Big Money Placing Bets on Continued Rally

Mutual, pension and hedge fund managers have been investing large quantities of cash in the market in recent weeks, and while the pace of their buying has been slowing, it appears to indicate their faith in a continued rally, Reuters reports.

In the week ended July 21-when the Dow Jones Industrial Average gained 600 points to reach 8,915, many corporate earnings continued to beat estimates and previously owned home sales increased for the fifth month in a row­-mutual funds and pension funds placed $1.9 billion in the market, according to Thomson Reuters. The following week, as the Dow continued to hover around 9,000, they bailed out of $578 million worth of stocks, but hedge funds invested $19 million.

"There is some momentum lost among pensions and mutual fund investors, but the move is still generally positive," noted Jeff Shacket, vice president of corporate services at Thomson Reuters. "These buyers are saying that this market is going to go higher, not lower, anytime soon. There is some confidence on the part of long-term investors that we won't have a bad second half," Shacket added. "All of this suggests how investors overreacted to the downside during the first quarter."

Then, last Monday, the Standard & Poor's 500 Index broke above 1,000 on the news of a government report that construction spending rose in June and another report predicting manufacturing will grow next month.

"The market is beginning to smell economic recovery," Howard Ward, manager of the GAMCO Growth Fund, told the Associated Press. "It may be too early to declare victory, but we are well on our way."

75% of Retail Investors Move Savings Into Stocks

Individual investors are regaining confidence in the stock market and increasingly taking investing into their own hands, a survey of 450 retail investors by online broker Zecco shows.

Seventy-five of the respondents said they were investing cash from their savings or checking accounts, or which was lying fallow, and 72% believe the Dow Jones Industrial Average will continue to rise in the next six months. Among this group, 42% said it will rise more than 10%, and 30% expect gains of between 1% and 10%.

Fifty-one percent said they were doing their own extensive research before buying a stock, with 58% saying they relied more on news and television reports than they did their own brokers. Thirty-two percent said they are trading more now than they were six months ago.

"The survey shows the degree to which investors are becoming self-sufficient," said Jeroen Veth, chief executive officer of Zecco. "Despite the financial crisis and massive loss of wealth in the stock market, the individual investor is feeling empowered and confident in his or her ability to do their own research, analyze the market and make intelligent investment decisions."

The survey was conducted the week of July 26 via e-mail to randomly selected Zecco customers.

Only 39% of Investors Have Rebalanced Portfolios

Perhaps as a testament to investors taking a more proactive interest in their investments rather than wallowing in inertia, 54% say they have become more knowledgeable since the market downturn, Charles Schwab found in a survey. Despite this, only 39% have changed their portfolio allocations since the market began to decline.

Thirty-one percent said they now speak with their broker or financial adviser on a regular basis. On the other hand, 36% didn't know which mutual funds they own.

"When market volatility occurs, it presents a great opportunity for individuals to increase their levels of engagement in how they manage their investments," said Peter Crawford, senior vice president for investment management service at Schwab.

"As a time when people are probably in need of more guidance, we encourage investors to ask questions and seek out a deeper relationship with their broker or consultant," Crawford added. "Greater engagement will help ensure individuals maximize the opportunities that are available to them."

Schwab's survey was conducted in April among 602 mutual fund investors age 18 and older.

Strong Fund Investors Will Finally Receive $154M

Five years in the making, it appears that Strong Funds investors who were harmed by mutual fund market timing may soon receive their share of the $154 million settlement.

The Securities and Exchange Commission has published a disbursement proposal for the 24 funds affected on its website. The plan was devised by independent consultant Michael R. Gibbons, a finance professor at the Wharton School at the University of Pennsylvania.

The plan notes that the original settlement, reached with Strong Capital Management, its former CEO Richard S. Strong, and executives Thomas A. Hooker, Jr. and Anthony J. D'Amato, was for $140 million, but with interest, it has grown to $154 million.

While other investors have long since been repaid from damages done to their returns from market timing, the Strong case was complicated, explained Robert J. Burson, associate regional director of the SEC's Chicago office.

Asset International Acquires Strategic Insight

Asset International has acquired Strategic Insight for an undisclosed sum.

Asset International CEO Jim Cassella will become the new CEO of Strategic Insight, succeeding Joel Rosenthal, 70, who is retiring.

Cassell said, "Our team at Asset International and our partners from the private equity firm Austin Ventures see many opportunities for Strategic Insight to expand its highly respected services, both independently and in collaboration with other AI business units."

AI publishes Plansponsor, Planadviser, Global Custodian and The Trade.

Mass. Subpoenas Brokers On Leveraged ETF Sales

Massachusetts regulators have subpoenaed four brokerages to obtain sales, revenue and training records for leveraged exchange-traded funds. The four are: Ameriprise, UBS, LPL and Edward Jones.

However, Amerprise, UBS and LPL had already suspended or curtailed sales of the products in recent weeks, apparently responding to investigations by the Financial Industry Regulatory Authority and Massachusetts into the products. Charles Schwab has just warned investors about the products, and Morgan Stanley Smith Barney is reviewing sales of the products.

Due to the heightened volatility of the stock market over the past year, 55% of leveraged ETFs and 88% of inverse ETFs have delivered the opposite performance of what they are designed for, according to Morningstar data. Thus, as Morningstar Director of ETF Analysis Scott Burns said, the performance of leveraged and inverse ETFs becomes somewhat "less trustworthy."

Regulators are concerned that investors may not understand or fully appreciate the products' risks, since the number of these funds has increased 86% over the past year and a half to 119 with $32.8 billion in assets, up from $11 billion at the start of last year. Regulators attribute the strong growth to aggressive marketing.

More Mutual Funds Expected to Adopt Hedging

Of the 132 mutual funds on the market that employ hedging strategies, nearly half have been launched in the past three years, and in light of the 39% average decline in stock funds last year, more are likely on the way, The Wall Street Journal reports.

Some short the market. Others arbitrage or use options, and some employ an overall absolute-return or market-neutral strategy.

Given the fact that the average hedge fund declined by only 20% last year, some analysts, including Morningstar's Nadia Papagiannis, welcome the development. "These are strategies that should have been offered to retail investors a long time ago," she said.

However, investors should be warned that investment strategies in these funds vary widely, not to mention that they assume additional risk, fees are higher than a regular mutual fund, and few have proven track records.

Still, as The Journal put it, "The landscape of hedge-like mutual funds could eventually become as crowded as the actual hedge fund universe."

Fidelity Joins Growing Chorus on Leveraged ETFs

Fidelity Investments has joined the growing chorus of fund companies, brokerages and regulators warning investors about potential outsized losses in leveraged exchange-traded funds due to the effect of compounding.

"Leveraged products are complex, carry substantial risks and are intended for short-term trading," Fidelity warns investors on its website. "Most reset daily and seek to achieve their objectives on a daily basis. Due to compounding, performance over longer periods can differ significantly from the performance of the underlying index."


(c) 2009 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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