Returns of pre-packaged fund – also known as model portfolios – hit by huge fees

June 2, 2014 7:42 pm

Packaged fund returns hit by huge fees

By Emma Dunkley

The investment returns on “pre-packaged” portfolios sold by wealth managers could vary by as much as £46,000 over a decade on a £500,000 pension due to the wide range of fees charged, a report reveals.

Research by investment platform Skandia based on data from The Lang Cat, an independent consultancy, shows the total cost of investing in these pre-packaged funds – also known as model portfolios – can have a substantial impact, knocking thousands of pounds off returns.

Model portfolios invest in a number of funds to target a level of returns and a degree of risk. Wealth managers may offer a number of such portfolios, often assigning them a risk rating to suit different types of investor. Read more of this post

China faces crucial choice over future growth; Growth can be robust or consumption-led but not both

June 2, 2014 6:08 am

China faces crucial choice over future growth

By Manoj Pradhan

Growth can be robust or consumption-led but not both

China has always divided investor opinion. The biggest debate now is about the future path China’s growth will take. Bulls say the transition to sustainable growth will be smooth; bears argue it will be volatile. Yet both agree consumption will rise to offset weaker investment. The result? Economic growth of 6 per cent, give or take, led by consumption.

This may turn out to be wishful thinking. Growth in China can either be robust, or consumption-led, but not both. If China chooses consumption-led growth, it could also be choosing much lower growth than the 6 per cent or so most have in mind.

There are three reasons for this. First, high investment growth in the past few years has added capital and supported labour income and hence consumption. Lower investment growth would weaken that support. Read more of this post

Do not be fooled by fund rankings; Memory of risks fades as crisis drops out of performance tables

Last updated: June 2, 2014 11:18 am

Do not be fooled by fund rankings

By Stephen Foley

Memory of risks fades as crisis drops out of performance tables

To the extent that good can come from calamity, the silver lining of the credit crunch is that it has begat an era of more cautious lending, tougher capital rules and wider regulation, plus more risk-aware investment processes. The crisis was so searing that its lessons will be carried by a whole generation of finance professionals.

It is not the fading of human memories that should worry us most. It is a fading of statistical memory.

As we have checked off the string of “fifth anniversaries” of credit crisis milestones, the period is being erased from some of the most important metrics used by investors to plan their portfolios – with the result that the risks in those portfolios may be unwittingly drifting upwards. Read more of this post

Australia: End of the boom; A cooling Chinese economy has hurt the mining sector, prompting protests over the tough new budget

June 2, 2014 6:19 pm

Australia: End of the boom

By Jamie Smyth

A cooling Chinese economy has hurt the mining sector, prompting protests over the tough new budget

The small coal mining town of Singleton was so over-run by contractors seeking jobs during Australia’s decade-long mining boom that some had to join waiting lists for apartments. Unemployment was virtually non-existent and businesses thrived as an army of workers arrived to work in the dozen mines that ring the town.

“It was so vibrant here it was impossible to keep good staff. Most went to highly paid jobs in the mines,” says Danny Gresham, director of the Singleton Tyre and Battery Centre, a local industry supplier. Read more of this post

Economic Wind Doesn’t Fill Companies’ Sales; This is a break from the usual pattern, where public-company sales increase at a much faster pace than overall sales during economic expansions and fall much more during recessions.

Economic Wind Doesn’t Fill Companies’ Sales

JUSTIN LAHART

Updated June 2, 2014 3:48 p.m. ET

Even with a tepid economy, it is surprising just how difficult it has been for U.S. companies to get sales going.

With nearly all the results in, it looks like revenue at companies in the S&P 500 rose 3.6% in the first quarter from a year earlier, according to S&P Dow Jones Indices. That is only marginally higher than the 3.4% gain in economywide sales, as measured by final sales of goods and services produced in the U.S.

This is a break from the usual pattern, where public-company sales increase at a much faster pace than overall sales during economic expansions and fall much more during recessions. Nor is the weakness of corporate sales a recent phenomenon. They have increased just 3.4% over the past two years, while economywide sales have risen 6.9%. Read more of this post

Index ETFs May Not Track Benchmarks as Expected; The Basic Idea: Their Returns Trail by the Amount of Fund Expenses. But That Isn’t the Whole Story

Index ETFs May Not Track Benchmarks as Expected

The Basic Idea: Their Returns Trail by the Amount of Fund Expenses. But That Isn’t the Whole Story.

ARI I. WEINBERG

Updated June 2, 2014 5:21 p.m. ET

The party line on index exchange-traded funds is that they offer easy exposure to a benchmark, less the fund’s expense ratio. If a stock index were to gain 10% this year, for instance, and an index ETF charges 0.1% of fund assets a year in expenses, an investor in that ETF might expect to earn 9.9%.

The reality is messier. The fund’s costs to buy and sell securities, and other aspects of portfolio management, influence your return as well.

For most stock ETFs, this slippage beyond the expense ratio is usually marginal: The median added cost is four-hundredths of a percentage point for ETFs with more than $100 million in assets that invest in U.S. stocks, according to data from research firm ETF.com. Some ETFs even overcome some costs to deliver tighter index-hugging than their expense ratios would indicate.

In other cases, the lag in ETF performance is significantly greater than one might expect based on fund expenses alone. Read more of this post

A Big-Name Index Is No. 2 in Returns; The Russell 2000 Trails the S&P SmallCap 600 Over Multiple Periods

A Big-Name Index Is No. 2 in Returns

The Russell 2000 Trails the S&P SmallCap 600 Over Multiple Periods

TOM LAURICELLA

June 2, 2014 5:20 p.m. ET

The lineup of stocks in the Russell 2000 small-stock index—and all the index funds that track it—gets an annual tweaking this month. One thing that may not change: the venerable benchmark’s lagging performance versus a younger rival.

For tracking small-company stocks, the 30-year old Russell 2000 is the go-to metric for most investors. But there’s another game in town, and it has often chalked up better total returns than the Russell: the S&P SmallCap 600. Since its launch, the S&P 600 has beaten the Russell 2000 in 12 of 19 years. The S&P benchmark is ahead for the five-, three- and one-year periods through the end of May, including leading by 20.2% to 16.8% over the latest 12 months. Read more of this post

‘Alternative’ Mutual Funds: Different, Yes. Better? Not Lately. Funds With Nontraditional Strategies Haven’t Beaten Stocks Over the Past Few Years

‘Alternative’ Mutual Funds: Different, Yes. Better? Not Lately.

Funds With Nontraditional Strategies Haven’t Beaten Stocks Over the Past Few Years

DAISY MAXEY

Updated June 2, 2014 5:22 p.m. ET

Investors spooked by the stock-market collapse of 2008 have been pouring money into so-called alternative mutual funds ever since. It’s a strategy that they hope will help cushion the blow if stocks take another dive.

It may still do that yet. But meanwhile, many of those investors have taken a beating on their alternative funds as stocks staged an impressive recovery. Consider it a lesson in what to expect from funds whose mission is to set a different course from the stock market. If these funds perform as expected, “you’re protected on the downside, but you’re really going to pay a price if the market is raging,” says Adam Zoll, an analyst at research firm Morningstar Inc. Read more of this post

Stock Investors Can Handle the Truth; The ban on ‘locking’ markets has the effect of hiding the best prices

Stock Investors Can Handle the Truth

The ban on ‘locking’ markets has the effect of hiding the best prices.

CAMERON SMITH

June 2, 2014 7:33 p.m. ET

Most investors would be surprised to learn that current stock-market regulations actually prevent them from seeing and receiving the best price. Why? Well, in 2005 federal regulators at the Securities and Exchange Commission decided, in the immortal words of Jack Nicholson in “A Few Good Men,” that investors “can’t handle the truth” and that seeing true market prices would only confuse them.

Given the SEC’s willingness to conduct pilot programs to make U.S. markets more efficient and competitive, one would hope that eliminating a regulation that reduces transparency and thus harms investors would move to the top of the pilot-program list.

This can’t-handle-the-truth rule is a seemingly arcane part of the SEC’s Regulation NMS, implemented in 2007, that prohibits a market from displaying a quote that would “lock” the quote of another market. In other words, if one market is displaying, say an offer at $15.50 in IBM, IBM +0.72% then another market should not display a matching bid in IBM at $15.50.

The simple reason is that, in theory, if a bid is the same as an offer, it should result in a trade. Indeed, the stated purpose of the prohibition is that it promotes healthy interaction between buyers and sellers and contributes to a fair and orderly market. Read more of this post

China Keeps Tiananmen Chatter Under Wraps Ahead of Anniversary

China Keeps Tiananmen Chatter Under Wraps Ahead of Anniversary

Dozens Detained, Questioned or Put Under House Arrest, Rights Groups Say

BRIAN SPEGELE and JOSH CHIN

Updated June 2, 2014 3:14 p.m. ET

In Hong Kong, protesters recreated scenes from the Tiananmen Square crackdown. In mainland China, however, such displays were forbidden. Associated Press

BEIJING—China’s leadership is leaving little to chance ahead of this week’s 25th anniversary of the bloody quashing of the Tiananmen Square protests, having embarked on a widespread clampdown on dissent that has targeted lawyers, rights activists and journalists, among others.

Rights groups say dozens have been detained, questioned or put under house arrest to try to make sure no commemorations are held. The group Chinese Human Rights Defenders puts the number at 50 “detained, disappeared or summoned.” Read more of this post

Symbol of Resistance Catching Fire in Bangkok

Jun 2, 2014

Symbol of Resistance Catching Fire in Bangkok

NEWLEY PURNELL

A woman holds up a three-fingered salute during a protest against the Thai military coup at a popular shopping mall in Bangkok on Sunday. The salute is from the movie “The Hunger Games: Catching Fire.”

Anti-coup protesters in Thailand are adopting a symbol of resistance from a science fiction movie in which citizens struggle against a tyrannical government in a dark, dystopian future.

A few dozen demonstrators on Sunday gathered in a flash-mob style protest at a Bangkok shopping mall, where many held anti-army signs and raised their hands in a three fingered salute aimed at nearby troops. Read more of this post