What to Look For in Actively Managed Funds
Expense Ratio
Tax Efficiency
Investing Goals and Style
Management Incentives and Interests Ownership Fee Structure
Historical Returns But be careful because historical returns often aren’t
indicative of future returns!
Examples of Value-Oriented Funds
Fairholme (FAIRX)
Longleaf Partners (LLPFX)
Sequoia Fund (SEQUX)
Periods of underperformance when value is out of favor.
Relying on the decisions of management.
Exchange Traded Funds (ETFs)
If the ETF tracks an index, you don’t have to worry about tax efficiency, evaluating a manager, but do pay attention to expenses!
“A security that tracks an index, a commodity, or a basket of stocks like an index fund, but trades like a stock on an exchange.”
Pay same commission as a regular trade ($7 at Scottrade, remember to use limit orders).
Buy and sell anytime markets are open.
Keeping ETFs Fairly Priced: Arbitrage
ETFs have an underlying net asset value (NAV).
Depending on supply and demand, the price of an ETF may deviate from its NAV.
When trading at a discount, authorized arbitragers can buy ETF shares and exchange those shares for the underlying securities and sell those securities, or vise-versa if the ETF is trading at a premium.
This keeps the price of the ETF close to its NAV, and thus fairly valued.
Examples of ETFs
Sector-Specific
Country-Specific: EWZ, EWY, FXI
Commodities, Dynamic Indexes
Index Funds: VTI, VEU, VNQ, VWO, IVV, SPY
Simple Indexed ETF Portfolio
60% VTI – Vanguard Total Stock Market Index, ER 0.07%
40% VEU – Vanguard FTSE All World Ex-US Index, ER 0.25%
Add bonds later
Weighted ER of 0.14%
Holds Over 5,000 Stocks
Index Mutual Funds
Higher minimums.
Better for small, frequent purchases (DCA). Avoid trading costs by buying directly.
Only priced and traded at the close of the day.
Vanguard (generally $3,000 minimum).
MorningstarAvailable via OSU libraries and ccig.osu.edu:http://proxy.lib.ohio-state.edu/login?url=http://library.morningstar.com
Morningstar
Aggregates Fund Data Expenses Historical Returns After-Tax Returns Holdings Also Rating System and Analyst Reports
Portfolio X-Ray Displays data for a portfolio of funds
Sometimes more data than you really need…
Some Related Reading
A Random Walk Down Wall Street by Burton Malkiel
Common Sense on Mutual Funds by Jack Bogle
The Bogleheads’ Guide to Investing
Morningstar’s Guide to Mutual Funds
Summary
Do some research, read one or two books and you will be set.
Weigh the pros and cons of investing in active versus passive funds.
CCIG generally is not focused on investing in funds, but we can point you in the right direction.
Remember that enterprising investors may still choose ETFs for easy and inexpensive exposure to specific industries, countries, etc.
Goals
Show by realistic example how to choose investments.
Provide a sample portfolio of value investments for a college-aged investor.
Learn about different stocks and companies and what makes them attractive investment opportunities.
Encourage discussion and debate.
Maintain records of the portfolio to learn from mistakes and successes.
Parameters
Start with $20,000 cash.
Trades cost $7 (Scottrade pricing).
Placing a trade requires that a majority of present and voting members approve the transaction.
Provide rationale and analysis (as well as continuing discussion) for each investment on the appropriate forum page.
Analysis
Reason for Buying
Selling Strategy / Expected Duration
Reason for Selling
Analysis (what went well, what didn’t)
Core-Mark (CORE)
Vote on the forum!
Voting will close Tuesday night (with the votes tallied Wednesday morning).