Actively Managed Mutual Funds Out Perform Index Funds!

For the first two months since I hypothetically invested in affordable mostly managed mutual funds (there are a few index funds where no competitive actively managed fund was available) the funds I picked have outperformed comparable Vanguard Index funds.


Though note that the Index portfolio did slightly better today. I think for a few days on my recent trip the index portfolio pulled ahead.

They are really close though. The big surprise to me has been how poorly the ETFs have performed. I would have thought they would have been more or less in line with the index mutual funds, but they have fallen almost 1% behind.

Etrade fixes minimum investing in mutual fund issue

So before I left town for a while, I was trying to resolve an issue with my Etrade account. My man Justin got back to me and the issue was resolved, but I took a break from posting about financial matters while I was on the road. I did update the message in the upper right corner of this site to indicate that the issue was fixed though, so it would not look like Etrade was not following up!

Basically, the minimum additional purchases for two mutual funds I own were not allowing any additional investments under $1000 each. Morningstar listed the minimum additional investments for an automatic investment plan purchase as $100. When Justin called me up and left a message it should be fixed, I went into the 'Automatic Investment Setup' screen and could see the new $100 minimum amounts showing.

Now that July has rolled around, I will wait for the first down day on the market and try and add $100 each to these funds and see if it lets me.

What the heck is Janus Contrarian?

When I noted the market was tanking today, I decided to make my hypothetical investment for June in the second fund of the "WylieMoney Slowly" portfolio. In this portfolio I am adding one of the 20 funds I researched each month, starting in May 2007. money

The second fund I originally chose was a Global Equity fund: MDISX. money

Well according to Etrade, this fund is closed to new investors:

But according to Morningstar, this fund is not closed and is available through Etrade: money

Regardless of whether this is a mistake on Etrade's site or not, getting someone to help you is not worth the effort. money

So I decided to pick my original runner up, Janus Contrarian JSVAX. This brings me to the title for this post. money

Back in November of 2006, it was open to new investors and it was categorized as World Stock or Global Equity. But tonight, as I look it up, it is not. Morningstar lists it as Large Blend which means it invests primarily in Large Cap American companies. money

Morningstar also shows that it is a Large Cap Growth fund. Note the red dot.


But more curious to me is the allocation of 37.8% in non-American companies!


Why does this matter? Well funds are compared to their peers. So if your peers are domestic funds and you have been gaining profits from surging international markets, you are going to look great compared to your peers:


But if your peers are World Funds which invest in stocks all over the world, you are not likely to look as stellar:


Well MDISX is 70% invested in international companies so it certainly has more of an international focus now than JSVAX but JSVAX has a 39% turnover ratio so who knows what it looked like last December, much less what it will look like in 6 months. money

Regardless, I'm calling it a Global Equity fund and I added it to the WylieMoney slowly portfolio tonight as of today's closing price. money

Ummm Etrade... anybody there?

I went in to Etrade's Boston branch with a customer service question on May 25th, 2007. money

Mutual Funds allow different amounts for "Additional Minimum Investments" and "Additional AIP Minimum Investments." Morningstar.com lists these differences and lists Etrade as a provider for which these minimums apply. money

I tried to set up an AIP for SSEMX through Etrade's website and was told the minimum I needed to invest in the AIP was $1000, not the $100 listed on Morningstar's site. I called Etrade and was told that as soon as I paid the additional $1000 on top of the $2500 I already invested when I first bought the fund, THEN I would be able to lower the AIP to $100. money

I then did research and other funds I own did not charge me an additinonal "Initial AIP Minimum", if I already owned the fund so what I was told was not consistently true in the interface. money

So like I said, I went to the Branch office on 5/25/07 and explained the issue to a representative who understood, agreed that the answer I got over the phone was not consistent with what we saw in the interface and forwarded the question to people people who would be able to figure out what is going on. money

I have yet to get a follow up. money

I called the Boston Branch phone number a couple of times but have yet to reach a person. Today I left a message. Then I called Etrade's main customer service line and got a customer service rep who looked up the extension of the person I spoke with at the downtown Boston branch and gave it to me and I called that number and left a message. money

Please call me and let me know the answer to my question- Why can't I set up an AIP plan using my funds "Additional AIP Minimum" amount of $100? money

FYI- the AIP page on Etrade's site says "Automatic investments require a minimum investment of $100 or the fund minimum, whichever is greater." money

Lazy Portfolio continues to catch up

With today's nice sell off, the Lazy portfolio made up more ground, but the WylieMoney portfolio held on to its tenuous lead with a 1.98% increase since I invested on May 1st. money

I have added a summary over on the right which I will update going forward. money

Today is the day I am adding fund #2

Today is the day I am adding fund #2 to the WylieMoney Slowly portfolio. Sadly, fund number 2, MDISX has closed to new investors through Etrade. It does not appear to have closed to new investors in general and Morningstar shows it available through Etrade, but you can't buy into it through their interface so I am adding a different fund (JSVAX). I'll explain more later tonight. money

A chart for Ian

Ian gave me grief about a lack of charts so here you go. So far, everything is tracking pretty close together so the chart is not terribly informative. I did try to make it pretty...

Managed Mutual Funds, Index funds and ETFs...

...are going every which way these days. Since I first invested, the WylieMoney portfolio wins. Year to date, the Vanguard portfolio is ahead. And today, ETFs did the best. I will invest in fund #2 sometime this month when the time is right. money


I am still waiting on a response from Etrade and will try and follow up tomorrow at lunch.

I'm also switching my employer sponsored retirement plan from one of our two options to the other. I'll explain why soon. money

Finally, I leave for New Orleans this weekend and plan to write about the trip here! money

WylieMoney Portfolio continues to slide

Close call, but the Vanguard funds beat my picks by .02% today. My funds are still ahead since my 'purchase,' but year to date they are tied. ETFs continue to fall behind. MONEY

Mostly Managed Portfolio Loses Ground...

...but still remains in the lead! MONEY

First of all, last week I went to Etrade's office in downtown Boston and explained my issue to Justin, who forwarded it to the 'Mutual Fund Department' with a link to this site. So if you are here looking for the details of my issue, click here or on the link in the upper right corner. Basically your site is not allowing me to set up an AIP plan with the additional minimum for AIP plans for the fund SSEMX which is $100. MONEY

On to the competition! MONEY

As of today, the WylieMoney portfolio is still ahead, but not by much. I think today's slight under performance is due to some dabbling of a few of my fund managers in emerging markets which did poorly before American markets caught fire. The year to date totals for WylieMoney and Lazy are remarkably close. I wonder how long that will last. MONEY

Anyway, I made a little chart of the the random dates that I have managed to document the total value of the accounts. This does not represent day to day performance as I only have totals from 8 days over the last month, but once I have several months of data, the graph should be loosely indicative of trends. MONEY

Etrade, don't do this to me!

Arrrrggghhhh. MONEY

On this site I have put together a pretty detailed hypothetical portfolio available for purchase through Etrade. I have not gone into great detail about if I would actually buy these funds if I could or if I own any of them. MONEY

I do own some of them but I do not own all of them. Some of the categories I researched here, are categories for which I already own a Mutual Fund that I bought years ago. Even though the fund I picked for this hypothetical portfolio might look a little better than the fund I own, it is not worth it to me to sell my fund and pay the capital gains tax and then invest the leftover money in a new fund, at this point in time. Also I do not own funds for each of these 20 specific categories. MONEY

One of the funds I do own is SSGA Emerging Markets SSEMX. I bought it back in May of 2006. I have also managed to save enough to add $100 to my initial investment at a couple of points since then (not every month though!). Since I bought it, my holdings in this fund have increased 27.46%! Not bad for one year. MONEY

This is a risky fund and that risk has been well rewarded over the short term. I imagine it is only a matter of time before Putin does something so un-democratic that western investors balk and sell Gazprom in droves or China's speculators finally try and jump ship or Chavez convinces the rest of South America to 'reclaim' their private businesses. I do not know what it will be, but something will send emerging markets into a downturn. MONEY

In fact, yesterday, SSEMX was my second biggest loser down -2.03%. My biggest loser, if you're curious, was PNRZX. If you click that link, you'll see that PNRZX has been on fire over the last 5 years. I personally have only gained 10.30% since buying in just over a year ago. Not too bad, but not great given the recent gains I missed out on. My only fund that increased in value yesterday was BTTRX, a WylieMoney pick, up 0.14% on the day. MONEY

Even though I do not think it necessarily the best time to buy an emerging market fund specifically, I did try and add another $100 to my holding several days ago and was denied.

The entire reason I bought this specific fund and recommended each of the WylieMoney funds over sometimes better funds in each category is the $100 minimum for additional investments. I am still trying to figure out what happened here, but the last time I added $100 to this fund was in February. Now the minimum that Etrade is letting me add to my holding is $1000. So something changed in the last few months. Despite trying to save and invest as much as I can, I cannot afford to add $1000. And I should not have to darn it! Here is what Morningstar claims the fund allows: MONEY


What I suspect happened was that SSEMX changed its 'Additional Minimum Investment' to $1000 recently. You can see above it is $1000 now- I do not remember if it was that way before February. Fine. Gone are the days I can add $100 whenever I have the $100 to add and think the timing is right. I am willing to set up the Automatic Investment Plan or AIP for this. The Additional AIP minimum is listed as $100. MONEY

Etrade allows you to set up an AIP that invests in a few different intervals: MONEY


If I can come up with $400 a year to add to this fund, I could choose the "Quarterly" option and be all set, right? Not so fast! Here is a picture of the option I get when trying to set up the additional AIP investments: MONEY


So I called Etrade and here is what they tell me. Despite the fact that I already paid at least an initial $1000 when I first invested, to set up an AIP now, I have to pay another $1000 before I can reduce the AIP investments to $100. Since you can start and stop an AIP at anytime, this leaves me wondering if I should not have just bought the fund through this screen and set it up with an AIP plan for once a year that I never intended to make on that schedule and then just adjusted the frequency and amounts as desired. MONEY

But this does not make sense. I should not have to pay different amounts based on which screen I used to buy the fund. Does this make sense to anyone else? Do all brokerages and funds that have different minimums for AIPs and and non-AIP subsequent purchases make you pay a separate 'Initial Investment Amount' to both buy the fund initially and then set up the AIP as well? MONEY

This is not what is going on at Etrade either, at least not consistently. Another WylieMoney recommended fund I own is American Beacon Large Cap Value Planahead AAGPX. Here are the details for this fund from Morningstar:



So to set up an AIP to automatically invest $50, I should have to first pay another $2500. But I don't. Here is my option in the drop down menu: MONEY


I'm going to try approaching Etrade again and see if I can find out more. MONEY

Mostly Managed vs 'Lazy' Vanguard Index funds

I promised weekly updates and failed. I'll try and come up with a good system I can keep on top of.

My negligence is not due to shame from the WylieMoney portfolio lagging behind. Far from it. Not only is the Wylie portfolio ahead since I 'hypothetically invested' in it, it has pulled ahead of the lazy portfolio year-to-date as well. Also, I realized that the reason the ETF portfolio appeared to be ahead of all the portfolios was that a few of the options, including two of the Bond funds, have not existed for a year and were being left out of the calculation so I am leaving out the ETF YTD number.

I included today's performance as well. The one-fund WylieMoney Slowly 'portfolio' is way ahead both year to date and since I 'invested' but note that its loss today is over twice that of the more balanced portfolios. And when I add the second fund in June, a Global Equity fund, I do not anticipate it will settle down...

Here are the details of each Portfolio. Click the image for a larger view:

WylieMoney

WylieMoney Slowly

ETFs

Lazy

P

Oh yea... and Managed funds win again!

I was kinda curious what would happen when the US Markets took a dive like they did today. I am pleased to report that the Wylie Portfolio won, losing hundreds of dollars, but not losing as much as the "Lazy Portfolio" of Vanguard funds or the ETFs.

Managed funds beat index funds and ETFs!

Nice title eh?

On 5/01/07 I hypothetically invested in a portfolio of mutual funds you can buy through a single brokerage for no commissions with a $2500 minimum in each. For comparison I invested in corresponding portfolios of Vanguard Index Funds- the "Lazy Portfolio" (which you can't do- they require $3000 each to start) and ETFs (which require commissions). I also invested in a single fund from the 20 mutual funds and plan to add an additional fund each month for 20 months.

I have not decided how often I will provide updates or in what format exactly so for now I will keep it simple and once a week.

For the first week, the Wyliemoney portfolio of mostly managed mutual funds, available through Etrade, beat the Index and ETF portfolios. Note that year-to-date, the ETF and Index portfolios win. I am not paying too much attention to the single fund or "Wyliemoney Slowly" portfolio until I add a few more funds.

The Real Scoop- Managed Funds, Index Funds or ETFs?

I just invested $152,824.12. (Hypothetically)

As promised, I have invested $50,000 in the Wylie Portfolio, $50,000 in a portfolio of Vanguard Index funds, $50,000 in a portfolio of ETFs, and $2500 in the first Wylie fund of the Wylie Portfolio. By first fund, I mean the first fund I picked: NTIAX. The extra $324.12 comes from fees required for the ETF portfolio and the exact cost of each ETF position being a little more or less than $2500.

So we have a portfolio of assorted managed funds and a few index funds you can buy through etrade for no fees, a portfolio of Vanguard index funds that you can't buy through Etrade or Vanguard for any fee because each fund has a $3000 minimum. I only invested $2500 to make the comparison simple. We have a portfolio of ETFs you can buy through Etrade for $12.99 each. And we have a version of the mostly managed portfolio I will add to one fund per month.

The purchase dates for all these portfolios is the price as of closing on 5/1/07. So if you have your own portfolio you want to compare to these, go to morningstar and create your own portfolio and enter your purchase at the price from 5/1/07. It is easy to look up historical prices. One way to do this is to go to Yahoo Finance and look up your fund or stock and click the "Historical Prices" link.

So far, the Wylie Portfolio invested in just one fund is in the lead, up 1.44% and the entire Wylie Portfolio of 20 funds is up 1.09% compared to the Vanguard Portfolio which is up 1.02% and the ETFs which are up .46%. Note that Year to Date, the Wylie Portfolio is in last place:



Some of the ETFs have not been in existence since 1/1/07 so I am not going to put too much creed in that figure as it is not an equal comparison. I'm also not going to put much creed in performance of two days. We'll see how things look in a bit.

Here are the portfolios. Click the image for a larger view:

Non-Retirement: Inflation Protected Bond Mutual Fund

Wylie Pick: American Century Inflation Adjusted Bond inv ACITX

Selecting from mutual funds available through Etrade with no load or transaction fee and an initial $2500 investment or lower minimum and subsequent $100 or lower minimums, when looking for an inflation protected bond fund, I use the Mutual fund screener and find one.

Back in November of last year I started this project. This is the 20th fund and it is the last pick for this portfolio.

It looks pretty average all around. Expenses are a fairly low 0.49%. It gets three stars- average returns with average risk.

Actually if you look at it using Morningstar, it looks like it is slightly ahead of its category and its peers. Regardless, we are not talking about spectacular returns. Hopefully it will stay average. If this category performs really well, that will likely mean that inflation is out of control and that might be good for this fund, but the rest of the funds, not to mention the economy might be less amused.

So there is only one option, but it serves our need so ACITX is the pick!

Non-Retirement: Foreign Large Cap Blend Mutual Fund

Wylie Pick: BlackRock International Index A MDIIX

Selecting from mutual funds available through Etrade with no load or transaction fee and an initial $2500 investment or lower minimum and subsequent $100 or lower minimums, when looking for another Foreign fund, I include all International Foreign Category Funds and use the Mutual fund screener to a number of options.

I was planning to choose a Foreign Small/Mid Cap Value fund to balance against the Foreign Small/Mid Cap Growth fund already selected. Sadly, there is only one available through Etrade to new investors and I do not like the looks of it.

ICON International Equity I IIQIX is listed as a Small/Mid Cap fund, but then is also listed (yes, both links go to the same page!) as a Large Cap Blend fund that recently changed from being a Large Cap Growth fund. The average market value of companies held by the fund is $15 billion. A small company fund this ain't. And it may be focused on value companies or growth or both. Now we could dive deeper into this and try and figure it out, but why bother...

The expenses on this fund are 1.71% which is higher than any of the other Foreign funds across all categories. The turnover ratio was also higher than all other funds from this search and that is only acceptable if performance is stellar on a comparative basis and it is not. It has slightly out-performed one of the benchmarks it claims to track, but has underperformed the average of its peers in this group:


So instead of a Small/Mid Cap company fund I'll chose a Foreign Large Cap Blend fund to compliment the Foreign Growth and Value funds already in the portfolio and I'll ignore the ICON fund because of high expenses and turnover.

Among Blend funds we have 6 choices and really 2 choices that stand out. And upon further investigation, one of these two funds- SSgA International Stock Selection SSAIX is listed as a Blend fund but is also listed as a Value fund and has been a operating as a Value fund for many years. I already have a value fund so I am going with the other choice.

I'm starting to wonder if all of these category designations are being manipulated to represent performance in a better light than is legit. Funds are often measured against their peers, but if a fund is compared against peers in a category other than the one in which it invests, then the comparison is not really valid and perhaps fraudulent.

Anyway, BlackRock International Index A MDIIX is a foreign blend index fund. It has lower than average expenses (0.81%) and turnover (23%) which one expects with an index fund and has performed better than all the other legit Blend funds available over the last year.

When to buy Mutual Funds Part III

In Part I we pondered the issues involved in deciding when to invest. In Part II we looked at a few tools and discussed some strategies to help gauge what shape the market is in. In part III we will work out a system to invest in the wylie hypothetical portfolio of 20 mutual funds.

To make the initial investment in the 20 funds I am picking, I would need $50,000. Many of these funds have $2500 initial investments, so I plan to make a hypothetical initial investment of $2500 across the board to keep things simple. Hey- it is only hypothetical money, after all.

If I was investing my hypothetical $50,000 and it was mid to late 2002, I would invest it all right away. Indeed, in 2002, I did invest the savings I had set aside to invest, as soon as I was sure I could leave it invested for a while. I wish I had $50,000 real dollars to invest in a portfolio like this at that time as many of these funds are way up over the last 5 years.

That said, I do not think today is a terrible time to invest but also it does not feel like the best time either. So to invest my $50,000 hypothetical dollars, I will invest $2500 in one fund at a time, once every month. This will spread my initial investments out over almost two years.

I also plan to invest all $50,000 in a separate portfolio, right away and I will see after the fact which approach was better.

Once I make the minimum initial purchase for each fund I will add $100 to each fund or $2000 per month into the entire portfolio. And I will keep an eye on the market and the first day each month that markets are down about 1%, I will make that subsequent purchase. Etrade actually lets me do this for now. The $100 minimum for additional investment into mutual funds is often listed as being contingent on setting up an Automatic Purchase Plan, but I have found that I can pick the day myself and make the purchase manually for mutual funds I own (which again is not all 20 of these!).

I will invest these funds in two hypothetical portfolios in Morningstar's portfolio tool, unless I find a better one by next week.

Now some of you are saying- "I do not have $50,000 or $2000 extra a month to invest so what do I care" I tried to pick funds in a specific order such that one could invest any amount between $10k and $50k and still employ a system like this one. For example one could put $10,000 in a wylie portfolio of 4 funds. Then, if one could save $400 hypothetical dollars every month or every other month or even every quarter, one could still use this system- though there is no guarantee you won't lose gobs of money so do your own research and take responsibility for your own investments!

I'll try and work out how hypothetical portfolios of fewer funds perform as well.

Finally, I want to compare my list of Etrade's best no load no fee mutual funds (in my opinion!) against a similar portfolio consisting of Vanguard index funds and also against a portfolio of ETFs.

If all the work I did picking mutual funds does not lead to a portfolio that outperforms what could be easily done with simple index tracking, that will be good for me to know when I do have $50,000 real dollars saved up after I stick with all our tips for living cheaply!

So to do this, I need to finish picking the 20 funds. I hope to set up the portfolios starting in May so expect a few more posts soon!

When to buy Mutual Funds Part I

It is often said, "You can't time the market."

What does this mean?

In general it means you never know what will happen tomorrow.

If you thought the market was ready to slump after its nice run up before 1999 and not invested in the beginning of 1999, in some cases you would have missed the largest one year returns we may ever see in our lifetime. Data courtesy Yahoo Finance for Janus Global Technology fund:



By all accounts, many of the stocks in this fund were trading at prices way above historical averages given what the underlying companies were earning, even before they proceeded to double in value in less than a year.

Stock prices and therefore fund prices are not driven by fundamentals, but by what people are willing to pay. Many people determine what they are willing to pay based on fundamentals, but many people do not. And in either case you still have to guess how you think the economy will do in the future. Had you invested at the beginning of 2000 thinking that this is a new economy and historical valuations do not apply because technology is going to enable corporate growth to expand at levels never before imagined, you would have been very sad by the end of 2002. Again consider Janus Global Technology:


Since 2002, markets around the world have gone up, almost across the board. Small and large company stocks have increased. Growth and value oriented companies have done well. Historically when oil prices have soared, economies have struggled as the added cost of manufacturing and transportation have been factored into the price of goods, lowering sales or reducing profits. Recently this has not been the case as companies across all sectors have grown and earned significant profits. Some claim tax cuts in the US are the cause, but European markets despite much higher taxes have trounced American markets so I am hesitant to attribute any single factor to these trends. Despite a long run of gains, stock price valuations are nowhere near as high as they were in 2000. So what does all this mean?

Beats me, I'm a philosophy major.

Some claim that current valuations are too high as they are calculated anticipating that above average growth will continue for a while which is possible, but unlikely given historical trends.

Some think the economy is ready to pick up steam. Would you trust this guy?


Others say things are not good, not bad.

One of the reasons the hypothetical portfolio I am creating here only holds funds that allow $100 or smaller subsequent investments is to not have to figure out how to time the market. My thinking is that if I buy a fund and contribute $100 every month, every 2 months or once a quarter, the exact timing of each purchase will not have a significant impact over the long term as the cost of the overall holdings will be the average of each purchase through up and down markets. If the sector the fund invests in grows and the fund managers make good picks, I should come out ahead.

I agree that you can not time the market, but you do have to determine a time to make the initial investment. And no advice works in every situation. If you had cash to invest in January 2000, the notion that you can't time the market so just buy when you have the cash, would not have been good advice. So even though I agree with the claim that you can't time the market, there are, good and bad times to invest and more importantly good and bad strategies for investing. And even if you buy into the Wylie idea of regular contributions, you still have to make the initial purchase which for the funds I am looking at are often a minimum of $2500.

So even though you cannot predict how markets will perform there are a couple of tools out there that you can use to see if it is a good time to buy or not and hopefully avoid buying at a market peak.

In part II I will talk about these tools and lay out a strategy for hypothetically investing in the Wylie hypothetical portfolio. Then I will pick the last few funds necessary to round out the portfolio and begin tracking the performance of the portfolio.

Non-Retirement: Small Cap Blend Mutual Fund

Wylie Pick: Dreyfus Small Cap Stock Index DISSX

Selecting from mutual funds available through Etrade with no load or transaction fee and an initial $2500 investment or lower minimum and subsequent $100 or lower minimums, when looking for a Small Cap Blend fund, I use the Mutual fund screener to screen out options with 3, 4, or 5 stars and find a number of choices. money

There are a few index funds and a number of actively managed funds two of which are recommend by Etrade. Like the Mid Cap Blend pick, I am going to pick an index fund in the Small Cap category for a couple of reasons. The Small Cap Growth and Value picks are both actively managed so if Wylie were to actually buy these funds, an index fund would be a good diversification next to these. money

More importantly, the managed funds are more expensive, generate more tax exposure and have not consistently out-performed to overcome these negatives. money

Allow me to illustrate:


The expenses and the turnover of the Index fund are less than half those of the two actively managed funds. money

When you use Yahoo charts to look at the year to date performance of these three funds, the index fund (blue) is off to a rough start. It is upu for the year, but trailing the competition.


Jump back to mid 2002 and buy in and the index fund actually comes out ahead. money


Looking at the performance record, each fund has underperformed the other two during one of the periods over 1, 3 and 5 years. money

Given the solid long term record, lower expenses and turnover, Dreyfus Small Cap Stock Index is the Wylie pick. money