Bloomberg interviewed Steve Leuthold this morning and the legendary investor had some interesting insights into how 2009 will play out. He has turned even more bullish now given the level of fear among investors. Oh, and he also thinks the S&P 500 will close at least above 1,000 in 2009, a 40%+ return from the recent lows.
Steve Leuthold, whose Grizzly Short Fund returned 74 percent last year betting against U.S. stocks, said now is the time to buy equities because investors are too fearful about the economy.
“These comparisons people make with the Great Depression are totally out of touch with reality, and pretty stupid,� he told Bloomberg Television in an interview today. “We’ve been in much worse, much more panicked and more scary situations in the U.S.�
It’s not every day you get a fund manager telling you to not buy his fund but thats exactly what Leuthold stated…
Because a rally is likely, Leuthold said investors shouldn’t buy his Grizzly Short Fund. It has returned 26 percent in 2009.
Honesty is quite refreshing…
Recently finance professor Itay Goldstein[Wharton], Qi Chen [Duke University's Fuqua School of Business], and Wei Jiang [Graduate School of Business at Columbia University] autored a study on the impact of large outflows from mutual funds and how the underlying investors are impacted.
The authors believe that there are four underlying factors that will determine if mutual fund investors will sell out of a fund:
the past performance of the fund; the investors’ propensity to do what they expect other investors to do, a factor called “payoff complementarities”; the fund’s liquidity; and whether the fund’s investors are primarily individuals and other small stakeholders, or banks and other large institutional investors.
The “herd mentality”:
What typically happens with investors on both the upside (Tech bubble buying) or downside…when some starts looking for the door, other will follow.
“Consequently, the payoff complementarities, or expectation that other investors will withdraw their money, increases the incentive for each individual investor to do the same thing,” adds Goldstein. “Thus the magnitude of the damage due to expected investors’ withdrawals is significant enough to alter the behavior of a sizable group of investors and cause them to redeem early.”
The followup effect of investors bailing from a fund is added cost to the current shareholders. Perhaps some of them know this is going to happen and its why they are getting out, but I’m not convinced that most investors think about this.
He says existing studies indicate that on average, so-called “forced trading” reduces a fund’s return by 2.2%. “Obviously, for illiquid assets, forced trading is likely to cause more damage. Moreover, for unusually large redemptions, the proportion of redemptions that leads to forced trading is also likely to be larger” than those current studies estimate.
And it should come as no suprise that retail investor have a quicker trigger when it comes to sales than do the institutional investors.
They also found however, that the performance-outflow relationship remained strong for funds that are primarily held by small or retail investors, but were not so strong for funds primarily held by large or institutional investors, including banks, insurance companies, corporations and such nonprofit organizations as state and local governments. The researchers say this is because institutional investors know they control large shares of the fund assets, and are therefore less concerned about the behavior of others
There are several reasons that you may wish to review those funds that you have in your portfolio from time to time. Below is a list of possible red flags that your mutual fund needs to be reviewed. These red flags don’t necessarily mean that it’s time to bail on the fund but at the very least you should review them to make sure they are still doing what you hired them to do.
Manager Changes:
Perhaps the bigges red flag is when there is a manager change within a fund. The bottom line is that you are hiring the manager to execute his or her strategy. If they are no longer running the fund then someone else is and they most likely will run the fund differently. No two managers are exactly the same so you should expect if there is a manager change on a fund, that the underlying investment strategy that is being executed will change somewhat.
Key analysts leaving the team:
While most people believe the most important person on a fund is the lead portfolio manager. Most times this is true, but almost every fund has analysts that support the lead portfolio manager, and these analyst can be just as important an any other person on the team. If one or more of these key individuals were to leave the fund the overall strategy could be severely impaired.Â
Changes in investment process:
When I select a fund I want to make sure that the managers of the fund have a clearly defined and repeatable investment process.  It is very important that you understand the strategies employed by the portfolio managers so that you know what to expect from a returns standpoint.Â
If a manager ever changes there investment strategy/process it makes me question their motives. They may have every reason to make a change. Possibly they have realized that their strategy will not work in the current investment environment and decided to modify the strategy to attempt to take advantage of what the market is giving them. But if you were sold on the old investment process why the need to change it now? Usually there is none.
Large flows of money into or out of a fund:
This is especially important when you own the fund in a taxable account. If one or two large shareholders takes their money out of the fund it is possible that there will be a considerable tax consequence if the manager needs to sell holdings in order to accomodate this withdrawal of funds. While this is not a problem for the shareholders of the fund in an IRA or 401(K) it can be a large problem for those that hold the fund in a taxable account. It is very possible that you will be stuck with the tax bill for all of these sales.
Merging of funds
Usually the merging of a fund is done to get rid of an underperforming strategy. The merging of funds can create an added cost to the underlying fund if they need to sell certain stocks in the underperforming fund in order to get better aligned with the merged fund.
Update 2.11.09
Raising Fees or One Time charges
Clearly raising of your fees paid to a fund should give you pause and make you reconsider how shareholder friendly they truly are. Especially in low return environments the expense ratio eats away at your returns and the lower the better (at least for you)
Morningstar has a recent example of a one time charge. In 2008 Seligman funds agreed to be purchased by Ameriprise, but now shareholders of Seligman are having to pay a one time charge to change transfer agents.
In a January 2009 prospectus update filing for the Seligman funds, the firm announced that it was sticking the funds with a one-time charge of approximately 0.16% per fund relating to a change in transfer agents (up to a fund’s expense cap). RiverSource undoubtedly wants to use its own transfer agent, which is reasonable, but why should shareholders pay for the change? Often the surviving fund company picks up any non-recurring charges relating to a fund company merger/acquisition.
The 4th quarter, and all of 2008 for that matter, was an extremely difficult investing environment. There truely was no place to hide if you were not 100% in short term U.S. Treasurys.
Performance:
Positives:
For the full year only three investments in the Model Portfolio’s had postive returns and of those were fixed income investments. Clearly the best performing area of the market was shorter duration U.S. Treasurys as there was a flight to quality among investors. The model portfolio’s holding in iShares Barlcays 7-10 year Treasury (IEF) and iShares 1-3 year Treasury Bond (SHY) were the top two performing investments. IEF returned 17.91% while SHY returned 6.61% for the year. The iShares Invest Grade Corp Bond (LQD) was the only other investment with a positive return for the year, ending up 2.46%.
Some of the equity funds held up fairly well during the year given the challenging environment. The Nakoma fund (NARFX) returned -4.34% and the Hussman Growth fund returned -9.02% for the year.   While it is never a good thing to loose money with an investment (Warren’s 1st and 2nd rules), these strategies provided excellent downside protection in an extremely difficult investing environment.
This weeks market commentary from John Hussman leaves the fund mostly hedged:
For now, the Strategic Growth Fund remains largely hedged against deep, significant market losses, but remains reasonably exposed to “local� fluctuations. Our current hedge places our line of defense between the 800 and 900 area on the S&P 500 for now, meaning that our sensitivity to market fluctuations begins to mute on market weakness below about 900, and would strongly mute if the S&P 500 approaches 800 or lower. As always, the extent and structure of our hedging will shift as market conditions change.
Nakoma has come out with their year end commentary on the fund and they too remain defensively positioned.
Negatives:
The list here is long, led by the iShares Emerging Markets (EEM) and the iShares Mid Cap Growth (IWM) etf’s. The Emerging Markets investment was down -48.98% while the Mid Cap Growth holding lost -44.56% for the year.
Another area of pain was the PIMCO Commodity Real Return fund (PCRDX) which suffered considerably in the second half of 2008 as many commodity prices fell. PCRDX was up approximately 14% in both Q1 and Q2 but gave back all the gains and then some, finishing down -43.61% for the entire year of 2008.
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Changes: None during 2008
The beginning of the year is an excellent time to review your portfolio, overall investment strategy and goals for the future.  Here are a few things to think about for 2009 and the coming years.
Educate yourself :
Learn what other investment managers are doing and what they see for the future. I think its a good idea to get several different perspectives on the market before making up my mind on where I should invest.   Here are a few things I try to read:
Review your 401k/IRAÂ contributions:
Marketwatch has an interesting arcticle about 4 of the more contrarian investment managers around and their take on the current market environment: Jeremy Grantham (GMO), Bob Rodriguez (FPA Capital and FPA New Income), John Hussman (Hussman funds), and Steve Leuthold (Leuthold Funds)
I make it a point to always read Jeremy Granthams investment newsletters even though he has caused me to lose some sleep with his predictions about certain investments. He has been a believer in emerging markets for quite some time now but has recently changed his position.
Notably, just a few weeks ago Grantham turned negative on his “beloved” emerging markets, which had been a spot-on bullish call. “If the global economy is going to disappoint, the cost of holding them just seemed too high,” he said.
John Hussman runs the Hussman Growth fund which is what I like to call a “poor-mans hedge fund”.
For Hussman nowadays, risk-taking doesn’t offer much reward. “We’re fully hedged,” the fund manager said, meaning that a portfolio won’t be affected, positively or negatively, by market gyrations.
And ever the contrarian Steve Leuthold has actually turned positive towards equities…
Now Leuthold’s allocation-driven portfolios are covering short positions and other hedges and moving from a neutral, 50-50 equity/bond allocation toward 60% stocks — nearing their 70% maximum threshold.
“Our whole office is surprised,” Leuthold said in an interview “This is quite a departure for us. I don’t believe I’ve ever seen such a dynamic change, going from mildly negative through neutral to pretty positive.”
Seems like everybody is getting on the Frontier Market bandwagon. Back on July 17th Wisdom Tree launched the Middle East ETF (GULF).Â
Index Description:
The WisdomTree Middle East Dividend Index is a fundamentally weighted index that measures the performance of companies in the Middle East region that pay regular cash dividends on shares of their common stock and that meet specified requirements as of the index measurement date. Companies are ranked by market capitalization, and the 100 largest companies by market capitalization are selected for inclusion. Companies are weighted in the Index based on dividends paid in the annual cycle prior to the index measurement date. Country weights are capped so that no country’s weight in the Index exceeds 33% at the annual measurement date.
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