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.
Berkowitz makes a move
Superstar manager Bruce Berkowitz of the Fairholme Fund (FAIRX) has been making a few changes to his portfolio, according to the fund's recently released annual report. In the second half of 2009, Berkowitz "materially disposed" of health-care names Pfizer
It's not a complete surprise that Berkowitz has sold down his former top holding, Pfizer. While the stock still sports a decent free cash flow yield, that yield has fallen significantly from a year or so ago, when it was approaching 20%. That means it's less of a bargain for Berkowitz, and so he's cutting back his exposure.
But despite this move, health care still makes up the second-largest sector holding in the fund. I think this is a smart move, as this sector represents one of the greatest opportunities for 2010. Health-care spending grew last year, even as the economy contracted, and given the continued aging of our population, that spending will continue to grow and grow at a faster rate. While that will put a fiscal squeeze on the government and on all Americans, it spells fat profits for much of the health-care industry.
To offset these reductions, Berkowitz initiated new positions in battered financial Citigroup
If you just couldn't get enough gambling in during your last trip to Las Vegas, never fear. ProShares is here with eight new ways for you to get your fix. The world's largest purveyor of leveraged and inverse funds recently announced its launch of eight new ProShares exchange-traded funds. Four of these funds will provide 300% the daily return of the Nasdaq 100 Index, Dow Jones Industrial Average, S&P 400 Mid-Cap Index, and Russell 2000 Index. The other four funds will provide 300% of the inverse of the daily return for those indexes.
While these funds may seem like an easy way to leverage your bets on the short-term direction of the stock market, investors should view these investments with a very wary eye. Because these funds track the daily return of each of these indices, that means your returns or losses could be meaningfully different from the target return over longer periods, thanks to the compounding effect of daily returns. That equals more volatility and risk on top of an already risky triple-leveraging approach.
Call this what it is -- gambling, not investing. There may be a few super-smart traders who can utilize these funds without getting burned, but most investors are just asking for trouble by dipping their toes in the water here. Play it safe and stick to regular, boring ETFs.
The incredible shrinking mutual fund industry
It's been a rough few years for the global economy as a whole, and the mutual fund industry hasn't been immune from its terrible effects. According to Morningstar data, there are currently 6,814 distinct share classes of open-end mutual funds. Believe it or not, that's a drop of 241 from last year, which is the biggest one-year plunge since 2001 when 390 funds bit the dust. There were only 323 funds launched during 2009, the second lowest number in the past decade. 261 funds were merged with other mutual funds last year, the highest such number since 2001. That leaves over 300 funds that closed up shop thanks to challenging market conditions.
These numbers point out one of the more pernicious effects of long-term investing in the mutual fund world -- survivorship bias. Over the long-run, badly managed or poorly performing funds tend to disappear. So the funds you see now are only those who have managed to, at the least, keep afloat for a certain time period. Losing funds simply disappear from the radar. That artificially inflates the track record of all mutual funds as whole over the long run.
All of this makes identifying mutual funds that actually outperform over the long-run much trickier and more difficult than it seems. With so many duds out there, it's a real chore to find the few good funds that actually beat the market year after year, rather than ending up with an underperforming investment that may be liquidated out of existence in a few years anyway! If you want a helping hand in finding these rare fund winners, you might want to check out the Fool's Rule Your Retirement investment service, which provides top-notch mutual fund, retirement, and personal financial planning tips. You can start your free 30-day trial and get the inside scoop on which funds will make you money today.
Stay tuned for more mutual fund news and updates in the coming weeks!
Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. She owns shares of Fairholme. Berkshire Hathaway, Pfizer, and UnitedHealth Group are Motley Fool Inside Value recommendations. Berkshire Hathaway and UnitedHealth Group are Motley Fool Stock Advisor choices. The Fool owns shares of Berkshire Hathaway, Fairholme, and UnitedHealth Group. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.