Insured Bond Funds Quietly Outperform
DALLAS-As the subprime mortgage crisis unfolded in the latter part of 2007 and took its toll on the municipal market- specifically the bond insurance industry-one sector of tax-exempt mutual funds was quietly outperforming all other categories.
In the fourth quarter, in all of 2007, and even in two-year trailing returns, insured municipal debt funds performed better than all other categories, according to Lipper. These funds are also benefiting from better inflows when compared to other muni fund categories, according to AMG Data Services.
Lipper reports that in the fourth quarter of 2007, cumulative total reinvested performance for the 53 insured muni funds with $11.2 billion of assets under management was 0.57%. For general muni debt funds-Lipper tracks 248 funds with $82.3 billion of assets under management for this category-the return was 0.07%. For the 105 high-yield funds with $46.9 billion, the return was negative 2.51%.
With solid performance compared to other categories, insured funds had better flows. AMG reported on Jan. 10 that the four-week moving average of inflows for insured municipal mutual funds was $4.8 million. The four-week moving average for all muni funds was an outflow of $593.7 million. On Dec. 5, the four-week moving average for insured funds was positive $9.2 million, whereas the same average for all funds was negative $156.5 million.
Sickly Adoption of HSAs
Despite bankers' best efforts, a report finds that health savings account adoption is falling short of expectations.
Companies like UMB Financial have been trying to breathe life into adoption of HSAs by improving their educational materials and making technology associated with the accounts easier to use.
Dennis Triplett, president of UMB's healthcare services unit, said its recent drive to create posters, sample e-mails, postcards and other materials to be distributed to employees on disks about the accounts has been a critical tool in the race to gain scale in the still-young business line.
The confusing nature of the accounts and the accompanying high-deductible insurance plans have emerged as two central impediments, Triplett said.
"I don't think there's been enough emphasis on education" at banks, insurers and distributors, he said. "It could be the most critical piece."
UMB's health savings accounts grew 53% last year, but most large providers have found the early results disappointing.
The report, released early this month by Celent, argues that adoption rates have badly lagged expectations because would-be users are unfamiliar with and intimidated by HSAs.
But Triplett said that the $8.2 billion-asset UMB, which has 136 branches in Arizona, Colorado, Illinois, Kanasas, Missouri and Nebraska, has been skeptical of the bolder predictions floating around, and that the $100 million of health savings account deposits that the company had accumulated by the end of last year is a figure he had expected.
Kirk Hoewisch, president of HSA Bank, a Sheboygan, Wis., subsidiary of Webster Financial Corp. in Waterbury, Conn., said adoption at his bank has fallen 50% short of early projections.
The consulting firms upon which banks and others relied to gauge the industry's potential turned out to have been too optimistic, Hoewisch said.
"Based on predictions a few years ago, I think everybody thought HSAs would be more commonplace than they are today," said Hoewisch, whose bank, with more than 200,000 of the accounts and $429 million in HSA deposits, is one of the most successful providers.
Alenka Grealish, author of the Celent report, said several major banking players she researched are halfway to their original projections, at best.
Hoewisch said HSA Bank is incrementally improving its webinars and other educational materials. But the bank and its insurance partners are working intently on improving technology issues that are another key impediment to adoption, Hoewisch said.
The improvements would, for instance, allow a single online sign-on for both insurance plans and health savings accounts and would speed up payment to healthcare providers. Such improvements should open the door for HSA Bank to land the more demanding large corporate clients, Hoewisch said.
"Once we get the infrastructure to where the carrier can work with the bank, we will do a lot more volume," he said.
Grealish said that education and technology will help determine which companies will create the scale to dominate the industry several years from now.
"They know it's a race for scale," she said, citing the low margins associated with the accounts. "Unit costs have to be pushed down in order to push yourself into the black."
The emergence of several dominant players will lead to price competition that will trim margins further and reward scale, Grealish believes. Account opening fees, for instance, are "likely to go the way of the credit card annual fee."
Meredith Baratz, vice president of market solutions at Definity Health, a unit of Minneapolis' United HealthGroup, said health savings account adoption was disappointing through about the middle of 2006. But the unit, which provides health plans in conjunction with United HealthGroup's Exante Bank, discovered that adoption picked up significantly after the company implemented a one-stop sign-up process for the accounts and insurance plans. Exante, which has custody of United HealthGroup's accounts, now has 330,000 of them with $454 million of deposits.
United HealthGroup's ease-of-use initiatives include a test program for a card that integrates health plan eligibility information and payment functionality, Baratz said.
Celent projects that as a result of such improvements, the number of accounts will increase 60% this year, to three million, after growing 36% last year, to 1.9 million.
David Josephs, the head of consumer-directed healthcare at JPMorgan Chase, said that characterizing the industry's growth as successful or disappointing is difficult, because predictions varied so widely at the account's inception four years ago.
"You could find different projections ranging from 10 million to 40 million HSAs by 2010," he said. "We've been conservative and never really thought you were going to see vertical rates of increase."
Be Realistic Before Moving Money Overseas
Investors should have realistic performance expectations when investing international funds, said Dan Lefkovitz, a mutual fund analyst for Morningstar.
In a recent interview with national columnist Chuck Jaffe, Lefkovitz said the strong performance of foreign funds can be deceptive, and that international funds should be purchased with realistic expectations of what they will deliver.
Lefkovitz told Jaffe he would buy the Artisan International fund along with the Vanguard Total International Stock Index fund. He'd hold Janus Oversaes and T. Rowe Price Latin America. Sell Fideltiy Aggressive International, he advised, along with Oberweis China and DWS Europe Equity.
In a separate interview, Charles Rotblut, senior market analyst for Zacks.com, called the small-cap biotech Pozen Fund the "Bull of the Week," and predicted it is poised to hit a six-month target price of $18 per share, up 40% from current levels.
NYSE to Stoke First Coal ETF, From Van Eck
Van Eck Global, a money management firm, recently launched the first coal industry exchange-traded fund on the New York Stock Exchange.
The fund will track the performance of the Stowe Coal Index, a basket of 60 coal companies that list on a number of exchanges, and allow investors to gain exposure to a broad spectrum of companies involved in the production, equipment manufacturing and transport of coal.
"We're delighted to welcome Van Eck back to the exchange with the addition of the Market Vectors Coal ETF to our ETF marketplace," said Lisa Dallmer, senior vice president of exchange-traded funds and indexes at NYSE. "This ETF provides investors with direct access to a diverse portfolio of the world's leading coal stocks, and we are pleased to have the first ETF in the U.S. to target the coal industry listed on NYSE Arca."
Dow Jones Puts Faith In Dharma Indexes
Dow Jones Indexes has launched a new faith-based index that looks to the principles of Hinduism and Buddhism, similar to traditional sin sector filters.
Unlike sin stocks, companies engaged in sectors like aerospace, defense, alcohol and breweries, casinos and gambling, pharmaceuticals, tobacco, adult entertainment, animal testing and genetic modification of foods would not be included in the index.
The Dharma India Index will track the performance of 250 companies and is likely to include companies like ICICI Bank, L&T, Infosys, HDFC and Bharti Airtel, according to Sumeet Nihalani, senior director of the Asia Pacific region for Dow Jones Indexes.
Dow Jones came out with its first faith-based index in 1999 with the introduction of an Islamic market index.
New ETFs May Harbor Surprise Capital Gains
The rapid growth in the exchange-traded fund arena is increasing the complexity of capital gains taxes, writes The Wall Street Journal.
Last year, 18% of the ETFs tracked by Morningstar, or 95 ETFs in total, passed along capital gains to investors. In 2006, that number was 6%, and in 2005 it was 3%.
"ETFs are not immune" from capital gains, said Christine Hudacko, a spokeswoman for Barclays. "We've got so many slices of the market," it is difficult to compensate for mergers and other corporate actions, she said.
Holders of ETFs and mutual funds pay taxes on their gains when they sell fund shares, but they also pay taxes on trading profits the funds earn. The tax rate for long-term capital gains tops out at 15% and at 35% for short-term gains.
ETF fund managers can eliminate some capital gains before distributing to investors because of the unique way ETFs create and redeem fund shares.
Funds launched in 2006 or 2007 were three times more likely to pass along capital gains than older funds, according to Morningstar.
Back to Basics on the Street Hit hard by mortgage-related losses, Wall Street is returning to less risky transactions and focusing on tried-and-true practices like selling stocks and bonds to investors, according to The Wall Street Journal.
Mounting losses and write-downs at Merrill Lynch and Citigroup have forced big banks and brokerages to take fewer risks and focus on less profitable but more reliable businesses.
Earlier this month, Merrill CEO John Thain announced write-downs totaling $11.5 billion, with a fourth-quarter net loss of $9.83 billion, compared to a net income of $2.3 billion a year ago.
"We are still going to have a trading component to our business, but it is not going to be of the same nature," Thain told The Journal. "We will continue to take risks."
Big banks like Citigroup are undergoing similar shifts by holding on to more of the loans they make, rather than selling them off to investors.
Banks and brokers are more likely to see their profits fall to the "mid-to-high teens in good years and high single digits in the bad years," said David Hendler, senior analyst at CreditSights. "They're going to see less transaction volume and less complexity; there will be more of a focus on generic product lines."
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