Plenty of investment ideas sound good and make sense, right up to the point when they are executed. Take, for example, the Sound Mind Investing...
Plenty of investment ideas sound good and make sense, right up to the point when they are executed.
Take, for example, the Sound Mind Investing fund. It’s based on a successful newsletter, it invests in mutual funds that have all had recent success, it has delivered good results in its short life, and yet it’s a Stupid Investment of the Week.
That’s because the fund’s positive attributes are outweighed by factors that should make the average investor wonder, “Does it make sense to do this?”
Stupid Investment of the Week highlights the flawed thinking and characteristics that make a security less than ideal for the average consumer, and is written in the hope that showcasing danger in one situation will make it easier to root out elsewhere. While obviously not a purchase recommendation, the column is not intended as an automatic sell signal, as there may be times when dumping a problem investment simply creates a new set of issues.
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With the Sound Mind Investing fun (SMIFX), investors would have capital gains to worry about, as the fund gained 14 percent a year ago and is already up 11 percent this year.
Those gains alone would make some investors think that the $210 million fund — which will celebrate its second anniversary in December — makes sense.
But the problem with the fund isn’t performance so much as it is underlying thinking of shareholders.
The fund itself is based on the Sound Mind Investing, a financial newsletter that’s “written from a Biblical perspective.” The newsletter runs multiple fund portfolios, some following a buy-and-hold strategy and others using the “upgrader” strategy followed by the fund.
There’s no denying that the newsletter’s track record is impressive; the upgrading strategy has beaten the market, as measured by the Wilshire 5000, for eight years in a row.
But the fund world is littered with tales of bad funds spun out of successful newsletters, and Sound Mind seems likely to join that list but for a different reason — namely that this is a fund that you’d be better off replicating yourself.
Sound Mind Investing is a newsletter that targets average investors, and all of its portfolios are straightforward. According to the Hulbert Financial Digest, the model portfolios have anywhere from 4 to 22 mutual funds in them. Portfolio changes in the upgrading strategies occur on a monthly basis, meaning an investor could follow the strategy with no more than a half-hour’s worth of work.
The fund, meanwhile, isn’t following precisely the same portfolios that readers see in the newsletter, which may account for why performance has actually lagged that of the newsletter.
Of course, a bigger reason for trailing the newsletter would be the fund’s expense ratio. As a fund-of-funds, Sound Mind buys other mutual funds, which means investors pay expense ratios at two levels; first you have the expenses of those other funds, then you pay roughly 1.4 percent — the average for a stock fund — for the expertise of the Sound Mind team. By the time all expenses are accounted for, the costs are north of 2.3 percent.
Mark Biller, senior portfolio manager of the fund, says that expenses should shrink as the fund grows, but he noted that investors are willing to pay the cost for the sake of convenience.
“For 17 years, we’ve had this newsletter and people kept calling and writing saying, ‘I like your strategy, but can you do it for me,’ ” Biller says. “For the first 15 years, we had to say, ‘No, you either do it yourself or you’re out of luck.’ Now we say that you can go with the newsletter or go with the fund — and that the newsletter is the less expensive option — but the fund is there if you don’t want to do it yourself.”
Even when buying the fund, some people might say that the fund’s strategy feels very much like what investors get when they invest on their own.
According to the fund’s Web site: “The Upgrading strategy … focuses on owning the best-performing mutual funds, whatever the current market environment may be.
“We purchase those funds showing superior performance relative to their peer group, and hold them until they stop outperforming. When that occurs, they are sold and replaced with other funds showing stronger recent performance.”
That’s a strategy that leads most investors to underperformance, as witnessed by countless studies which show that investors make their moves at precisely the wrong time, so that they underperform the long-term performance they could get from buying the fund.
“That strategy is a euphemism for ‘Buy whatever is on the cover of Money magazine this month,’ ” says Jeff Tjornehoj, senior research analyst for Lipper. “And the expenses are awfully rich, when what you’re really getting is the convenience of not following the newsletter strategy on your own.”
In defense of the fund, “upgrading” by another name would be called “sector rotation,” and there are plenty of solid funds that use the technique. And while newsletter-bred funds typically are lackluster performers — where the fund does worse than the published portfolio on an after-tax/expenses basis — there’s no denying that some funds and some newsletters break the mold.
“The track record of the newsletter indicates that there’s a strategy here that adds value, and thus far it seems they have brought that to the mutual fund,” says Mark Hurlbert, whose newsletter tracks newsletter performance. “But let’s face it, a lot of people like newsletters but don’t really follow the strategy.”
The fund doesn’t precisely follow the newsletter strategy either. But it does make you wonder if the real expertise is in picking the funds or making the timing decisions.
Digging into the Sound Mind portfolio, there are about two-dozen big-name funds, nothing that would make an educated observer believe there was a stroke of genius in the fund selections. And while the newsletter takes its “Biblical perspective,” that doesn’t show up in purchasing any special-interest funds; the most recent portfolio holdings did not include any social-investment funds that share management’s beliefs.
Says Tjornehoj: “It might be an OK fund, but you buy a mutual fund to get professional management at a reasonable cost. This is high cost, and you can follow the same management strategy yourself. … Most people want more than that.”
Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe’s Stupid Investment of the Week or a comment about this week’s column, you can reach him at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.