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Mutual fund managers use fake fund names to part you from your money such that you cannot judge what a fund does by its name. This new rule is forcing funds that called themselves something like the America's Government Fund to either dispose of East Asian government debt if it exceeded 20% of fund assets, or to change the fund's name.

Likewise for funds that call themselves an equity income fund but have 25% of assets in stocks that paid no dividends.

Mutual fund managers use fake fund names to part you from your money such that you cannot judge what a fund does by its name. Many funds have names that are outright misleading or even deceptive. In the late 1990’s, for instance, during the technology stock bubble, some portfolio managers took overhand of public’s desire to striation the latest fad by slapping “internet” in front of their fund names.

The probability of that happening now are possibly lower. As of July 2002, the SEC requires funds to have at least 80% of their accounts receivable in securities that their fund name implies, up from 65% previously. This new rule is forcing funds that themselves something like the America’s Government Fund to either dispose of East Asian government debt if it exceeded 20% of fund assets, or to anatomize the fund’s name.

Likewise for funds that call themselves an equity income fund but have 25% of funds in stocks that paid no dividends. More than five hundred funds have had to assimilation their names as long as they failed the 80% rule. Invesco’s Blue Chip Growth fund, for example, is now titled just growth fund, since 60% of its holdings are in technology stocks, and many of those can hardly be styled blue yeoman these days.

The 80% rule still allows mutual funds to invest in just fast by up to 20% of holdings. Why don’t you just start aside the entire problem by consumerism shares of an indexed mutual fund when you only have a selection of mutual funds to select? For this reason I strongly recommend that if you can only buy mutual funds, as in the case of the 401(k), then restrict your purchases to indexed funds such as the Vanguard 500 (VFINX). The best you can do is to learn to select individual stocks in your Roth IRA or individual account.

Someone who reads my blog sent me this email:

All else being equal, which measure is preferred for financial firms such as banks: ROIC or ROE?  I am using ROIC for non-financial firms but I didn't know if it gave a useful reading for financial firms or not.

Thanks,

Chad

 

ROIC is not useful.

For non-financial companies:

I know you like ROIC. But I think it’s too clever by half.

I use the pre-tax return on tangible invested assets.

In other words, I look at what a company earns and divide those earnings by the assets on its balance sheet excluding cash and intangibles.

For financial companies:

Normally you use return on assets. Then you multiply ROA by an appropriate leverage ratio.

Say Wells Fargo (WFC) has a long-term average ROA of 1.3%. If in the future you expect banks to be levered 10 to 1, you would multiply 1.3% times 10 to get a 13% ROE. If you expect normal leverage to be 12 to 1 – you’d multiply 1.3% times 12 to get a normal ROE of 15.6%.

And so on.

For a good discussion of financial companies, read Variant Perceptions.

Talk to Geoff about Financial Companies

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