June 11, 2007
Scamming U.S. Military: Garbage In, Garbage Out
For many years, First Command Financial Services sold "garbage" mutual funds, with obscene upfront expenses and contracts committing investors to periods of 10 years or more, to U.S. military personnel, FundAlarm.com maintains. Congress recently clamped down on the creation of such additional funds, and First Command was fined and banished from the business.
But Fidelity Investments has also participated in the scheme, "with two Fidelity brokerage units fined $400,000 last month for preparing and distributing marketing brochures with misleading and wildly inaccurate claims about the Destiny funds," FundAlarm.com blog author Roy Weitz writes. "It's difficult to say exactly how much Fidelity earned from managing these garbage funds over their lifetime, but that amount is certainly millions of dollars more than this ridiculously small fine.
Weitz said, tongue-in-cheek, that Fidelity is currently "negotiating to buy a corporate soul. Once they acquire a soul, misguided ventures like the Destiny funds should be much less likely."
Eye on Wachovia Deal
Wachovia's acquisition of A.G. Edwards dominated the debate on bankstocks.com. New York-based hedge fund manager Thomas K. Brown questions a post from breakingviews.com that christened the deal a lucrative one by citing a two-year rate of return around 11%.
Brown counters that 11% doesn't even cover the cost of capital, which he said will likely exceed 12%. Furthermore, he noted, 11% isn't exactly anything to call Mom about. "Wachovia would have done better (and saved all those investment banking fees) if it had simply taken the $7 billion and bought back the stock.
Plus, no execution risk!" Brown also questions the suggestion that the acquisition of A.G. Edwards opens a wider pool of retail investors for Wachovia.
"That hasn't exactly worked so great for Morgan Stanley," he wrote. "Why Wachovia is giving up 7% of itself in return for a retail brokerage business at the top of the market, I don't understand."
MAXfunds Challenges Morningstar Fund Picks
MAXfunds.com recently took a hard look at Morningstar's quarterly fund picks and called the results "disturbing." Morningstar touted its five-year 65% average as "solid," but MAXfunds points out that index funds beat their fund category average more than 65% of the time.
And Morningstar's domestic large-blend picks beat their category average only 50% of the time. MAXfunds called that "pathetic," saying, "Any dart-thrower could expect to beat the large-blend fund category average, not the benchmark index, at least 50% of the time."
No Aracnophobe Here
Over at ETFExpert.com, Gary Gordon notes that today's SPDR S&P 500 is a better bet than S&P 500 stocks of yesteryear. Even with the hoopla surrounding the S&P's record-breaking returns, Gordon maintains the markets are safe from a repeat of 2000. First of all, the days of the index being weighted 42% to tech and telcom are over. Those segments represent only 19% today. High-performing energy, utilities and materials have nearly doubled their stakes. Together, they accounted for less than 10% in 2000.
Real estate represents a big chunk now, but that is tempered enough to prevent a value drain, Gordon said. "Simply put, today's S&P 500 index is more diversified than the index from 2000," he said.
UBS Hedge Funds: R.I.P.
The NY Times Dealbook offers a eulogy to UBS's foray into hedge funds. The blog blames real estate for forcing the Swiss bank to abandon attempts to pump life into the lagging Dillon Reade Capital Management.
The Dealbook cites Bloomberg, noting that the unit was supposed to stop highly skilled managers from leaving, and taking their wealthy and institutional clients with them. But many of investors got a surprise when Dillon Reade lead John Costas, called it quits, saying that sub-prime mortgages sank the operations in a single month. Investors will be able to cash out of the fund, gain and all.
German Finance Minister Wants to Rein in Hedgies
German Finance Minister Peer Steinbrueck has reiterated his desire to see more oversight of the hedge fund industry, but knows that consensus on the issue may take a while.
With the leaders of the Group of Eight (G8) meeting in Germany, "the government is trying to reach international consensus on potential measures that aim to limit potential systemic risks for financial stability," Steinbrueck wrote in a guest column in the weekend addition of Boersen-Zeitung business daily.
However, the FiNTAG financial blog doesn't understand why the financial industry would listen to Germany. "How many German hedge funds can you think of? That would be none," the blog states. FiNTAG's blog can be found at www.fintag.com.
Gen X Blog Touts Int'l Real Estate Mutual Funds
Many investors looking to diversify their portfolio often add bonds to the mix and overlook buying real estate.
But there is more to real estate then just owning a home, states Jeremy, author of the blog GenerationXFinance.com. International funds are a viable option, and the Fidelity International Real Estate Fund could fit nicely in a portfolio, he said. International real estate doesn't follow the same domestic trends, so it can work as a great hedge.
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