There's a lot going on in the mutual fund world and if you miss something, it could end up costing you money. To keep you up-to-date and on top of things, below we scope out some of the recent happenings in the mutual fund industry during the past week and how they may affect your portfolio.
An ETF love affair
Traditional financial advisors earn their living by shuffling clients into load-bearing mutual funds that provide them with a commission. But as fee-based advising becomes more prevalent, the universe of investments recommended to clients has also changed, opening up to include no-load funds and exchange-traded funds. In fact, according to consulting firms Horsemouth and kasina, the average advisor held 6.2% of client assets in exchange-traded funds in the last quarter of 2010, up from 5.2% of assets in the second quarter of 2009.
The fact that more advisors are moving to ETFs is a generally good thing for clients. Their rock-bottom costs can help investors keep more of their hard-earned money. Of course, investors should make sure that advisors aren't trading their ETF holdings on a regular basis and racking up fees in the process, since this chips away at some of these investments' cost advantages. Even if you're not working with a financial advisor, you should get familiar with how ETFs can work for your portfolio.
For instance, if you want broad-market, large-cap exposure, consider funds like Vanguard Total Stock Market ETF
Gross' expanding empire
Bond guru Bill Gross' Pimco Total Return Fund (PTTAX) is the single largest mutual fund in existence, thanks in part to its stellar long-term performance and the recent mass flight into the safety of bonds. Now you'll have yet another opportunity to benefit from Gross' knowledge and expertise. Regulatory filings reveal that Pimco plans on launching the Pimco Total Return Fund IV, a fund that will be managed similarly to the flagship Total Return Fund, but with less use of derivatives and leverage. Gross will manage the new fund in a similar manner to his original charge, but this alternative fund would likely have fewer bells and whistles and be marketed to investors who prefer a more conservative strategy.
While the final details are still being ironed out, I think it's worth keeping an eye on this new entrant to the fixed income field. It's not surprising to see Pimco pursue alternative bond strategies, given that the decades-long bull market for fixed income investments is almost certainly coming to an end. They will likely be looking for new ways to market their products and make them appealing in a new era for bonds.
I still caution investors against stuffing too much money into the bond market at this juncture, especially if you're relatively young or still have a few decades left before you retire. However, folks in or near retirement still need a decent allocation to fixed income securities in their portfolio. Based on the limited details available so far, I think the Total Return Fund IV could be a good choice for more conservative and risk-averse bond investors. If you want the opportunity to benefit from Gross' expertise while keeping risk to a bare minimum, stay tuned for more on this new offering.
Dumping on munis
You don't have to look far to find the latest sector of the market getting the stink-eye from investors. Investors have pulled roughly $27 billion out of municipal bond funds in the past few months as fears of potential default have heightened. Analyst Meredith Whitney's call for 50 to 100 sizeable defaults has already helped push the market into a panic and now another notable manager has joined the fray. Jeffrey Gundlach, chief executive officer of DoubleLine Capital, announced that he has liquidated 55% of his own holdings in the municipal bond market. Gundlach stated that the current muni bond market has "the hallmarks of a market that could collapse" if defaults rise along with interest rates.
It would be naive to think the municipal bond market won't face increasing pressures and difficulties over the next few years. Indeed, we are likely to see a decent number of defaults. But the fact remains that defaults on the state level and for larger, more stable cities and municipalities are extremely rare. Of course, just because an event is unlikely doesn't mean it can't happen, as we learned all too well in the most recent financial crisis.
I don't think muni bond investors should dump their holdings, but they should take some time to reevaluate what they own. In this environment, a focus on high credit quality and wide diversification should take priority. This is no time to reach for extra yield by investing in shaky or more troubled issuers. If you own individual muni bonds, make sure your holdings aren't dominated by any one issuer or type of bond. Owning bonds across multiple sectors will help cut down on the risk of any potential blow-up sinking your portfolio. There will surely be risks ahead, but smart investors should be able to make it through this crisis with minimal damage.
