Mutual funds: Protect Yourself With Segregated Funds

Segregated funds were initially developed by the insurance industry to compete against mutual funds. Today, many mutual fund companies are in partnership with insurance companies to offer segregated funds to investors. Segregated funds offer some unique benefits not available to mutual fund investors.

Segregated funds offer the following major benefits that are not offered by the traditional mutual fund.

1. Segregated funds offer a guarantee of principal upon maturity of the fund or upon the death of the investor. Thus, there is a 100 percent guarantee on the investment at maturity or death (this may differ for some funds), minus any withdrawals and management fees - even if the market value of the investment has declined. Most segregated funds have a maturity of 10 years after you initial investment.

2. Segregated funds offer creditor protection. If you go bankrupt, creditors cannot access your segregated fund.

3. Segregated funds avoid estate probate fees upon the death of the investor.

4. Segregated funds have a "freeze option" allowing investors to lock in investment gains and thereby increase their investment guarantee. This can be powerful strategy during volatile capital markets.

Segregated funds also offer the following less important benefits:

1. Segregated funds issue a T3 tax slip each year-end, which reports all gains or losses from purchases and redemptions that were made by the investor. This makes calculating your taxes very easy.

2. Segregated funds can serve as an "in trust account," which is useful if you wish to give money to minor children, but with some strings attached.

3. Segregated funds allocate their annual distributions on the basis of how long an investor has invested in the fund during the year, not on the basis of the number of units outstanding. With mutual funds, an investor can invest in November and immediately incur a large tax bill when a capital gain distribution is declared at year-end.

There has been a lot of marketing and publicity surrounding segregated funds and how much value should be placed on their guarantee of principle protection. In the entire mutual fund universe, there have been only three very aggressive and specialized funds that lost money during any 10-year period since 1980. Thus, the odds of losing money after ten years are extremely low. If you decide you need a guarantee, it can cost as much as 1/2 percent per year in additional fees.

However, with further market volatility these guarantees could be very worthwhile. In addition, most major mutual fund companies also offer segregated funds.

About the author: Tony Reed is the author of "Mutual funds: protect yourself with segregated funds", please visit his website Mutual Funds & Stock Trading for more information.

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Managing Investment Portfolio Risk - Mutual Funds that Work Like Hedge Funds

We look at mutual funds that are not structured like typical mutual funds, that is, funds that don't invest exclusively in long only positions in stocks and bonds. These can be powerful tools to manage the risk management of our investments.

As the SEC has loosened the rules on mutual funds shorting stock and investing in options, a small group of funds has emerged that invest like some hedge funds. These can be purchased by almost anyone, unlike hedge funds, which are only available to accredited investors (e.g. those with a net worth of more than one million dollars).

Appropriate use of these mutual funds can be quite effective in providing both diversification and hedging of your investment portfolio. According to the Securities and Exchange Commission, there are several types of hedge funds.

However, we will examine some of the more conservative strategies. One of these is the Long/Short fund.

Long / Short Funds:

Long/Short which includes sector and market neutral/relative value funds. These funds try to exploit perceived anomalies in the prices of securities. For example, a hedge fund may buy bonds that it believes to be underpriced and sell short bonds that it believes to be overpriced. No matter what happens to overall interest rates, as long as the spread between the two narrows, the fund profits. Conversely, if spreads widen, gains can turn quickly into losses. Long/short equity is the most frequently used strategy among hedge funds.

Arbitrage Funds:

Another of the lower risk strategies is Risk/Merger Arbitrage. These funds attempt to profit from pending merger transactions by, for example, taking a long position in the stock of the company to be acquired in a merger, leverage buyout or takeover and simultaneously taking a short position in the stock of the acquiring company.

Since these strategies are fairly conservative, they are ones that would be most appropriate in managing portfolio risk. Also, they have a low correlation to the market so some advisors see them as alternatives to bond funds in your portfolio.

Morningstar has added a category called Long/Short to its listing of mutual funds. Morningstar puts arbitrage funds into that same category as well.

There are many new entrants into this field. While there may be several of the newer funds that are excellent offerings, the most straightforward way to judge the risk management performance of these funds is to look at their history during at least some part of the most recent bear market (2000 2002).

Some example mutual funds that fared reasonably well in the last bear market include:

Merger Fund (MERFX):

This fund has been around for over 10 years. The basic approach is to capture the spread between the share price of companies that might be acquired and the proposed purchase price. This is done by buying the shares of the target firms of deals and occasionally shorting the stocks of the acquiring firm. This fund did fairly well during the bear market, although it had only fair performance in 2005.

Schwab Hedged Equity Fund (SWHIX):

A clone of its older sibling (SWHEX) that has significantly lower minimum investment, its managed by a group that has a long history of success in the small cap stock arena. The volatility of this fund is well below the market, and its returns have been good for a long/short fund.

Gateway Fund (GATEX):

This fund has been around for years. It has a unique approach of holding large cap stocks with high dividend yields and selling covered calls for extra income, while holding put options to guard against a market downturn. Once again did reasonable well in the bear market years.

Calamos Market Neutral (CVSIX):

One of the older offerings in the long/short group, it has a good track record that extends back through the 2000-2002 bear market. This fund utilizes a convertible arbitrage approach to target an 8-10% long term annual return. (This one has a sales load.)

Hussman Strategic Growth (HSGFX):

This is a hard one to categorize. John Hussman runs the fund, and buys stocks based on his valuation models, and then hedges against market risk by synthesizing a short position in a couple of the major indices with short call options. The hedge varies based on his appraisal of current market conditions. This is not your typical mutual fund, but over the last several years has had a very low drawdown, with reasonable returns.

As you can see, the universe of mutual funds that adopt the best strategies of hedge funds is increasing. These funds are a powerful tool in building a diversified, low risk portfolio, hedging away some of the market risk while keeping a reasonable return for your investments. But keep in mind that while all these fall into Morningstars category of long/short funds, they each have unique approaches to the concept of hedging. So before you invest in any of them be sure you understand the specifics of each approach to ensure it is a good fit for your portfolio.

John Ruppel writes for Fundztrader.com. Fundztrader offers model portfolios featuring Fidelity Mutual Funds, Fidelity Select Funds, and an ETF trading system, including iShares and Powershares. More information and a free newsletter are available at http://www.fundztrader.com

 

6 Reasons Why Exchange Traded Funds Are Better Than Mutual Funds

Exchange traded funds (or ETFs) are better for most investors than mutual funds. The mutual fund industry has experienced tremendous growth over that last twenty-five years or so. But it's a new era now. It's the era of the ETF.

What are exchange traded funds? ETFs are similar to index mutual funds. Essentially, an ETF is a portfolio of securities that is intended to provide investment results that, before fees and expenses, generally correspond to the price and yield performance of the underlying benchmark index. ETFs trade on the stock exchanges. As such, they offer features of a mutual fund in a stock-like instrument.

There are at least six important advantages that exchange traded funds have over mutual funds…

 

 

 

1. ETFs, instead of pricing once a day after the market closes (like mutual funds), are traded throughout the day as if they were regular stocks.

    

    

2. Since an ETF trades like a stock, it can be bought and sold (and shorted at any time during market hours.

    

    

3. Investors can calculate the value of an ETF during the day because the composition of the underlying portfolio - normally a published index - doesn't change. For example, the value of the SPDR ETF (SPY) that tracks the S&P 500 index is calculated continuously throughout the day.

    

    

4. An ETF can be exchanged for the underlying assets it represents with the issuing institution for a small fee. It means that ETFs will not trade at significant discounts or premiums to the value of the underlying assets of the fund. This is not true with closed-end mutual funds.

    

    

5. Because they are not actively managed and have very little portfolio turnover, ETFs carry some nice tax advantages over mutual funds because they distribute relatively few capital gains.

    

    

    

6. Most ETFs have very low management fees, especially compared to mutual funds. And the lower the expenses, the more money goes into the investor's pocket.

 

So exchange traded funds offer most of the advantages of mutual funds -- instant diversification and many to choose from -- without the major disadvantages.

The primary disadvantage of an ETF is that if you are making small transactions on a regular basis, you will pay a commission on each transaction -- just like you would by buying and selling a stock.

But, all in all, the advantages of an exchange traded fund far outweigh any disadvantages. I suggest that you use ETFs as an important part of your investment strategy.

Copyright 2005

Larry Holmes invites you to visit http://www.smart-money-report.com/ Your common sense guide for financial and investment success.

Exchange-Traded Funds are an Interesting Alternative to Mutual Funds

Exchange-traded funds (or EFT for short) have recently become a more and more interesting alternative to classic mutual funds. As of today, there are over 175 EFTs accumulating over 200 billion dollars - and these numbers are growing. While it is improbable for EFT to completely supersede classic mutual funds (at least in the near future), they are an interesting alternative and probably a must-have in every beginners portfolio.

What is EFT?

Basically, an exchange-traded fund is a fund made of a portfolio of stocks from a single market. The portfolio is composed based on an index, industry sector or (more rarely) a country the companies are tied to. There are many stocks in each EFT portfolio, so the risk of the losses is roughly the same as in case of mutual funds. However, the expenses are tied thus keeping EFT funds from going much lower, and the fees charged by EFTs are minimal, giving investors additional income. What's more, EFTs trade like stock, making life easier both for investors and fund managers.

Benefits

1. Low fees The most obvious strong point of EFTs is their low fees. While lowering them to such levels as 0.2% a year may look like magic, it is completely normal - due to the fact that all the stocks are tied to some single slice of the market, the funds can reduce the amount of money spent on market analyses. 2. Lower taxes Unlike mutual funds, exchange-traded funds distribute nothing but a dividend from time to time, so there are few reasons to get taxed. 3. They're transparent You can check real-time what your EFT is actually doing with your money, while mutual funds report their holdings only twice a year. 4. Extra trading opportunities EFTs are sold just like normal stocks, thus creating many different trading options. Stop-loss and limit orders are but one of many opportunities available only to stock trading.

Switching to EFT

Switching to exchange-traded funds is relatively easy on tax-free accounts, such as IRA (Individual Retirement Account), where you simply cease to invest in mutual funds or stocks and start buying EFTs. However, when we're speaking about taxable accounts, you will have to make a switch only a little at a time to ease the taxation burden on your revenue.

Remember that while Exchange-traded funds are an excellent investing opportunity, it is not without risk, so consult with your Financial Professional before investing, especially if you have a taxed account.

For more information on learning stock investing, visit http://www.learn-stock-investing.info