This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.
Ralph Cioffi and Matthew Tannin were indicted on June 18, 2008. They are accused of a litany of fraudulent activities in connection with the demise of two hedge funds they managed for Bear Stearns.
Cioffi and Tannin are entitled to the presumption of innocence. The obligatory "perp walk," staged for the benefit of the press, is offensive to traditional notions of justice. Not only does it demean and humiliate them, it taints the jury pool and intrudes upon their right to a fair trial.
Nevertheless, the indictment offers an insight into conduct that would otherwise be inexplicable.
Here are two highly educated, sophisticated, fund managers who achieved the American dream -- and then some. Why would they risk it all by, as alleged, misrepresenting the risk of these funds, and their personal stake in them?
This post is part of our Battle of the Brands feature. Let us know which brand you prefer, and check out other Battle of the Brands posts.
To some degree, a face-off between Vanguard and Fidelity is really a face-off between John Bogle, Vanguard's founder, and Peter Lynch, Fidelity's star fund manager. While Bogle was a pioneer in no-load and low-cost investing in index funds, Lynch was a proponent of investing in "what you know," or getting investing ideas from your day-to-day life. BloggingStocks covered this Bogle vs. Lynch match up back in September, and readers gave the financial edge to Lynch.
Privately held Fidelity Investments is made up by two independent but closely cooperating companies: Boston-based Fidelity Management and Research LLC serves the North American market, and Fidelity International Limited (FIL), spun off in 1969, provides investment products and services to clients in the rest of the world. Fidelity reported revenue of $12.87 billion in 2006, by offering a large family of mutual funds, as well as providing discount brokerage services, retirement services, estate planning, wealth management, securities execution and clearance, life insurance, and a number of other financial services. The founding Johnson family still controls Fidelity, but Peter Lynch and some other fund managers also hold stakes in the company.
This post is one of several on business heirs apparent. Let us know in the comments whether you think Abigail Johnson should take up the reigns of Fidelity, and be sure to check out the other heir apparent posts.
I covered the mutual fund business for about six years in the 1990s, when Fidelity Investments was all the rage. It had the most star managers, the best performing funds and by far the most assets. It had the awe-inspiring Fidelity Magellan! And that was nothing to sneer at back then.
So it was with great interest when I learned that Abigail Johnson, the daughter of CEO 'Ned' Johnson (himself an heir to Fidelity), and a woman near my age (she's 46), was being primed to take over the company. I have been cheering for her ever since. (Even as I wonder if the only way a woman can get to the top of a major financial services firm is by having her father run the place).
MarketWatch today has an interesting interview with Jason Weiner, the manager of Fidelity Growth Discovery Fund. As an individual investor, while I don't always parrot what institutional investors do, I do find that understanding their thought processes and seeing how they themselves make sense of data and the markets is really useful as I make my own investment decisions.
For those who know a little bit about Fidelity funds, the Growth Discovery Fund used to be called the Fidelity Contrafund II, which Weiner himself managed from 1998-2000. This year through Dec. 3, the $1.6 billion fund was up 26.2%, landing in the top 5% of its large-cap growth category, according to investment researcher Morningstar Inc.
Google Weiner likes Google Inc. (NASDAQ: GOOG). Weiner says of the search giant, "I don't think there's [strong] threats to their paid search advertising model." Interestingly, Weiner says that Google's biggest threat is not being a one-product pony, as many analysts and pundits criticize the company. Rather, Weiner is nervous about the expansionist drives of Google management into businesses that may not be nearly as attractive as paid search.
The first inkling I got that Fidelity might be tied to the SIV bailout was a story last week in The Wall Street Journal that indicated Fidelity's Prime Money Market Portfolio owned $402 million medium-term notes in Gordian's Sigma Finance Inc. as of the end of August [subscription required]. Taking a closer look at Fidelity Funds, I found two broad market bond funds with significant exposure to the mortgage-backed and asset-backed credit categories now showing signs of trouble.
As of 9/30/2007 Fidelity Ultra Short Bond Fund holds 42.4% of its assets in asset-backed securities, 17.5% in collateralized mortgage obligations and 15.2% in commercial mortgage-backed securities. That's 75.1% of its assets in securities tied to the credit markets that are now showing signs of trouble. While I'm not saying that 75% of this fund's assets are in trouble, what I am asking is, do you really want that much exposure to these markets in this volatile time?
As of 9/30/2007 Fidelity Short-Term Bond Fund holds 23.1% of its assets in asset-backed securities, 13.5% in collateralized mortgage obligations, and 11.6% in commercial mortgage-backed securities. That's almost half of its assets in the most volatile parts of the credit markets. If you do hold these funds, you need to decide if you want this level of exposure to these risky credit markets right now.
In reviewing bond funds this morning, these two Fidelity bond funds were less-diversified than many of its peers. While their yields may be high, you must decide whether the risk is worth it.
Lita Epstein is the author of more than 20 books including the "Pocket Idiot's Guide to Investing in Mutual Funds."
Nearing retirement and wondering how you can possibly manage your retirement portfolio yourself? I'm talking about the funds you'll be rolling out of your 401K, 403B or other employer-based retirement savings program. Many people are asking that question as they look at those large chunks of money and want to be sure they don't outlive their money during retirement.
Fidelity and Vanguard want to make that easier and cheaper with an alternative to annuities. Fidelity calls them Income Replacement Funds and Vanguard calls them Managed Payout Funds. Eleven Fidelity funds were launched last week and Vanguard plans to make its version of three funds available by early 2008.
How do these differ from annuities? Annuities are a type of insurance with a guaranteed payout based on a contract. They can be structured with a guaranteed payment for the rest of your life (no matter how long that is) or can be structured with a set payout over a set number of years. The big disadvantages of annuities is that you lose all control of the money inside the annuity and you have to pay significant fees to the insurance company managing it.
You probably think mutual funds are the least likely activist investors. While that was true in the past, the tides appear to be changing. T. Rowe Price just did something it's only done once before in its 70-year history - filed as an activist investor in order to fight the management buyout of Laureate Education, according to the Wall Street Journal.
T. Rowe Price mutual fund manager, Brian Berghuis, ran the numbers and determined that the private deal valued at $3.8 billion for this operator of universities could be valued about 80% higher. Why did he care? T. Rowe Price mutual funds shareholders could be losing as much as $210 million according the the Journal.
Management buyouts tend to work differently than the more traditional outsider takeovers. Managers want to keep the price as low as possible in these deals, while they look for the highest price possible for an outsider takeover.
Fidelity Investments took a similar stance against a deal for a private-equity buyout of OSI Restaurant Partners earlier this year. OSI manages the Outback Steakhouse chain. Fidelity's stance worked and the offer had to be increased before shareholders would approve it.
It's about time that mutual funds take activist stands to protect their shareholders. Mutual fund assets totaled $11.496 trillion in August, according to the Investment Company Institute. As managers of their investors' money, mutual funds have an obligation to make sure people who hold mutual funds get the best bang for their buck. There's power in numbers and if the mutual fund companies became more active in protecting the rights of their shareholders, both stocks and mutual funds shareholders would benefit.
Lita Epstein is the author of more than 20 books including the "Pocket idiot's Guide to Investing in Mutual Funds."
Few professional money managers have had the success Peter Lynch has had. The former Fidelity manager of the widely-held Magellan mutual fund racked up great returns year after year in his tenure at Fidelity. After he retired in the 1990s, Lynch wrote a few books (which are worthy reads, I might add), and aimed them at the "everyman" of investing: the normal American consumer (hopefully, investor).
Along with Vanguard founder John Bogle, Lynch is someone I've followed for some time, and following much of what he said has, well, done right by me. But, after having talked with many a business associate and family member in the past year -- as the market has swayed to and fro -- few of them follow Lynch's investing strategy. That is, if they have an investing strategy at all beyond pumping 0.5% into that 401k and putting 50% of their portfolios into their employer's stock. Yikes!
The average mutual fund is a dog and laggard, yet salespeople rope everyday people into these expensive funds by the boatload. Bogle would have said, "just buy index funds and be done with it." Lynch would have said, "check the price-to-earnings ratio, make an informed choice, and be done with it." Both are exemplary ways to examine and adjust your portfolio.
Does it take some self-education? Sure it does -- but hey, it's only your money, right? Why would anyone pay an underperforming fund manager when buying a no-cost index fund produces better returns? Yes, in many cases the situation is a bit more complex than that, and tax rules and holding periods (among other things) come into play. Still, do you invest like Peter Lynch did? If not, why?
William Ackman's Pershing Square Capital Management, whose firms holds about 15% of Ceridian Corporation (NYSE: CEN), doesn't like the proposed $5.3B sale of the company to Thomas H. Lee Partners and Fidelity National Financial Inc (NYSE: FNF), and says he's going to find higher bidders, according to the Wall Street Journal.
The Financial Times reported that British bank Barclays PLC (NYSE: BCS) has drawn up plans to sweeten its $86B all-share offer for Dutch bank ABN Amro Holdings (NYSE: ABN), by substituting cash for some of the shares it is currently offering for ABN.
Beginning today, Apple Inc (NASDAQ: AAPL) is embedding its iTunes internet music download service in the British and Irish social networking site Bebo, reported the Financial Times.
OTHER PAPERS:
The New York Post has learned that a private-equity firm owned by the Dubai government is close to buying Barneys New York from the Jones Apparel Group (NYSE: JNY).
The New York Times reported that the Wall Street Journal is set to "shake up its newsroom" by reassigning and replacing several top editors.
The Wall Street Journal (subscription required) reported that Time Warner Inc's (NYSE: TWX) Warner Bros. is planning to release movies to video-on-demand services at the same time as the DVD launch to see if they can expand one distribution pipeline without harming another.
Fidelity Investments, which was the third-largest shareholder in Dow Jones, has sold almost all its shares in the company, which is the target of a $5B takeover by News Corporation (NYSE: NWS), reported the New York Post.
I'm just about as big of a Warren Buffett fan as you'll find, but I found myself somewhat disillusioned when he declined to divest Berkshire Hathaway's (NYSE: BRK.A) stake in PetroChina (NYSE: PTR), after critics proposed such a move because of the company's ties to Darfur. Fidelity Investments recently sold its share of PetroChina for just that reason.
Buffett defended the investment by saying that it was Chinese state oil company CNPC, the parent of PetroChina that was involved with Darfur. But in a piece on TheStreet.com, Brett Arends points out just how closely the companies are linked. He discusses the numerous insiders at PetroChina who also work for or did work for CNPC; PetroChina's Chairman, Chen Geng, was General Manager at CNPC until last November.
Over at the Motley Fool, Emil Lee opined that Buffett should go ahead and sell the shares: "Both sides of the divestment argument are entitled to their own opinions, but I think that Berkshire should divest, not because it will help save Darfur victims -- the problems go much, much deeper than who owns PetroChina's shares -- but more because Berkshire has always been a beacon of light for investors everywhere, and it would be a tragedy for that light to be clouded, regardless of whether the reasoning was even slightly correct."
Lee summed it up perfectly. Berkshire's investment in PetroChina just smells bad, even if the company really isn't to blame. The arguments for divestiture were powerful enough to sway Fidelity, and I just really wish Berkshire would go ahead and sell the shares, if only to preserve its squeaky clean image.
Lately, we've seen some considerable pushback from major shareholders on private equity deals. Yes, these investors want to maximize their returns. In fact, key investors like Fidelity have a fiduciary responsibility to do so.
As a result, we are seeing a tug-a-war and shareholders seem to have an edge. Just look at the Clear Channel (NYSE: CCU) deal. Despite two increases in the bid, the buyout deal still had to be delayed and may not get done.
There's an excellent piece on this in Bloomberg.com. Basically, the focus is on the mighty Fidelity, which has $1.4 trillion in assets. Yes, that's a lot of leverage.
This does not mean deal activity will diminish. There's simply too much money in private equity funds (that is, they get paid by putting money to work).
Rather, it's good news for individual shareholders who -- over the years -- had little choice but to leave money on the table.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
The Wall Street Journal reported today that four mutual fund companies reported rising profits [subscription required] that met or surpassed Wall Street's estimates. Amvescap, Janus, Federated Investors, and Franklin Resources all reported strong numbers, and Fidelity Investments reported that its assets under managements had grown 19% to a staggering $1.77 trillion.
Why am I mentioning this? In order to be a savvy fund investors, it's important to know how they earn money. Assets under management is far, far more important than fund performance. Fund performance only matters to the extent that it helps them attract new investors. Take a look at the numbers:
If a fund charges a 2% expense ratio, has $100 under management at the beginning of the year, and earns a return of 5% for its investors, the fund company will earn $2.10 (before its own expenses).
If a fund charges a 2% expense ratio, has $100 under management at the beginning of the year, and earns a return of 25% for its investors, the fund company will earn $2.40 (before its own expenses).
In other words, a return that is five times as good for investors will only increase the fund company's earnings 14%. The interests of the fund manager are not aligned with the fund holders'. By increasing its assets under management, a fund adds a corresponding amount to its revenue -- 20% growth in assets under management means 20% more revenue for the firm.
So when you're evaluating mutual funds, remember this: Their business is asset gathering, not investing.
When I read this lead in an article in the New York Times, I couldn't believe my eyes: "When a group of economists argued recently that Americans might be saving too much for retirement ...." This reminds me of something that I saw in a book of highlights from the Headlines segment of Jay Leno's Tonight Show, where readers send in funny headlines from newspapers and advertisements. The headline read: "Postal Service looks to deliver mail more slowly."
If Americans are indeed saving more than is necessary for retirement, is that really a big problem? With the national savings rate below zero, how can less than nothing be more than enough? According to a survey released by Fidelity Investments (in rebuttal to the argument), the average American saves only enough money to generate 58% of their pre-retirement income, less than the 65% that the economists said was a realistic estimate of how much would be required.
So who are we to believe? I would advise people to err on the side of saving more than is enough. It's kind of like a friend I have who claims to be atheist but goes to church regularly: "If I'm right and there is no god, I'll have wasted a couple hours of my time each week. If I'm wrong and don't go to church, I'll be in deep (trouble)."
One sentence that no one will ever utter during their retirement: "Ugh, I just saved too much money for this. I have no idea what to do."
Since the beginning of the year, shares of Yahoo!, Inc. (NASDAQ:YHOO) have lost 30% as the stock has severely underperformed the broad market. To put this in perspective, shares of Google, Inc. (NASDAQ:GOOG) have gained nearly 18% over the same period.
Now we find that institutions may be in the process of giving up on the stock as Fidelity Investments dumped 16 million shares [subscription required] in recent weeks. It is also noted that Fidelity is not the only institutional shareholder to bail out of the stock this year. It would stand to reason that Fidelity's selling has helped to pressure the stock, but as a contrarian, my ears perk up when I hear chatter about signs of heavy selling.
A rush to the exits can be a sign of capitulation, a situation where selling pressure is flushed out of the system. Once the selling has run its course, you have the potential for buying demand once again to assert itself and boost the shares.
Digging a little deeper into Yahoo!, however, shows that the stock may not yet be at the point where everyone has capitulated. According to Zacks, 14 of 23 analysts (61%) still rank the stock a "buy." I say "still" because the percentage of "buys" stood at 78% in January, when the stock was trading near multi-year highs.
This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.
This post is part of our 
This post is one of several on business heirs apparent. Let us know in the comments whether you think Abigail Johnson should take up the reigns of Fidelity, and be sure to check out the other heir apparent posts. 
.gif){kind=logo}
Lately, we've seen some considerable pushback from major shareholders on 
McDonald's continues its coffee crusade
Cramer on BloggingStocks: Paulson and Bernanke step up to the plate
Google's $1.7 billion YouTube deal going down the tubes?
