and/or higher market multiples that result from increased investor recognition in order to achieve her upside target. Although Hoover looks for out-of-favor names, she avoids deep-value stocks and tries to avoid buying a name too early. In Hoover’s words, “We want to be the last value buyer.”
Growing stocks in out-of-favor industries are candidates for fundamental analysis. An initial step in this process is to run a stock through the team’s “risk checklist,” a list of potential problems that is based on their past mistakes. The list ensures that they consider business risks such as turnarounds that rely on difficult-to-predict macro factors, threats of a larger competitor entering the market, high customer concentration, and legal or environmental issues. It also covers organizational risks such as aggressive revenue-recognition policies, as well as valuation risk, to mention a few factors. The risk checklist helps emphasize predictability and minimize the risk of losing money.
Because the focus is on companies in out-of-favor industries, further fundamental analysis focuses on whether stocks are down because of issues that are permanent or temporary. As part of this analysis, the analysts study industry trends, companies’ operating histories, and financial statements. The team will sometimes meet with suppliers, customers, and competitors to gauge demand for the company’s product or services, as well as its competitive advantage. Management evaluation is also important. The team typically meets with companies to assess operations and whether management’s goals are achievable.
When buying stocks, Hoover is looking for at least a 25% upside over an 18- to 24-month horizon. Price targets are based on a P/E multiple, which is based on their earnings-growth expectations for the next 18 months. For example, if they think earnings will grow at 20% over the next 18 months, they will put a 20x multiple on the earnings 18 months out. However, price targets are dynamic and change with the fundamentals of the company. It’s very important for Hoover’s internal earnings estimate to be above Wall Street consensus as they’re looking to capture earnings growth and P/E-multiple expansion. Assessing a stock’s downside risk is also important, as Hoover won’t buy stocks with huge downside potential, regardless of the upside potential.
Hoover sells when a stock has hit the team’s price target, to raise money for better opportunities, if they see a deterioration of fundamentals, or when the stock has “run ahead” of improving fundamentals.
The portfolio typically holds 60 to 80 names, but that number can occasionally be higher because of “transition holdings,” i.e., holdings that she is still buying or selling. During periods of market uncertainty/volatility, Hoover will slightly increase the number of holdings to lessen stock-specific risk. Sector weightings are a byproduct of where the team is finding ideas, and Hoover spends very little time thinking about the portfolio’s weightings versus the index. Initial position size is a function of conviction and liquidity. Positions typically start out between 1% and 1.5%, although Hoover will occasionally establish a larger position in a high-conviction idea. But larger holdings are usually a function of price appreciation and tend to top out at 2%. The fund is usually fully invested.
Team and Team Interactions
Hoover Investment Management was formed in 1997 by Irene Hoover, who is portfolio manager and chief investment officer. Hoover has almost 30 years of investment experience. Prior to forming Hoover Investment Management, Hoover was at Jurika & Voyles (1991-1997), where she was a director of research and also managed Jurika & Voyles Mini Cap Fund. In 1999, Hoover teamed up with Forward Management, who is the advisor, and provides marketing and client services for the fund. Forward Funds does not have an ownership stake in Hoover Investment Management.
Today, Hoover heads a six-member investment team, and the analysts are all generalists though each has a specific sector emphasis. Once a security is selected for purchase, Hoover and the analyst work together to determine portfolio weightings and target sell prices, however, Hoover is the final decision maker. The team meets weekly in a comprehensive investment-strategy meeting to discuss economic policy, monetary and fiscal policy, as well as news events and trend analysis as they relate to portfolio holdings.
Style Analysis
When evaluating a fund’s investment style, we examine both quantitative and qualitative factors. Quantitatively, we consider a portfolio’s valuation statistics, sector weightings, performance history and correlations with various benchmarks, etc. Qualitatively, we consider a manager’s valuation methodology and the aggressiveness of assumptions used in their analysis. Based on our assessment of these factors for Hoover, we are categorizing the fund as Smaller-Cap Growth-at-a-Reasonable-Price. We should note that some fund-rating firms categorize the fund as a growth fund, which we disagree with.
Touching on some quantitative measures, the portfolio’s valuation and sector weighting statistics tend to be more in line with the GARP category over time. Performance also tends to correlate best with the GARP index. Qualitatively, we think Hoover’s valuation methodology–deriving price targets based on the team’s forward earnings estimate–falls between GARP and Growth. Many pure growth investors pay little (if any) attention to valuation, while value investors typically require a much steeper discount than Hoover is looking for. Hoover falls between Value and Growth. As for modeling assumptions, the analysts seems to strike a balance of assessing what a company can reasonably do, while not giving much, if any credence to “what-if” scenarios (which is more typical of growth investors). As for the timing of investments, while Hoover is looking for out-of-favor stocks, she also wants to be “the last value buyer” in an effort to minimize the opportunity cost of waiting for a stock to appreciate. This differs from pure value investors who are typically more patient and are willing to hold stocks for years before realizing a stock’s value. Hoover has a shorter investment timeframe that is evident in the portfolio’s turnover, which is relatively high at 150-200%. A lot of the turnover is due to trimming and adding to names, as opposed to a complete turnover of names. Meanwhile, Hoover runs a fully invested portfolio, as she says there are always stocks that are moving up, regardless of the market environment. This is in contrast to many pure-value investors who are willing to let cash build in times when they consider the market expensive and opportunities limited.
As for performance expectations, Hoover invests in a risk-averse manner. Our expectation is that the fund will underperform when speculative stocks are leading the market, and outperform in more “normal” markets where companies with sound fundamentals are being rewarded. We also expect the fund to outperform during steep market corrections where speculative stocks perform proportionately worse, as the team avoids this type of company. Since the fund’s inception in September 1998, the fund has a compounded annual return of 11% versus 10% for the Russell 2000 iShares. As for risk parameters, the fund’s worst 12-month return is a 24% loss compared to 27% loss for the benchmark. Meanwhile the standard deviation of three-month returns is 17.7, which is much lower than 21.3 for the Russell 2000 iShares.
Litman/Gregory Opinion
As a result of our research, we are comfortable adding Forward Hoover Small Cap to our Approved list in the Smaller-Cap Growth-at-a-Reasonable-Price category. Our favorable opinion of the fund is based not a single edge, but rather on several things that we think they do very well that collectively constitute an edge. The positives are as follows.
We believe the investment philosophy and investment process are consistently applied across the team. We have observed a systematic framework for identifying new investment ideas, clearly laid out criteria for buys and how these criteria are weighted, and the analysis seems very thoughtful. The research process is very fundamentally driven, and the team is clearly looking for catalysts that will drive a company’s future growth. They try to benefit from the excitement of strong earnings growth but they also want to measure it very carefully by understanding what the risks are to achieving that growth. As for information gathering, analysis is not built off of numerous third-party checks, but it is clear that the analysts gather the necessary information to make informed decisions. This research includes meeting with company management and talking to suppliers, customers, and competitors. There are also tools in place (e.g., quantitative screens and the risk checklist) to ensure that the team brings specific types of companies to Hoover for inclusion to the portfolio.
There are also positives at the investment-team level. One plus is the team’s investment experience. Hoover has been in the business for over 25 years, while the analysts each have several years of investment experience. As for the quality of the research, we have generally been impressed with the team’s stock discussions, where they walked us through their fundamental analysis. They seem to know their industry/sectors and stocks very well, and strike us as independent thinkers who are enthusiastic about their work. Another positive is that the team has minimal non-research responsibilities, which allows them to focus on investing. The team has also been cohesive, and most of the team members have worked together for about five or more years. Hoover seems to think a lot about retention of analysts, e.g., sharing equity in the firm and handing off some decision-making autonomy, which reduces the odds of personnel departures. There has been no turnover of investment personnel in the past few years. Hoover has also implemented a compensation structure that we think encourages analysts to identify their best long-term ideas, as well as aligns the team’s interests with shareholders’ interest.
The asset base in the strategy is closing in on $1.5 billion and Hoover is starting to think very seriously about closing institutional accounts, although she plans to leave the fund open to new shareholders. The fund currently has about $500 million in assets. Hoover does not strike us as an empire builder, and seems to genuinely want to do well for shareholders. The fund is not marketed very heavily and because of the relationship with Forward Funds, she has very minimal client-service responsibilities on the mutual fund side of the business. Hoover is responsible for handling client-service responsibilities for institutional clients. As for running the business, Hoover has an internal staff that handles the majority of business decisions, compliance, and client servicing.
As for why the fund is not Recommended, we don’t have any major concerns, but there are a few areas of the investment process that we were not able to fully get our arms around, despite discussing them with Hoover. For example, during times of perceived market uncertainty or highly volatile markets, Hoover will diversify the portfolio by increasing the number of names. Related to this are questions we have around Hoover’s sell discipline. Hoover says that selling is where she makes most of her mistakes because she gets nervous when she loses money on a stock. The source of her nervousness seems to be losing clients’ money, as we discussed a number of examples where Hoover sold a stock because it was down, and ultimately missed an upside move, despite analysts suggesting to buy more. On the flip side, Hoover has also sold names and avoided further losses.
The potential risk is that Hoover makes decision errors or gets whipsawed if she makes a bad call when it comes to timing of these decisions, which involve a considerable amount of subjectivity and don’t exhibit the same level of discipline we see elsewhere in the process. After discussing these issues with Hoover, our impression is that these issues seem to be done at the margin, where the goal is to protect shareholder capital. We wouldn’t call these issues concerns, but because we are not clear about her decision-making framework for these aspects of portfolio management, we are currently not comfortable with Recommended. Perhaps over time, if we come to better understand the framework of Hoover’s thinking when it comes to portfolio construction we could raise our opinion.
One area we plan to watch going forward is the structure of the investment team. Our sense is that the analysts may have a larger role in portfolio management of the fund in the future and we plan on monitoring this to see how things play out.
At this time, only the institutional shares meet our 1.5% expense threshold for domestic small-cap funds (the retail shares currently have a 1.69% expense ratio). After discussing this issue with Forward Funds and after doing some back-of-the-envelope math, we doubt retail share expenses will get to 1.5%, so our Approved rating extends only to the higher-minimum institutional shares.
—Jack Chee
Reprinted from AdvisorIntelligence. Copyright© 2007 Litman/Gregory Analytics, LLC.
The Financial Pragmatist
Libby Mihalka
DUE DILIGENCE: Forward Hoover Small Cap Fund (FFHIX, Inst’l)
Category: Smaller-Cap Growth-at-a-Reasonable-Price Manager: Irene Hoover
We’ve recently completed our due diligence on Forward Hoover Small Cap Fund. Our research consisted of several face-to-face meetings with portfolio manager Irene Hoover both in our office and in her San Francisco office, where we also met with the team’s five analysts. As a result of our research, we are adding the fund’s institutional share class to our Approved list in the Smaller-Cap Growth-at-a-Reasonable-Price category. Below we provide an overview of Hoover’s investment philosophy and process, the investment team, and the reasons for our favorable opinion. We should note that because the fund is Approved, we have gone into less detail in this due diligence report than we would for a Recommended fund.
Investment Philosophy and Process
Hoover’s overriding objective for the fund is to generate high rates of return, but with low volatility and risk. In a nutshell, she wants to preserve capital and provide superior risk-adjusted returns over time. Her philosophy is somewhat contrarian in that she emphasizes businesses in out-of-favor industries, with minimal Wall Street coverage.
The bulk of investment ideas come from quantitative screens that highlight underperforming industries, but ideas also come from bottom-up research, sell-side contacts, and the identification of themes. Although Hoover looks for cheap stocks (those with at least a 25% upside), she emphasizes that she only wants to own profitable and growing businesses. To be considered for purchase, companies must have a growth catalyst (e.g., new product introduction, geographic expansion, or new management, etc.) that will lead to higher earnings and/or higher market multiples that result from increased investor recognition in order to achieve her upside target. Although Hoover looks for out-of-favor names, she avoids deep-value stocks and tries to avoid buying a name too early. In Hoover’s words, “We want to be the last value buyer.”
Growing stocks in out-of-favor industries are candidates for fundamental analysis. An initial step in this process is to run a stock through the team’s “risk checklist,” a list of potential problems that is based on their past mistakes. The list ensures that they consider business risks such as turnarounds that rely on difficult-to-predict macro factors, threats of a larger competitor entering the market, high customer concentration, and legal or environmental issues. It also covers organizational risks such as aggressive revenue-recognition policies, as well as valuation risk, to mention a few factors. The risk checklist helps emphasize predictability and minimize the risk of losing money.
Because the focus is on companies in out-of-favor industries, further fundamental analysis focuses on whether stocks are down because of issues that are permanent or temporary. As part of this analysis, the analysts study industry trends, companies’ operating histories, and financial statements. The team will sometimes meet with suppliers, customers, and competitors to gauge demand for the company’s product or services, as well as its competitive advantage. Management evaluation is also important. The team typically meets with companies to assess operations and whether management’s goals are achievable.
When buying stocks, Hoover is looking for at least a 25% upside over an 18- to 24-month horizon. Price targets are based on a P/E multiple, which is based on their earnings-growth expectations for the next 18 months. For example, if they think earnings will grow at 20% over the next 18 months, they will put a 20x multiple on the earnings 18 months out. However, price targets are dynamic and change with the fundamentals of the company. It’s very important for Hoover’s internal earnings estimate to be above Wall Street consensus as they’re looking to capture earnings growth and P/E-multiple expansion. Assessing a stock’s downside risk is also important, as Hoover won’t buy stocks with huge downside potential, regardless of the upside potential.
Hoover sells when a stock has hit the team’s price target, to raise money for better opportunities, if they see a deterioration of fundamentals, or when the stock has “run ahead” of improving fundamentals.
The portfolio typically holds 60 to 80 names, but that number can occasionally be higher because of “transition holdings,” i.e., holdings that she is still buying or selling. During periods of market uncertainty/volatility, Hoover will slightly increase the number of holdings to lessen stock-specific risk. Sector weightings are a byproduct of where the team is finding ideas, and Hoover spends very little time thinking about the portfolio’s weightings versus the index. Initial position size is a function of conviction and liquidity. Positions typically start out between 1% and 1.5%, although Hoover will occasionally establish a larger position in a high-conviction idea. But larger holdings are usually a function of price appreciation and tend to top out at 2%. The fund is usually fully invested.
Team and Team Interactions
Hoover Investment Management was formed in 1997 by Irene Hoover, who is portfolio manager and chief investment officer. Hoover has almost 30 years of investment experience. Prior to forming Hoover Investment Management, Hoover was at Jurika & Voyles (1991-1997), where she was a director of research and also managed Jurika & Voyles Mini Cap Fund. In 1999, Hoover teamed up with Forward Management, who is the advisor, and provides marketing and client services for the fund. Forward Funds does not have an ownership stake in Hoover Investment Management.
Today, Hoover heads a six-member investment team, and the analysts are all generalists though each has a specific sector emphasis. Once a security is selected for purchase, Hoover and the analyst work together to determine portfolio weightings and target sell prices, however, Hoover is the final decision maker. The team meets weekly in a comprehensive investment-strategy meeting to discuss economic policy, monetary and fiscal policy, as well as news events and trend analysis as they relate to portfolio holdings.
Style Analysis
When evaluating a fund’s investment style, we examine both quantitative and qualitative factors. Quantitatively, we consider a portfolio’s valuation statistics, sector weightings, performance history and correlations with various benchmarks, etc. Qualitatively, we consider a manager’s valuation methodology and the aggressiveness of assumptions used in their analysis. Based on our assessment of these factors for Hoover, we are categorizing the fund as Smaller-Cap Growth-at-a-Reasonable-Price. We should note that some fund-rating firms categorize the fund as a growth fund, which we disagree with.
Touching on some quantitative measures, the portfolio’s valuation and sector weighting statistics tend to be more in line with the GARP category over time. Performance also tends to correlate best with the GARP index. Qualitatively, we think Hoover’s valuation methodology–deriving price targets based on the team’s forward earnings estimate–falls between GARP and Growth. Many pure growth investors pay little (if any) attention to valuation, while value investors typically require a much steeper discount than Hoover is looking for. Hoover falls between Value and Growth. As for modeling assumptions, the analysts seems to strike a balance of assessing what a company can reasonably do, while not giving much, if any credence to “what-if” scenarios (which is more typical of growth investors). As for the timing of investments, while Hoover is looking for out-of-favor stocks, she also wants to be “the last value buyer” in an effort to minimize the opportunity cost of waiting for a stock to appreciate. This differs from pure value investors who are typically more patient and are willing to hold stocks for years before realizing a stock’s value. Hoover has a shorter investment timeframe that is evident in the portfolio’s turnover, which is relatively high at 150-200%. A lot of the turnover is due to trimming and adding to names, as opposed to a complete turnover of names. Meanwhile, Hoover runs a fully invested portfolio, as she says there are always stocks that are moving up, regardless of the market environment. This is in contrast to many pure-value investors who are willing to let cash build in times when they consider the market expensive and opportunities limited.
As for performance expectations, Hoover invests in a risk-averse manner. Our expectation is that the fund will underperform when speculative stocks are leading the market, and outperform in more “normal” markets where companies with sound fundamentals are being rewarded. We also expect the fund to outperform during steep market corrections where speculative stocks perform proportionately worse, as the team avoids this type of company. Since the fund’s inception in September 1998, the fund has a compounded annual return of 11% versus 10% for the Russell 2000 iShares. As for risk parameters, the fund’s worst 12-month return is a 24% loss compared to 27% loss for the benchmark. Meanwhile the standard deviation of three-month returns is 17.7, which is much lower than 21.3 for the Russell 2000 iShares.
Litman/Gregory Opinion
As a result of our research, we are comfortable adding Forward Hoover Small Cap to our Approved list in the Smaller-Cap Growth-at-a-Reasonable-Price category. Our favorable opinion of the fund is based not a single edge, but rather on several things that we think they do very well that collectively constitute an edge. The positives are as follows.
We believe the investment philosophy and investment process are consistently applied across the team. We have observed a systematic framework for identifying new investment ideas, clearly laid out criteria for buys and how these criteria are weighted, and the analysis seems very thoughtful. The research process is very fundamentally driven, and the team is clearly looking for catalysts that will drive a company’s future growth. They try to benefit from the excitement of strong earnings growth but they also want to measure it very carefully by understanding what the risks are to achieving that growth. As for information gathering, analysis is not built off of numerous third-party checks, but it is clear that the analysts gather the necessary information to make informed decisions. This research includes meeting with company management and talking to suppliers, customers, and competitors. There are also tools in place (e.g., quantitative screens and the risk checklist) to ensure that the team brings specific types of companies to Hoover for inclusion to the portfolio.
There are also positives at the investment-team level. One plus is the team’s investment experience. Hoover has been in the business for over 25 years, while the analysts each have several years of investment experience. As for the quality of the research, we have generally been impressed with the team’s stock discussions, where they walked us through their fundamental analysis. They seem to know their industry/sectors and stocks very well, and strike us as independent thinkers who are enthusiastic about their work. Another positive is that the team has minimal non-research responsibilities, which allows them to focus on investing. The team has also been cohesive, and most of the team members have worked together for about five or more years. Hoover seems to think a lot about retention of analysts, e.g., sharing equity in the firm and handing off some decision-making autonomy, which reduces the odds of personnel departures. There has been no turnover of investment personnel in the past few years. Hoover has also implemented a compensation structure that we think encourages analysts to identify their best long-term ideas, as well as aligns the team’s interests with shareholders’ interest.
The asset base in the strategy is closing in on $1.5 billion and Hoover is starting to think very seriously about closing institutional accounts, although she plans to leave the fund open to new shareholders. The fund currently has about $500 million in assets. Hoover does not strike us as an empire builder, and seems to genuinely want to do well for shareholders. The fund is not marketed very heavily and because of the relationship with Forward Funds, she has very minimal client-service responsibilities on the mutual fund side of the business. Hoover is responsible for handling client-service responsibilities for institutional clients. As for running the business, Hoover has an internal staff that handles the majority of business decisions, compliance, and client servicing.
As for why the fund is not Recommended, we don’t have any major concerns, but there are a few areas of the investment process that we were not able to fully get our arms around, despite discussing them with Hoover. For example, during times of perceived market uncertainty or highly volatile markets, Hoover will diversify the portfolio by increasing the number of names. Related to this are questions we have around Hoover’s sell discipline. Hoover says that selling is where she makes most of her mistakes because she gets nervous when she loses money on a stock. The source of her nervousness seems to be losing clients’ money, as we discussed a number of examples where Hoover sold a stock because it was down, and ultimately missed an upside move, despite analysts suggesting to buy more. On the flip side, Hoover has also sold names and avoided further losses.
The potential risk is that Hoover makes decision errors or gets whipsawed if she makes a bad call when it comes to timing of these decisions, which involve a considerable amount of subjectivity and don’t exhibit the same level of discipline we see elsewhere in the process. After discussing these issues with Hoover, our impression is that these issues seem to be done at the margin, where the goal is to protect shareholder capital. We wouldn’t call these issues concerns, but because we are not clear about her decision-making framework for these aspects of portfolio management, we are currently not comfortable with Recommended. Perhaps over time, if we come to better understand the framework of Hoover’s thinking when it comes to portfolio construction we could raise our opinion.
One area we plan to watch going forward is the structure of the investment team. Our sense is that the analysts may have a larger role in portfolio management of the fund in the future and we plan on monitoring this to see how things play out.
At this time, only the institutional shares meet our 1.5% expense threshold for domestic small-cap funds (the retail shares currently have a 1.69% expense ratio). After discussing this issue with Forward Funds and after doing some back-of-the-envelope math, we doubt retail share expenses will get to 1.5%, so our Approved rating extends only to the higher-minimum institutional shares.
—Jack Chee
Reprinted from AdvisorIntelligence. Copyright© 2007 Litman/Gregory Analytics, LLC.
Managing Turbulent Markets in 2007
The stock and bond markets will be turbulent in 2007. Typically investors make stupid mistakes in volatile markets by selling at the bottom and missing the next run up. It is always important to behave rationally and not market time.
Here is a link to a paper by Blackrock that specifically addresses how to manage your investments in a turbulent market.
http://literature.blackrock.com/eStudioContent/public/TurbulentMarkets.pdf?PubDate=/1_29_2007_TurbulentMarkets.pdf
Remember, the markets are always irrational in the short term so take the rational long term perspective when managing your portfolio.
The Financial Pragmatist
Libby Mihalka
Here is a link to a paper by Blackrock that specifically addresses how to manage your investments in a turbulent market.
http://literature.blackrock.com/eStudioContent/public/TurbulentMarkets.pdf?PubDate=/1_29_2007_TurbulentMarkets.pdf
Remember, the markets are always irrational in the short term so take the rational long term perspective when managing your portfolio.
The Financial Pragmatist
Libby Mihalka
Friday, January 26, 2007
International Real Estate
The case for investing in international real estate is very compelling. This is one of the areas I am currently researching. The risk-adjusted returns and diversification benefits of this asset class are attractive.
Here is a research paper that is interesting. It is called Going Global: The Case for Investing in International Real Estate Securities. You'll have to scroll down to the fourth paper listed on the site.
http://www.jpmorgan.com/pages/jpmorgan/am/ia/research_and_publications/white_papers
I'll have my research findings on international real estate completed with investment recommendations by the end of the First Quarter 2007.
The Financial Pragmatist
Libby Mihalka
Here is a research paper that is interesting. It is called Going Global: The Case for Investing in International Real Estate Securities. You'll have to scroll down to the fourth paper listed on the site.
http://www.jpmorgan.com/pages/jpmorgan/am/ia/research_and_publications/white_papers
I'll have my research findings on international real estate completed with investment recommendations by the end of the First Quarter 2007.
The Financial Pragmatist
Libby Mihalka
Wednesday, January 24, 2007
Artisan International Mutual Funds 4th Quarter Commentary
Manager Mark Yockey has written a Fourth Quarter 2006 Commentary for both Artisan International and Artisan International Small Cap. These commentaries summarize the performance of each fund. What worked and what didn't.
Artisan International Link
http://www.artisanfunds.com/data/pdfs/ipmp0612_vR.pdf
Artisan International Small Cap Link
http://www.artisanfunds.com/data/pdfs/jpmp0612_vR.pdf
The Financial Pragmatist
Libby Mihalka
Artisan International Link
http://www.artisanfunds.com/data/pdfs/ipmp0612_vR.pdf
Artisan International Small Cap Link
http://www.artisanfunds.com/data/pdfs/jpmp0612_vR.pdf
The Financial Pragmatist
Libby Mihalka
Tuesday, January 23, 2007
Should You Rollover Your 401(k) to an IRA or New 401(k) When You Change Jobs
Unless you want to take the tax and penalty hit, never take a check from your 401(k) made out directly to you. You must do what is called a direct transfer from trustee to trustee. The money can never see the inside of your bank account or taxable brokerage account. The money must be transferred directly into an established traditional IRA or new employer 401(k) plan.
If your account balance is more than $5,000, you can leave it in your previous employer's 401(k). However, I usually recommend that you not leave your retirement money behind.
This trail of 401(k) balances at various employers is never monitored or rebalanced. Over time these balances can be lost, especially if your mailing address changes and you don't inform your previous employer's 401(k) plan administrator that you've moved. It also creates a mess for your heirs who have no idea that you have multiple 401(k) balances at different companies.
Your best bet is to either roll over your balance directly into your new employer's 401(k) plan or an IRA you've established at a brokerage firm. Most companies allow you to roll your 401(k) balance from a previous employer into their plan, but you will need to check with your employer.
If you are considering rolling funds into an IRA, make sure it is a traditional IRA (not a SEP or Simple) and does not hold funds that were contributed after tax. Mixing after-tax contributions with pretax contributions usually results in either you or your heirs paying taxes again on the after-tax funds.
Rolling your retirement funds into an IRA affords more flexibility than you usually have with a 401(k) plan. Many 401(k) plans offer only a few investment options, which might be poorly managed or charge high fees.
The administrative costs and the money management fees of the employer's 401(k) plan are not reported to you. You see your account's performance only after the fees have been subtracted. These fees can easily constitute a 2 percent per year withdrawal from your account, which is significant and can compromise the long-term performance of your portfolio. If your account balance is $100,000, you could be paying fees of $2,000 a year without realizing it.
Moving your funds to an IRA solves both of these problems. In an IRA you are able to customize a portfolio to meet your specific investment goals and risk profile. There are many brokerage firms that have huge mutual fund supermarkets and charge reasonable commission and custodial fees. Luckily, IRA fees must be disclosed, but it's important you understand them.
Make sure your brokerage firm offers a good selection of mutual funds that are well managed and charge a reasonable fee. You can also invest in stocks and bonds directly in your IRA, an option that is not available in most 401(k) plans. Just make sure the brokerage firm you choose charges reasonable trading commissions.
IRAs still offer greater flexibility in estate planning than 401(k)s do. For instance, if you have multiple beneficiaries with substantially different ages, you may want to establish a separate IRA for each beneficiary. This would allow you to create different portfolios to meet the investment objectives of each beneficiary.
Although it is usually a good idea to move your 401(k) plan to an IRA, there are a few special conditions that might cause you to move the funds to your new employer's 401(k) plan instead:
• You may decide to transfer your old 401(k) to your new 401(k) plan in order to have the flexibility to retire earlier. If you plan to retire from ages 55 to 591/2, you may want to leave your retirement funds in a 401(k) plan so you can access the money without incurring the 10 percent penalty. This is available only if your company's plan allows for distributions before normal retirement age (591/2) and you separated from service after age 55.
If you retire before age 55, you do not get this special penalty-free withdrawal period from ages 55 to 591/2. In contrast, funds withdrawn from an IRA before age 591/2 are subject to a 10 percent penalty unless you take advantage of a provision that allows for "substantially equal payments."
• Here is another 401(k) perk. The government usually requires taxpayers older than 701/2 to start taking annual minimum distributions based on IRS life expectancy tables. If you are older than 701/2 and are still working, you can avoid taking "required minimum distributions" (RMD) from your employer's 401(k).
Funds held in an IRA must meet the RMD rules and cannot be delayed. Please note that you are allowed to delay your distributions from your 401(k) only if you do not own more that 5 percent of the company. If you plan to keep working past 701/2, you may want to transfer your balances in previous employers' 401(k) plans to your new employer's plan to be able to delay taking distributions until you stop working.
Most people can't afford to retire at age 55 and few people intend to keep working past age 701/2, but these two options are good to know.
IRAs do offer some relief in special circumstances that are not available to funds in 401(k)s. You can take IRA distributions before age 591/2 to pay for qualified higher education expenses for yourself, your spouse, your children or grandchildren, and incur no penalty. There is no dollar limit on IRA early withdrawals for qualified higher education expenses. However, these expenses must be incurred and paid for during the same taxable year, and distribution amounts that exceed annual qualified higher education expenses are subject to the 10 percent penalty tax. Remember, you'll still have to pay the regular income tax on the distribution.
The IRS is also very specific regarding which expenses are qualified and how expenses should be properly documented. Proceed cautiously if you pursue this perk, and make sure you get professional help from your financial planner or tax professional.
Another special circumstance that allows you to avoid the 10 percent penalty for early distributions from an IRA is available to first-time home buyers. You can withdraw as much as $10,000 from your IRA toward the purchase of your first home.
There is one last landmine to highlight before you roll over your 401(k) plan. If you own highly appreciated employer stock within your 401(k) plan, don't touch it! You may qualify for one of the best tax breaks out there. It is called "Net Unrealized Appreciation" (NUA).
This strategy allows a lump-sum distribution of company stock from your 401(k) plan to be taxed as ordinary income and is assessed only on the stock's basis (purchase price).
If you have highly appreciated employer stock in your 401(k) and are interested in this strategy, make sure you carefully research it and get help from your financial planner or tax professional.
If your account balance is more than $5,000, you can leave it in your previous employer's 401(k). However, I usually recommend that you not leave your retirement money behind.
This trail of 401(k) balances at various employers is never monitored or rebalanced. Over time these balances can be lost, especially if your mailing address changes and you don't inform your previous employer's 401(k) plan administrator that you've moved. It also creates a mess for your heirs who have no idea that you have multiple 401(k) balances at different companies.
Your best bet is to either roll over your balance directly into your new employer's 401(k) plan or an IRA you've established at a brokerage firm. Most companies allow you to roll your 401(k) balance from a previous employer into their plan, but you will need to check with your employer.
If you are considering rolling funds into an IRA, make sure it is a traditional IRA (not a SEP or Simple) and does not hold funds that were contributed after tax. Mixing after-tax contributions with pretax contributions usually results in either you or your heirs paying taxes again on the after-tax funds.
Rolling your retirement funds into an IRA affords more flexibility than you usually have with a 401(k) plan. Many 401(k) plans offer only a few investment options, which might be poorly managed or charge high fees.
The administrative costs and the money management fees of the employer's 401(k) plan are not reported to you. You see your account's performance only after the fees have been subtracted. These fees can easily constitute a 2 percent per year withdrawal from your account, which is significant and can compromise the long-term performance of your portfolio. If your account balance is $100,000, you could be paying fees of $2,000 a year without realizing it.
Moving your funds to an IRA solves both of these problems. In an IRA you are able to customize a portfolio to meet your specific investment goals and risk profile. There are many brokerage firms that have huge mutual fund supermarkets and charge reasonable commission and custodial fees. Luckily, IRA fees must be disclosed, but it's important you understand them.
Make sure your brokerage firm offers a good selection of mutual funds that are well managed and charge a reasonable fee. You can also invest in stocks and bonds directly in your IRA, an option that is not available in most 401(k) plans. Just make sure the brokerage firm you choose charges reasonable trading commissions.
IRAs still offer greater flexibility in estate planning than 401(k)s do. For instance, if you have multiple beneficiaries with substantially different ages, you may want to establish a separate IRA for each beneficiary. This would allow you to create different portfolios to meet the investment objectives of each beneficiary.
Although it is usually a good idea to move your 401(k) plan to an IRA, there are a few special conditions that might cause you to move the funds to your new employer's 401(k) plan instead:
• You may decide to transfer your old 401(k) to your new 401(k) plan in order to have the flexibility to retire earlier. If you plan to retire from ages 55 to 591/2, you may want to leave your retirement funds in a 401(k) plan so you can access the money without incurring the 10 percent penalty. This is available only if your company's plan allows for distributions before normal retirement age (591/2) and you separated from service after age 55.
If you retire before age 55, you do not get this special penalty-free withdrawal period from ages 55 to 591/2. In contrast, funds withdrawn from an IRA before age 591/2 are subject to a 10 percent penalty unless you take advantage of a provision that allows for "substantially equal payments."
• Here is another 401(k) perk. The government usually requires taxpayers older than 701/2 to start taking annual minimum distributions based on IRS life expectancy tables. If you are older than 701/2 and are still working, you can avoid taking "required minimum distributions" (RMD) from your employer's 401(k).
Funds held in an IRA must meet the RMD rules and cannot be delayed. Please note that you are allowed to delay your distributions from your 401(k) only if you do not own more that 5 percent of the company. If you plan to keep working past 701/2, you may want to transfer your balances in previous employers' 401(k) plans to your new employer's plan to be able to delay taking distributions until you stop working.
Most people can't afford to retire at age 55 and few people intend to keep working past age 701/2, but these two options are good to know.
IRAs do offer some relief in special circumstances that are not available to funds in 401(k)s. You can take IRA distributions before age 591/2 to pay for qualified higher education expenses for yourself, your spouse, your children or grandchildren, and incur no penalty. There is no dollar limit on IRA early withdrawals for qualified higher education expenses. However, these expenses must be incurred and paid for during the same taxable year, and distribution amounts that exceed annual qualified higher education expenses are subject to the 10 percent penalty tax. Remember, you'll still have to pay the regular income tax on the distribution.
The IRS is also very specific regarding which expenses are qualified and how expenses should be properly documented. Proceed cautiously if you pursue this perk, and make sure you get professional help from your financial planner or tax professional.
Another special circumstance that allows you to avoid the 10 percent penalty for early distributions from an IRA is available to first-time home buyers. You can withdraw as much as $10,000 from your IRA toward the purchase of your first home.
There is one last landmine to highlight before you roll over your 401(k) plan. If you own highly appreciated employer stock within your 401(k) plan, don't touch it! You may qualify for one of the best tax breaks out there. It is called "Net Unrealized Appreciation" (NUA).
This strategy allows a lump-sum distribution of company stock from your 401(k) plan to be taxed as ordinary income and is assessed only on the stock's basis (purchase price).
If you have highly appreciated employer stock in your 401(k) and are interested in this strategy, make sure you carefully research it and get help from your financial planner or tax professional.
Monday, January 22, 2007
Wasatch Funds Re-open
Wasatch Family of mutual funds is well managed but many of their have been closed since 2001.
Wasatch is re-opening certain funds to exisiting shareholders and Registered Investment Advisors. The four funds available again are Wasatch Small Cap Growth, Wasatch Small Cap Value, Wasatch Core Growth and Wasatch International Growth.
Unfortunately the Micro Cap funds are still closed.
I'll be adding positions in the newly re-opened funds to clients who do not have them in their portfolios. These changes will be incorporated in your quarterly rebalancing statements.
Here is the press release.
http://www.wasatchfunds.com/AboutUs/NEWS/Re-Opening%20Press%20Release%20Jan%2018%2007.pdf
The Financial Pragmatist
Libby Mihalka
Wasatch is re-opening certain funds to exisiting shareholders and Registered Investment Advisors. The four funds available again are Wasatch Small Cap Growth, Wasatch Small Cap Value, Wasatch Core Growth and Wasatch International Growth.
Unfortunately the Micro Cap funds are still closed.
I'll be adding positions in the newly re-opened funds to clients who do not have them in their portfolios. These changes will be incorporated in your quarterly rebalancing statements.
Here is the press release.
http://www.wasatchfunds.com/AboutUs/NEWS/Re-Opening%20Press%20Release%20Jan%2018%2007.pdf
The Financial Pragmatist
Libby Mihalka
Friday, January 19, 2007
Thornburg Mutual Funds January 2007 Commentary
Here are the latest market commentary from Thornburg's portfolio managers.
As most of you know I use the Institutional shares of their funds in my practice.
Bill Fies has been named International manager of the year. Alex Motola has done a super job of running a growth fund duringn a tough period following the dot-com bust. I also love the traditional laddered bond funds. These funds all get consistently how ratings from Morningstar.
http://www.thornburginvestments.com/research/mkt_comm.asp
As most of you know I use the Institutional shares of their funds in my practice.
Bill Fies has been named International manager of the year. Alex Motola has done a super job of running a growth fund duringn a tough period following the dot-com bust. I also love the traditional laddered bond funds. These funds all get consistently how ratings from Morningstar.
http://www.thornburginvestments.com/research/mkt_comm.asp
Wednesday, January 17, 2007
Numeric Investors Abandons Shareholders and Closes Mutual Funds
On January 12, Numeric Investors announced its decision to exit the mutual fund business in order to focus on its core institutional and alternative-investment products. As a result, Numeric’s four mutual funds—Emerging Growth, Growth, Small Cap Value, and Mid Cap—will be liquidated on February 23, 2007, although the board of directors may approve an earlier liquidation.
Numeric’s failure points out a common problem in the mutual fund world. If you manage your mutual funds with your investor’s interest at heart, you are compromising your profitability. For example, Numeric closed three of its four funds to new investors at very reasonable asset levels, and these funds have been closed for quite some time. Current assets across all four funds total approximately $450 million, and only Mid Cap remained open when the decision to liquidate was made.
By closing these funds to new investors, N/I preserved its ability to generate consistently good returns. However, it hurt the firm’s ability to generate enough business to offset the increasing costs and regulations associated with running a mutual fund. Numeric Investors no longer wants to be in the mutual fund business because it is more profitable for them in their asset constrained environment to focus on institutional accounts. It can cut down on support staff and then fully deploy its investment staff in the more profitable institutional arena.
It is a shame that the firm has abandoned its original vision and is now hurting the very shareholders that it so enthusiastically wanted to help when the firm began.
Numeric’s failure points out a common problem in the mutual fund world. If you manage your mutual funds with your investor’s interest at heart, you are compromising your profitability. For example, Numeric closed three of its four funds to new investors at very reasonable asset levels, and these funds have been closed for quite some time. Current assets across all four funds total approximately $450 million, and only Mid Cap remained open when the decision to liquidate was made.
By closing these funds to new investors, N/I preserved its ability to generate consistently good returns. However, it hurt the firm’s ability to generate enough business to offset the increasing costs and regulations associated with running a mutual fund. Numeric Investors no longer wants to be in the mutual fund business because it is more profitable for them in their asset constrained environment to focus on institutional accounts. It can cut down on support staff and then fully deploy its investment staff in the more profitable institutional arena.
It is a shame that the firm has abandoned its original vision and is now hurting the very shareholders that it so enthusiastically wanted to help when the firm began.
Saturday, January 13, 2007
Annuities A Bad Investment - Why I Hate Annuities
There is a great article in Saturday’s (January 13, 2007) Wall Street Journal called “Smart Retirement Shopping.” It talks about the high pressure sales tactics used on senior citizens to sell them ill suited investment products that pay the salesmen high fees. We see it all the time in my practice. Last year we donated our time to help a 93 year old woman who was sold an annuity that she couldn’t touch for years. The salesmen at the bank sold her that annuity knowing it was all she had besides her house. It was despicable. We got her all her money back including fees so she would have something besides social security to live on. She did not want to pursue any type of legal action though she had a great case. She just wanted it settled quickly because the stress was keeping her up at night.
Last year I published a column addressing annuities and how much I hate them. Boy did I get hate mail from annuity associations and annuity salesmen from across the country. I’ve kept all those letters and even framed one of them. Annuities are a great tool in a few select situations but most annuities are sold to people who don’t need them. If you really want an annuity then buy it someplace like Vanguard where the investment choices are sound and the fees are reasonable. I’m sure I’ll get more hate mail again but here’s the reprint of my column:
Libby Mihalka
The Financial Pragmatist
Annuities, Annuities, Annuities, Why are people buying annuities?
Annuities are complicated tax deferred investment vehicle that make sense for only a few people in very specific circumstances. If annuities aren’t the right investment for most people then why are they being sold like produce at a farmers market? The person selling them to you makes a huge commission usually 5% of the funds you’ve invested. Ain’t that sweet!
I have never meet with anyone who owned an annuity that understood what they were invested in, why they were invested in it and what fees they were paying. After learning about their annuity’s features and fees, most people are upset. If annuities were simpler to understand most people would not buy them. It is the deferred annuities that cause the most confusion. It allows an investor to accumulate funds for the future tax deferred. Let’s be clear about the tax consequences: An investor does not get a tax deduction for the money put in (unlike a 401(k)), the funds inside the annuity compound tax free, and the earnings are taxes as income rather than that lower long term capital gains rates at withdrawal. You can’t withdraw your funds until you are over 50 ½ or you’ll owe a 10% penalty plus fees, plus taxes….
With the current lower capital gains tax rates it is hard to justify buying a deferred annuity. The current low tax environment makes annuities a bad deal for most people when you factor in the high fees. There are multiple layers of fees when it comes to variable and equity-indexed annuities, some of the most common fees are
Mortality and Expense Charges (M&E) which cover the minimum guarantees provided by the insurance company and are typically 1% to 1.25% of your account each year. In addition, there are Management Fees which in a variable annuity are usually 0.9% annually.
Surrender Charges are only incurred if you were to move your money out of the annuity before a stated period of time had passed usually 7 years (but can be as high as 10 years). It is assessed on the money you withdraw before the surrender period is up. I have seen surrender charges as high as 12% (they can be as high as 100%). That’s right you changed your mind and decide to move the funds to another annuity company, you are giving up 12% of your money in fees.
There are also Performance and/or Death Benefit Guarantees which generate additional fees to for the insurance companies and pay hefty commissions to the salesmen. Some annuities guarantee that if you die before 70 ½ your beneficiaries will receive the sum of your contributions to the annuity plus a certain minimal amount of interest. Others guarantee that after 10 years of being invested they will make you whole if you have less than what you put into the annuity. All of these guarantees have costs, often another 1% to 2% a year.
When everything is said and done, it is not uncommon to see someone paying 2% to 4% in fees each year for a deferred variable or equity-indexed annuity. When you add up all these fees and factor in the cost of leaving, you aren’t casually dating an annuity you are marrying it.
What fees are you paying on your annuity, well good luck finding out. While mutual fund information is easily accessible, especially on the internet, there are very few objective third parties that provide information on the performance and expenses of particular annuity subaccounts. The only free source of this information is the annuity company, through their website, your statement, and their prospectus, which is only updated once a year. As an advisor I have software that I’ve purchased from Morningstar that clearly states all these expenses but it is not available online to the public. This lack of transparency should make you suspicious.
Here is my final annuity tirade. Annuities are frequently sold into investors’ tax deferred accounts such as IRAs. If you buy an annuity you are paying a hefty fee to save money tax deferred. Why would you then put an annuity in an investment account that is already tax-deferred? Placing an annuity in an IRA, 403(b) or 401(k) plan is ludicrous because you are already receiving the tax deferred benefit free of charge. Therefore, purchasing an annuity in a 401(k), IRA and 403(b) does not make tremendous sense because you are getting very little for the high fees you are paying.
All in all, annuities aren’t such a great deal because of their complicated structure, high fees, lack of portability and declining tax benefit in a low capital gains rate environment. So when a financial salesmen suggests an annuity well lets just say, Caveat emptor, buyer beware!
Last year I published a column addressing annuities and how much I hate them. Boy did I get hate mail from annuity associations and annuity salesmen from across the country. I’ve kept all those letters and even framed one of them. Annuities are a great tool in a few select situations but most annuities are sold to people who don’t need them. If you really want an annuity then buy it someplace like Vanguard where the investment choices are sound and the fees are reasonable. I’m sure I’ll get more hate mail again but here’s the reprint of my column:
Libby Mihalka
The Financial Pragmatist
Annuities, Annuities, Annuities, Why are people buying annuities?
Annuities are complicated tax deferred investment vehicle that make sense for only a few people in very specific circumstances. If annuities aren’t the right investment for most people then why are they being sold like produce at a farmers market? The person selling them to you makes a huge commission usually 5% of the funds you’ve invested. Ain’t that sweet!
I have never meet with anyone who owned an annuity that understood what they were invested in, why they were invested in it and what fees they were paying. After learning about their annuity’s features and fees, most people are upset. If annuities were simpler to understand most people would not buy them. It is the deferred annuities that cause the most confusion. It allows an investor to accumulate funds for the future tax deferred. Let’s be clear about the tax consequences: An investor does not get a tax deduction for the money put in (unlike a 401(k)), the funds inside the annuity compound tax free, and the earnings are taxes as income rather than that lower long term capital gains rates at withdrawal. You can’t withdraw your funds until you are over 50 ½ or you’ll owe a 10% penalty plus fees, plus taxes….
With the current lower capital gains tax rates it is hard to justify buying a deferred annuity. The current low tax environment makes annuities a bad deal for most people when you factor in the high fees. There are multiple layers of fees when it comes to variable and equity-indexed annuities, some of the most common fees are
Mortality and Expense Charges (M&E) which cover the minimum guarantees provided by the insurance company and are typically 1% to 1.25% of your account each year. In addition, there are Management Fees which in a variable annuity are usually 0.9% annually.
Surrender Charges are only incurred if you were to move your money out of the annuity before a stated period of time had passed usually 7 years (but can be as high as 10 years). It is assessed on the money you withdraw before the surrender period is up. I have seen surrender charges as high as 12% (they can be as high as 100%). That’s right you changed your mind and decide to move the funds to another annuity company, you are giving up 12% of your money in fees.
There are also Performance and/or Death Benefit Guarantees which generate additional fees to for the insurance companies and pay hefty commissions to the salesmen. Some annuities guarantee that if you die before 70 ½ your beneficiaries will receive the sum of your contributions to the annuity plus a certain minimal amount of interest. Others guarantee that after 10 years of being invested they will make you whole if you have less than what you put into the annuity. All of these guarantees have costs, often another 1% to 2% a year.
When everything is said and done, it is not uncommon to see someone paying 2% to 4% in fees each year for a deferred variable or equity-indexed annuity. When you add up all these fees and factor in the cost of leaving, you aren’t casually dating an annuity you are marrying it.
What fees are you paying on your annuity, well good luck finding out. While mutual fund information is easily accessible, especially on the internet, there are very few objective third parties that provide information on the performance and expenses of particular annuity subaccounts. The only free source of this information is the annuity company, through their website, your statement, and their prospectus, which is only updated once a year. As an advisor I have software that I’ve purchased from Morningstar that clearly states all these expenses but it is not available online to the public. This lack of transparency should make you suspicious.
Here is my final annuity tirade. Annuities are frequently sold into investors’ tax deferred accounts such as IRAs. If you buy an annuity you are paying a hefty fee to save money tax deferred. Why would you then put an annuity in an investment account that is already tax-deferred? Placing an annuity in an IRA, 403(b) or 401(k) plan is ludicrous because you are already receiving the tax deferred benefit free of charge. Therefore, purchasing an annuity in a 401(k), IRA and 403(b) does not make tremendous sense because you are getting very little for the high fees you are paying.
All in all, annuities aren’t such a great deal because of their complicated structure, high fees, lack of portability and declining tax benefit in a low capital gains rate environment. So when a financial salesmen suggests an annuity well lets just say, Caveat emptor, buyer beware!
2007 Tax Update - Giving Just Got Tougher Thanks to New Tax Rules
The IRS has just tightened up the rules for the 2007 tax year regarding charitable donations. You now need a receipt for all charitable donations no matter how small. Until this year, only donations that were greater than $250 required a receipt. So when you put $20 in the church collection plate, make sure you put it in a donation envelope and write your name on it. Your church can then send you a statement at the end of the year showing all your donations.
My best advice is to write a check for those small donations and skip throwing your change in the bell ringer’s holiday kettle when shopping.
Non-cash donation rules have also changed. You can now only deduct the value of donated household items and clothing that are in at least good condition to charity. You can not deduct what you paid for them only the fair market value of each item. So the value of that string bikini you can’t fit into anymore is probably approximately $15. If you want to know what the item might be worth look it up on the Salvation Army’s valuation guide on its website.
http://www.salvationarmyusa.org/usn/www_usn.nsf/vw-sublinks/85256DDC007274DF80256B80003D22FC?openDocument
Libby Mihalka
The Financial Pragmatist
My best advice is to write a check for those small donations and skip throwing your change in the bell ringer’s holiday kettle when shopping.
Non-cash donation rules have also changed. You can now only deduct the value of donated household items and clothing that are in at least good condition to charity. You can not deduct what you paid for them only the fair market value of each item. So the value of that string bikini you can’t fit into anymore is probably approximately $15. If you want to know what the item might be worth look it up on the Salvation Army’s valuation guide on its website.
http://www.salvationarmyusa.org/usn/www_usn.nsf/vw-sublinks/85256DDC007274DF80256B80003D22FC?openDocument
Libby Mihalka
The Financial Pragmatist
Friday, January 12, 2007
Emerging Markets Correction Looms- Chinese Market Fell on Friday
The Chinese government tried to manoeuvre its economy toward a soft landing today. It warned that the growth of the Chinese economy needed to slow down further. In response, mainland Chinese stocks plunged. Volatility in the Chinese market will increase substantially in 2007 and could result in a substantial correction.
International Hearld Tribune article has further details.
http://www.iht.com/articles/2007/01/12/business/chistox.php
This is your warning, if you own an emerging markets fund you should trade it in for an international fund that is primarily invested in developed countries.
Libby Mihalka
The Financial Pragmatist
International Hearld Tribune article has further details.
http://www.iht.com/articles/2007/01/12/business/chistox.php
This is your warning, if you own an emerging markets fund you should trade it in for an international fund that is primarily invested in developed countries.
Libby Mihalka
The Financial Pragmatist
Thursday, January 11, 2007
China Booming Now But Later? Bust
I think China is a great long term investment but the market has gotten ahead of itself. I've seen enough booms followed by busts over my life time to sense potential instability. The boom/bust cycle was repeated many times in America during its industrialization. So it is not surprising to see the same mistakes repeated elsewhere.
International funds that were primarily invested in emerging markets in 2006 performed amazingly well. Many of these funds had substantial investments in China. I would recommend selling emerging markets mutual funds and etfs in 2007. Instead, invest in international funds primarily focused in developed countires with a small exposure to emerging markets. This will minimize your risk of substantial losses but still earn you a decent return if China doesn't experience a correction in 2007.
Here is an article from Bloomberg on China's financial markets.
http://www.bloomberg.com/apps/news?pid=20601089&sid=aV4Hj3nDTAjE&refer=china
Libby Mihalka
The Financial Pragmatist
International funds that were primarily invested in emerging markets in 2006 performed amazingly well. Many of these funds had substantial investments in China. I would recommend selling emerging markets mutual funds and etfs in 2007. Instead, invest in international funds primarily focused in developed countires with a small exposure to emerging markets. This will minimize your risk of substantial losses but still earn you a decent return if China doesn't experience a correction in 2007.
Here is an article from Bloomberg on China's financial markets.
http://www.bloomberg.com/apps/news?pid=20601089&sid=aV4Hj3nDTAjE&refer=china
Libby Mihalka
The Financial Pragmatist
Thornburg Mutual Funds - Consistently Strong Performance
Thornburg is a high quality mutual fund family. I use their funds exstensively in my practice. I am able to buy the Institutional shares which are no load and have a lower expense ratio (though I do have to pay a commission to trade in or out of the funds).
The overall performance of the Thornburg mutual funds has been consistently high with reasonable risk. Here is Morningstar information on the A shares of the Thornburg International Value fund.
http://quicktake.morningstar.com/fundnet/Snapshot.aspx?Country=USA&Symbol=TGVAX
Bill Fries is the manager of the Thornburg International Value and Thornburg Value funds.
He was featured in the International Herald Tribune's International Round Table discussion.
http://www.iht.com/articles/2006/12/08/yourmoney/mround.php
Libby Mihalka
The Financial Pragmatist
The overall performance of the Thornburg mutual funds has been consistently high with reasonable risk. Here is Morningstar information on the A shares of the Thornburg International Value fund.
http://quicktake.morningstar.com/fundnet/Snapshot.aspx?Country=USA&Symbol=TGVAX
Bill Fries is the manager of the Thornburg International Value and Thornburg Value funds.
He was featured in the International Herald Tribune's International Round Table discussion.
http://www.iht.com/articles/2006/12/08/yourmoney/mround.php
Libby Mihalka
The Financial Pragmatist
Oil Prices Drop, England Raises Interest Rates and the U.S. Stock Market Rises
There are two big news stories today impacting the financial markets. The first, the price of crude oil continues to fall. The extent of the correction can be seen on the adjacent chart. High oil prices are considered by many economists to be a tax on the economy. It drags down profitability across many industries even the service sector. Falling oil prices are good news and the market rose in response. The chart is the price of Crude Oil (NYMEX) and can be viewed on the WSJ site through the link below.
http://online.wsj.com/mdc/public/page/mdc_commodities.html?mod=mdc_topnav_2_3000
The second story is the Bank of England raised their interest rate. This is the English version of our Federal Reserve changing the prime rate. By raising their interest rate, the English have made some of their investments more attractive. So the pound rose against the dollar and the euro. It also caused U.S. Treasuries to fall as investors moved funds into English bonds.
You can read more about this story on the International Herald website.
http://www.iht.com/articles/ap/2007/01/11/business/EU-FIN-ECO-Europe-Interest-Rates.php
The second story is the Bank of England raised their interest rate. This is the English version of our Federal Reserve changing the prime rate. By raising their interest rate, the English have made some of their investments more attractive. So the pound rose against the dollar and the euro. It also caused U.S. Treasuries to fall as investors moved funds into English bonds.
You can read more about this story on the International Herald website.
http://www.iht.com/articles/ap/2007/01/11/business/EU-FIN-ECO-Europe-Interest-Rates.php
Libby Mihalka
The Financial Pragmatist
Wednesday, January 10, 2007
Artisan International - An Exceptional Investment
Artisan International is one of the core holdings for our clients. Mark Yockey has several times been named International Manager of the Year by Morningstar. Mark is also the manager of Artisan International Small Cap which is invested in mid and small cap international stocks. This fund is closed directly to new investors but is available through our investment firm.
In 2006 Artisan International earned 26% and Artisan International Small Cap earned 33%.
Here is a research report of Artisan International by Advisor Intelligence also known as Litman/Gregory. It is copyrighted material and should not be reprinted.
Hope you enjoy!
Libby Mihalka
The Financial Pragmatist
FUND UPDATE: Artisan International Fund (ARTIX)
Category: International Growth at a Reasonable Price Managers: Mark Yockey Date of Interview: 10/05/06 With: Mark Yockey, Morten Aarnseth (analyst), and Stephen Chan (analyst)
Japan has underperformed other international markets this year but this has not diminished Yockey’s enthusiasm for its stock market. He continues to see investment opportunities in
Japan and currently has 23% of the fund’s assets invested there. According to Yockey, there are positives stemming from Japan’s transition from deflation to mild inflation. In deflation, where prices of goods are generally falling, consumers tend to postpone spending with the hope of buying at lower prices in the future. However, inflation, where prices of goods are generally rising, changes that mindset and encourages spending. Not only is this change increasing Japanese companies’ sales, it is also enabling them to raise prices. As a result, “Japan Inc. right now is more profitable than it’s been probably since the mid-80s,” observes Yockey.
In Japan, Yockey likes the financial area and has close to half of the fund’s Japan allocation there. He highlights banks that are restructuring by reducing costs—for example, using more technology to improve productivity—and expanding into fee-based businesses, such as private banking where they provide financial advice to wealthy Japanese. The fee-based business is much more profitable than the traditional bank-lending business. “We think that stream of earnings is worth a lot more money than a net-interest-income stream,” says Yockey. His view is influenced by the similarities he sees between Japanese banks and some U.S. banks who implemented similar steps over 20 years ago, which helped improve their profitability.
Another attraction of Japanese banks is the improved prospects of their traditional lending business. Yockey believes Japan’s interest rates will rise as inflation takes hold in the economy and higher rates will help the banks’ lending business by increasing their net interest margins (NIM), i.e., the difference between the income from lending and the expenses incurred to attract deposits, expressed as a percentage of bank’s earning assets. Japanese banks currently pay close to zero on their deposits because they have “excess deposits.” Deposits are in excess because the Japanese typically save a lot and lending opportunities have been scarce for the past several years. So, there is no incentive for Japanese banks to pay higher rates to depositors (to attract deposits) when interest rates rise, although this may change as Japan’s economic cycle matures. On the lending side, Yockey expects lending rates to go up modestly as interest rates rise, increasing banks’ NIM as a result. There are two reasons why he thinks lending rates will go up. If Japan’s economy improves as Yockey expects, companies will be encouraged to borrow for capital expenditures and grow their business, and the increased demand for loans will put upward pressure on lending rates. In addition, Yockey says that Japanese banks are pricing their loans according to their risk levels rather than based on “relationship banking,” which used to be the norm historically. He notes that NIM for many Japanese banks are very low (around 1.1%) and even a small improvement will significantly improve their earnings.
One bank fitting this mold is Mizuho Financial Group, a top-10 holding in the fund. Yockey expects its fee-income business to grow at a rate of 15% to 20% per year and NIM to improve by about 10 to 20 basis points over the next two years, resulting in earnings growth of about 10% over the next few years. This earnings growth is in line with a typical U.S. or European bank, and much higher than the bank’s own recent history. Mizuho trades at 12x next year’s earnings, similar to what its U.S. and European counterparts trade at. Yockey believes it should trade at 15x to 16x earnings because Japan’s interest rates are much lower than in the U.S. or Europe, making its earnings more valuable. A risk to Yockey’s thesis is that fee-income growth comes in below expectations. Yockey and his team are monitoring the bank’s investment-trust sales to ensure fee income grows in line with their expectations.
For the past several years Yockey has been buying oil and gas companies that are producing oil and gas at a faster rate than their peers. In a period of rising oil prices, such companies have generated higher earnings growth. Examples of such companies include Encana, Lukoil, and Eni SpA. In recent months, the share prices of these companies rose to a point where they were less attractive relative to their future earnings growth. As a result, Yockey trimmed Encana and Lukoil, and sold Eni out of his portfolio. Aside from valuations, Eni was sold because its production growth had slowed, and Yockey’s energy analyst, Morten Aarnseth, expects it to slow even further. Eni’s high production rate was an important factor behind its initial purchase.
A new addition related to the oil sector is Technip SA, a French engineering and construction company serving the oil industry. With traditional sources of oil dwindling or becoming difficult to access, due to technical difficulties or politics, many oil companies are focusing on “unconventional oil and gas reserves” such as LNG (liquefied natural gas), deepwater oil sources, oil sands, etc. Aarnseth says Technip is a market leader in providing products and services in these areas. Recently, its stock sold off on a profit warning, providing a buying opportunity. According to Aarnseth, Technip’s profits declined more than expected because it had experienced cost overruns in projects it entered into in 2002 and 2003 when oil was around $30 per barrel. As oil prices went up, it was late in getting price guarantees from its subcontractors, which led to cost overruns. Having met with Technip’s management, Aarnseth is confident that Technip’s pricing discipline has improved and that it will execute on high-price orders in the future. He thinks investors are not factoring this in their earnings estimates and, therefore, sees more earnings upside than reflected in their estimates. Technip’s stock currently sells at a discount of 10% to 30% relative to its peers. If its management executes on its pricing discipline per Aarnseth’s expectations, he sees this discount narrowing.
The fund’s weighting in utilities has risen from 5% to 8% over the past six months as Yockey has added to some existing holdings in this area. One such holding is Fortum Oyj, a Finnish utility company. Historically, power has been priced at a discount in Finland and neighboring Scandinavia relative to the rest of Europe. According to Yockey, this price discount should narrow as Europe moves towards a single liberalized electricity market, boosting Fortum’s earnings. Already, prices have gone up from 30 euros/MWh to 45 euros/MWh, but he expects them to go even higher. He says there is an electricity shortage in Europe and very little new power capacity is expected to come on line in the near future, which should keep power prices relatively high across Europe. Commenting on why this stock remains attractive, Yockey says that Fortum did not expect prices to rise as much as they did and, therefore, sold most of its power for this year at lower prices in the forward market. However, it will start benefiting from higher power prices late next year and the following year, which investors are not yet fully discounting in their earnings expectations.
The fund has about 14% in emerging markets. Most of this exposure is concentrated in South Korea and China. In Korea, a large holding is Kookmin Bank, which is benefiting from its move to fee-income business, similar to its Japanese counterparts discussed above. In China, while there is no particular theme, most holdings there are benefiting from the country’s rapid economic growth. One example is China Life Insurance Co., a new position initiated in the fund in the third quarter. Chan says that with the Chinese economy growing at about 10% per annum incomes will rise, making life insurance more affordable for its citizens. He thinks the Chinese insurance market has a lot of room to grow as China’s economy develops. He notes that on average China spends 2% of its GDP on life insurance, much lower than 5% globally and 8% to 10% for other more developed Asian countries such as Korea and Singapore.
Litman/Gregory Opinion
Year to date through October, Artisan International Fund is up 16.7% compared to an 18.4% return for Vanguard Total International Stock Index Fund. Despite outperforming its index in 2005, the fund lags over the trailing three and five years, largely due to an 11-percentage-point performance deficit in 2003 when picks in the financial and media sectors and an underweighting to emerging markets hurt performance. Longer term, the fund’s track record remains impressive. Over 10 years (through September) the fund is outperforming its index by six percentage points, annualized, although this includes 1999 when the fund outperformed its index by 51 percentage points. We also look at Yockey’s track record going back to July 1990, which includes his history at Waddell & Reed. Since July 1990, Yockey has beaten his benchmark by six percentage points, annualized. In addition, he has shown good performance consistency over longer periods, finishing ahead of the index in 70% of rolling three-year periods and 84% of rolling five-year periods. This performance has come with slightly higher volatility than the index, but it is superior to the index on a risk-adjusted basis (i.e., Sharpe ratio). We caveat Yockey’s long-term record by noting that he managed a smaller asset base during the early years and could pick stocks across a wider range of stock-market capitalization than he can now. While a larger asset base diminishes Yockey’s ability to add value the same way he did in the 1990s, we believe his opportunity set is broad enough to allow him to beat his index over the long term.
We also compare Artisan International’s performance to MSCI AC World ex U.S. Growth to account for the fund’s growth orientation. While over five years the fund trails this index by 1.6 percentage points, over seven years (we do not have returns for the index beyond seven years in our database) it is ahead by 5.9 percentage points, annualized. Versus its peers, Artisan International has generated roughly median performance in both the international growth-at-a-reasonable-price and international growth categories over the past five years. We note that the fund, while diversified across 80 to 120 holdings, can take significant sector and country bets versus its index. For example, the fund has about 8% of its assets in the U.K versus an index weight of over 20%. As a result, its performance can be out of sync with its index over long periods.
There have been two new additions to the investment team this year—Tony Kim and Laurie Fitch. The team now comprises 10 individuals, including Yockey. Kim will cover the technology sector while Fitch will focus on utilities and infrastructure. We will speak to these analysts in the coming months.
Recently, we spoke with Aarnseth and Stephen Chan, both analysts who joined the team last year. Our discussions with them reinforced several key points that drive our positive opinion on Artisan International. Yockey has surrounded himself with experienced analysts who are impressive in terms of their knowledge of their sectors and companies. While quality of the analyst team is important, of even greater importance is Yockey’s involvement with his analyst team on a day-to-day basis and his focus on investing, which helps him act as a filter for ideas. This is because we believe his ability to understand business models, his independent thinking, and his ability to profitably synthesize macro factors at the company level gives him an edge over his peers. We think Yockey is very accessible to his analyst team to discuss ideas and remains engaged and passionate about investing. We continue to recommend Artisan International Fund.
—Rajat Jain, CFA
_________________________________________________________________________________Reprinted AdvisorIntelligence. Copyright© 2007 Litman/Gregory Analytics, LLC.
In 2006 Artisan International earned 26% and Artisan International Small Cap earned 33%.
Here is a research report of Artisan International by Advisor Intelligence also known as Litman/Gregory. It is copyrighted material and should not be reprinted.
Hope you enjoy!
Libby Mihalka
The Financial Pragmatist
FUND UPDATE: Artisan International Fund (ARTIX)
Category: International Growth at a Reasonable Price Managers: Mark Yockey Date of Interview: 10/05/06 With: Mark Yockey, Morten Aarnseth (analyst), and Stephen Chan (analyst)
Japan has underperformed other international markets this year but this has not diminished Yockey’s enthusiasm for its stock market. He continues to see investment opportunities in
Japan and currently has 23% of the fund’s assets invested there. According to Yockey, there are positives stemming from Japan’s transition from deflation to mild inflation. In deflation, where prices of goods are generally falling, consumers tend to postpone spending with the hope of buying at lower prices in the future. However, inflation, where prices of goods are generally rising, changes that mindset and encourages spending. Not only is this change increasing Japanese companies’ sales, it is also enabling them to raise prices. As a result, “Japan Inc. right now is more profitable than it’s been probably since the mid-80s,” observes Yockey.In Japan, Yockey likes the financial area and has close to half of the fund’s Japan allocation there. He highlights banks that are restructuring by reducing costs—for example, using more technology to improve productivity—and expanding into fee-based businesses, such as private banking where they provide financial advice to wealthy Japanese. The fee-based business is much more profitable than the traditional bank-lending business. “We think that stream of earnings is worth a lot more money than a net-interest-income stream,” says Yockey. His view is influenced by the similarities he sees between Japanese banks and some U.S. banks who implemented similar steps over 20 years ago, which helped improve their profitability.
Another attraction of Japanese banks is the improved prospects of their traditional lending business. Yockey believes Japan’s interest rates will rise as inflation takes hold in the economy and higher rates will help the banks’ lending business by increasing their net interest margins (NIM), i.e., the difference between the income from lending and the expenses incurred to attract deposits, expressed as a percentage of bank’s earning assets. Japanese banks currently pay close to zero on their deposits because they have “excess deposits.” Deposits are in excess because the Japanese typically save a lot and lending opportunities have been scarce for the past several years. So, there is no incentive for Japanese banks to pay higher rates to depositors (to attract deposits) when interest rates rise, although this may change as Japan’s economic cycle matures. On the lending side, Yockey expects lending rates to go up modestly as interest rates rise, increasing banks’ NIM as a result. There are two reasons why he thinks lending rates will go up. If Japan’s economy improves as Yockey expects, companies will be encouraged to borrow for capital expenditures and grow their business, and the increased demand for loans will put upward pressure on lending rates. In addition, Yockey says that Japanese banks are pricing their loans according to their risk levels rather than based on “relationship banking,” which used to be the norm historically. He notes that NIM for many Japanese banks are very low (around 1.1%) and even a small improvement will significantly improve their earnings.
One bank fitting this mold is Mizuho Financial Group, a top-10 holding in the fund. Yockey expects its fee-income business to grow at a rate of 15% to 20% per year and NIM to improve by about 10 to 20 basis points over the next two years, resulting in earnings growth of about 10% over the next few years. This earnings growth is in line with a typical U.S. or European bank, and much higher than the bank’s own recent history. Mizuho trades at 12x next year’s earnings, similar to what its U.S. and European counterparts trade at. Yockey believes it should trade at 15x to 16x earnings because Japan’s interest rates are much lower than in the U.S. or Europe, making its earnings more valuable. A risk to Yockey’s thesis is that fee-income growth comes in below expectations. Yockey and his team are monitoring the bank’s investment-trust sales to ensure fee income grows in line with their expectations.
For the past several years Yockey has been buying oil and gas companies that are producing oil and gas at a faster rate than their peers. In a period of rising oil prices, such companies have generated higher earnings growth. Examples of such companies include Encana, Lukoil, and Eni SpA. In recent months, the share prices of these companies rose to a point where they were less attractive relative to their future earnings growth. As a result, Yockey trimmed Encana and Lukoil, and sold Eni out of his portfolio. Aside from valuations, Eni was sold because its production growth had slowed, and Yockey’s energy analyst, Morten Aarnseth, expects it to slow even further. Eni’s high production rate was an important factor behind its initial purchase.
A new addition related to the oil sector is Technip SA, a French engineering and construction company serving the oil industry. With traditional sources of oil dwindling or becoming difficult to access, due to technical difficulties or politics, many oil companies are focusing on “unconventional oil and gas reserves” such as LNG (liquefied natural gas), deepwater oil sources, oil sands, etc. Aarnseth says Technip is a market leader in providing products and services in these areas. Recently, its stock sold off on a profit warning, providing a buying opportunity. According to Aarnseth, Technip’s profits declined more than expected because it had experienced cost overruns in projects it entered into in 2002 and 2003 when oil was around $30 per barrel. As oil prices went up, it was late in getting price guarantees from its subcontractors, which led to cost overruns. Having met with Technip’s management, Aarnseth is confident that Technip’s pricing discipline has improved and that it will execute on high-price orders in the future. He thinks investors are not factoring this in their earnings estimates and, therefore, sees more earnings upside than reflected in their estimates. Technip’s stock currently sells at a discount of 10% to 30% relative to its peers. If its management executes on its pricing discipline per Aarnseth’s expectations, he sees this discount narrowing.
The fund’s weighting in utilities has risen from 5% to 8% over the past six months as Yockey has added to some existing holdings in this area. One such holding is Fortum Oyj, a Finnish utility company. Historically, power has been priced at a discount in Finland and neighboring Scandinavia relative to the rest of Europe. According to Yockey, this price discount should narrow as Europe moves towards a single liberalized electricity market, boosting Fortum’s earnings. Already, prices have gone up from 30 euros/MWh to 45 euros/MWh, but he expects them to go even higher. He says there is an electricity shortage in Europe and very little new power capacity is expected to come on line in the near future, which should keep power prices relatively high across Europe. Commenting on why this stock remains attractive, Yockey says that Fortum did not expect prices to rise as much as they did and, therefore, sold most of its power for this year at lower prices in the forward market. However, it will start benefiting from higher power prices late next year and the following year, which investors are not yet fully discounting in their earnings expectations.
The fund has about 14% in emerging markets. Most of this exposure is concentrated in South Korea and China. In Korea, a large holding is Kookmin Bank, which is benefiting from its move to fee-income business, similar to its Japanese counterparts discussed above. In China, while there is no particular theme, most holdings there are benefiting from the country’s rapid economic growth. One example is China Life Insurance Co., a new position initiated in the fund in the third quarter. Chan says that with the Chinese economy growing at about 10% per annum incomes will rise, making life insurance more affordable for its citizens. He thinks the Chinese insurance market has a lot of room to grow as China’s economy develops. He notes that on average China spends 2% of its GDP on life insurance, much lower than 5% globally and 8% to 10% for other more developed Asian countries such as Korea and Singapore.
Litman/Gregory Opinion
Year to date through October, Artisan International Fund is up 16.7% compared to an 18.4% return for Vanguard Total International Stock Index Fund. Despite outperforming its index in 2005, the fund lags over the trailing three and five years, largely due to an 11-percentage-point performance deficit in 2003 when picks in the financial and media sectors and an underweighting to emerging markets hurt performance. Longer term, the fund’s track record remains impressive. Over 10 years (through September) the fund is outperforming its index by six percentage points, annualized, although this includes 1999 when the fund outperformed its index by 51 percentage points. We also look at Yockey’s track record going back to July 1990, which includes his history at Waddell & Reed. Since July 1990, Yockey has beaten his benchmark by six percentage points, annualized. In addition, he has shown good performance consistency over longer periods, finishing ahead of the index in 70% of rolling three-year periods and 84% of rolling five-year periods. This performance has come with slightly higher volatility than the index, but it is superior to the index on a risk-adjusted basis (i.e., Sharpe ratio). We caveat Yockey’s long-term record by noting that he managed a smaller asset base during the early years and could pick stocks across a wider range of stock-market capitalization than he can now. While a larger asset base diminishes Yockey’s ability to add value the same way he did in the 1990s, we believe his opportunity set is broad enough to allow him to beat his index over the long term.
We also compare Artisan International’s performance to MSCI AC World ex U.S. Growth to account for the fund’s growth orientation. While over five years the fund trails this index by 1.6 percentage points, over seven years (we do not have returns for the index beyond seven years in our database) it is ahead by 5.9 percentage points, annualized. Versus its peers, Artisan International has generated roughly median performance in both the international growth-at-a-reasonable-price and international growth categories over the past five years. We note that the fund, while diversified across 80 to 120 holdings, can take significant sector and country bets versus its index. For example, the fund has about 8% of its assets in the U.K versus an index weight of over 20%. As a result, its performance can be out of sync with its index over long periods.
There have been two new additions to the investment team this year—Tony Kim and Laurie Fitch. The team now comprises 10 individuals, including Yockey. Kim will cover the technology sector while Fitch will focus on utilities and infrastructure. We will speak to these analysts in the coming months.
Recently, we spoke with Aarnseth and Stephen Chan, both analysts who joined the team last year. Our discussions with them reinforced several key points that drive our positive opinion on Artisan International. Yockey has surrounded himself with experienced analysts who are impressive in terms of their knowledge of their sectors and companies. While quality of the analyst team is important, of even greater importance is Yockey’s involvement with his analyst team on a day-to-day basis and his focus on investing, which helps him act as a filter for ideas. This is because we believe his ability to understand business models, his independent thinking, and his ability to profitably synthesize macro factors at the company level gives him an edge over his peers. We think Yockey is very accessible to his analyst team to discuss ideas and remains engaged and passionate about investing. We continue to recommend Artisan International Fund.
—Rajat Jain, CFA
_________________________________________________________________________________Reprinted AdvisorIntelligence. Copyright© 2007 Litman/Gregory Analytics, LLC.
China's Record Trade Surplus Further Pressures Dollar
U.S. trade deficit fell an unexpected 1% in November. This was due primarily to a fall in oil prices. Our trade deficit with China fell slightly in November but it is still at a record high.
China’s trade surplus with the world last year jumped a staggering 74% to a record $177 billion. Pressure on China will increase to raise the value of their currency (the yuan).
From the International Herald Tribune: “Economists said the figures would increase political pressure on Beijing to let the yuan rise faster to head off the risk of protectionism by governments fearful that Chinese companies are eroding wide swathes of their manufacturing sectors”.
The dollar, euro and yen will have to depreciate faster against the yuan in order to stabilize the situation. Owning foreign unhedged bonds and international stocks unhedged is a solid strategy for 2007.
Libby Mihalka
The Financial Pragmatist
China’s trade surplus with the world last year jumped a staggering 74% to a record $177 billion. Pressure on China will increase to raise the value of their currency (the yuan).
From the International Herald Tribune: “Economists said the figures would increase political pressure on Beijing to let the yuan rise faster to head off the risk of protectionism by governments fearful that Chinese companies are eroding wide swathes of their manufacturing sectors”.
The dollar, euro and yen will have to depreciate faster against the yuan in order to stabilize the situation. Owning foreign unhedged bonds and international stocks unhedged is a solid strategy for 2007.
Libby Mihalka
The Financial Pragmatist
Friday, January 5, 2007
New Roth IRA Strategy - Contribute to Non-Trad IRA Now and Convert to Roth IRA in 2010
I love Roth IRAs. The problem has always been qualifying for the darn things.
Well here’s your chance to move some of your income into a Roth IRA without worrying about qualifying.
Backround
Roth IRA s are fabulous for two reasons. First, withdraws from Roth IRA s are tax free. When does that ever happen? The initial contribution to a Roth IRA is not tax deductible but everything it ever earns will never be taxed again.
The second reason I love Roth IRA s is that there are no required minimum distributions (RMD). For other IRA s (and 401k plans), you are required to begin taking minimum distributions when you reach 70 ½ years old. You have to take the money out of your tax deferred accounts and pay income taxes whether you need the funds or not.
The bulk of funds saved for retirement are in tax deferred accounts that will be subject to income taxes when distributed. Suppose you want to buy a car (or replace your roof) in retirement but all your money is in a tax deferred portfolio. A large withdrawal will move you into a higher tax bracket. Wouldn’t it nice to have a pool of funds that can be accessed without any tax ramifications?
To qualify for a Roth IRA contribution in 2006 your income must be less than $150,000 if married filing jointly ($95,000 if single or head of household). You can make a partial Roth IRA contribution up to $160,000 income for MFJ and $110,000 income for Single or HOH. The income limitations have gone up in 2007. For MFJ the 2007 income limitation is $156,000 to $166,000 and Single and HOH are $99,000 to $114,000.
In order to convert your tax deferred IRA to a Roth IRA your income has to be less than $100,000. Income taxes are due on the amount converted. Typically, conversions only make sense if you have the funds to pay the income taxes outside the IRA. Few people making less than $100,000 a year have the additional funds available to pay a substantial tax bill making Roth IRA conversions impractical.
The Roth IRA Strategy
If you are below these income limitations, you (and your spouse) should be making Roth IRA contributions or considering a conversion. If you currently exceed the 2006 and 2007 income limitations for Roth IRA contributions or conversions, here is a strategy that will get you in the game.
Last year Congress passed legislation that abolished the Roth IRA income limitations for conversions in the year 2010. What good does that do me know you might ask?
Making contributions to a non-deductible (non-traditional) IRA and then in 2010 converting the balance to a Roth IRA is a fabulous strategy. The original contributions would not be subject income taxes at conversion because you already paid income taxes when you contributed the funds to the non-traditional IRA. However, any money earned in those few years would be subject to income taxes. It is not too late to establish a non-traditional IRA and make a contribution for 2006.
If you are less than age 50, you can make the maximum contribution to a non-traditional IRA each year up to 2010. So you would be able to contribute $4,000 in 2006, $4,000 in 2007, $5,000 in 2008, $5,000 in 2009 and another in 2010. Please note: If you are age 50 or over, you are eligible to contribute an additional extra catch-up amount of a $1,000 a year.
As a married couple, you will be able to move more than $50,000 into a Roth IRA. As it stands now, this loop hole is available in 2010. Conversions can be tricky so make sure you understand all the rules or hire a professional. It is a great strategy it just takes a little work to execute but it is worth it.
Libby Mihalka
The Financial Pragmatist
Well here’s your chance to move some of your income into a Roth IRA without worrying about qualifying.
Backround
Roth IRA s are fabulous for two reasons. First, withdraws from Roth IRA s are tax free. When does that ever happen? The initial contribution to a Roth IRA is not tax deductible but everything it ever earns will never be taxed again.
The second reason I love Roth IRA s is that there are no required minimum distributions (RMD). For other IRA s (and 401k plans), you are required to begin taking minimum distributions when you reach 70 ½ years old. You have to take the money out of your tax deferred accounts and pay income taxes whether you need the funds or not.
The bulk of funds saved for retirement are in tax deferred accounts that will be subject to income taxes when distributed. Suppose you want to buy a car (or replace your roof) in retirement but all your money is in a tax deferred portfolio. A large withdrawal will move you into a higher tax bracket. Wouldn’t it nice to have a pool of funds that can be accessed without any tax ramifications?
To qualify for a Roth IRA contribution in 2006 your income must be less than $150,000 if married filing jointly ($95,000 if single or head of household). You can make a partial Roth IRA contribution up to $160,000 income for MFJ and $110,000 income for Single or HOH. The income limitations have gone up in 2007. For MFJ the 2007 income limitation is $156,000 to $166,000 and Single and HOH are $99,000 to $114,000.
In order to convert your tax deferred IRA to a Roth IRA your income has to be less than $100,000. Income taxes are due on the amount converted. Typically, conversions only make sense if you have the funds to pay the income taxes outside the IRA. Few people making less than $100,000 a year have the additional funds available to pay a substantial tax bill making Roth IRA conversions impractical.
The Roth IRA Strategy
If you are below these income limitations, you (and your spouse) should be making Roth IRA contributions or considering a conversion. If you currently exceed the 2006 and 2007 income limitations for Roth IRA contributions or conversions, here is a strategy that will get you in the game.
Last year Congress passed legislation that abolished the Roth IRA income limitations for conversions in the year 2010. What good does that do me know you might ask?
Making contributions to a non-deductible (non-traditional) IRA and then in 2010 converting the balance to a Roth IRA is a fabulous strategy. The original contributions would not be subject income taxes at conversion because you already paid income taxes when you contributed the funds to the non-traditional IRA. However, any money earned in those few years would be subject to income taxes. It is not too late to establish a non-traditional IRA and make a contribution for 2006.
If you are less than age 50, you can make the maximum contribution to a non-traditional IRA each year up to 2010. So you would be able to contribute $4,000 in 2006, $4,000 in 2007, $5,000 in 2008, $5,000 in 2009 and another in 2010. Please note: If you are age 50 or over, you are eligible to contribute an additional extra catch-up amount of a $1,000 a year.
As a married couple, you will be able to move more than $50,000 into a Roth IRA. As it stands now, this loop hole is available in 2010. Conversions can be tricky so make sure you understand all the rules or hire a professional. It is a great strategy it just takes a little work to execute but it is worth it.
Libby Mihalka
The Financial Pragmatist
Thursday, January 4, 2007
Declining Dollar is an Investment Opportunity
"We believe that the dollar's decline versus the euro has further to run, with $1.38 a possible destination for the pair over the next six months."
Tom Levinson, a foreign exchange strategist with ING London Banking
One trend you can count on this year is the decline of the dollar against most developed country currencies. Even OPEC is now pricing oil contracts in euros. The U.S. dollar has been the reserve currency of the world for many years. In other words, it has been the default currency used in many international transactions. Our economy has benefited from reserve currency status but we have abused that privilege. The U.S. government has accumulated huge fiscal deficit and our economy has amassed an enormous trading deficit. These twin debts have jeopardizing the value of our currency.
The least risky and inexpensive way to take advantage of this play is to invest in unhedged international stock and bond funds.
I’ll be adding to my client’s positions in the institutional shares of PIMCO Unhedged Foreign Bond Fund. All the international stock funds I use are unhedged.
Libby Mihalka
The Financial Pragmatist
Tom Levinson, a foreign exchange strategist with ING London Banking
One trend you can count on this year is the decline of the dollar against most developed country currencies. Even OPEC is now pricing oil contracts in euros. The U.S. dollar has been the reserve currency of the world for many years. In other words, it has been the default currency used in many international transactions. Our economy has benefited from reserve currency status but we have abused that privilege. The U.S. government has accumulated huge fiscal deficit and our economy has amassed an enormous trading deficit. These twin debts have jeopardizing the value of our currency.
The least risky and inexpensive way to take advantage of this play is to invest in unhedged international stock and bond funds.
I’ll be adding to my client’s positions in the institutional shares of PIMCO Unhedged Foreign Bond Fund. All the international stock funds I use are unhedged.
Libby Mihalka
The Financial Pragmatist
Wednesday, January 3, 2007
Mutual Fund Research Web Site
As part of my job I read a lot. Over the next few months, I’ll share some of my favorite spots to peruse on a regular basis.
Here is one of my favorite free websites about mutual funds.
http://www.fundalarm.com/
Roy Weitz does an entertaining job of exposing the greed, arrogance and misdeeds (and sometimes just stupidity) in the mutual fund world. I always skim his monthly highlights and then check out the manager changes. He posts his comments the first day of every month. I also skim the message board periodically. It is usually worth reading anything posted by Ted.
Roy doesn’t get paid for running this website, so if you like it and start using it regularly, send him a donation.
Libby Mihalka
The Financial Pragmatist
Here is one of my favorite free websites about mutual funds.
http://www.fundalarm.com/
Roy Weitz does an entertaining job of exposing the greed, arrogance and misdeeds (and sometimes just stupidity) in the mutual fund world. I always skim his monthly highlights and then check out the manager changes. He posts his comments the first day of every month. I also skim the message board periodically. It is usually worth reading anything posted by Ted.
Roy doesn’t get paid for running this website, so if you like it and start using it regularly, send him a donation.
Libby Mihalka
The Financial Pragmatist
Tuesday, January 2, 2007
2006 and 2007 IRA Contribution and Income Limitations
Here are the basics:
An IRA or Individual Retirement Account is a personal savings plan that allows an individual with earned income to accumulate money tax deferred until retirement.
You can still open an IRA for your 2006 contribution as long as it account is opened and funded before April 15, 2007.
Contributions to an IRA may or may not be tax deductible depending on whether you and/or your spouse are participating in a company retirement plan and your level income.
For 2006 and 2007, the maximum contribution to an IRA is $4,000. If you are age 50 or older you can contribute an additional $1,000 called the catch-up contribution.
You cannot set up an IRA unless you and/or your spouse have earned income that tax year of at least the amount you would like to contribute. If you have income only from investments and social security, you cannot put money away in an IRA. It has to be compensation. Employment or self employment income (or alimony) is necessary to make a contribution.
As long as you have earned income you can setup an IRA, you just may not be able to deduct it from your taxes. If you and your spouse do not participate in a company retirement plan, you can both contribute the maximum to IRAs and deduct them from your taxes. Everyone else, brace yourselves it gets more complicated.
If you are a participant in a company sponsored retirement plan (like a 401k, 403b, SEP, traditional pension) then you and your spouse can deduct your IRA contribution as long as you earn less than the income limitations set each tax year by the IRS.
So if you are the active participant in a company plan, you can deduct IRA contribution for yourself in 2006 if you earn less than $75,000 (with contribution reduced up to $85,000) and are married filing jointly. In 2007, income must be less than $83,000 (with contribution reduced up to $103,000). The filing single or head of household limits are lower for active participants. In 2006, you must earn less than $50,000 (with contribution reduced through $60,000) to deduct your IRA. In 2007, the limit increases to $52,000 (with reduced contribution through $62,000).
If you are not covered by a company retirement but your spouse is, you must earn less than $150,000 in 2006 (reduced contribution up to $160,000) in order to deduct your IRA contribution. In 2007 the phase out limit is $156,000 to $166,000.
Even if you do not meet these limits, it may be worth while making a nondeductible IRA contribution. Just make sure you file IRS Form 8606.
More to come next week on Roth IRAs and conversion strategies.
Libby Mihalka
The Financial Pragmatist
An IRA or Individual Retirement Account is a personal savings plan that allows an individual with earned income to accumulate money tax deferred until retirement.
You can still open an IRA for your 2006 contribution as long as it account is opened and funded before April 15, 2007.
Contributions to an IRA may or may not be tax deductible depending on whether you and/or your spouse are participating in a company retirement plan and your level income.
For 2006 and 2007, the maximum contribution to an IRA is $4,000. If you are age 50 or older you can contribute an additional $1,000 called the catch-up contribution.
You cannot set up an IRA unless you and/or your spouse have earned income that tax year of at least the amount you would like to contribute. If you have income only from investments and social security, you cannot put money away in an IRA. It has to be compensation. Employment or self employment income (or alimony) is necessary to make a contribution.
As long as you have earned income you can setup an IRA, you just may not be able to deduct it from your taxes. If you and your spouse do not participate in a company retirement plan, you can both contribute the maximum to IRAs and deduct them from your taxes. Everyone else, brace yourselves it gets more complicated.
If you are a participant in a company sponsored retirement plan (like a 401k, 403b, SEP, traditional pension) then you and your spouse can deduct your IRA contribution as long as you earn less than the income limitations set each tax year by the IRS.
So if you are the active participant in a company plan, you can deduct IRA contribution for yourself in 2006 if you earn less than $75,000 (with contribution reduced up to $85,000) and are married filing jointly. In 2007, income must be less than $83,000 (with contribution reduced up to $103,000). The filing single or head of household limits are lower for active participants. In 2006, you must earn less than $50,000 (with contribution reduced through $60,000) to deduct your IRA. In 2007, the limit increases to $52,000 (with reduced contribution through $62,000).
If you are not covered by a company retirement but your spouse is, you must earn less than $150,000 in 2006 (reduced contribution up to $160,000) in order to deduct your IRA contribution. In 2007 the phase out limit is $156,000 to $166,000.
Even if you do not meet these limits, it may be worth while making a nondeductible IRA contribution. Just make sure you file IRS Form 8606.
More to come next week on Roth IRAs and conversion strategies.
Libby Mihalka
The Financial Pragmatist
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