Shutting the doors of a mutual fund to new investors doesn't often improveperformance, even though that's the reason funds give for making the move.With less new money flowing in, the thinking goes, funds can more easilymanage their assets. Not necessarily, says Morningstar, the mutual fundrating service. "A fund's best days are probably behind it by the timeit closes," comments Russ Kinnel, Morningstar's mutual funds editor.
Funds often close too late--after their market sector has peaked, theirperformance has skidded for some other reason, or their assets have growntoo large. The T. Rowe Price New Horizons Fund, for example, gained 120percent in the three years before its closing in June 1996. Small-cap andmid-cap growth stocks were surging at the time. But over the next threeyears, New Horizons gained only 17 percent.
Morningstar compared the performance of funds three years before theyshut out new investors and three years after. The average annual total returnslid from almost 20 percent to just above 15 percent. Compared with theirpeer funds, performance dropped from the top quintile to just below average.
Adding insult to injury, the tax efficiency of these funds also suffered.Shareholders in the top 39.6 percent tax bracket kept only 80 percent oftheir pretax earnings, compared with 85 percent before the doors closed.
Nevertheless, Morningstar says, there are times when closing a fund canbenefit investors. A fund that begins life with a predetermined plan toshut its doors when assets reach a certain level, such as Fidelity New Millennium,is likely to close at the right time, not after its performance has peaked.In addition, a fund that reopens after having been closed for a while isoften a good buy.
If you own small-cap stocks, be prepared for higher investment risk.The OTC Bulletin Board, which quotes bids and offers for thousands of stockstoo small to be listed on Nasdaq, is in the midst of a massive effort toprune its list. As many as half of the 6,500 stocks quoted on the BulletinBoard could be removed in the next eight months.
Once a stock is kicked off the Bulletin Board, it usually becomes inactive--andconsequently its price drops.
To find out whether any of your stocks will be thrown off the BulletinBoard (or have been already), visit www.otcbb.comCheck OTCBB News for most recent delistings, and Eligibility Rule foran explanation of new listing requirements.
We've barely learned to execute a stock trade from the home PC, and alreadythat's yesterday's technology. Some brokerage firms now offer wireless trading,which lets you buy and sell securities via mobile phone, handheld computer,or pager. For more about trading online, see "A cheaper and easierway to trade stocks".
Discover Brokerage and Fidelity Investments currently offer this service,called TradeRunner and InstantBroker, respectively, and Charles Schwab &Co. expects to have it by year-end for its most active customers.
In addition to allowing trades from almost anywhere, these services canprovide you with crucial data, such as account positions and balances, stockquotes, and price alerts. Discover's program also includes financial newsalerts, summaries of the biggest market gainers and losers, and historicalprice charts.
There is a cost for all these conveniences, however, and probably onlythe most active investors will want to pay it. It includes monthly feesof about $50 to $80, regular online commission charges, and the price ofthe required hardware. Fidelity charges $359 for its pager, while Discoverasks $479 to $579 for its handheld computer system. The Schwab program willoffer a choice of pager, handheld computer, or cellular phone.
You'll be able to earn slightly more in 2000 without getting bumped intoa higher tax bracket. That's because inflation, which is the basis for annualadjustments in tax brackets as well as in standard deductions and exemptions,has been slight this year. What adjustments can you expect for taxes onyour 2000 income? Official figures won't be released till next month, butthis table reflects the same inflation adjustments the IRS uses.
With the millennium less than two months away, this is a good time totest how much you know about the potential effect of Y2K on your bank deposits.These questions were culled from a quiz developed by the Federal DepositInsurance Corporation. You'll find answers below.
1. The FDIC and other financial industry regulators believe thereis no need for you to take extra money out of your account as part of yourY2K preparation. True or false?
2. The federal government's protection of insured deposits won'tbe affected by Y2K. True or false?
3. If there's a power failure, banks will still be able to operate.True or false?
4. Federal regulators say you should keep good records of yourfinancial transactions, such as deposit slips and bank statements, to protectagainst Y2K-related error in your account. What time period do they suggestthese records cover?
a. December 1999
b. The last few months of 1999 and and the first few months of2000
c. The first six months of 2000
5. If you try to get cash from an ATM on Jan. 1 and it's out oforder, you should
a. Assume the Y2K bug has bitten this ATM and all other ATMs inyour bank's network
b. Assume the ATM is "down" for routine servicing oris temporarily unable to dispense cash because of a problem not relatedto Y2K
c. Try another nearby ATM
d. Both b. and c
6. It's highly unlikely that your bank will "lose" yourmoney or post it to someone else's account because of a Y2K problem. Trueor false?
7. Which of the following statements best describes what federalregulators have suggested to consumers about Y2K and loans?
a. Keep good records of your loan payments to help you quicklyresolve any error
b. Review your credit report to make sure it doesn't contain inaccurateinformation that might affect your ability to get a new loan
c. Both a and b
d. Neither a nor b
1. True. Regulators and banks are working to ensure that consumers willbe able to conduct business as usual before and after Jan. 1. Consumerswill have a variety of payment options, such as checks, credit cards, debitcards, and ATMs, in case one doesn't work. The Federal Reserve will ensurethat banks have sufficient cash on hand to serve consumers.
2. True. Y2K won't affect your $100,000 federal deposit insurance coverage,but if you have more than $100,000 in any insured bank, thrift, or creditunion, review the insurance rules to make sure you're fully protected.
3. True. Banking regulators require institutions to have backup plansto continue service if the power goes out. Those may include alternativework sites, manual transactions, or secondary sources of power and phones.Banks must also have paper copies of transactions to use in the event ofa disruption.
4. b. Then compare your records for the last few months of 1999 and firstfew months of 2000 against your bank statements, and contact your bank toresolve any error.
5. d. ATMs are occasionally turned off for basic servicing, and tryinganother one nearby is always good advice if one isn't working.
6. True. Banks are being closely supervised by federal and state regulatorsto make sure they test and, if necessary, fix the computers that keep trackof customer deposits, withdrawals, and other transactions. They also mustkeep backup records of transactions in order to recover information in emergencies.
7. c. Although federal regulators have found that nearly all federallyinsured institutions are doing a good job getting their computer systemsready for 2000, it still pays to take precautions.
In the Sept. 6, 1999, Financial Beat, we reported that the CertifiedFinancial Planner Board of Standards intended to create an "Associate"category of planner, which critics referred to as "CFP lite."The board has now scrapped the plan.
Bernice Napach. Financial Beat. Medical Economics 1999;21:28.