Archive for August, 2007

Finding Information on Mutual Funds

For over 20 years, Morningstar is the recognized, trusted leader in providing current information on mutual funds. Before Morningstar was founded, in 1984, complete information about fund performance, management, and historical fund information was not widely available to the individual investor. Morningstar changed all this by providing essential mutual fund analysis and commentary that was simply unavailable to the individual investor before.

What started out as the quarterly published Mutual Fund Sourcebook in 1984 has evolved today into on online investment information portal serving over 5.2 million investors, 210,000 financial advisors, and 1700 institutions worldwide. Since its inception, Morningstar has operated on the adage that mutual funds were created for individual investors and that affordable analysis and commentary should be available so these investors can make educated decisions with their hard-earned dollars. Morningstar continues with this theme today. For $69, an individual can sign up for a 3 month trial subscription to Morningstar and receive detailed, comprehensive reports and analysis on the 1600 funds out of nearly 14,000 on the market that Morningstar feels are “worthy of your attention.”

Morningstar also offers “Self-Study Investing Workshops” with in-depth instruction on fund investment topics that can be difficult to understand. Topics include: Methods for Investing in Mutual Funds, Five Questions to Ask before Buying a Fund, When to Sell a Fund, and 7 Sins of Fund Investing. Each workshop is priced at only $24.95 – far less than other widely publicized investment seminars. Morningstar really does have the individual investor in mind.

Much of Morningstar’s information is available online for free – without the in-depth commentary and analysis that comes with a subscription. Morningstar regular publishes its ‘Best and Worst’ list of funds that is freely available. Other lists showing average fund manager tenure are also available at no cost. Morningstar famously rates funds from 1 to the coveted 5-star rating. The 5-star list is available here:

The Advantages and Potential Problems of the Red Flags and their Material Adverse Effect

“Red Flags” are often used to refer to a stock with potential problems. It, therefore, draws analysts’ attention. However, there is not a fixed standard for its identification, for that depends on the methodology of investment used. Thus, the same investment can be positive and negative at the same time, depending on the investor interested in it; for example, if you are looking for an undiscovered company, you will look for low institutional ownership, but the same type of ownership is considered negative to a pension fund that is looking for blue chips.

There are usually some important red flags that you, as an investor, should look for. Major among these is the “Material Adverse Effect” (MAE). This flag indicates that something is extremely wrong, such as a decline in profitability or even the bankruptcy of the firm/business.

Thus, although the SEC (Securities and Exchange Commission) and the legal boilerplates prefer to disclose as many problems as they can, red flags, especially the MAE, will provide investors with crucial information, helping him/her to avoid mistakes of investment.

The Two Flavors of Real Estate Index Funds

These funds invest in real estate investment trusts (REITs) which are firms investing in real estate (equity) or mortgages on real estate (debt) or a combination of the two. A fund focused largely on equity would be valued on the property invested in and the rents received from the property. The valuation of property is not tied to interest rates. Funds focused on the debt side of real estate are valued based upon the ability of the financed to pay their mortgages. Interest rates can have a big impact on these REITs. As indexes, both types of funds seek to mimic the performance of the real estate market.

Much has been in the news lately about the American housing market slump and mortgage crunch. It would be easy to think that in today’s market, it would not be wise to invest in a real estate index fund. But the opposite is probably true. One of the most popular real estate index funds, Dow Jones U.S. Real Estate Index Fund (IYR) is down from its 52 week high of 94.99 at 72.65 on August 31, 2007. This shows a rebound from the 52 week low at 66 after the news about mortgage companies going bankrupt broke. IYR is still a bargain at the current price. It looks like the real estate bubble won’t burst any further for this well-established REIT.

The best known mortgage REIT, Annaly Mortgage Management (NLY), is similarly off its 52 week high of a little over 16 at the current price of 14.10 and is similarly making a rebound. This is another investment that is probably bargain priced. After all, mortgages don’t go away once the mortgage house goes under, but are bought and sold by different firms. When the fed meets in September to lower interest rates as speculation leads us to believe it will, that will only drive the stock price of funds like NLY up.

Stock - What Is Active Trading?

Stock market investing is a great way to make money. Buy shares at a low price, and sell at a higher price. What could be easier? Sadly, its not always that easy. However, understanding the markets and the terms used by traders can help to give you an advantage. While I wont cover them all here, below you will find a couple of examples to help you get started trading.
Read the rest of this entry »

More Types of Investment Funds: Index Funds, Fixed Income funds & Asset Manager Funds

Index funds aim to construct investments that mimic the movements of an index of a particular financial market. The fund manager can accomplished this by setting up a mutual fund composed of stocks in the S&P 500, and by keeping the stocks in amounts equal to the proportions they represent as members of the index. The idea here is not to beat the S&P 500 but to match its performance with a mutual fund. Not a bad goal considering the S&P 500 averaged returns of 17.3% in the 1990s while mutual funds could only manage 13.9% during that same time period. Another advantage with these funds is the low expense ratios, which are the costs charged to shareholders. The Vanguard S&P 500 expense ratio, 0.18% in 2006, is less than one fifth the expense ratios of the average mutual fund.

Fixed income funds are mutual funds that seek to preserve a set income stream by investing in very secure investments like highly rated corporate bonds and government bonds. They can provide monthly income, diversify a portfolio, or a higher level of liquidity for the investor. These are generally lower risk investments with a lower return, but a return that can be counted on to remain, thus the term “fixed income fund.” Many of these funds also have expense ratios below 1%.

Asset manager funds seek to match investment with the lifestyle or risk-tolerance of the investor. For example, the more risk-tolerant the investor, the longer the investor has until retirement so that fund would be composed more of equity (stocks) and less of bonds that have a slower rate of return. As the investor becomes less risk-tolerant, that fund will become more composed of bonds and less of equity. These types of funds are usually more actively managed than, say, the index funds and can have higher expense ratios. This is true with Fidelity’s Asset Manager 85% (85% equity) at 0.87% in 2006 and Asset Manager 20% (20% equity) at 0.58% in 2006, respectively. Still, these ratios are lower than other types of mutual funds.

Stocks - Examining Online Stock Investing

The stock market can be traced back to the late 1700s, in the infancy of the United States. Beginning in Philadelphia, the first American stock exchanged was founded in order to bolster commerce in this new world. Before long the New York Stock Exchange was born which soon gave rise to the New York Stock and Exchange Board which led the now frenetic pace that exists today on Wall Street.
Read the rest of this entry »

Risk Allocation for Balancing Financial Risks and Investment Funds

Determining risk allocations begins with identifying risks. Once the risks are identified, they should be categorized according to the probability of the risk and determine how significant the impact of such a risk would be. Obviously, risk allocation has some speculative nature to it but there is also a lot of established research with results widely available on the Internet. Any fund manager must allocate risk when determining the makeup of an investment fund, just as the individual should manage risk when determining what funds to invest in.

Various types of risks occur in everyday business operations including, credit risk, country risk, market risks, etc. However, the good fund manager will do a good job scrutinizing risks that may be more probable in his managed funds. For example, a fund manager overseeing a Latin American fund that includes Venezuelan assets would have to consider the recent seizures of private assets in his risk allocation. This might be the biggest risk in investing in Venezuela right now. Country risk must always be considered when investing in foreign funds.

Private investors can do their own risk allocation when researching investment funds. A little research can provide a level of fund risk management that is more responsive to changing markets. One of the tools fund managers use that is widely published on the Internet is beta. Beta is calculated through regression analysis and shows the tendency of a security’s returns to respond to market changes. Beta is less than 1, 1, or more than 1. A beta of 1 represents the volatility of the market itself. A beta more than 1 shows the fund to be more volatile than the market and a beta less than 1 shows the beta to be less volatile than the market. By putting beta to practical use an investor would want a fund with a beta greater than 1 during bull markets and a fund with a beta less than one during bear markets.

Defining the Nikkei 225 Stock Index, its Weighting, Modifications and Changes of Components

In the TSE (Tokyo Stock Exchange), the “Nikkei 225” is a market index which is the most important in the Asian stocks. Since 1971, this stock index has been calculated every day by the “Nihon Keizai Shimbun (Nikkei)” newspaper. Moreover, and besides being reviewed once every year, the Nikkei’s unit is the Yen.

After its introduction to the OSE (Osaka Securities Exchange), CME (Chicago Mercantile Exchange, and the SGX (Singapore Exchange, the Nikkei 225 has become an international ingredient in the stock exchange. One of its other major indexes is the “Topix”.

The highest average ever recorded of the Nikkei 225 in the 20th century was in 1989 (reaching 38,957.44 before closing at 38,915.87). In the 21st century, it reached right above 18.300 points.

To weight stock by the Nikkei 225, they are given equal weighting based on 50 yen per share. Such weighting is also influenced by removals, splits and addition of constituents. Since it reflects the overall market, there is no final weighting for the Nikkei 225.Review results of the Nikkei 225 are published every September with changes applied early October. Such changes are usually announced in the Japanese Nikkei newspaper plus appearing on the NNI. Whenever a stock is being replaced, the divisor is, afterwards, changed to make sure that there is a smooth transition of the stock index.


Stocks - The Role Of Brokers In Online Stock Trade

The online stock brokers play a significant role in online stock trade for those who want to invest but do not possess a good amount of amount to play. They are different from the traditional stock brokers in terms of investing and managing money.
Read the rest of this entry »

Mutual Funds with Best Rate of Return over 5 and 10 year Periods

The top performing mutual funds over the last five years are dominated by Latin American funds. Of the 13 funds reporting a greater than 40% return after five years, five are mutual funds emphasizing Latin America. More impressively, the top four returns after five years are all Latin American funds with BlackRock Latin America (MDLTX) leading the pack with a whopping return of 49.4%. That means a $1,000 investment in MDLTX 5 years ago would be worth $7443.08 today. Some of the performance of these funds over the last five years can be attributed to the rise of commodity and oil prices. Much oil, minerals, and agricultural products are exported from the region. Another reason behind the Latin American fund surge is many governments have adopted sound macroeconomic policies, especially in Brazil, Mexico, and Chile where greater control over interest rates, inflation, and government spending has come about during the time period. Also, national debts have been reduced. The future does look bright for Latin American funds, but caution must be taken. I’ll elaborate on why in the last paragraph.

There is a different picture if we look at the best performing funds over a ten year period. No single focus area dominates as Latin America does over a five year period but there are several focusing on small cap and ultra-small cap or micro-cap companies. The best return rate is 21.5% for Wasatch Micro Cap (WMICX) which would make that $1000 investment worth $7018.83. The fund is very volatile, at one time gaining 30.5% over a month (July 1998) and another time losing 24.7% in a month (August 1998). However, the 5 year rate of return is 20%, and the one year rate is 20.5%, showing that for this fund, 20% or better can be expected. Averaging rates over 20% for a period of ten years paints an excellent track record for the fund’s management.

The ten year rate of return paints a different picture of the Latin American funds that dominate the five year period. MDLTX, mentioned above, has a return rate of 15.5% over ten years so something drastic happened between 5 and 10 years ago and the fund has rebounded in the last five years. If considering a Latin American fund, do the research on what companies are focused on. There are still some unstable countries in the southern hemisphere with oil-rich OPEC member Venezuela providing a glaring example. Venezuela’s government has been seizing assets of private companies recently.