Tags: Hybrid | Funds | the | Path | Performance?

Hybrid Funds the Path to Performance?

Monday, 03 April 2006 12:00 AM

While the argument rages on over which investment vehicle is better - mutual funds or exchange-traded funds - some money managers are finding that the best results may come from a mixture of both.

According to Murray Coleman of Investor's Business Daily, "using ETFs and open-end mutual funds results in better performance than sticking solely to either type of investment vehicle, some money managers have found."

More and more managers, Coleman says, are using ETFs in lieu of index funds. But for other markets, actively managed funds are the buyer's choice.

"Why? Since they're often based on indexes, ETF turnover is light," he says. "That means if you've bought an ETF with a large percentage of its assets in one or two stocks, you could be locked into a laggard if those stocks underperform the market."

Coleman cites Jason Browne, portfolio manager at DAL Investments, who manages $1.5 billion in assets. "We don't have any trading restrictions with our investment strategy," said Browne. "All things being equal, we like ETFs to help us maximize our freedom and focus on performance."

Coleman says that DAL Investments looks at funds on a case-by-case basis, making decisions dictated by needs and the strengths that funds can potentially bring to the table.

Add in managers' performance in declining markets and weighting factors, and DAL has the ingredients it needs to rank funds on a one-, three-, six- and 12-month trailing-return basis.

"It's not an issue whether ETFs are better," said Browne. "Our back testing of different portfolios over time shows that mixing the two produce better results than using one over the other."

As a result, ETFs have replaced traditional index mutual funds in DAL's portfolios.

"ETFs are indexed funds with lower costs and more flexibility since they can be traded throughout the day," said Browne.

Other managers say they can get a better price break on ETFs (compared to mutual funds) but can't get the performance of actively managed funds.

Hence the move to hybrid strategies - a trend that Coleman says will grow in 2006 and 2007.

Amidst reports that the U.S. housing market is in disrepair, a new A.G. Edwards survey of personal finances says that while Americans' nest eggs are dragged down by poor savings behavior, they are kept afloat by real estate assets and gains from stocks and bonds.

The survey gave Americans a score of "fair" - or a 3 on a scale of 1 to 4 (1 being excellent, 4 being poor).

About 55% of Americans listed the cost of covering day-to-day living expenses as the biggest obstacle to building a retirement nest egg. Other obstacles include: too little income (48%), too much debt (28%), the cost of raising children (24%) and medical expenses (21%).

More than half of adults (52%) said a high priority in the next 90 days was reducing overall household expenses, followed by paying down credit card debt (47%) and paying more often with cash (45%).

When asked about their high near-term priorities, only 35% of American adults cited increasing their after-tax savings, while 17% mentioned putting more of their pre-tax savings in an employer-sponsored retirement plan.

Among adults who plan to retire, 58% said they do not know what size their nest eggs will need to be in order for them to live comfortably in retirement. Some 41% of those 55 or older do not know how big their nest egg will need to be.

As MoneyNews reported on Friday, GM was in talks to sell a majority stake in GMAC, its financial arm. Today it's official.

According to a company statement over the weekend, GM will jettison GMAC, selling a 51% stake to a financial group led by hedge fund firm Cerberus Capital Management LP for $14 billion. The firm is made up of the private equity unit of Citigroup and Japan's Aozora Bank Ltd.

GM's current management is expected to stay on at GMAC, at least until the closing of the deal, which is designated for Fall 2006.

The $14 billion, payable over three years, will serve as a shot in the arm for GM.

Today Reuters reported that "the long-awaited sale will generate much-needed cash for the world's largest automaker, which reported a $10.5 billion loss in 2005. The move will also help to restore the financing unit's credit rating to investment-grade status."

The sale should be greeted with some enthusiasm in the financial markets today. Reuters reports that GM shares jumped 3.5% in pre-market trading on Monday.

Here's how the financials break down.

Of the $14 billion, $7.4 billion in cash comes straight from Cerberus and its partners. Another $2.7 billion in cash comes from the conversion of GMAC and its subsidiaries to limited-liability companies.

"In addition, GM will retain about $20 billion of GMAC automotive lease and retail assets and associated funding with an estimated net book value of $4 billion that will monetize over three years," Reuters reports.

The wire service adds that GM is planning on taking a non-cash pre-tax charge to earnings of roughly $1.1 billion to $1.3 billion in the second quarter of 2006.

Based on this year's list of Fortune 500 companies, there's a new sheriff in town - or maybe a new sultan.

Thanks to a big surge in oil prices, ExxonMobil lays claim to the top spot in the Fortune rankings.

The oil company steals the crown once worn by Wal-Mart, although the retail giant, along with the rest of the Fortune 500, still saw steady growth last year.

"ExxonMobil hauled in nearly $1 billion a day in sales last year, making it the biggest company in the United States and knocking Wal-Mart from the No. 1 spot for the first time in four years, according to the latest Fortune 500," reports CNNMoney.

CNN says that ExxonMobil's earnings were the "biggest ever for a U.S. company."

Two other oil companies, Chevron and ConocoPhillips, were also on the top 10 list. The companies brought in $189.4 billion and $166.6 billion in revenues last year.

General Motors, which ranks No. 3, had the distinction of suffering the second-biggest loss overall. GM, which dropped over $10 billion in 2005, was bested only by United Airlines' $21.1 billion loss. UAL ranked 124th on the Fortune 500 list.

As far as other companies worthy of mention, Warren Buffett's Berkshire Hathaway came in at No. 13.

Overall, U.S. companies earned a whopping $9.1 trillion in sales and $610 billion in profits for the year. Those numbers also broke previous records, says CNN.


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While the argument rages on over which investment vehicle is better - mutual funds or exchange-traded funds - some money managers are finding that the best results may come from a mixture of both. According to Murray Coleman of Investor's Business Daily, "using ETFs and...
Monday, 03 April 2006 12:00 AM
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