Market Outlook for 2008

Alright, since my mutual fund research process has been slowed down somewhat, I will share my investment thoughts/expectations for the year.

Interest rates: I think there will be additional, albeit smaller (25bps), interest rate cuts in the future, but 2008 will NOT end with interest rates below 3%. For interest to stay that low (or lower) for that long would mean that U.S. economy would be in absolutely dire economic shape by the end of the year (which I obviously don't foresee happening) and/or that Fed will forget about its duties to monitor inflation.

Stock market: Overall stock market will rise in high single-digits or low double-digits because there are more sectors and companies with strong earnings than those going into the red in 2008. Financials sector is likely to gain a significant momentum by year since the subrime market crisis has pulled down many sound financial institutions and even punished too severely those who did deserve to be punished. Once investors will see that those companies are still making money and lots of it, they will create plenty of demand to push share of those companies up.

Attractive sectors/industries: Besides Financials, I think that Healthcare, Technology, and Consumer Staples will outperform the overall market.

• Healthcare sector tends to be independent from the overall market conditions and here is what in particular I like in Healthcare: Big Pharma and biotech stocks have been beaten down and are likely to show solid results. Companies such as AstraZeneca and Amgen have plenty of high-potential products in the pipeline and are currently selling at attractive prices. Medical equipment manufacturers should also benefit from the rising medical costs, one that I like in particular is Medtronic.


• Technology companies will benefit from renewed focus on efficiency (as always happens during economic downturns), constantly increasing demand for bandwidth and data storage put these companies in a good position: Cisco, Accenture, and EMC are the ones that I would pay attention to. Microsoft is also likely to post strong earning growth in 2008 as its Vista OS will receive wider implementation among business users.


• Consumer Staples such as Johnson & Johnson and Procter & Gamble have diversified portfolios of consumer products that people need on a daily basis regardless of the overall economic conditions. Currently, both of these companies (especially J&J) are selling at attractive prices.


• In general, large global companies who do not depend on the outside financing and have strong presence in the emerging markets should do well relatively to the overall market.

My 401(k) Mutual Funds: Picks and Allocation

You may be wondering by now if I'll ever post what I picked for my 401(k). The moment of truth has come, although some of you may have guessed already what I picked. Yep, I picked the A-rated funds and here is how I allocated my contributions:

DFA Emerging Markets Value I DFEVX: 40%

Fidelity Capital & Income FAGIX: 20%

Oppenheimer International Bond Y OIBYX: 40%

It's an aggressive portoflio allocation, but I think (and hope) it's a smart one too. Overseas markets should perform better than the domestic market and bonds are here to, both, limit the downside and diversify growth opportunities.

Now that I'm done with the 401(k) funds, it's time to move on to mutual funds for my personal account. So, that's what I'll be looking at next.

My 401(k) Mutual Funds: Fund Ratings

The time has come for me to share how I rate these funds that I've posted reviews for. All funds are rated from A to D. A, of course, being the top choice and D, well, D isn't really a choice at all.

American Funds Growth RGAFX: B (This fund’s enormous size will surely drag down its performance. The number of holdings is so large you might as well invest in the index fund, which is much cheaper.)

DFA Emerging Markets Value I DFEVX: A (I believe emerging markets will continue posting great returns, which weak dollar will only enhance. This fund is a star among peers – it ranks #1 in 5-year returns which are 45%.)

DFA U.S. Small Cap Value I DFSVX: D (I’m very bearish on small caps in general and this fund’s being overweight in Financials only makes it worse.)

Fidelity Capital & Income FAGIX: A (This is one of the highest performing high-yield bond funds with a high-quality management. It tends to do really well during market rallies so my plan here is to load up on this fund in the first half of 2008 and then ride the upstream wave during the second half of 2008 when I expect market to rebound.)

Fidelity Contrafund FCNTX: B (This is a very well-regarded fun with a great track record, my only concern is that, historically, this fund hasn’t done well in bear markets. It’s also very large, which makes it more difficult to quickly get out from bad positions and get into good ones.)

Fidelity Small Cap Independence FDSCX: D (Middle-of-the-road performance coupled with a relatively new manager and small-cap orientation make this fund a “no-go” for me.)

JPMorgan International Value I JNUSX: C (I like the fact that it’s Foreign, and Large, and Value, but I don’t like its performance at all. It’s too average.)

Morgan Stanley Inst Intl Growth Equity I MNWAX: D (Started in 2005, it’s too new.)

Morgan Stanley Inst Mid Cap Growth I MPEGX: B (I like the quality of management and their stock-picking ability, just a little bit doubtful they can continue their streak in the 2008. A solid fund.)

Oppenheimer International Bond Y OIBYX: A (Started in 2004, this fund is new and I would have immediately disregarded it if not for an OIBAX, which is the same fund with A-type shares, which has a longer history. This fund has blown its peer out of the water in the short- and long-term total returns. I also like the international exposure.)

Third Avenue Real Estate Value TAREX: D (What more is there to say: Real Estate!)

Vanguard Developed Markets Index VDMIX: C (It has minimal exposure to emerging markets and I don’t think “developed markets” will be that hot overall.)

Vanguard Extended Market Index Signal VEMSX: D (Started in 2006, it’s too new.)

Vanguard Inst Total Stock Market Index Inst VITNX: D (Performance is lagging, I don’t see any reason to hold this fund.)

Vanguard Small Cap Index Signal VSISX: D (Started in 2006, it’s too new.)

Vanguard Total Bond Market Index Signal VBTSX: B (Started in 2006, this fund very new, but so far it has done very well).

Western Asset Core Bond Institutional WATFX: B (Very steady growth, quality management, but in this fund lack of volatility also means average returns.)

Western Asset Inflation Indexed Plus Bond WAIIX: B (One of the better performing funds in it’s category. Managed by four managers since the inception.)

My 401(k) Mutual Funds: Part 6 of 6

Finally, this is the last of the six-part series detailing 18 mutual funds available in my 401(k) plan. (There are actually more funds to choose from, but other funds didn't have public information available for them, so I ignore them.) In the coming days (hopefully tomorrow!) I will post how I personally rank these funds in respect to each other and which funds I chose to allocate my 401(k) contributions to.

Vanguard Total Bond Market Index Signal VBTSX

Started In: 2006
Load: No
Yield: 5.02%
Annual Turnover: 64%
Size: $56 billion
Expense Ratio: 0.11%
Cost: $35 per $10,000 over 3 years
MS Stars: NR
Stewardship: B
Category: Intermediate-Term Bond
Management: Kenneth Volpert has been its manager since inception at the end of 2006
Performance: The fund has no performance history to speak of, but it is showing some promising signs.
Lipper: The Fund seeks to generate returns that track the performance of the Lehman Brothers Aggregate Bond Index, and will maintain a dollar-weighted average maturity consistent with that of the index. The Index measures investment-grade, taxable fixed income securities in the U.S.
Comments: It invests into US Treasuries (24%), Mortgage Pass-Thru (37%), and US Corporate (18%). It has 11068 holdings.

Western Asset Core Bond Institutional WATFX

Started In: 1990
Load: No
Yield: 5.25%
Annual Turnover: 432%
Size: $7 billion
Expense Ratio: 0.47%
Cost: $151 per $10,000 over 3 years
MS Stars: 4
Stewardship: NR
Category: Intermediate-Term Bond
Management: The fund has 5 experienced managers, 3 of whom have managed this fund since its inception. A lot of analysts support these managers.
Performance: This fund hasn't had a bad year as far as I can tell (since 1997). Although the returns aren't exactly stellar, the overall performance is good considering the steady growth. The fund has 10-year return of 6%, 5-year return of 4.8%, and 3-year return of 3.9%. This performance has earned ranks of #9, #29, and #58, respectively.
Strategy: In general, the fund is more aggressive than most of its peers. For example, management makes bolder duration adjustments (plus or minus 20% of its benchmark's duration) than many of the category's more conservative offerings. It also takes on added credit risk on occasion. Overall, though, it is a true core bond holding, with a focus on investment-grade bonds and a broadly diversified portfolio.
Lipper: The Fund seeks to maximize total return, consistent with prudent investment management and liquidity needs, by investing in a broad range of fixed income securities, to obtain the average duration specified for the portfolio. Assets growth has exploded since 2003.
Comments: This fund is an MS Analyst Pick. It has 36% in Cash, 56% in Bonds, and 9% in Other. The fund shorts a significant portion of the assets. It invests in AAA (80%) and BBB (11%) bonds; 35% in Mortgage Pass-Thru, 9% in Mortgage CMO, and 17% in US Corporate. It has a total of 1671 holdings with 53% of assets in top 10 holdings. This one can be considered to be a part of the portfolio due to its steady growth and high-quality management. Although it lagged category peers in 2007, it seems poised for a good run in 2008 with Fed further cutting interest rates,

Western Asset Inflation Indxd Plus Bd WAIIX

Started In: 2001
Load: No
Yield: 4.77%
Annual Turnover: 96%
Size: $0.76 billion
Expense Ratio: 0.25%
Cost: $89 per $10,000 over 3 years
MS Stars: 4
Stewardship: NR
Category: Inflation-Protected Bond
Management: Four seasoned managers have led since inception.
Performance: 5-year return is 6.8% which earns this fund a #9 rank among peers. In 2007 it returned 10.2%.
Lipper: The Fund seeks to maximize total return by investing primarily in inflation-indexed fixed income securities issued in the United States. The average modified duration of the Portfolio is expected to range within 3 years of that of its benchmark, the Lehman Brothers Treasury Inflation Notes Index.
Comments: Almost 10% in Cash. No stock holdings, 90% in Bonds with 11% being shorted. 95% of all bond investments are AAA. Invests into US Treasuries (15%) and TIPS (63%). Seems to be a steady-growing fund, although performance history isn't as extensive as I'd like it to be.

My 401(k) Mutual Funds: Part 5 of 6

Almost done, here comes the fifth installment of this series of posts:

Vanguard Extended Market Idx Signal VEMSX

Started In: 2006
Load: No
Yield: 1.31%
Annual Turnover: 16%
Size: $14 billion
Expense Ratio: 0.10%
Cost: $32 per $10,000 over 3 years
MS Stars: NR
Stewardship: B
Category: Mid-Cap Blend
Management: Donald Butler has managed it since inception.
Performance: The fund has virtually no history.
Lipper: The Fund seeks to track the performance of a benchmark index that measures the investment return of small- and mid-capitalization stocks. The Fund employs a "passive management" approach designed to track the performance of the Wilshire 4500 Completion Index.
Comments: Fund invests in Medium (52%), Small (31%), and Micro (11%) companies. It has zero in Cash. It has 3222 holdings.

Vanguard Inst Total Stock Mkt Idx Ins VITNX

Started In: 2001
Load: No
Yield: 1.71%
Annual Turnover: 8%
Size: $10 billion
Expense Ratio: 0.05%
Cost: $15 per $10,000 over 3 years
MS Stars: 4
Stewardship: B
Category: Large Blend
Management: Michael Perre has managed since 2005.
Performance: Fund lost 21% in 2002, rough start. Since then it posted 11.5% 5-year returns which rank it #22 among peers.
Strategy: This index fund tracks the MSCI U.S. Broad Market Index. Both indexes include nearly all publicly traded domestic stocks. It would be impractical to own each small company in the index, so, among the tiniest firms, management selects a representative sample. In an effort to boost returns by a few basis points, the manager uses various techniques, including securities lending.
Lipper: The Fund seeks to match the performance of a benchmark index that measures the investment return of the overall stock market. The Fund employs a passive management strategy designed to track the performance of the Wilshire 5000 Total Market Index.
Comments: It has virtually zero in Cash. It invests in Giant (42%), Large (31%), and Medium (20%). It has 3360 holdings. Bottom line: I don't see an edge, I don't see stunning performance, I'm not impressed.

Vanguard Small Cap Index Signal VSISX

Started In: 2006
Load: No
Yield: 1.38%
Annual Turnover: 24%
Size: $15 billion
Expense Ratio: 0.13%
Cost: $42 per $10,000 over 3 years
MS Stars: NR
Stewardship: B
Category: Small Blend
Management: Michael Buek has been its manager since inception at the end of 2006
Performance: The fund has no performance history to speak of.
Lipper: The Fund seeks to track the performance of a benchmark index that measures the investment return of small-capitalization stocks. The Fund employs a "passive management" approach designed to track the performance of the MSCI U.S. Small Cap 1750 Index, a broadly diversified index of stocks of smaller U.S. companies.
Comments: It has 1685 holdings.

My 401(k) Mutual Funds: Part 4 of 6

Fourth installment of 401(k) mutual funds' reviews:

Oppenheimer International Bond Y OIBYX

Started In: 2004
Load: No
Yield: 7.23%
Annual Turnover: 68%
Size: $10 billion
Expense Ratio: 0.54%
Cost: $180 per $10,000 over 3 years
MS Stars: 5
Stewardship: C
Category: World Bond
Management: Arthur Steinmetz has managed the fund since inception.
Performance: This fund is new, but so far it has performed well. In 2007 it returned 14%, while 3-year annualized return is 10.49% which makes it #1 in its category.
Strategy: This fund invests primarily in sovereign debt and provides investors with a lot of emerging-markets exposure. The fund also takes on substantial developed and emerging-markets currency risk and makes substantial use of derivatives to take currency and country exposures. Interest-rate sensitivity is usually kept close to its benchmark's.
Lipper: The Fund seeks high total return by investing primarily in foreign debt securities.
Comments: Has 28% in Cash, which is probably a good thing. 44% is in AAA bonds, 17% in AA, 25% in A, and the rest lower-rated bonds. It has 274 holdings with 25% of assets in top 10. I looked at the A share version of this fund, which has a longer history to speak of. The fund (OIBAX) is ranked #1 for 3-year, 5-year, and 10-year returns! While #3 for 1-year returns. In the past 8 years it didn't have a single negative year and from looking at the chart, they fund may have had a bad year in 1998, but even though it was only about a 10% dip, so I'm definitely impressed with this fund's performance!

Third Avenue Real Estate Value TAREX

Started In: 1998
Load: No
Yield: 1.91%
Annual Turnover: 19%
Size: $ billion
Expense Ratio: 1.11%
Cost: $353 per $10,000 over 3 years
MS Stars: 4
Stewardship: NR
Category: Specialty-Real Estate
Management: Michael Winer has been the manager since inception.
Performance: This fund didn't have a negative year since its inception in 1998 until 2007 when it lost 8.4%. Overall, it has performed well with a 5-year return of 17% and 3-year return of 8%. But by looking at category ranking, I see that it's rather in the middle of the pack ranking between 18 and 33.
Strategy: Like other Third Avenue offerings, this one seeks companies that trade at a discount to management's estimate of net asset value. The manager favors REOCs over REITs because the former can reinvest cash flow back into the business for growth. The fund often stashes more than 60% of assets in its top 10 holdings, which means it's among the most concentrated in the category.
Lipper: The Fund seeks long-term capital appreciation by investing at least 65% of its assets in equity and debt securities of well-financed companies in the real state industry or related industries or in companies which own significant real estate assets at the time of investment. This fund's rates have skyrocketed in the past few years.
Comments: Has 5.6% in Cash. It has 59% of assets in top 10 holdings. This fund invests in Large (49%), Medium (30%), Small (9%), and Micro (9%) companies. Its investment style is Blend-Growth. It has a total of 40 holdings. This is an MS Analyst Pick. This fund's performance relative to its peers isn't overly impressive, but I like its steady performance until now. Could a worthwhile pick once the real estate will start making a comeback.

Vanguard Developed Markets Index VDMIX

Started In: 2000
Load: No
Yield: 2.85%
Annual Turnover: 7%
Size: $3.9 billion
Expense Ratio: 0.27%
Cost: $87 per $10,000 over 3 years
MS Stars: 4
Stewardship: B
Category: Foreign Large Blend
Management: It doesn't have a manager, it's an index.
Performance: The fund only has a 7 year history, which so far shows double digit losses in 2001 and 2002. Although returns in the subsequent 5 years were pretty good, I would venture a guess that this fund isn't designed to withstand bear markets all that well. 5-year return is 19% and 3-year return is 15%, ranking it #29 and #50, respectively, among peers.
Strategy: This is a passively managed fund of funds that invests all of its assets in Vanguard European Stock Index VEURX and Vanguard Pacific Stock Index VPACX, with the majority going to the Europe fund. Its goal is to track the performance of the MSCI EAFE Index. It has minimal exposure to emerging markets. It does not hedge its foreign-currency exposure.
Lipper: The Fund seeks to track the performance of the MSCI Europe, Australia, Far East (EAFE) Index. And this fund's assets, also, have skyrocketed lately.
Comments: The fund has virtually zero in Cash and is 98% invested in stocks. Most significant sector holdings are: Financial Services, Consumer Goods, and Industrial Materials. The fund is heavily invested in the UK (22%) and Japan (20%) as well as in France, Germany, Australia and Asia ex-Japan. Fund has only two holdings: Vanguard European Stock Index (70%) and Vanguard Pacific Stock Index (30%). Bottom line: not a bad offering, but not now and not if I have a choice of a better-performing peer.

My 401(k) Mutual Funds: Part 3 of 6

This is a third installment of a six-part series listing my reviews of mutual funds offered by my employer's 401(k) plan:

JPMorgan International Val I JNUSX

Started In: 1993
Load: No
Yield: 1.37%
Annual Turnover: 92%
Size: $1 billion
Expense Ratio: 0.94%
Cost: $319 per $10,000 over 3 years
MS Stars: 3
Stewardship: NR
Category: Foreign Large Value
Management: Gerd Woort-Menker has been managing it for 7 years now.
Performance: It has returned 11.8% in 2007, 20.8% over 3 years, 23.8% over 5 years, and 9.4% over 10 years. 3-year records ranks #4, 5-year record is at #10, and 10-year is at "whopping" #65. It was negative (double-digit negative) in 2000, 2001, and 2002.
Lipper: The Fund seeks to provide a high total return from a portfolio of equity securities of foreign companies.
Comments: Only 1.5% in Cash. The fund ignores Software, Hardware, Media, Healthcare, Consumer Services, Business Services, and Utilities, while concentrating on Financial Services (36%!), Consumer Goods (13%), Industrial Materials (15%), and Energy (12%). Invests in Giant (61%), Large (28%), and Medium (9%) companies. Is mostrly concentrated in UK, Japan, Germany, France, and the rest of Western Europe. Has a total fo 69 holdings and invested 31.7% in the top 10 holdings.

Morgan Stanley Inst Intl Growth Equity I MNWAX

Started In: 2005
Load: No
Yield: 0.81%
Annual Turnover: ?%
Size: $0.02 billion
Expense Ratio: ?%
Cost: $850 per $10,000 over 3 years
MS Stars: NR
Stewardship: NR
Category: Foreign Large Growth
Management: Has managed it since inception 2 years ago.
Performance: The fund is new, so it has only two full years of performance: 27.9% in 2006 and 15.2% in 2007, which are not overly impressive for its category.
Lipper: The Fund seeks long-term capital appreciation, with a secondary objective of income. Under normal market conditions, the Fund invests at least 80% of its assets in equity securities of issuers from at least three different foreign countries.
Comments: The fund is similar iin its sector weighing to the peers except for a larger stake in Energy. Only 0.3% in Cash, has no room for new picks without selling its current stakes. Investos in UK/Western Europe, Japan, and Asia ex-Japan. Has 72 holdings 21.5% investted in the top 10 holdings. Botoom line is that this fund is too new and way too expensive for the category-average returns.

Morgan Stanley Inst Mid Cap Growth I MPEGX

Started In: 1990
Load: No
Yield: 0.49%
Annual Turnover: 64%
Size: $3.4 billion
Expense Ratio: 0.63%
Cost: $202 per $10,000 over 3 years
MS Stars: 4
Stewardship: C
Category: Mid-Cap Growth
Management: Dennis Lynch has been in charge for the past 6 years. So, he's at least partially responsible for the impressive 5-year returns.
Performance: This fund lhas ost money in 2000, 2001, and 2002. 3-year return is 15.4%, 5-year return is 19.8%, and 10-year return is 11.3%, these return rank this fund #6, #4, and #18, respectively. So, it basically does really bad in the bear environment, although roars back quite well during bull times.
Strategy: This fund's team, led by Dennis Lynch, looks for mid-cap companies with defensible business models and high returns on capital that generate significant cash flow. The fund is fairly concentrated and is willing to go wherever its best stock ideas take it. That means it will often look and act differently from its benchmark.
Lipper: The Fund seeks above-average long-term return (primarily through capital appreciation) relative to broad market indices, and to returns of other managers of mid-cap growth portfolios, through investments in the common stock of small and mid-size companies that have the potential for superior long-term earnings growth. Last time fund's assets peaked was in 2001 and is currently at the highest point in the past 5 years, although still not quite at the 2001 level.
Comments: Has 5% in Cash. Compared with its peers, it has relatively large stakes in consumer services, business services and financial services and rather low stakes in hardware, health care and industrial materials. Invests in Large (19%) and Medium (78%) companies. Has a total of 57 hldings, with 30% of assets in the top 10. Most of the top 25 names don't get me all excited, although I can't say I'm familiar with them all. Managers do seem to be solid stock-pickers, so I will keep my mind open in regard to this fund. Although, I'm suspicious of anything that has done really well during the past 4-5 years. Everything that goes up must come down, right?

My 401(k) Mutual Funds: Part 2 of 6

Fidelity Capital & Income FAGIX

Started In: 1977
Load: No
Yield: 6.33%
Annual Turnover: 37%
Size: $9.7 billion
Expense Ratio: 0.75%
Cost: $243 per $10,000 over 3 years
MS Stars: 5
Stewardship: C
Category: High Yield Bond
Management: Mark Notkin has been managing it since 2003. He's done well and he's supported by an extensive staff.
Performance: The fund has lost money in 2000, 2001, and 2002, but then roared back in 2003 with a 39% return. Although this fund (obviously) can be volatile it ranks at the in 3-year, 5-year, and 10-year returns among it's peers, taking third, forth, and fifth places, respectively. 5-year annualized total returns are 12%, which is awesome for a bond fun.
Strategy: This opportunistic high-yield fund typically takes on more risk than its average high-yield category peer. Management often dabbles in distressed securities and equities while primarily focusing on bonds rated B. The fund's equity stake has ranged as high as 18% of assets. It will also own bank loans.
Lipper: The Fund seeks to provide a combination income and capital growth. The Fund invests its assets in equity and debt securities of any type. Ranked best (5) in Consistent Return, Total Return, Expense, and Tax Efficiency. Ranked lowest (1) in Preservation. Assets have skyrocketed from $2.5 billion in 2003 to $7.5 billion (per Lipper) in 2007. This means that the fund is probably at its peak now, and you never want to be at anything's peak.
Comments: It holds 14% in Cash, 17% in Stocks, 59% in Bonds, and 10% in Other. Virtually all investments are made at bonds rated BB or lower; it invests 76% in US Corporate Bonds. It's not concentrated with 333 holdings and only 10% of assets in top 10 holdings. This fund is aggressive, but also rewards investors for the risk with a considerable upside. This fund is possibly worth holding after the current credit/suprime crisis, since it performs very well during market rallies. So, it may perform well in late 2008/early 2009?

Fidelity Contrafund FCNTX

Started In: 1967
Load: No
Yield: 0.57%
Annual Turnover: 76%
Size: $81 billion
Expense Ratio: 0.89%
Cost: $287 per $10,000 over 3 years
MS Stars: 5
Stewardship: C
Category: Large Growth
Management: Domestic-Equity Fund Manager of the Year. Will Danoff is a well-respected manager who has been leading this fund since 1990.
Performance: This fund has lost money in 2000, 2001, and 2002, but has shown impressive results since then. This fund is ranked #4 for 3-, 5-, and 10-year periods. Its 5-year annualized return is 16.35%. Impressive as it is, the fund has done very well in the bull market, but not so in the bear market and that is what is expected in the near future.
Strategy: It has been more conservative than most of its large-growth rivals in recent years, with big underweightings in racy sectors such as technology.
Lipper: The Fund seeks capital appreciation. Fidelity Management & Research invests the Fund's assets in securities of companies whose value they believe is not fully recognized by the public. Assets are at all time high, last high was in 2000 (hint, hint). Ranked best (5) in Preservation, Total Return, Expense. Ranked (2) in Tax Efficiency. Ranked (4) in Consistent Return.
Comments: Top 5 holdings are Google, Apple, Berkshire Hathaway, HP, and ExxonMobil (of which, Google and Apple are overpriced, Berkshire Hathaway will probably return 15-20% in 2008, HP and ExxonMobil will more than likely have a return in the double digits). Has significant stakes in Hardware, Healthcare, Business Services, Financials, Consumer Goods, Industrial Materials, and Energy (meaning that it's ignoring Software, Media, Telecom, Consumer Services, and Utilities). This fund has almost 11% in Cash. Fund invests in Giant (58%), Large (25%), and Medium (15%). Fund has 26.5% of assets in the top 10 holdings with a total of 339 holdings. MS doesn't suggest that investors add to their stake in this fund because of it's enormous size and manager's increased workload managing another large fund.

Fidelity Small Cap Independence FDSCXStarted In: 1993

Load: No
Yield: 0.0%
Annual Turnover: 84%
Size: $2.4 billion
Expense Ratio: 0.81%
Cost: $322 per $10,000 over 3 years
MS Stars: 4
Stewardship: C
Category: Small Growth
Management: Richard Thompson has only managed this fund for two years. Maybe he'll perform better than his predecessors, maybe not.
Performance: Over the past 8 years, it was negative only once in 2002 (-21%), but it has been rocky before then though. 1-year return is -1.8% and 5-year return is 13.7%. Such performance puts it in the middle of the pack, pretty unimpressive. Not terrible, but I'm impressed by this return, especially considering the small-cap risk and how well other small caps have done over the same period.
Strategy: This fund applies a growth-at-a-reasonable-price strategy to the small-cap universe. Manager Richard Thompson has worked overseas and will leverage his knowledge of those markets, spicing this fund up with some foreign exposure. Thompson will hew fairly closely to the Russell 2000 Index in terms of sector weightings and will employ Fidelity's favored valuation metrics, such as price/earnings and enterprise value/operating earnings.
Lipper: The Fund seeks capital appreciation. Normally invests at least 65% of assets in securities of companies with small market capitalizations. Uses computer-aided quantitative analysis of historical earnings, dividend yield, earnings per share and other factors supported by fundamental analysis to select investments. Fund lagged S&P 500 for the past 11 years. Fund assets have skyrocketed in the past two years: at first doubling in 2006, and then tripling in 2007.
Comments: 5% in Cash. 21% of assets in top 10 holdings. Invests in Medium (43%), Small (42%), and Micro (15%). MS analyst pretty much sums up my opinion of this fund in the following: "This fund looks promising, but investors can find more-proven options."

My 401(k) Mutual Funds: Part 1 of 6

So, as promised, here is Part 1 of brief reviewes of my 401(k) mutual funds.

American Funds Grth RGAFX

Started In: 2002

Load: No

Yield: 1.26%

Annual Turnover: 26%

Size: $193.5 billion

Expense Ratio: 0.35%

Cost: $122 per $10,000 over 3 years

MS Stars: 5

Stewardship: B

Category: Large Growth

Management: Ten experienceed managers working independently of each other, but with the same strategy.

Performance: Not bad. 11% total return in 2007 and 14.3% 5-year annualized return (which ranks #9 among peers).

Comments: MS doesn't recommend new purchases. Not a terrrible fund, but rather average. Weighed down by its enormous size. Portfolio has a very large number of holdings, even compared to its peers - this makes it less volatile, but also too tame. A lot of familiar holdings such as: Google, Microsoft, Oracle, Cisco, GE, Medtronic, AIG, Caterpillar, etc.

DFA Emerging Markets Value I DFEVX

Started In: 1998

Load: No

Yield: 1.84%

Annual Turnover: 9%

Size: $7.8 billion

Expense Ratio: 0.63%

Cost: $202 per $10,000 over 3 years

MS Stars: 5

Stewardship: NR

Category: Diversified Emerging Mkts

Management: One manager, Karen Umland, has managed it almost since inception.

Performance: 45% return in 2007 and 45% 5-year return (ranks #1 among peers in 5-yr).

Comments: 41% in Industrial Materials and 18% in Financial Services. Invests in Large-Mid Value. Almost 0% in Cash. Negative in 2000, 2001, and 2002 (lost a scary 34% in 2000!). In South Korea, India, Taiwan, South Africa, and Brazil (NOT in North America, UK/Western Europe, or Japan). Very low annual turnover. The fund doesn't show individual stock holdings, only Dimensional Emerging Markets Val Series.

DFA U.S. Small Cap Value I DFSVX

Started In: 1993

Load: No

Yield: 0.97%

Annual Turnover: 27%

Size: $8.7 billion

Expense Ratio: 0.53%

Cost: $170 per $10,000 over 3 years

MS Stars: 4

Stewardship: NR

Category: Small Value

Management: One manager, Robert Deere, has managed it almost since inception.

Performance: The fund has done pretty well over time, with negative years in 2002 and 2007 (about -10% each time). But 5-year return is 15.7% which makes it #4 in ranking among peers.
Strategy: It screens the smallest 10% of the exchange-listed universe for stocks with low price/book value ratios. That typically amounts to just fewer than 1,500 stocks from across all sectors and industries. Since its early 1993 inception, it has returned 15%, beating the S&P 500's 11% gain and the rival's near 13% climb.

Comments: Large concentrations in Financials and Industrial Materials, 22% in each one. Virtually zero assets in cash. 59% in Small and 34% in Micro. The fund doesn't show individual stock holdings, only Dimensional U.S. Small Cap Value Series. The fund is considered top-notch in its category and is managed by an advisory firm that has a solid reputation in this niche, but the wave it rode is on the way down in the choppy market conditions that are expected in 2008. Fund had negative return in 2007 and I don't think it will perform all that great in 2008, even if it stays in the black. It is certainly worth considering once the small-caps will make a come back, which could as soon as 2009.

My 401(k) Mutual Funds; Upcoming Interest Rate Cut

Since the stock market is taking a dive for the most part, I'm still paying more attention to the mutual funds.

I've finally went through the 401(k) mutual funds offered by my employer and will be posting my findings in a 6-part series. I'm breaking up 18 funds into 6 three-fund postings to make it more readable. Some reviews are more in-depth than others, depending on how much information was available for a particular fund. This is especially the case for the funds that are new. I have no idea why a 401(k) administrator would pick funds with virtually no history to speak of, it just doesn't make any sense to me. Of course I can of think of reasons for such picks, but none that would benefit the plan participants. In any case, that is what's coming up, along with my final choices (which are a bit unusual, but I had my reasons - you'll see!).

Also, now that I'm done with the 401(k) mutual funds, I will be going through the entire mutual fund universe to find funds for a non-tax-advantaged account.

While I'm here I might as well share my thoughts on the interest rate environment. There has been talk of Fed cutting interest rates before the next meeting as well as during that meeting (some people expect a total interest rate cut of 1%??). I don't think the situation is that dire and if the Fed will make a move before the next meeting it will send a strong signal that the economy is very weak and will do more harm than good as such a signal will support panicky investors' outlook. What I believe is the most likely scenario is that there will be a 50bps (0.5%) interest rate cut made at the January 30th Fed meeting. This cut is already highly expected by the markets so there should be no sudden spikes.

On a side note, Firstrade just e-mailed me that it will send me a free t-shirt! I've signed up with them back in December, but so far has made no trades because of the unfavorable market conditions. I wonder if they'll be sending gifts on a monthly basis, wouldn't that be nice?

Market Down; Stock Picks Looking Better; Mutual Funds for 401(k)

With the stock market going down (especially today after the employment numbers were reported!) my stock picks keep looking better and better. Overall they're down 9%, ranging from 4.8% price increase in Medtronic to a 16.7% price decrease in Cisco. When I say "down," I mean down since I've analyzed them since that is how they're being tracked in my spreadsheet. This basically means that it was a good call not to invest in my stock picks just yet (except for Medtronic, which is actually up).

So, for now I'm holding out on investing in the stock market. This "strategy" can be called market timing, but in my opinion it may be wised to wait a bit to see how everything will get sorted out since bad news keep coming out and a number of stocks on my "final" list are dependant on the overall economy since Coach and Harley-Davidson are in the "Consumer Discretionary" category, while Bank of America is obviously in the "Financials." Of course, there is a reward for taking a risk in the turbulent times, but at this time it's not clear whether the reward is great enough to compensate for the risk. In a way, that's what investing is all about: balancing risks and rewards to maximize the rewards with minimal risks.

Jumping to a different topic. I will be looking at mutual funds (and maybe ETFs), as the time will allow, while stock market is figuring itself out. Most of the mutual funds (although not all!) have already made capital gains distributions, so it's a good time to start investing in them. Also, I will need to pick mutual funds for my new 401(k) plan, which will involve looking over 20+ mutual funds. One thing I'm not clear about is whether load/no-load mutual fund structure matters in 401(k) plans since the benefit administrator has some sort of a pricing structure worked out with the employer. I'm wondering if and whether this differs from employer to employer and how those "load" fees are passed to plan participants. This may make a significant difference in how I choose mutual funds for the 401(k) plan. Any thoughts on this?