Q. Your recent column on the disappointing performance of government securities mutual funds confirmed what I suspected about my GNMA and Treasury funds with AARP, but it still broke my heart. I have $100,600 invested with AARP in this fund and on September 30 it was worth $93,000.
I need this for living monthly. Am I stuck with this fund? It would be pretty horrendous to take such a loss in selling it.
--- E.G., Houston, TX
A. Don't spend too much time kicking yourself. In the 12 months ending October 31, the AARP GNMA and Treasury fund provided a total return of 5.89 percent, a figure that put it in the top 6 percent of 363 general government securities funds according to data from Morningstar. With this fund, you missed the up front loads that whack the returns and/or principal of many investors; you missed the hefty 12b-1 charges that are levied on many of the funds; and you missed the large expense ratios sported by some funds--- the AARP fund has no 12b-1 charge and has a total expense ratio of 0.67 percent.
What you have been hit by is… interest rates… and your decision to take distributions of investment income. Without a purchase date, I can't be precise but what has probably happened is that income distributions have exceeded the total return of the fund in every year by 1995 since 1992. This is not unique and this fund tends to be in the top 25 percent of funds so you certainly aren't at the bottom of the heap.
What to do? You've got two major options.
One is to move to a fund that offers superior performance. I don't like to sound like a shill for the Vanguard GNMA fund but it's difficult not to mention a no load fund with an expense ratio of 0.29 percent that has been in the top 7, 3, 4, 1, and 1 percent in the last 12 months, 3 years, 5 years, 10 years, and 15 years, respectively.
Sounds nearly perfect, doesn't it? Well, you should know that you can run a tip-top fund and still lose money in some time periods. Vanguard GNMA lost 0.95 percent in 1994 and had a total return of only 2.15 percent in 1987. If you were taking income you would have seen the market value of your investment decline in those years. It just wouldn't have declined as much as
most funds.
The phone number for the Vanguard group is 800-662-7447 and the minimum investment is $3,000.
Another route is to abandon mutual funds altogether and put your money in a ladder of U.S. Treasury obligations, replacing them as they mature, and taking income. This will take you out of the interest rate guessing business and increase the stability of your investment income.
( A ladder is a series of bonds at different maturities such as 2, 4, 6, 8, and 10 years. Each security, when it matures, is replaced with a new security with the longest maturity so your portfolio is always rolling toward you. Eventually, you have the yield of a 10 year security on a portfolio with an average maturity of 5 years.)
If you check the market value of the securities in your ladder you may have a loss in market value when interest rates rise… and you can worry about that if you want. But since you are holding these securities until maturity, you won't realize any losses. When you invest in a fund, you don't have a say in the matter.
Q. Assume that a sum of money, say $30,000, is to be invested in one of two funds. Assume also that the funds are essentially the same, i.e. have the same objectives, equally respected managers, essentially the same assets, have almost equal return histories, etc. The only apparent difference in the two funds is that one is priced much lower than the other; say one is $20 and the other is $50. Is there any advantage to buying one fund instead of the other and, if so, which should you buy and why?--- L.H., Austin, TX
A. No advantage. It has regularly been argued that you are better off purchasing lower priced individual stocks, e.g. the Dow 5 idea from Motley Fool, but the idea doesn't apply to a portfolio of stocks that is always sold at the net asset value per share of the portfolio.
File Name: 961125MO
Dallas Morning News file date: 11/26/96---TUE
Universal Press Syndicate file date: 11/25/96---MON ©
Dallas Morning News, Universal Press Syndicate, 1996
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.
AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.
