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 on top of things, we'll scope out some recent happenings in the mutual fund industry during the past week, and see how they may affect your portfolio.
Vanguard steps it up
Apparently, Vanguard is gaining market share in the red-hot exchange-traded-funds space. According to data from State Street Global Advisors, in the first six months of the year Vanguard's market share in the ETF space grew from 11.8% to 13.3%. The two largest players in this space, BlackRock and SSgA, saw their market share decline by 1.3 percentage points and 0.3 points, respectively, to 46.7% and 24%. Vanguard has now amassed more than $100 billion in its 46 exchange-traded funds.
To me, it's not completely surprising why Vanguard is gaining market share at the expense of its competitors. Vanguard's ETFs are some of the cheapest in the business. For example, the Vanguard Total Stock Market ETF (NYSE: VTI) clocks in at just 0.07%, compared with 0.09% for State Street's SPDR S&P 500 (NYSE: SPY) and BlackRock's iShares S&P 500 ETF (NYSE: IVV). That's not a huge difference, but over time those costs add up. And because you're not paying for manager expertise with ETFs, it makes sense to look for the cheapest fund you can find.
Vanguard offers a number of other first-rate ETFs, including my favorite in the popular emerging markets category, Vanguard Emerging Markets Stock ETF (NYSE: VWO). It also offers one of the better bond ETFs around, the Vanguard Total Bond Market ETF (NYSE: BND), which comes with a 0.10% annual expense ratio, half the cost of the popular iShares Barclays Aggregate Bond ETF (NYSE: AGG), with its 0.20% price tag. The bottom line is that Vanguard has one of the best lineups of ETFs around, so be sure to consider these funds when doing your ETF shopping.
Bill Gross on interest rates
It's been accepted wisdom for a while now that interest rates were headed up -- it was just a matter of when. Economists had initially forecasted a rate hike toward the end of 2010, but the current economic soft patch has pushed off that expected date to well into 2011.
Now Bill Gross, manager of PIMCO Total Return (PTTAX), the single largest mutual fund in existence, has said he thinks the Fed will hold off on raising rates for two to three years as it fights to keep the economy from falling back into recession. Gross cited the steep yield curve and continued high unemployment as factors in why he thinks the Fed will be on hold for a long time.
While I don't foresee a Fed rate hike any time soon, the idea that rates could remain at their current levels for another two to three years seems a bit extreme. After all, according to a recent Wall Street Journal economic forecasting survey, most economists expect the Fed to begin raising rates sometime in 2011. Of course, much of the timing will depend on which way the economy sways in the next few months, and whether a return to recession becomes more likely.
In any event, bond investors should be prepared for rates to rise down the road. That means expectations for bond returns should be moderated. Don't expect the returns of recent years to repeat themselves forever. Likewise, if you've got exposure to longer-term bonds or bond funds, you might want to think about adjusting your duration to the shorter side, as those bonds will be less sensitive to price declines due to rising interest rates.
If you buy individual bonds, deploying a bond laddering strategy may help avoid some of the concerns over rising rates. If you get your exposure through bond funds, make sure you know what your fund's duration is, and think carefully before investing in funds with higher relative durations.
Fairholme finding value in financials
Battered, big-name financials may still be getting the stinkeye from the general public, but one prominent fund manager is finding a lot to like in that area. Fairholme (FAIRX) manager Bruce Berkowitz has been building his positions in beaten-down names like AIG (NYSE: AIG), Citigroup (NYSE: C), and Bank of America (NYSE: BAC). Berkowitz believes government intervention has helped these big-name financials clear their balance sheets and provide greater clarity. Given that he bought these stocks at depressed prices, he remains confident that he will make money with these investments in the long run.
No small number of investors are skeptical of Berkowitz's view on financials, but he has a truly impressive track record on his side. Fairholme ranks in the top 1% of all large-blend funds over the past decade, and it's the fastest-selling domestic stock fund so far this year, according to Morningstar. Berkowitz has made contrarian calls before, and his fundholders have been the richer for it.
I'm not quite as sanguine about the prospects for many big-name financials, including the ones Berkowitz favors. But if you're going to invest in a battered-down, riskier sector, I'd rather do it with someone like Bruce Berkowitz. If you're looking for a solid, long-term proven winner that's willing to take on a few unpopular bets here and there, Fairholme may be right for you.
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