Tuesday, November 25, 2014

"A" Shares May Have Highest Redemptions in 21 Years

Morningstar estimates that "A" shares, the most common mutual fund share class among retail investors, may have its largest redemption year in history in 2014. Over $122 billion dollars have been removed from "A" shares so far this year, and the number is still growing.

Why the redemptions? The short answer is that investors want better returns. Imagine that the S&P 500 returns 15% one year.  An "A" class S&P 500 Index fund with a 4 1/2% load plus 1 1/2% internal management fee may return only 9% (15% return minus 4 1/2%, minus 1 1/2%). On a $100,000 account, that 6% difference means $6000 in underperformance to the investor!

Where does that $6000 go? Why, it goes to the commission stock broker's pocket, and to the bottom line of the brokerage firm he or she works for!

Where is all the money going that is leaving "A" shares? Well, a large part of it is going to lower cost funds and ETFs that do the same thing as the higher cost funds. Rather than using an S&P 500 "A" class fund that keeps 6% of the investor's money, many investors are using ETFs like the Vanguard S&P 500 ETF, which has only 0.05% in fees. In other words, Vanguard keeps $50 of your money for expenses versus the "A" class fund keeping $6000 of your money for expenses. In the above example, your net return would be 14.95% rather than the "A" class return of 9%.

Other low cost funds and ETFs are offered by Dimensional Funds, iShares, SPDR, etc.

Keep more of your money. Work with a fee-only fiduciary, and use the very least expensive instruments you can to access the areas of the market you wish to access.

Thursday, October 23, 2014

IRS Raises Retirement Plan Contribution Limits for 2015

The IRS announced today that contribution limits for some retirement plans will be going up for 2015.

  • IRA: The IRA contribution limit will remain at $5500 and the "catch-up" limit remains at $1000.
  • SEP IRA and Solo 401ks: Those who are self employed or own their own small business will be pleased that contribution limits have moved from $52,000 in 2014 to $53,000 in 2015. These are subject to certain percentages of one's salary, so be sure to ask your accountant for details.
  • SIMPLE IRA: Contribution limits on SIMPLE IRAs have gone up slightly, from $12,000 in 2014 to $12,500 in 2015. Also, the "catch-up" limit is now $3000 rather than $2500.
As pensions continue to disappear and the onus for retirement savings falls back to the worker, setting aside retirement funds becomes even more important. Obviously, the earlier one starts saving for retirement the better.

Many firms offer free IRA accounts and free purchases and sales of a great number of mutual funds, ETFs, etc. The more you save on transaction fees and related expenses, the more you'll have for retirement.






Wednesday, October 15, 2014

Are You Getting Fiduciary Duty? (Or Are You Helping Someone Win a Sales Contest?)

The New York Times recently ran a story about a retired couple who was looking for a higher rate of interest than their bank CDs could provide. The bank's teller recommended that the couple speak with the bank's investment department. The bank's investment department, which wasn't required to act as a fiduciary, recommended $650,000 worth of annuities which happened to pay an annual commission to the bank investment department of $24,000.

The bank claims the annuity was "suitable" and the couple (and probably their attorneys) say they were mislead and assumed they were getting fiduciary duty...meaning the investment department would act in the client's best interest at all times (rather than the bank's best interest). This is yet another story of people thinking they are getting fiduciary investment advisory when actually all they are getting is a product salesman.

Had the couple gone to a Registered Investment Advisor they would have gotten fiduciary duty. Even better, they probably would have almost $24,000 per year in extra income. Instead, they were sold a bill of goods by someone who was being paid on commission and who had zero fiduciary duty to his client.

Before you move your retirement money to a money manager, double check that you are moving it to someone who acts as a fiduciary at all times. Ask for a signed copy of their fiduciary pledge. Ask for a copy of any complaints the firm has had or the individual has had. Double check that the individual works only as a fiduciary and will always work with your best interests placed first.

Click here for the New York Times story or contact us for a copy.






Saturday, September 27, 2014

Why I Use Low Cost Instruments to Access the Markets

I remember years ago taking a look at my 401k statement and being quite surprised. That year, the S&P 500 had returned 16%. I looked at my 401k statement and the S&P 500 fund I was using returned around 14 1/2%. "Odd" I thought. "Why would my S&P 500 Fund return less than the S&P 500?"

Similarly, my small cap mutual fund was also underperforming the small cap index. My mid cap mutual fund was underperforming the mid cap index. Across the board, my funds were underperforming their various indices.

One fund I had was outperforming the S&P 500. It called itself a large cap fund...but I looked into its holdings and sure enough, it had some mid cap stocks and even a few small cap. I did a little research and found that over time, small cap stocks return more than mid cap and mid cap return more than large cap. So, essentially, the fund manager was cheating a bit. He or she was exhibiting what is now known as "style drift," including the fund in one category but using instruments from another. Was he really doing as well as the indices he held? I'll never know...which is probably exactly what that fund company wanted.

I did some digging and found that my S&P 500 fund had around 1 1/2% internal fees...hence the 1 1/2% underperformance versus the index. Similarly, the mid cap and small cap funds were in the same situation. The funds were underperforming their index by approximately the same amount as their fees.

I then looked at a couple other groups like Vanguard and Dimensional Funds. They were much closer to achieving the yields I'd expect. In fact, I seem to remember the Vanguard S&P 500 ETF returning 15.90% versus the S&P 500 returning 16%. You guessed it, Vanguard at that time had a 0.10% internal fee.

Over the last couple years, research has become overwhelming supportive of low cost instruments. In fact, Morningstar, the group that makes their money by assigning stars to mutual funds came right out and said, "In every single time period and data point tested, low-cost funds beat high-cost funds. To see the results, click here." This is from the group that makes money using their star system to rate funds. The full article can be accessed here.

Wall Street and the big Wall Street firms want people to think that expensive managers can "foresee" market downturns and outperform the indices. Nothing could be farther from the truth. Check what this Forbes article said about active managers: "The claim that active managers can successfully time markets isn’t even close. The truth is that a majority of active fund managers performed badly in bad markets and good markets."

The number one way to increase your market performance is to decrease your expenses. If you manage money on your own, use low cost ETFs and funds. If you hire a manager to handle things, hire a low cost manager who uses low cost funds.

Lastly, 1 1/2% may not sound like much, but remember, that's $15,000 dollars of underperformance each and every year on a $1mm portfolio.

Increase your odds of successful portfolio performance with the above recommendations from Morningstar and Forbes. Keep that $15,000 for yourself rather than giving it to Wall Street.

Sunday, August 3, 2014

Why I Recommend Only Garrett Planning Network Fee-Only Planners

Blue Haven Capital often has individuals or couples make an appointment to interview us for fee-only investment management only to be told at the end of the hour or so that what they really need first is a plan drawn up by a fee-only planner. Often, people are surprised that I don't push them to harder to sign up for investment management, but sometimes they don't need management, they just need a plan. The only planners I recommend, regardless of the location of the client or potential client, are planners in the Garrett Planning Network.

Often, I'll get questions like "Do I have enough insurance?" or "What sort of pension split should I sign up for if both my partner and I are healthy and the same age?" Too often, when I tell them I don't get involved in insurance, people say they'll ask their insurance agent. Really?? They'll ask their insurance agent if they have enough insurance? That's usually when I recommend a Garrett Planner.

The reason I often send clients and potential clients to planners in the Garrett Planning Network is that I know for certain that those individuals will get a comprehensive, objective plan from a full fiduciary. They won't walk out of there with a $1mm universal life policy, they won't be pressured into opening a brokerage account to buy the latest high commission bells-and-whistles products from one of the many Wall Street brokerage firms, they'll simple have an objective plan to help guide them financially well into the future.

Sometimes those same people come back to me to manage their money according to their plan. Usually, they are looking for very low cost, index oriented, full fiduciary investment management. Those people tend to dislike things like rebalancing and paying attention to tax ramifications. Sometimes they come back to me because their active lifestyle doesn't permit constant oversight of their portfolio. Sometimes they come back to me because they want better access to low cost products such as Dimensional Funds. Sometimes they just want a third party to manage things in case one of them becomes incapacitated or dies. Whatever the case may be, I believe the best long term solution for individuals looking for investment help is to look for fee-only planners and fee-only investment managers. Once that list is established, one should check backgrounds, fees, disciplinary actions, investment philosophy, etc., but the first step should always be to look for a fee-only fiduciary.

Sometimes people have a plan and just need management. Sometimes people have neither a plan nor management. And occasionally, people have management but no plan. In all cases, going with a full fiduciary, fee-only professional who focuses on the specialty you need will be your best option.

This video, up on YouTube, gives a funny but enlightening look at the difference between fiduciaries and non fiduciaries. Enjoy!








Saturday, August 2, 2014

Money Market Mutual Fund Developments

If you have a money market account, you need to be aware of the latest SEC regulatory changes regarding those money market accounts. Changes will be implemented over a number of years, but individuals, trusts, and small businesses should review their options and the category into which they fall.

For many years, money market mutual funds provided a safe, stable haven for idle funds. In fact, the funds were so stable that many equated money market mutual funds with bank checking accounts. With the 2008 financial crisis in the US, the SEC decided to strengthen money market regulations in order to provide more stability to the market.

For individuals and what the SEC deems "natural persons":
First, U.S. Government issued or guaranteed money market mutual funds will undergo no changes. They will continue to offer $1 net asset value per share stability, and they will not impose any restriction on investor access.

Second, U.S. Government issued or guaranteed money market funds that also include corporate bonds in their fund will continue to offer $1 net asset value per share stability, but they will have the ability to impose restrictions on redemptions in times of what the SEC calls "market stress."

Third, municipal bond money market funds will also continue to offer $1 net asset value per share stability, but they too will have the ability to impose restrictions on redemptions in times of market stress.

For corporations, small businesses, and pension plans:
Funds that are considered "institutional" and cater to other than "natural persons" will be required to transact buys and sells at a floating rate (read "not held at a stable $1 per share) that will be carried out to the 4th decimal place. Also, liquidity fees may be imposed upon redemptions during times of market stress.

The time period for this implementation date is currently scheduled at 2 years. Blue Haven Capital recommends you speak with your advisor and ask specifically what sort of restrictions and changes will be imposed by the money market account you currently hold. Also, there are alternatives you can consider and those should be offered to you as well.

As always, we recommend you have an advisor who acts as a fiduciary at ALL times. That way you know the advisor is legally obligated to put your interest first at ALL times, not just some times.

See this SEC site for more information, or contact us if we may be of further assistance.



Thursday, July 17, 2014

5 Rules for Retirees To Follow In This Low Interest Rate Environment

Those living on a fixed income are especially vulnerable during periods of low interest rates like the one we are in now. Here are five easy-to-remember rules to help keep yourself out of trouble:


  • Don't go out past 10 years in maturity for the time being. A 7-10 year bond might fall approximately 7 or 8% in price when rates head back up, but remember, it will come due worth 100 cents on the dollar at the end of those 7-10 years. A 30 year bond, like those found in many bond mutual funds, could fall 15% or more in price, and that bond won't be coming due at 100 cents on the dollar until 2044! That's a long time to wait.
  • Make sure your trust officer or investment advisor is not buying discount coupon bonds. All things being equal, a premium bond is less sensitive to rising interest rates than a discount bond.
  • Don't get talked into buying a lot of high yield bonds. High yield bonds may fall in price even more dramatically than other bonds when interest rates move back up.
  • Don't just sit in money market and wait for higher rates. Higher rates may take a few years to come about. Each year that you wait costs you 4% or so in yield. In four years, you will have given up 16%. It makes more sense to buy short and intermediate maturities than it does to sit in money market.
  • Make sure you are working with someone that knows bonds. Ask them their background and check their credentials. Many stock brokers focus only on stocks. Your bond portfolio is your income, make sure it is being managed professionally! 


Sunday, May 4, 2014

"If You're Not Confused, You're Not Paying Attention"

What a wonderful quote from Tom Peters and his book "Thriving on Chaos: Handbook for a Management Revolution."

On Friday, May 2, we got some important economic numbers. Without getting too technical, the numbers pointed to lower unemployment and a higher number of jobs created in the US. Good stuff, right? Well, as you know, the bond market really doesn't like "good stuff" and tends to fall rather dramatically when "good stuff" walks into the room.

In addition to the "good stuff," we also recently got an announcement that the Fed will again reduce its bond purchasing. The Fed's goal is to slowly wean itself of supporting the US bond market and it has been telegraphing its exit strategy and pace for over a year now. That too ought to signify a weaker bond market.

However, bonds on Friday rallied, ie, went up in price. Why? Well, things in Ukraine don't seem to be getting any better, and many in the US are worried that the jobs people do have are in positions that are beneath their abilities. Yes, the old "he was in middle management but is now working the counter at a fast food restaurant" argument.

The negative Nellies outweighed the positive Petes, and bonds rallied. We consider this a classic bear market rally and are loath to put money to work when 10s are trading a 2.57%. In fact, we were much better sellers on Friday than buyers.

For those who feel their bond portfolios are a bit long, look for days like we had on Friday to jettison some of the longer duration paper. If you are comfortable with your bond portfolios, use a day like Friday to go for coffee. But by all means, don't use a day like Friday, when unemployment is going down and the Fed is announcing less market intervention, to buy bonds.

Monday, April 28, 2014

Unintended Consequences

Two weeks ago we wrote about a bear flattening and discussed the especially vulnerable short end of the curve. Since that writing, 5 year Treasuries have moved from 1.58% up to 1.74%. The 30 year has gone from 3.48% to 3.49%. The curve is flattening and it is flattening from the most manipulated end: The short end.

So what is causing the slow rise in interest rates when everyone expects a slightly faster rise? And if the banks have lots of cash available, why do there continue to be complaints about access to borrowing? Any time there is government intervention in the markets, there is most likely to be unintended consequences. One unintended consequence of the increased liquidity standards forced upon banks is the lack of liquidity for borrowers.

Banks have been forced to strengthen their balance sheets as a result of the 2008 financial crisis. A liquidity coverage ratio has been established for the banks and only cash and Treasuries and Agencies count fully in that ratio calculation. The result? Banks need to keep more assets on hand to cover times of  "stress" and the best instruments that banks can use happen to be Treasuries and Agencies. So, once again, we have an unnatural demand for Treasuries on the short end of the curve, which is why on days like today we had 10 Year Treasuries briefly at 2.67%. Also, since banks need to keep more cash on hand to prevent a similar fiasco to 2008, banks cannot lend in the way that they used to. As a result, there are now businesses and individuals that historically looked like good candidates for lending, but now cannot be lent to due to the banks' need to beef up their own balance sheets.

If the economy keeps growing, and when banks reach the ratios that are acceptable, we expect that the short end of the yield curve could move up in yield faster than we've seen recently. Again, the short end most likely has the most risk and needs to be approached very cautiously.





Sunday, April 13, 2014

Rising Interest Rates and a Flattening Yield Curve

What exactly tends to happen when the Fed tightens (raises interest rates)?

Historically, the yield curve flattens, meaning the difference between short term interest rates and longer term interest rates becomes less, when the Fed tightens. For example, currently, the 5 year Treasury to 30 year Treasure curve is 190 basis points (the 5 year is 1.58% and the 30 year is 3.48%). A flattening means that difference may go from 190 basis point to 150 basis points. But which bond will change? If the 30 year went to 3.08%, and 5s stayed at 1.58%, we'd have our 150 basis point steepness as a result of a bullish flattening. If, instead, 5s went from 1.58% to 1.98%, we'd also have a 150 basis point difference, but it would be the result of a bear flattening.

According to some recent research by BMO Harris, the market appears to be heading for a convergence point in interest rates below 3.75%. In other words, the long bond may fade 20 to 25 basis points, but most of the flattening will come from bear flattening on the short end.

Where exactly will the bond market rise in yield the most? Current studies show the very short part of the curve (Bills to 5 years) is most likely the most vulnerable. As of right now, we have:

1 year: 0.09%
2 year: 0.36%
5 year: 1.58%
10 year: 2.62%
30 year: 3.48%

Perhaps, once the US Government exits the bond manipulation game, we'll see Bills at 2.25%, 5s at 2.85%, 10s at 3.40% and the 30 year at 3.65%. This would be significantly flatter, with bear flattening all through the curve, but with the majority of damage on the short end. For many, this is the most intuitive shape of the interest rate rise simply because the Fed is manipulating the short of the curve the most extensively.

Keep an eye on curve shape, and don't assume that holding 5 year bonds absolves you of all risk. Again, the short end of the curve is being unnaturally manipulated and probably is the most vulnerable to change when the Fed exits.

Tuesday, March 11, 2014

Entertainment Industry Financial Fails

The entertainment and sports industry is rife with examples of those who make a tremendous amount of money in a short period of time and then end up destitute. How is it that someone who makes over $300mm in a span of 15 years or so becomes bankrupt? The easy answer of course is that the person spent more than he earned. The more exact answer is that the person most likely trusted others who were not acting in a fiduciary capacity, ie, a person who had legal responsibility for managing the assets.

An article appeared in 2012 that described 15 Hollywood personalities who had gone bankrupt. It is probably safe to assume that in most cases, the person making the investments for the individual who eventually lost his or her money had some conflict of interest. Perhaps the individual managing the money stood to make commissions if he or she sold the entertainer certain investments. Perhaps the managing individual sold the entertainer investments in which the managing individual had ownership. Perhaps the entertainer got pressured socially by friends to jump on the bandwagon regarding certain investment. Perhaps the portfolio ended up highly concentrated; the old "all the eggs in one basket" scenario.

Rule one: Find a fee-only Registered Investment Advisor who is a fiduciary at all times. Use a person that is legally obligated to put client interests first and who is legally obligated to disclose any and all conflicts of interest. Ask for acknowledgement of fiduciary duty in writing.

Rule two: Make sure your Registered Investment Advisor's fees are low. A relationship over $500k should have fees less than 1%.

Rule three: Discuss your investment philosophy and see if the Advisor's philosophy, experience, etc. matches yours.

If investment management is something you either don't like or don't have the time or experience for, hire someone to do it. But hire someone who is a fiduciary and whose fees make sense. Don't end a great work career with no investments to live on.



Friday, February 28, 2014

Oscar Swag Bag 2014 - What We Would Have Offered

It is Oscar time again and as usual, all the buzz leading into this Oscar weekend is about what is inside the Oscar Nominee Swag Bag (also known as the Oscar Swag Bag). Perhaps the most talked about item is a $50 off coupon for hiring film maker Charles Van Loucks. That's right, somehow Charles Van Loucks was able to convince the powers that be to put a $50 off coupon in the swag bag that goes out to each and every one of the Oscar Nominees.

Blue Haven Capital did not get the opportunity to put an item in the Oscar Swag Bag, but had we been given that opportunity, we would have offered a 20% off coupon on our fee-only investment management advisory services. Looking at all the gifts offered, from laser hair removal to a Hawaiian vacation, we think ours would probably be the most valuable item for an up-and-coming or established Hollywood star.

How often does one hear about an athlete or entertainment personality who for years earned between $5mm and $25mm annually yet somehow got involved with bad investments, got taken advantage of by friends or colleagues, or somehow couldn't afford retirement and ended up working a 9-5 type job to make ends meet? Where was the advisor who offered full fiduciary duty? Where was the advisor who put the client first rather than the client second? Where was the advisor who offered discreet service and ensured complete privacy?

Blue Haven Capital would have offered full investment advisory services to all the Oscar Nominees at 20% less that its normal published rate. We would have offered over 25 years of experience, we would have offered full fiduciary duty, and we would have offered traditional, long term investment management that over time would probably have proven more valuable than anything else in the swag bag. Doesn't that sound far more exciting than a one week trip to Hawaii?

Perhaps in 2015 we'll have the opportunity to submit our contribution to the Swag Bag. Until then, we can only hope.

Saturday, January 4, 2014

Dimensional Fund Advisors Philosophy

Dimensional Fund Advisors was recently featured as the cover story in the January 4, 2014 edition of Barron's Magazine. The article highlighted the consistent outperformance of Dimensional Funds, the repeatability of the firm's success, and the quiet and efficient manner with which the firm goes about its business. Also discussed was the relatively small group of Registered Investment Advisors that have access to Dimensional Funds and the vetting process those advisors must go through to gain that access.

Unfortunately, many investors have difficulty buying Dimensional Funds because Dimensional is loathe to offer their funds to the commission-oriented big wirehouses. Also, since the funds charge no commissions and offer the big wirehouses no 12b1 fees and no selling agreements, perhaps the wirehouses see a relationship with Dimensional Funds as "less than profitable." Why would a commission wirehouse offer funds that won't pay it a 12b1 fee when it could offer funds that contain not only 12b1 fees, but also handsomely high commissions?

Well, where the wirehouses lose, the investors win. Registered Investment Advisors that have gone through the Dimensional Funds vetting process successfully are able to offer their clients some of the most consistently high-ranking funds in the world. Because the funds are extremely low cost, and because the funds minimize things like trading activity, the investor maximizes his or her gain. 1% may not initially sound like a big deal, but for a $500,000 portfolio that means $5000 each and every year in portfolio outperformance.

Blue Haven Capital highly recommends that investors look for Registered Investment Advisors that have access to Dimensional Funds. The investor will most likely find himself or herself working with a firm that has embraced the low-cost approach, is comfortable with the Dimensional Funds 3 Factor Model, and works quietly (Dimensional Funds does zero advertising) and efficiently to maximize the odds of outstanding portfolio performance.