The Top 10 Mistakes Mutual Fund Investors Make

Mutual funds are one of the most widely held investment options. That’s why it’s more important than ever that mutual fund investors become aware of the potential pitfalls they may face when selecting funds.

Here are 10 mistakes investors tend to make and how to avoid them:

1. Blinded by returns: Don’t focus too much on a mutual fund’s past performance.

2. Paying too much in expenses.

3. Purchasing a fund whose size is outside its sweet spot: In general, it’s best to avoid funds with very small asset bases, but it’s also best to avoid small-cap funds with large asset bases.

4. Overpaying for market exposure: An increasing number of actively managed funds are becoming closet indexers. Don’t overpay for market exposure you could get from an index fund.

5. Ignoring risk controls: Risk controls are policies such as limits on stock or sector weights. The more risky or volatile the investment category, the more important it is to have these controls in place.

6. Loving a drifter: A drifter is a manager who consistently invests in securities outside the category’s benchmark. This can cause havoc with your asset allocation. In addition, it’s difficult to know if the manager’s performance is demonstrating investing excellence or if he or she just got lucky.

7. Putting too much in focused funds, such as regional or sector funds.

8. Overlooking excessive demands on your manager’s time: Start by reviewing how many funds your manager is managing, and in what roles. The better money management firms give their best managers ample support.

9. Not knowing who is managing your money: Be wary of investing in a fund with a novice manager or a faceless team whose compensation might not be aligned with the performance of your fund.

10. Not asking questions when a portfolio manager leaves: If the fund’s lead portfolio manager leaves, ask: How much of the fund’s performance was driven by the manager and how will the fund change?

—Schwab Center for Investment Research

The Graduation Gift That Saves

The U.S. Department of Education recently announced that student borrowers, even those who are still in school or in the grace period immediately after graduation, may consolidate existing government-backed student loans and lock in the low interest rates currently available. Consolidation could potentially save student borrowers or their parents thousands of dollars.

Most student loans guaranteed by the federal government have variable interest rates that are tied to the three-month Treasury bill. By combining multiple student loans into a Federal Consolidation Loan, borrowers get a fixed interest rate but also benefit from a single monthly payment and a longer repayment term.

The Higher Education Act permits Federal Family Education Loan Program (FFELP) borrowers who do not have an “in-school” status to consolidate student loans. On May 16, the Department of Education issued guidance permitting students currently enrolled in school to consolidate their loans but only if they enter repayment early. If current students do choose to consolidate, they lose the “grace period,” which is usually a six-month period after graduation. For that reason, the decision whether or not to consolidate must be carefully considered, weighing the benefits of a low fixed interest rate against the value of delaying repayment.

—AccountingWEB’s Weekly Business Bite (www.accountingWEB.com)

Sector Outlook: Higher Spirits But Flatter Beer

Attention, students of significant cultural change: Americans are going upscale in their drinking habits, with demand for wine and spirits outpacing that of beer.

Although beer remains the most popular alcoholic beverage, its market share has fizzled from 60% in 1995 to about 56% in 2004, according to our industry sources. Wine and spirits have picked up the slack in market share. As we see it, in the remainder of the decade, sales of beer could be as flat as a day-old glass of a draft brew, while sales of wine and spirits may increase at a more sprightly 2%–4% annually.

Wine and spirits have generally been good businesses, but we think they will get even better. Wine and spirits have been classic defensive business segments, relatively immune to the ups and downs of the economic cycle. As a favorite industry maxim with some basis in fact has it, when times are good, people drink, and when times are bad, people drink—often even more.

Also, more drinking is being done by women, who generally favor wine and spirits over beer. A survey by Deutsche Bank found that 73% of young adults who liked wine the most were women and 62% who preferred spirits the most were women. (In contrast, 62% of the young adults who preferred beer were men.) Wine and spirits are the alcoholic beverages of choice of older women as well.

In all, we think the distinct shift in consumers’ drinking habits from beer to wine and spirits is bad news for brewers like Anheuser-Busch and Molson Coors Brewing and good news for four well-managed wine and spirits companies in particular. We think these four companies have the potential to generate above-average earnings growth for the next two years or longer:

• Diageo, based in the United Kingdom, has been called the Microsoft of the alcoholic-beverage industry in light of its dominant position.
• Constellation Brands, the world’s largest wine company and the largest diversified alcohol company in the U.S.
• Fortune Brands, which is teaming up with Pernod Ricard to buy Allied Domecq, a leading spirits maker. Fortune Brands is the most diversified of the spirits companies.
• Brown-Forman, the world’s fourth-largest producer of distilled spirits.

—Source: Turner Investment Partners’ Sector Focus, May 2005

Enforcement On-Line:Direct Link to State Actions

Want to know if a particular firm or individual has been the subject of a recent enforcement action?

The North American Securities Administrators Association [NASAA] has a new resource that provides direct access to on-line enforcement actions, cease and desist orders, and other administrative orders from34 different state securities regulators. To access the information, go to the Enforcement & Legal Activity section under the Issues & Answers heading at www.nasaa.org.

—Alliance for Investor Education