JPMorgan Finds Flaws in Target-Date Funds' Design
Some target-date funds are poorly designed, JPMorgan reports in a new white paper. First, rather than concentrating on providing income to a participant over the course of their retirement years, which may vary widely, JPMorgan recommends concentrating on replacing a percentage of a participant's income at the time of their retirement, since that is a date certain, whereas no one knows how long they will live.
As a standard, JPMorgan suggests that participants aim to purchase an annuity at the time of their retirement that will replace 40% of their income.
In addition, JPMorgan found, participants contribute less than expected to their accounts and borrow and withdraw more than earlier research has shown. Looking at the 1.3 million participants in its own plan, JPMorgan discovered that one in five participants borrow from their 401(k) plan and that the average loan is 15% of the balance. And at age 59-1/2, they begin withdrawing as much as 20% to 25% of their assets every year.
Because of this, JPMorgan believes that target-date funds should incorporate other asset classes to generate more predictable investment results.
Investors Still Waiting for Restitution From Scandal
Four years and $2.5 billion in fines later, regulators are still trying to figure out how to compensate investors whose assets were depleted by the actions of the late-trading and market-timing scammers, The Capital reports.
Even when they track down investors in the funds, regulators have to figure out exactly how many shares the investors owned when the timing took place-and how much that timing depleted the value of their shares. And then there are those investors who have since sold their shares, as well as those who held accounts through employer retirement accounts and whose identities cannot be uncovered.
In the end, the Internal Revenue Service may claim rights to taxes on the refunds and the cost of all of this calculation will be depleted from any refunds. No surprise, then, that many experts believe individuals will see no more than $10 returned to them.
In the meantime, many funds have argued that the best way to solve this dilemma is simply to return the refunds to the funds that were market timed.
Ironically, when the assets are returned to the funds-many of which knowingly permitted or solicited the wrongdoing-the money will reward those firms with higher fees.
Long-Term Funds Take in Record Amount in Jan., Feb.
Stock and bond mutual funds netted $110 billion in flows in January and February, the largest amount they have ever taken in during the first two months of the year, Strategic Insight reports.
International equity funds took in the largest amount of cash, netting $27 billion in January and $20 billion in February. In February, bond funds had $14 billion in inflows, while equity and balanced funds reaped $20 billion.
"These record net flows early in 2007 mirror an extraordinary confidence in mutual funds, and suggest that the periodic fluctuations in stock prices worldwide, unless spiraling downward, will not reverse fund investor attitudes and choices in the near term," said Avi Nachmany, Strategic Insight's director of research.
SEC Official Calls Stiffer Hedge Fund Rules a Given
The Securities and Exchange Commission will almost assuredly approve proposed rules that will increase the minimum assets an investor must have to partake in a hedge fund, Reuters reports. Currently, that's $1 million, inclusive of the value of one's home. The SEC wants to make that $2.5 million, exclusive of homes, and will most likely succeed, Jennifer McHugh, a senior adviser in the SEC's division of investment management, told the Council of Institutional Invsetors. The SEC will change the requirements in spite of thousands of investors' comment letters protesting them, McHugh said.
In addition, the SEC is considering applying anti-fraud rules to hedge funds and is also weighing imposing requirements for investing in a venture capital fund. "We'll be looking carefully at that issue, as well," McHugh said.
Finally, the SEC hopes to soon put behind it the long-debated issue of independent chairmen, she said. "I think it would be good for the fund industry if we could put that behind us," she said.
Utah Charges First Western, Four Brokers With Fraud
Utah Department of Commerce's securities division has filed a petition against First Western Advisors and two of its current and two of its former brokers for securities fraud.
Among the charges is recommending unsuitable investments, giving false account information to clients and attempting to present false client testimony to the Securities and Exchange Commission. According to Utah regulators, the brokers had their clients sign disclosure statements saying they were fully aware of their actions all along.
According to the suit, the four brokers invested more than $20 million in client money in Class B shares in order to earn higher commissions and attempted to make the clients believe they were invested in Class A shares by sending them Morningstar snapshot reports for Class A shares.
The petition also charges First Western with failing to maintain accurate books and records and not properly supervising the brokers.
At Least 288 ETFs Await Approval from the SEC
At least 288 exchange-traded funds have registered with the Securities and Exchange Commission and are awaiting its approval, The Wall Street Journal reports. If approved, it would boost the 460 or so ETFs currently on the market by more than 60%.
The offerings include those focused on international markets, sectors and commodities. Ninety-six of the filings are long and short funds from Rydex Investments.
As of the end of January, ETFs had $431 billion in assets, up 43% from $300.8 a year earlier, according to data from the Investment Company Institute.
Mutual Funds Increasingly Turn to Hedging Strategies
Mutual funds are utilizing popular and successful investment strategies from hedge funds more and more, according to the Economist.
There are three types of mutual funds that show hedge fund-like characteristics, said Todd Trubey, an analyst with Morningstar.
Market-neutral funds aim to make money in bad times as well as good; however, Trubey noted that it is hard to squeeze worthwhile returns from such a strategy without the leverage hedge funds have.
The equity long-short strategy is much more ambitious and involves bets on the direction of individual stocks. Shorting stocks is a risky game that can offer huge returns for some or be unsuccessful for others.
Lastly, a funds-of-funds approach combines a number of strategies in one product. Several invest in different hedge funds, while some mutual fund managers can gain access to unique accounts set up for them by hedge-fund managers.
However, financial specialty comes at a price, and the high fees of hedge funds are seeping into the mutual-fund arena. So far, the specialty products account for a tiny share of the $20 trillion global mutual fund market.
The overlap can only go so far, though, as the two products appeal and are marketed to different audiences. Mutual funds are heavily regulated and are geared toward retail investors, while hedge funds target the ultra-rich and institutional investors.
Only 1/3 of Mutual Fund Firms Satisfy Wealthy
Weak long-term performance, inconsistent returns and a greater focus on advisers than on investors at mutual fund companies are prompting wealthy investors to turn elsewhere, The Wall Street Journal reports. Only 11 of 38 top fund families, or less than one-third, have the loyalty of affluent investors, according to a report from Cogent Research. Cogent based its findings on a survey of 4,000 fund investors with at least $100,000 in investable assets.
"The findings show it's difficult for fund companies to produce consistent returns that investors can be pleased with," said Cogent Research Managing Director Chris Brown.
However, there "is a small group of firms that has been able to generate sufficient long-term returns to build investor loyalty," he said. Standing head and shoulders among them is Vanguard. American Funds, Davis Funds, Franklin Resources and JPMorgan Chase, which sell their funds through advisers, have managed to build strong support among investors, however.
Others that were commended by investors were Charles Schwab, Dodge & Cox, Fidelity Investments, Legg Mason, Riversource Investments and T. Rowe Price.
"Each of the firms earning top loyalty ratings is clearly communicating to investors that they're not going to chase hot returns, and they're dedicated to long-term investing," Brown said. "It's the consistency of fund performance that drives their loyalty."
Morningstar CEO Says:
No Immediate Acquisition
Although Morningstar has the finances to take on another acquisition-it recently completed four, three of them in 2006 and one last month-the company has no immediate plans to do so, CEO Joe Mansueto tells Reuters.
Instead, Mansueto said, Morningstar is focused on integrating the fund data business of Standard & Poor's, which it acquired last month for $55 million.
"Our core business is growing 20% a year last year, so we can have very fine growth without any acquisitions," Mansueto said. "We're in a fortunate position of not needing to do any. But if one came along, we're also ready to move forward and begin discussions. We've a strong balance sheet [and] we don't have any debt, so we're financially in a very strong position to do an acquisition."
Small Investors in Europe, Asia Embrace Hedge Funds
Much as in the U.S., small investors in Europe and Asia are flocking to hedge funds through windows such as hedge funds-of-funds and publicly traded investment firms that invest in hedge funds, The Wall Street Journal reports.
In the past year, even with a minimum investment of a mere few thousand dollars, such instruments have raised billions of dollars. More of these funds, aimed at retail investors, are being brought to market, typically with minimum investments of $6,000 or less. Europe's retail hedge fund market grew 32% in 2006 to $216 billion, according to FERI Fund Market.
"Retail investors have embraced hedge funds for the same reasons pension funds, institutions and high-net-worth individuals have," said Omar Kodmani, senior executive officer at Permal Group, which manages $29 billion in hedge funds-of-funds. "It's a diversification strategy and a way of accessing talented managers."
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