How to Earn 22.85% in Mutual Funds or Better

by | Oct 22, 2001 | Archives

Equity mutual funds have performed poorly over the past year. Here is one way to reduce losses.

The average stock mutual fund fell 17.6% over the past year while the average bond mutual fund rose 5.255. If you switched from equity to bonds last year and those bond funds performed with mediocrity you are 22.85% ahead. This is why recent messages at this site have been focused on bonds rather than shares. Investors can select their own bonds, let their bankers advise them (many bonds are available for as little as $1,000) or choose bond mutual funds. The trend for investors to switch from stocks to bonds went into overdrive in the third quarter of this year. Two bond specialty companies, Blackrock and Nuveen raised 2 billion dollars alone in the last quarter from 11 new funds bringing the total raised by 27 bond funds to 4.24 billion this year. Blackrock manages dozens of closed end bond mutual funds (closed end funds have out performed open end funds 8.2% to 5.25% on average this year).

The trend of bonds outperforming shares is likely to continue as well,because setting all external factors such as the terrorist attacks aside,the simple fact is that equities on Wall Street are still overvalued. There are two ways to value shares, one is to compare the marketvalue of a company to the firm's replacement costs. The other way is lookat the price earnings ratio. In both instances we can look first to see ifa share price makes any sense and secondly compare this valuation to theaverage of the company and the market over the history of the business.In the replacement comparison, Wall Street still needs to fall 30% to reachits historic average!

At its peak, the Dow needed to fall 66% to reach its historical average.The long range average price earnings ratio is 14, which is consistent witha real return of 7%. Today Data stream's measure of the total market isstill 23. This is well down from the peak of 33 in April 2,000 but wellabove its historic average.

A recent message about one of Wall Street's top value investment managersconfirms this overvaluation and points out that the market may rally, butthe trend is potentially on its waydown. See

The current recovery from the terrorist plunge may in fact be the rally andthus a good time to exit from equities or to shift from high risk to valueoriented shares. There are only two defensible views for the market atthis time, one is that the market has massively deviated from the norm andhas not yet fully corrected. The other view is that the market isreasonably valued because investors are now willing to accept lower returnsfrom holding shares than they were in the past. Either view suggests thatreal returns in the equity market will remain modest for some time to come.This does not mean, however, that all bond funds will make money over thenext year. Fund managers can make money in one of two ways, through theincome of the bonds or through the capital movement. If you buy bondsyourself, you can lock in a known return, ie hold the bond until maturityand thus eliminate the capital risk.

In the case of bond mutual funds you do not always have thisreliability. For this reason these messages will continue to focus onbonds of different quality ratings and yields. Recent messages coveredbonds issued by SAS airlines, Philippine government and Argentine government. Here is information I just receivedfrom Jyske Bank about US dollar Mexican bonds that yield 8.25%.

Gary, just for your information is a file that shows the spread of MexicanGovernment Bonds in USD versus T-bonds.It can be seen that there is a lot of potential in the 10 yr segment, thereforewe keep our recommendation of the 8.375% Mexico 2011 bonds.And with stock markets in negative readings, the bond market sentiment isstill positive. If you feel the duration is too high for you, it could beinteresting to move shorter on the curve, where you still get a nice yield pick-up versus T-bonds. Teddy

You can get more details about buying bonds individually or about Jyske's bond funds on this from Teddy Christiansen at Jyske Bank or at Jyske's web site at Of course your investing plan should always be matched to your wants, needs and desires as outlined in a PIEC investing plan.

Until next message, Good investing!