Week In Review
September 7, 2009
FINRA Raises Margin Requirements On Leveraged ETFs
The Financial Industry Regulatory Authority beginning Dec. 1 will increase the deposit customers must place with their brokers before placing a margin, or borrowed, investment in a leveraged exchange-traded fund. The greater the leverage involved in the ETF, the bigger the deposit. Investors who use cash to purchase leveraged ETF shares, trades rather than borrowing from the broker, won't be affected.
ETFs "are very complicated, with a high element of risk. They are very much on FINRA's radar screen," said FINRA spokesman Herb Perone.
Deutsche Bank to Launch Floating NAV Money Fund
Deutsche Bank's DWS Investments unit is planning to offer the DWS Variable NAV Money Fund, a money market fund with a floating net asset value and a minimum $1 million investment.
The offering comes at a time when the Securities and Exchange Commission is considering changing the stable NAV of money funds to a floating one. But big fund houses, including Fideilty and Vanguard, have said the change could ruin the money fund industry.
In its comment letter, Vanguard tells the SEC that "a floating NAV would eviscerate a successful and important product for investors." Fidelity said the move would lead to "significant shareholder outflows, destabilizing money market mutual funds and overall money markets." Fidelity estimates that 69% of institutional investors would leave money funds with a floating NAV.
Deutsche Bank, however, told the SEC it supports a floating $10 NAV. The firm apparently hopes the floating NAV will encourage the SEC to back off of stricter money fund rules, including those covering holdings. That would permit money funds to assume more risk, and juice returns.
Funds Reap $10.37 Billion
Long-term stock and bond funds took in $10.37 billion in the week ended Aug. 26, marking the 24th straight week of inflows totaling $250 billion, the Investment Company Institute reported. The lion's share of the flows went to bond funds, which took in $9.8 billion, whereas stock funds took in a mere $29 million. Money funds lost $28.93 billion in the week, according to iMoneyNet.
Bill Would Permit Two 529 Trades a Year
September is College Savings Month and a bill in front of Congress would give financial advisers more flexibility to help their clients who invest in 529 college savings plans.
The current bill (HR 1351) would make permanent some changes that so far are only allowed this year. The most useful change for advisers is the ability to make two switches per year from one plan to another, or to change allocations within a plan.
Traditionally, only one such annual switch was allowed, said Joseph Hurley, founder of Savingforcollege.com. This year, two changes were allowed, and this bill is an attempt to make that a permanent change, he said.
Hurley said that advisers will view this as an aid mostly in terms of adding a level of flexibility in their service to clients.
But Hurley said that there is another way to make a switch within a plan. "Something that most financial advisers don't realize, is that you can always just change your beneficiary, and when you do that you can also make a switch in your  plan," he said.
Average Growth Fund Down 32% in Past Decade
While growth funds have the potential to deliver stellar returns, their performance has been uneven over the past 10 years, in which they declined 32%. By comparison, large-cap value funds have lost only 1%.
Known for chasing performance, investors have responded in kind, with $185 billion in net redemptions from large-cap growth funds over the past decade, three times the amount that was redeemed from large-cap value.
Given the increasing volatility and risk, academic researchers are now saying that "growth investors belong somewhere between people who believe the Earth is flat and those who get their stock tips from talking dogs," USA Today says.
Nonetheless, it is possible the market is entering a period when growth will reward investors. Robert Millen, manager of the Jensen Fund, which has delivered returns in the top 5% over the past 10 years, thinks the economic recovery is for real, although it will be slow due to tepid consumer spending, lingering debt, and higher interest rates and taxes inevitably on the horizon.
31% of Wealthy Investors Back in Equities, Another 26% Awaiting Dow 10,000
The Dow's resurgence this year has convinced many wealthy investors to reinvest their money in equities, but those rich households are still expressing some trepidation about the market's health.
According to the latest "High Net Worth Advisor Insight" report by the Spectrem Group, 16% of people with more than $500,000 in investable assets were convinced to invest in equities when the Dow reached 9,000 in July. An additional 15% had already returned to equities. Approximately 26% will reinvest once the Dow tops 10,000. This would mean that more than 50% of wealthy investors are investing in equities again. However, 11% of these investors said they will never invest in the markets again.