Incubator Rip Offs

I love www.fundalarm.com. The witty posts and the great education and tracking of the mutual fund industry make it a must read for all investors. In this months edition they track a favorite mutual fund scam, the incubator fund, here is what Roy Wietz has to say:

"A recent press release announcing the introduction of Delaware Small Cap Core might have caused your brow to furrow: Why is the press release announcing that Small Cap Core "is now available to investors" [italics added], when the press release also indicates that the fund's "inception date" was way back in December, 1998?.....A close reading of the press release -- a really close reading -- reveals that Delaware Small Cap Core is an "incubator fund," one of the industry's most cynical, most deceptive, entirely legal, and still largely unregulated practices.

....For the first six-and-a-half years of its existence, Small Cap Core was in "limited distribution" (typically, this means that only Delaware employees and their families would have been allowed to invest in the fund).....Because Small Cap Core performed reasonably well during its "limited distribution" (i.e., incubation), Delaware allowed the fund to survive, and the fund is now smiling for the public with a fresh new face and a well-worn track record.....

If the fund hadn't performed well during its incubation period, it would have been liquidated, and virtually no one outside of Delaware would have been aware of its failure.....This kind of cherry-picking is bad enough, but Delaware Small Cap Core compounds the cynicism and deception: During most of the incubation period, the fund had a different name, different managers, a different style of investing, a more concentrated portfolio, a small and stable asset base, a lower expense ratio, and it didn't extract a 12b-1 fee.....

In other words, the current fund is essentially new, yet it's being marketed with a track record that was carefully cultivated under totally artificial conditions.....When a fund comes to market with this kind of history, we offer just two words of advice: "Avoid it".....And when a fund company engages in tactics like this, remember, that company is giving you a clear demonstration of its values, and what it thinks of its customers. "

Would you have picked this up? I doubt it (of course most advisors would have missed it also). Still, this is one good reason to have a well qualified, fiduciary advisor working for you.

Scott Dauenhauer, CFP, MSFP

Mutual Fund Investors Flee Equities

Investor's Business Daily: Mutual Fund Investors Flee Equities

My favorite part of this article is as follows:

"If there's any solace in the weak showing for June, it is that mutual fund investors, as a group, are as wrongheaded as most investors. They tend to be selling at market bottoms and buying excessively at market tops.

June's net outflow was the first since February 2003 when investors took a net $10.88 billion out of stock funds. It should be noted that a substantial rally began in March.
Even that number pales in comparison with the net outflow of a record $52.61 billion in July 2002, near the tail end of a three-year bear market.

The most money ever put into stock funds in a month was $53.68 billion in February 2000, just as the stock market was hitting a bull-market high and just before the S&P 500 began a 50% plunge and the Nasdaq was about to see 75% lopped off its value."

My point is that following trends, especially mutual fund inflows and outflows is probably only valuable if you do the opposite of what you believe the flows are telling you. Most people sell when they should be buying and buy when they should be selling. Don't follow the crowd, they are historically wrong.

Scott Dauenhauer, CFP, MSFP

Netflix's Next Act (Netflix, Blockbuster, Movie Gallery, Amazon.com, Wal-Mart Stores)

Netflix's Next Act (Netflix, Blockbuster, Movie Gallery, Amazon.com, Wal-Mart Stores) SmartMoney.com

O.K., let me be clear - I am not recommending you buy the stock of Netflix, or that you short Blockbuster - I don't make stock picks. Also - I don't own any Netflix or Blockbuster stock (or any individual stocks for that matter)

I love Netflix. I've loved it from the beginning and think that they've done a great job. I've tried the blockbuster service and was not happy with it. If you don't currently use Netflix I encourage you to give it a try, it is incredibly cool and easy to use (even my Mom & Dad now use it). Evidently Netflix will start attempting to offer movies via direct download, yet another innovation.

This post has nothing to do with personal finances, but I just thought you should know how much I enjoy the Netflix service.

Scott Dauenhauer, CFP, MSFP

How to Profit From a Cooling Real Estate Market

I have a love hate relationship with Richard Kiyosaki. Sometimes he says things that make my blood boil. He says things that simply are not true and doles out advice that may be highly inappropriate for most people. However he does also have some good things to say and when he says them I like to make it available to you. A recent column on real estate is quite timely and well written. Kiyosaki rightly chastises speculators and tells investors to get ready, real estate may be entering into a time where real investors can dominate again (though I still think that time is a bit off and highly dependent on location). Keep this article in the back of your mind over the next few years.

Robert Schiller, the Yale economist famous for his book "Irrational Exuberance" and calling the end of the tech boom has completed a study that shows that the current U.S. Housing Boom is the Biggest Since 1890. It is an interesting article and Schiller has been instrumental in bringing to vehicles to the market to hedge against real estate drops in major markets - I suspect individual investors will soon be able to utilize some hedging techniques should the need arise.

Scott Dauenhauer, CFP, MSFP

Recent market volatility: How should you react?

Gus Sauter, a legendary index manager for The Vanguard Group echoes much of what I said recently in terms of keeping the recent volatility (fluctuation) in perspective. I encourage you to read what Gus has to say and look at his charts (Vanguard always writes in an easy to understand manner) and then compare it to my comments from last week.

The bottomline - diverify, keep costs low, and hang in there during the tough times.

Scott Dauenhauer, CFP, MSFP