Sunday Musings: Going Active

Ulli Uncategorized Contact

MarketWatch featured an interesting article titled “ETFs may give mutual funds a run for the money.” Let’s listen in:

We’ll soon find out if exchange-traded funds can live up to the hype and “replace” the traditional mutual fund.

The big headline news this week was BlackRock Inc. agreeing to buy Barclays Global Investors in a $13.5 billion deal. But the history-changing news was the registration of four new actively managed exchange-traded funds.

Most ETFs are index funds, and not portfolios based on manager intuition and research.

Grail Advisors, which develops ETFs, is looking to change that. The investment firm plans to launch four funds to be managed by RiverPark Advisors, where top management team previously was involved with the Baron Funds.

Bill Thomas, Grail’s chief executive officer, highlighted some clear reasons why investors could flock from traditional funds to actively managed ETFs.

“First, there’s the lower expense ratio of the ETF versus a mutual fund, so that you get the same expertise but at a lower price point,” he said.

“Then, there is transparency, the ability to know what is going on in the portfolio on a daily basis. The third advantage is that the ETF structure is more tax efficient than a mutual fund, and the fourth is liquidity, where you can trade on a moment’s notice. We now live in a world where you can trade 24 hours a day; why would you want to be in an investment vehicle that only trades once a day?”

For years, there has been back-room talk of how some traditional fund managers — particularly those struggling to attract assets and achieve the critical mass necessary for long-term success — might go through the conversion process and “go ETF.”

Still, active ETFs have to prove that they can back up the hype.

ETF supporters believe their vehicle is “the way to go,” but an ETF is still a mutual fund. Better platform — but the same underlying concept. Active managers can lag the market whether they run a traditional fund or an ETF.

So the next phase in the ETF revolution will be an explosion of active funds, but an investor who prefers managed funds shouldn’t join the revolution until they believe that an active ETF is superior to the traditional funds they hold.

I am all for alternative investment solutions, especially if they offer the individual investor freedom of choice. To me, that simply means getting them away from the world of ridiculous short-term redemption fees and minimum holding periods so common in the mutual fund industry.

If the competition between ETFs and mutual funds heats up, everyone will be better of with improved product choices and less restrictions. Eventually, mutual fund providers need to come off their high horse if they are to remain in business and compete successfully with ETFs.

Having said that, I also need to caution you that just because an ETF is actively managed, it will do no more for you than an actively managed mutual fund if you continue to follow the loser’s approach to investing by simply buying and holding.

2001/02 and 2008 have proven that it does not matter what investment you are involved with, or which fancy asset allocation model you were sold, they all went down with the bear market.

Actively managed ETFs are just like mutual funds in that it is still up to you to make appropriate investments decisions (or hire someone who will do it for you) as to when to be in the market and when not.

If you think that actively managed ETFs can take that responsibility from you, you will be sadly mistaken when the bear rears its ugly head again.

New Funds For The Fearful

Ulli Uncategorized Contact

MarketWatch reports that “Bear Market brings new funds for the fearful:

After last year’s market meltdown savaged just about every U.S. and international asset class, many investors have concluded that traditional portfolio diversification is not only discredited, but pure bunk.

In an appeal to these skeptics, some mutual-fund firms have introduced products they claim provide greater protection in bear markets than traditional balanced funds that blend stocks and bonds.

Firms say that investors can find comfort in these new funds, knowing that losses will be minimized and risk-awareness increased. But critics point to the higher fees and lack of a track record for some of these portfolios, and question the need to tinker with established investing formulas.

“I’m quite skeptical of any fund that says you can have your cake and eat it, too,” said Leo Marzen, partner at New York-based wealth manager Bridgewater Advisors Inc.

Among the new-style mutual funds launched this year are so-called absolute-return funds from Putnam Investments, and the AIM Balanced-Risk Allocation Fund, an asset allocation fund from Invesco Ltd. that invests according to risk-management techniques.

Absolute return is a strategy that shoots for positive returns regardless of market conditions. The problem, say critics, is twofold: There’s not much wrong with mainstream investing strategies that a tweaking of asset allocations can’t fix, and 2008 was such a bad year that everything suffered.

“A lot of this is just a reminder that really nothing worked last year,” said John Coumarianos, a mutual-fund analyst at investment researcher Morningstar Inc. “Treasuries were the only thing that held up.”

[My emphasis]

Read the highlighted part again. The ignorance and cluelessness is absolutely mindboggling.

To state that “there is not much wrong with mainstream investing strategies that a tweaking of asset allocation can’t fix” has to go down as the most stupid statement of the year. I would like to see a sample of that tweaked asset allocation. Tweaking it how? By adding a different menu of bullish funds and hoping they will fare better during the next bear market?

Yes, everything asset class suffered in 2008. Moving to the sidelines, and staying in cash, was the only way to survive the bear. But that is something you will never hear in the mainstream media and certainly not from Morningstar.

Be very aware of the pitfalls when you read articles like this one and look at the “new funds” with a grain of salt. Chances are that this is just another attempt to keep people investing when common sense (and Trend Tracking) tells you, you should be out of the market altogether.

No Load Fund/ETF Tracker updated through 6/18/2009

Ulli Uncategorized Contact

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

A sell off early in the week caused losses for all major indexes.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +1.08% keeping the current buy signal intact. The effective date was 6/3/2009.



The international index has now broken above its long-term trend line by +8.75%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.



[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Unleashing Creativity

Ulli Uncategorized Contact

President Obama attempted to unleash creativity by announcing the widely anticipated new regulations designed to overhaul financial markets.

The new regulations would increase some of the powers of the Fed but also add another layer of bureaucracy via a newly created consumer protection agency.

For some straight talk, please read Mish’s commentary at Global Economics titled “Obama’s Blueprint for Reform Concentrates Still More Power in Hands of the Fed.”

The market’s merely yawned and ended almost unchanged. Our Trend Tracking Indexes (TTIs) barely moved, and we seem to have reached a point of equilibrium. With no apparent driver to propel the indexes higher, the path of least resistance could very well be to the downside.

Nobody knows for sure, so we are content tracking our sell stops and will let the market tell us what our next move is to be.

Slipping And Sliding

Ulli Uncategorized Contact

Monday’s market drop continued Tuesday as economic worries persisted.

The only saving grace for the bulls so far was that volume was very light again, and the S&P; 500 bounced off its 200-day moving average.

Our Trend Tracking Indexes (TTIs) all retreated and are showing the following positions:

Domestic TTI: +0.62%
International TTI: +7.92%
Hedge TTI: +0.03%

Weakness has definitely set in and pulled our international holdings off their highs. We will watch the sell stops closely and take action when our pre-set trigger points get pierced.

Coming Off The Highs

Ulli Uncategorized Contact

A variety of forces combined yesterday and pulled the major indexes off their highs.

Some kind of a correction was long overdue with the markets having enjoyed an extended run. It remains to be seen, if this is the start of something prolonged.

Judging by the low volume, it does not appear that way but, nowadays, you need to be prepared for the fact that anything is possible. We may very well enter a period in which neither wild fear is coming back into the market nor unbridled enthusiasm.

Our Trend Tracking Indexes (TTIs) retreated and are hugging their respective trend lines as follows:

Domestic TTI: +0.86%
International TTI: +8.79%
Hedge TTI: +0.27%

All buys signals remains if effect subject to our trailing stop loss points.