Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Thursday, September 1, 2005: Window
dressing. Another reason to love mutual funds. Yesterday was the last day of
the month. Mutual fund managers bought heavily to drive stock prices up. They
bought two types of stocks:
Those stocks they owned. This made their gains for the month or quarter
higher and their bonuses bigger.
2. Those stocks they didn't own, but should have -- like Valero Energy (VLO).
By showing they owned hot stocks like Valero (up $9.71 yesterday), they showed
how smart they were.
mutual funds only reveal what they own at the end of each month, e.g. yesterday.
Although most don't reveal until the end of each quarter. The rest of the time
they leave their mutual fund owners in the dark.
practice of window dressing has three implications:
+ It misleads investors.
+ It makes the mutual fund managers get higher bonuses, which hurts investors.
Unlike hedge funds, mutual fund managers typically don't have to repay last
quarter's bonus, if next quarter they do horribly.
+ It generates higher brokerage commissions, which also hurts investors by needlessly
running up the funds' expenses.
I sent the words above this morning to a friend who works in a mutual fund and
asked him for comments. He emailed back:
short, I remain not a fan of most mutual funds.
most things published in the press, its based on the truth but massively
does happen to some degree and you can see it in the stocks. Ive worked
at two of the biggest mutual fund companies in the world and never seen it
happen (which of course doesnt mean it didnt happen). Our PMs
(portfolio managers) and analysts are paid on three-year trailing numbers
in order to make it impossible to get paid on this kind of stuff
because its true that you dont have to give up a bonus if you
give up the performance the next quarter, our firm makes sure they never give
you the bonus for performance that isnt real."
need to pay serious attention to our cash. Any
of us with cash in a bank or with a broker need to check. In recent weeks
I've written about:
1. A savings bank which is paying me 0.40% a year on a deposit on a condo.
2. Spurious "finance" charges that keep popping up in one of my brokerage
accounts and remain irksomely difficult to get rid of.
3. My favorite bank told me it was paying interest on my checking account, but
4. Another bank that refused to pay more than 0.40% a year on savings accounts
for reasons it couldn't explain.
Now The Wall Street Journal has a piece on how brokerage firms are sweeping
their clients' cash from money-market funds into lower-paying bank deposit accounts.
Here's the Journal's chart, showing how you and I are being ripped off.
Here are some
of the Journal's words:
your credit report for free: Today, you and I in the Northeast will
be eligible for a free credit report. Go to www.AnnualCreditReport.com.
But a credit report, in all its mind-numbing detail, is not what most people will
be looking for. They want the quick snapshot of their creditworthiness. They want
their FICO score, and it's not free. FICO is short for the Fair Isaac Corporation,
which created the score. The three-digit FICO number ranges from 300 to
850. It is used by mortgage brokers, credit card companies, retailers and
auto dealers to determine how much you can borrow and at what interest rate. The
higher the score, the better.
In a development
that hurts investors, brokerage firms are quietly moving their clients' cash
from money-market mutual funds -- the traditional default option -- into lower-yielding
The shift, which
is bolstering brokerage firm profits, means that investors with large cash
balances could lose thousands of dollars or more in annual interest payments.
These accounts are where brokerages typically park the proceeds from investor
stock sales as well as dividends. Some investors also keep their portfolio's
cash allocation in such accounts.
taxable money-market mutual fund is paying an annualized yield of 2.89%,
compared with an average yield of 1.53% on bank money-market deposit
accounts, according to iMoneyNet, a Westborough, Mass., research firm. For
an account of $100,000, each lost percentage point adds as much as $1,000
a year in lost interest.
can opt into higher-paying money-market funds, they need to take the initiative
to do so by contacting their broker. And brokerage firms are increasingly
raising their minimum balance requirements for clients to be eligible for
the higher-paying options.
Where idle cash
was sitting didn't matter so much a year ago, when yields on both types of
accounts were below 1%. But since the Federal Reserve started boosting short-term
rates in June 2004, money-market mutual fund yields have shot past yields
on many of these bank-sweep products. ...
1, new customers at Charles Schwab Corp. with less than $500,000 in household
assets will have their cash swept into a deposit account at the firm's bank
unit, and will no longer be able to choose a money-market mutual fund as a
default sweep option. Morgan Stanley's Individual Investor Group, meanwhile,
which currently has money-market mutual funds as the default cash-sweep option
for its clients, is planning to make bank deposits the default option for
more of its accounts later this year. ...
the New York Stock Exchange warned brokerage houses that they could face possible
enforcement action if they fail to disclose prominently that these so-called
cash-sweep accounts often pay inferior rates to money-market funds. ...
In April, E*Trade
Financial Corp. moved to a new rate structure that pays clients with bigger
balances higher yields. The firm has swept about $6.4 billion in cash out
of multiple sources, including money-market funds, into its bank since it
implemented its cash-sweep product in September 2003. And Ameritrade Holding
Corp. is gearing up to move customers' cash into cash-sweep accounts at TD
Bank once it closes its deal to buy TD Waterhouse, the online brokerage unit
of Toronto-Dominion Bank.
about $300 billion has been moved from money-market mutual funds to
bank accounts at brokerage firms, according to iMoneyNet -- and as much as
$100 billion that would have gone to money funds went to sweep accounts instead.
say that changing the sweep option will bring more business to their banking
units -- by making clients more comfortable using their banking services and
keeping more of their assets in house -- and that this will help allow them
to pay higher rates on other banking products or to trim trading fees.
says it is changing its program to be consistent with offerings in the marketplace,
according to a company spokeswoman, while other firms, such as E*Trade, say
the moves are part of their efforts to integrate their banking and brokerage
businesses. Charles Schwab says its moves are a result of "changes in
the marketplace" and its business.
firms have built in rate increases to their bank-deposit sweep accounts to
make them more attractive to clients. Citigroup Inc.'s Smith Barney unit,
for instance, pegs the rate on its account to the firm's taxable money-market
mutual fund. ...
to bank-sweep accounts can be enormously profitable for the brokerage firms,
since they can usually earn more money by reinvesting those deposits in higher-yielding
securities or loans, which they are prohibited from doing with the money funds
they manage. E*Trade, for example, says it has been able to lower the bank's
funding costs or liabilities by replacing third-party borrowings with a lower-cost
source of deposits.
Of the $103
million in revenue "synergies" that E*Trade expects to generate
from its acquisition of Harrisdirect, a unit of Bank of Montreal, about $75
million should come from sweeping $3 billion in cash from Harrisdirect customers
to the bank's sweep accounts.
for its part, expects to generate close to $200 million in additional revenue
from its acquisition of TD Waterhouse by moving customers' cash into TD Bank.
And Schwab, which has started to move into cash-sweep accounts "conservatively,"
could sweep as much as $18.8 billion in its clients' cash into the bank --
which could boost its 2006 earnings by another 12 cents a share, estimates
Richard Repetto, an analyst with Sandler O'Neill & Partners.
The score, according
to The New York Times, is largely based on two factors: history of paying
off debt and "credit utilization," or the amount of debt you have
in relation to your credit limits. Fair Isaac Corporation measures this, along
with three other factors, applies an algorithm to compare that data with the
payment patterns of millions of other Americans and generates your FICO score.
Any number below
500 and you are a financial pariah. Get above 750, where 40 percent of Americans
are, and the credit card companies will never stop plying you with offers. By
paying money, you can find out your FICO. But ....
Here's the first
rub, says the Times, the credit score you get is not really the score
that a lender will use. Fair Isaac sells a variety of scores aimed at various
markets. Its computers slice the data it purchases from credit bureaus any number
of ways for clients. Some scores calculate the odds of a bankruptcy filing,
while others help a collection agency predict the likeliness one will make good
on a debt. Some lenders even have their own algorithm to generate a proprietary
thousands of options and creditors choose which one they want," says Maxine
Sweet, vice president for consumer education at Experian, one of the three major
credit agencies. In fact, FICO uses Experian data to generate the score that
is very similar to what the majority of mortgage lenders ask for, but Experian
also sells a version to consumers called Score Plus.
You can also obtain
a credit score called Empirica from TransUnion, and one called Beacon from Equifax,
that closely approximate the FICO score. All the numbers are different, but
are not supposed to vary much.
You really only
need to look at one score. But MyFico.com
and each of the credit agencies not so subtly urge you to buy more with a variety
of products, including some that will give you constant updates of your score.
If you are checking your credit report three times a year as you should, watching
your score change every few weeks is complete overkill.
They also urge
you to buy products to improve your scores. It is not unlike the way Kaplan,
a unit of the Washington Post Company, or Princeton Review Inc. exhort people
to improve their SAT or GMAT scores. "It's a nice analogy," Mr. Jolls
said. The difference, he says, "is that not everyone goes to college and
most people in this country use credit."
But does everyone
need to obsess over this score? Suze Orman, the financial health evangelist,
says they do. She sells a $50 product on MyFico that tells you how improve it.
The advice is sound, but the truth is, nearly the same advice is found free
elsewhere on the MyFico site. (Where the Orman package has real value is a feature
to check your credit report for errors and automatically generate letters to
the credit bureau to correct them.) "My advice is targeted to people who
are broke," said Ms. Orman, whose latest book is titled, "The Money
Book for the Young, Fabulous and Broke." "These are the people
who need to get their scores up."
She is right,
says the Times. But if you have excellent credit, you already know it.
If you have bad credit, you also know that, too, and you should know what to
do about it: pay your bills. It is everyone else who could benefit by knowing
The people with
scores in the 600's could profit the most by nudging it into the 700's. In that
lower range, a difference of only a few points can mean paying thousands of
dollars more in interest. In some regions like California and the Northeast,
where home loans of more than $350,000 are the norm, anyone with a score below
660 will have trouble qualifying for a mortgage.
Widening the gap
between your credit card limits and what you owe will pay off. Mr. Jolls says
that a score can be raised 10 to 15 points in only a few months with a little
It seems fairly
pointless to go through all that trouble if your score is already above 720.
Since half of the credit score is determined by the length of time you have
paid your credit card bills and mortgage payments on time, there is really little
you can do to improve it except more of the same.
And if your score
is above 780? Says Lara Blake, senior associate at Holmgren & Associates,
an Oakland, Calif., mortgage brokerage firm, "It just means that you can
frame the score and put it on the wall."
will charge you $50, even $100 for this advice. We give it to you for just the
cost of today's newspaper (this is the Times speaking).
The credit score
is determined by five factors, some weighted more than others. If your score
is anywhere above 700, do not sweat it. Keep doing what you are doing. For everyone
else, here's where to apply a little discipline so you look less like a credit
risk, says the Times:
(35 percent): Pay your bills on time. The longer you do that, the faster
your score goes up. It is that simple.
(30 percent): If you have balances, start paying them down to zero starting
with the cards carrying the highest interest rate. Consolidating debt onto one
card can lower your score because a high ratio of debt to your credit limit,
what the industry calls "credit utilization," looks like you are about
Length of Credit
History (15 percent): This category trips up people who think they are improving
their credit by tearing up their credit cards. Do not close any accounts. It
does not hurt to let them sit there, because the longer you have accounts open
- assuming you pay on time - the better your score gets.
(10 percent): Ignore the come-ons from stores offering a discount if you
open a charge account. Taking out more credit makes you look short of cash.
But do not worry about shopping around for a loan. Inquiries from potential
lenders hitting credit bureaus within a 30-day period aren't harmful.
Types of Credit
Used (10 percent): Crazy as it sounds, if you have some debt you look better
than someone who has none. So do use a credit card. If you have some small amount
of installment debt -- as dumb as that is to do -- it can help to raise your
score a bit.
me, watch the news?
Norwegian Moose Hunters
Two Norwegian hunters from Minnesota got a pilot to fly them to Canada
to hunt moose. They bagged six.
As they started
loading the plane for the return trip, the pilot said the plane could take only
four moose. The two lads objected strongly.
we shot six, and the pilot let us put them all on board; he had the same plane
pilot gave in and all six were loaded. However, even on full power, the little
plane couldn't handle the load and went down a few moments after take-off.
Climbing out of
the wreck one Norski asked the other, "Any idea where we are?"
tink we's pretty close to where we crashed last year."
heart goes out to the fine people of New Orleans. I'm
saddened about the looting.
US Open tennis on TV. The TV schedule is below.
+ US Tennis Open TV Schedule. Click
+ Manhattan Pharmaceuticals: Click
+ NovaDel Biosciences appeals. Click
+ Hana Biosciences appeals. Click
+ All turned on by biotech. Click
+ Steve Jobs Commencement Address. The text is available:
Click here. The full audio is available. Click
+ The March of the Penguins, an exquisite movie. Click
+ When to sell your stocks. Click
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons: Writing is good for sorting
things out in my brain. Second, the column is research for a book I'm writing
called "In Search of the Perfect Investment." Third, I encourage
my readers to send me their ideas, concerns and experiences. That way we can
all learn together. My email address is .
You can't click on my email address. You have to re-type it . This protects
me from software scanning the Internet for email addresses to spam. I have no
role in choosing the Google ads. Thus I cannot endorse any, though some look
mighty interesting. If you click on a link, Google may send me money. That money
will help pay Claire's law school tuition. Read more about Google AdSense,
here and here.