Part I: INTRODUCTION & MAINTAINING PURCHASING POWER The fundamental purpose to save or invest versus spend is to have more money in the future. In a simple world, one without inflation or investments as alternatives to saving, money grows through saving more out of income relative to what is consumed, or spent. Therefore, today’s dollars are valued in the same terms as are tomorrow’s dollars. Any interest earned on savings translates into increased purchasing power. Introduce Inflation and your savings must earn an average annual long-term interest rate at least equal to inflation, otherwise the value (or purchasing power) of your money is in decline even if the dollar amount is increasing. If you are satisfied with simply maintaining your purchasing power, the best option is to put your money in Treasury Inflation-Protected Securities or “TIPS”. Government securities provide the safest means to preserve, but not increase purchasing power. Since simply saving your money is not sufficient to maintain the initial amount saved, I will regard savings and investments as one in the same. The only way to earn interest on your money is to invest it. In this world the fundamental problem is where to put money in order to grow future purchasing power. This implies a reasonable rate of return over inflation (ignoring income taxes for now). (If the parallel between saving and investing is unclear refer to the passage below for a brief but hopefully thorough explanation.) When you put your money in a savings account it is usually required that you keep a certain amount in that account for an extended period. When you go to a bank to withdraw your money, it would be a rare occasion that you have any problem getting it out. Having your money in a savings account may not appear to be an investment, but actually is. The bank uses your money and loans it out to individuals or businesses. Recall there is typically a restriction requiring that you not have access to your money for some amount of time. For the time you forego the use of your money you are paid interest. At the end of the period, you can take the money you put in the savings account and use it in any way you wish. A bond is very much the same. A business issues a coupon or (interest paying) bond, if you invest you give them money, which you expect back at the end of some specified period. To compensate you for the time you forego the use of your money they pay you interest, then at the end of the period they return to you the principal investment you initially made. The interest you get from a coupon bond is usually better than what you can get from a savings account and is also typically better than inflation. The downside is that there is a chance that the business will not be able to pay you back. Properly selecting businesses to invest in whether a bond or stock should be done carefully and with at least some basic investment knowledge. The important point is that if you must forego the use of your money you should require that your purchasing power be not only maintained, but rather enhanced. Such is the benefit of having money-you can either spend it, or prudently lend it to others. If you lend it you must get more back than you lent out, to provide for the effects of inflation, and for the potential that you might not get it back. The only certain way to get your money back is by investing in government securities (e.g. TIPS) but you will not get more than an inflation return.
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Part I: INTRODUCTION & MAINTAINING PURCHASING POWER The fundamental purpose to save or invest versus spend is to have more money in the future. In a simple world, one without inflation or investments as alternatives to saving, money grows through saving more out of income relative to what is consumed, or spent. Therefore, today’s dollars are valued in the same terms as are tomorrow’s dollars. Any interest earned on savings translates into increased purchasing power. Introduce Inflation and your savings must earn an average annual long-term interest rate at least equal to inflation, otherwise the value (or purchasing power) of your money is in decline even if the dollar amount is increasing. If you are satisfied with simply maintaining your purchasing power, the best option is to put your money in Treasury Inflation-Protected Securities or “TIPS”. Government securities provide the safest means to preserve, but not increase purchasing power.
Since simply saving your money is not sufficient to maintain the initial amount saved, I will regard savings and investments as one in the same. The only way to earn interest on your money is to invest it. In this world the fundamental problem is where to put money in order to grow future purchasing power. This implies a reasonable rate of return over inflation (ignoring income taxes for now). (If the parallel between saving and investing is unclear refer to the passage below for a brief but hopefully thorough explanation.)
When you put your money in a savings account it is usually required that you keep a certain amount in that account for an extended period. When you go to a bank to withdraw your money, it would be a rare occasion that you have any problem getting it out. Having your money in a savings account may not appear to be an investment, but actually is. The bank uses your money and loans it out to individuals or businesses. Recall there is typically a restriction requiring that you not have access to your money for some amount of time. For the time you forego the use of your money you are paid interest. At the end of the period, you can take the money you put in the savings account and use it in any way you wish. A bond is very much the same. A business issues a coupon or (interest paying) bond, if you invest you give them money, which you expect back at the end of some specified period. To compensate you for the time you forego the use of your money they pay you interest, then at the end of the period they return to you the principal investment you initially made. The interest you get from a coupon bond is usually better than what you can get from a savings account and is also typically better than inflation. The downside is that there is a chance that the business will not be able to pay you back. Properly selecting businesses to invest in whether a bond or stock should be done carefully and with at least some basic investment knowledge. The important point is that if you must forego the use of your money you should require that your purchasing power be not only maintained, but rather enhanced. Such is the benefit of having money-you can either spend it, or prudently lend it to others. If you lend it you must get more back than you lent out, to provide for the effects of inflation, and for the potential that you might not get it back. The only certain way to get your money back is by investing in government securities (e.g. TIPS) but you will not get more than an inflation return.
The most attractive avenue to grow your investments and purchasing power, and to guard against inflation is by investing in good American businesses. (While many international businesses are also perfectly fine, they are not necessary for this conversation.) Most people do not have the means or the desire to invest their future purchasing power in private business and instead turn to public companies. This is arguably the better option anyway since it is easy to take your investment back and for most people there are many more public businesses to choose from. American businesses in the last 20-30 years have on average earned between 7-10 percent for investors and about 6-7 percent over a longer time frame, whereas inflation has averaged about 3-4% over the long term. If you believe that in 20 years from now our country’s standard of living will have risen, then the most sensible thing to do with your money is to own small pieces of the best American Businesses (stocks) at sensible prices. The Standard of living can be measured by looking at income levels, quality of housing and food, medical care, educational opportunities, transportation, communications, etc. When economists talk about standard of living however, most are referring to changes in per capita (per person) Gross Domestic Product (GDP)-calculated by GDP divided by the population. GDP is defined as the total production of goods and services within the United States. The table below provides the changes in Real GDP during different time periods over more than the last 100 years. If the standard of living is to increase over time, then the GDP must also increase, meaning the total production of goods and services must also increase accordingly and by definition the average business will march similarly upward. If you own a claim on a prosperous business, then by definition you must prosper too. If you’re completely confused just think about it this way: Our country over the last century, has experienced two world wars, a great depression with unemployment rising to about 25%, two (possibly) three serious financial fiascos, the terrorist attacks of 9-11, the cold war, an assassinated president, the civil rights movement, etc, yet our standard of living increased about seven-fold. Had you purchased pieces of American businesses over time and without regard to market levels, you would have prospered similarly. There were however times when inflation rates were very high, even higher than most American businesses returns and those who held cash or earned an unduly low return suffered significant long-term reductions in their future purchasing power. Over the next century, it is certain that our country will experience periods of extreme uncertainty, but our country is equally certain to attain continued prosperity-a result of having a functional rule of law, belief in meritocracy, and an economic system that on the whole is market based. Seven fold increase in REAL GDP per person:
United States 1820-1870 1.43% 1870-1913 1.82 1913-1950 1.61 1950-1973 2.45 1973-2005 1.91 Source: GGDC
United States 1820 $1257 1870 2445 1913 5301 1950 9561 1973 16689 2005 30519
Real GDP Per Person: Growth Rate
PART II: IF YOU WISH TO GROW YOUR PURCHASING POWER, BEWARE OF MUTUAL MOST FUNDS!!!
3 PRIMARY REASONS TO RECONSIDER YOUR MUTUAL FUNDS AS A SOUND MEANS FOR INVESTMENT
(i) Most mutual funds are huge, they are so big that the amount of money they have to invest restricts the
number of businesses in which they can choose to invest. (ii) Most mutual Funds are closet index funds and tend to over diversify owning 100 or more stocks at a
time. (iii) They charge way too much in fees and expenses for services they (don’t) provide, which significantly
reduces the investors actual returns separate from the funds reported returns. Let’s explore why investing in an S&P 500 or DJIA index fund with low fees and expenses are better investments than mutual funds.
MUTUAL FUNDS
WHAT MUTUAL FUNDS PROVIDE: The basic attractiveness of stock mutual funds allows individuals to benefit similarly with that of general business. For more than the last century, American businesses have done roughly 2 percent better than inflation. Meaning stocks have provided the best means to not only to preserve, but to grow purchasing power over time. Mutual funds have provided an almost effortless avenue to making such investments. The overwhelming majority of public and private pension funds, employer sponsored retirement plan participants (401(k)’s, IRA’s, etc,) personal brokerage accounts, buyers of annuity contracts & life insurance policies, clients of financial planners, advisors, trusts, and others seek to enhance either their own, or their clients purchasing power via mutual funds. That is, the majority of Americans have placed their retirement savings, discretionary income, and inherited assets in American business via Mutual Funds. The assumption is that mutual funds provide an “experienced” and “competent” investment managers to look after clients money and to make investments with the clients best interests in mind. The Manager makes decisions about what, when, and how much to buy or sell. Investor’s pay for this however, in fees and expenses, which funds justify by claiming to earn investors better returns than an index (e.g. DJIA or S&P 500) return. (Though this is in large a myth.) Index funds were created to provide investors a means to invest in general American businesses at a low cost. Index Fund managers do not engage in independent decision-making. Whatever companies make up the index, also make up the index fund. As the index changes so too does the index-fund. As such, index funds charge much less in fees and expenses relative to mutual funds. In order for mutual funds to justify their existence they must perform better than an index fund after all fees, expenses, and taxes. We will find they do and will not.
MUTUAL FUND MARKET
A fat wallet is the investor’s worst enemy. However globally, mutual funds manage a total of $25 trillion. United States Domiciled mutual funds manage about 46% thereof, or $12 trillion, $4.8 trillion of which is invested in U.S. listed stocks. The Top 25 stock fund families manage more than 2.3 trillion dollars. The mutual fund market is huge and the majority of this capital is invested by only a few very large funds. This requires that their capital be concentrated among the largest stocks. To understand why these restrictions occur consider the following: If an investor owns 100 investments of equal proportion, then each will have a 1% influence on the aggregate return. If a fund manages $10 billion, with 100, 1% positions, and limits their controlling interest to 5% (which is normal,) then we can determine how large a company must be in order for them to be considered for investment by the fund. For example, $10 billion invested equally in 100 companies will have invested $100 million in each. Factoring in the requirement that ownership be no more than 5% requires the business to have a market value of at least $2 billion (100m/.05=2000b). As capital increases beyond $10 billion the investor finds their investment options in rapid decline. A portfolio of multiple businesses will earn the average of the returns provided by those stocks held within the portfolio. If you select only a few good companies and pay a reasonable price, you are obviously destined to earn a better return relative to someone who invests in a much larger group made up of good, bad, and average businesses. Most mutual funds hold dear the concept of wide diversification, investing in more than 100 positions at a time. But it is not often that there are 100 attractive companies available for purchase at any point in time, rather it is quite rare, often impossible. This concentration of mutual fund capital among only a few funds coupled with large diversification restricts the returns that mutual funds can earn which tends to fall somewhere between the returns for the two primary exchanges in the United States (before fees and expenses). The two primary stock indexes in the U.S. are the Dow Jones Industrial Index (DJIA) and the Standard and Poor’s 500 (S&P 500). The S&P 500 consists of 500 companies. The DJIA consists of 30 companies, all of which are included within the S&P 500 index. The DJIA by design is an attempt to monitor the more prosperous businesses (or at least largest, most popular, and widely held) and should as a result do better than an index that is designed to monitor the general or more average business, as does the S&P 500. The inevitable result is that mutual funds are destined to earn index returns, before fees and expenses, because they are, in effect, the index. After fees and expenses mutual funds will provide investors a lesser return relative to the returns provided by the index fund with a much less expense ratio. From a list of more than 725 U.S. Domiciled mutual funds provided by Money Magazine in 2007, about 68 were U.S. equity funds with more than $10 billion assets under management. The average annual return reported by the 68 Funds was no less than 10.72% for the 10-year period reviewed. Together, these 68 funds manage more than 2 trillion dollars. It is curious that 58% of them report having outperformed the 10.02% return of the S&P 500. As presented this is not an out-right lie, though it is certainly misleading. Can we really blame them for presenting their case in the most favorable light? -The answer is plainly, yes. The “reported” return is largely before having accounted for annual expenses, other obscure fees, and taxes. This is equivalent to measuring business success based upon sales, instead of the rate of return-the important factor as far as the sensible investor is concerned. The 10-year average return for the 68 mutual funds before any fees, expenses, or taxes was 10.72 versus 10.02 for the S&P 500. After load fees, if any, and annual expenses the mutual funds earned 9.75 versus a return of 9.81. If we apply the industry average index fund expense (which is 0.2%) to the S&P 500, the S&P 500 would have done better than mutual funds. Finally, if we apply both fees and expenses as well as the taxes you must
pay for distributions (dividends and capital gains of fund portfolio companies,) the S&P 500 would have provided the investor with an annual return of 9.71% versus only 8.88% for the professionally managed mutual Funds. A detailed summary of the data used in these conclusions is provided below for the interested reader. And is in the following order:
(1) Mutual Fund Capital – Global & U.S. (2) Portfolio Holdings of Long Term Mutual Funds – By Asset Class (3) Top 25 Domestic Stock Funds (4) Stock Funds with more than $2 billion and at least a 10 year record (From list of 725 funds) (5) Number of Domestic Companies Available with Increasing Investment Capital (6) Dow Jones Industrial Average by Market Capitalization (7) Standard And Poor’s 500 by Market Capitalization (8) Companies with a Market Capitalization of at least $2 billion (Valueline Database) (9) Summary Data 68 Funds Reported Returns, Pre-Tax Returns, & “Take Home Returns” (10) Summary of (9)
(1) Mutual Fund Capital – Global & U.S. U.S. Has the World's Largest Mutual Fund Market(percent of total assets, 2007)
Total Worldwide Mutual Fund AssetsUnited States 46% 12.05$ Europe 34% 8.91$ Africa and Asia/Pacific 14% 3.67$ Other Americas 5% 1.31$
Total U.S. Mutual Fund AssetsDomestic Stock Funds 40% 4.81$ International Stock Funds 14% 1.68$ Bond Funds 14% 1.68$ Money Market Funds 26% 3.13$ Hybrid Funds 6% 0.72$
Note: Components may not add to 100 percent because of rounding.
$26.2 trillion
$12.0 trillion
Sources: Investment Company Institute, European Fund and Asset Management
Association, and other national mutual fund associations
(2) Portfolio Holdings of Long Term Mutual Funds – By Asset Class
Portfolio Holdings of Long-Term Mutual Funds as a Share of Total Net Assets by Type of Fund(end of year)
Equity Funds
(3) Top 25 Domestic Stock Funds (4) Stock Funds with more than $2 billion and at least a 10 year record (From list of 725 funds)
As of Jan 2007:
Domestic Stock Funds with assets of more than $10 billion
Fund By Fund Family Assets Fund By Fund Family Assets(millions) (millions)
American Century Janus Ultra Inv. twcux 14,762$ Janus Fund 11,496$ American Funds: Legg Mason AMCAP AMCPX25,237 Aggressive Growth 10,833 American Balanced ABALX55,880 Value Trust 20,750 American Mutual AMRMX19,359 Longleaf Partners Capital Income Builder CALBX80,853 Longleaf 10,883 Fundamental Investors ANCFX38,375 Lord Abbett Growth Fund of America AGTHX161,166 Affiliated 20,837 Income Fund of America AMECX76,353 Mid Cap Value 10,482 Investment Co of America AIVSX 88,703 MFS Wash mutual AWSHX83,998 Total Return 11,582 Calamos Neuberger Berman Growth A CVGRX17,491 Genesis 10,850 Davis OakMark New York Venture NYVTX42,374 Equity and Income 11,534 Dodge & Cox Oppenheimer Balanced Group DODBX27,064 Main St. 11,730 Stock DODGX64,843 Putnam - Fund for Growth 15,262 Fidelity Selected Balanced 22,231 American 11,596 Blue Chip 20,574 T. Rowe Price Contrafund 68,771 Equity income 23,199 Diversified Growth 16,953 Growth 18,290 Equity Income 29,886 Mid cap Growth 15,570 Equity Income II 11,646 Van Kampen Freedom 2010 12,062 Comstock 19,429 Freedom 2020 16,495 Equity and income 18,002 Freedom 2030 10,342 Growth and income 10,211 Growth and Income 30,549 Vanguard Growth co 30,110 500 Index 117,740 Low Priced 38,784 Asset Allocation 12,551 Magellan 45,959 Energy 10,417 Mid Cap stock 12,853 Growth index 12,515 Puritan 25,512 Health Care index 26,834 Spartan 500 index 15,726 Prime Cap 31,811 Value 17,832 Reit Index 11,592 Franklin Small Cap index 13,796 Income 50,978 Star 13,789 Mutual Discovery 12,315 Value Index 10,391 Mutual Shares 20,854 Wellesley 12,597 Templeton Growth 34,578 Wellington 45,169 Harbor Windsor II 47,436 Capital Appreciation 17,643 Windsor 23,751
(5) Number of Domestic Companies Available with Increasing Investment Capital
Top 25 Stock Fund Families
Fund Assets Billions
The Vanguard Group 516.0
Fidelity Investments 434.0
American Funds 420.1
T. Rowe Price Group 135.4
Columbia Management 80.2
Janus 66.4
Franklin Templeton 60.8
Fidelity Advisor 57.4
Legg Mason 47.0
American Century 44.6
Davis Funds 44.4
Oppenheimer Holdings 44.4
BlackRock 35.9
MFS Investment Management 35.6
Invesco Aim Management Group 34.2
Lord Abbett & Co. 34.1
Putnam Investments 33.8
Van Kampen Investments 32.8
Goldman Sachs 29.2
Princor Financial Services 28.3
Ameriprise Financial 27.5
Royce Funds 26.3
Allianz 23.2
Charles Schwab Corp. 22.7
JPMorgan Chase 20.2
Billions
Total 2,335
Average 93
Median 36
Assets Under Market Cap Valueline Morningstar Number of economically
(6) Dow Jones Industrial Average by Market Capitalization
Company
By Size COMPANY NAME PRIMARY EXCHANGE TICKER As of September 2008 As of Octover 2007
1 Exxon Mobil Corp. New York SE XOM 419 526
2 General Electric Co. New York SE GE 255 418
3 Microsoft Corp. NASDAQ NMS MSFT 242 282
4 Wal-Mart Stores Inc. New York SE WMT 236 189
5 Procter & Gamble Co. New York SE PG 207 221
6 Johnson & Johnson New York SE JNJ 193 190
7 Cheveron Corporation New York SE CVX 179 1938 AT&T Inc. New York SE T 177 257
9 International Business Machines Corp. New York SE IBM 162 161
10 Bank of America New York SE BAC 158 23011 JPMorgan Chase & Co. New York SE JPM 149 157
12 Pfizer Inc. New York SE PFE 125 173
13 Coca-Cola Co. New York SE KO 118 133
14 Hewlett-Packard Co. New York SE HPQ 116 132
15 Citigroup Inc. New York SE C 105 230
16 Intel Corp. NASDAQ NMS INTC 104 150
17 Verizon Communications Inc. New York SE VZ 89 130
18 Merck & Co. Inc. New York SE MRK 69 116
19 McDonald's Corp. New York SE MCD 69 67
20 Walt Disney Co. New York SE DIS 61 68
21 United Technologies Corp. New York SE UTX 57 79
22 Kraft New York SE KFT 50 na23 3M Co. New York SE MMM 48 68
24 American Express Co. New York SE AXP 44 73
25 Boeing Co. New York SE BA 42 74
26 Home Depot Inc. New York SE HD 42 65
27 E.I. DuPont de Nemours & Co. New York SE DD 39 45
28 Caterpillar Inc. New York SE CAT 37 50
29 Alcoa Inc. New York SE AA 20 33
30 General Motors Corp. New York SE GM 5 23
Removed From Index
Altria Group Inc. New York SE MO 42 148
Honeywell International Inc. New York SE HON 31 46
American International Group Inc. New York SE AIG 8 171
Added to Index
Cheveron Corporation New York SE CVX 179 193
Bank of America New York SE BAC 158 230
Kraft New York SE KFT 50 na
MARKET CAPITALIZATION ($ billions)
Dow Jones Industrial Average (DJIA)
(7) Standard And Poor’s 500 by Market Capitalization Company Company Name Symbol Market Company Company Name Symbol Market Company Company Name Symbol Market Company Company Name Symbol Market
By Size Capitalization By Size Capitalization By Size Capitalization By Size Capitalization
1 Exxon Mobil Ord Shs XOM 508.93 101 Franklin Resources Inc BEN 32.35 301 Cognizant Technology Solutions CorpCTSH 10.75 401 Sigma-Aldrich Corp SIAL 6.10
2 General Electric Ord Shs GE 427.06 102 Illinois Tool Works Inc ITW 31.91 302 Ecolab Inc ECL 10.74 402 Avery Dennison Corp AVY 6.07
3 Microsoft Corp MSFT 271.23 103 Transocean Inc RIG 31.46 303 Hershey Ord Shs HSY 10.48 403 Safeco Corp SAF 6.04
4 AT&T Inc T 249.02 104 TXU Corp TXU 31.40 304 Gannett Co Inc GCI 10.48 404 E Trade Finance Ord Shs ETFC 5.93
5 Citigroup Ord Shs C 240.62 105 Union Pacific Corp UNP 30.95 305 Allegheny Technologies Inc ATI 10.46 405 MeadWestvaco Corp MWV 5.78
6 Bank of America Ord Shs BAC 227.24 106 CME Group Inc CME 30.26 306 Leucadia National Corp LUK 10.32 406 Cintas Corp CTAS 5.77
26 Pepsico Inc PEP 114.53 126 Celgene Corp CELG 26.52 326 Sunoco Inc SUN 9.16 426 LSI Corp LSI 5.00
27 MERCK AND CO INC MRK 109.69 127 Viacom Class B Ord Shs VIA.B 26.50 327 Brown Forman Class B Ord Shs BF.B 9.13 427 Molex Ord Shs MOLX 4.94
28 Oracle Corp ORCL 106.10 128 State Street Corp STT 26.11 328 Sherwin-Williams Co SHW 9.03 428 Affiliated Computer Services IncACS 4.92
29 Wachovia Corp Ord Shs WB 98.09 129 Adobe Systems Inc ADBE 25.72 329 Sovereign Banc Ord Shs SOV 8.94 429 CenturyTel Ord Shs CTL 4.92
30 Abbott Laboratories ABT 82.84 130 FPL Group Inc FPL 25.53 330 Nabors Industries Ltd NBR 8.90 430 Janus Capital Group Inc JNS 4.85
31 Goldman Sachs Ord Shs GS 81.33 131 Praxair Inc PX 25.48 331 Unum Group Ord Shs UNM 8.85 431 Interpublic Group Ord Shs IPG 4.82
32 United Parcel Service Inc UPS 79.55 132 First Data Corp FDC 25.43 332 C.R. Bard Inc BCR 8.85 432 D R Horton Inc DHI 4.82
33 UNITED TECHNOLOGIE UTX 77.52 133 Danaher Corp DHR 25.20 333 Fidelity National Information Services IncFIS 8.70 433 Allied Waste Ind Ord Shs AW 4.77
34 Comcast Class A Ord Shs CMCSA 77.27 134 Loews Corp Ord Shs LTR 25.10 334 Allegheny Energy Inc AYE 8.69 434 Varian Medical Systems Inc VAR 4.76
35 Boeing Ord Shs BA 77.17 135 Thermo Fisher Scientific IncTMO 24.53 335 Questar Corp STR 8.63 435 Manor Care Inc HCR 4.74
36 Morgan Stanley Ord Shs MS 72.11 136 PNC Finl Service Ord Shs PNC 24.49 336 NCR Corp Ord Shs NCR 8.63 436 Stanley Works Ord Shs SWK 4.69
37 American Express Co AXP 71.92 137 Anadarko Petroleum Ord ShsAPC 24.30 337 Genuine Parts Co GPC 8.58 437 Citizens Comms Ord Shs CZN 4.68
38 Home Depot Inc HD 71.92 138 Medco Health Solutions IncMHS 24.22 338 SUPERVALU INC SVU 8.56 438 McCormick & Co Non-Voting Ord ShsMKC 4.65
39 Time Warner Inc TWX 69.94 139 National Oilwell Varco IncNOV 24.15 339 Limited Brands Inc LTD 8.54 439 Pall Corp PLL 4.63
40 Walt Disney Ord Shs DIS 67.12 140 Automatic Data Processing IncADP 23.94 340 Molson Coors Brewing Ord Shs Non-Voting Class BTAP 8.54 440 Monster Worldwide Inc MNST 4.59
41 News Class A Non-Voting Ord ShsNWS.A 67.07 141 Alltel Ord Shs WI AT 23.92 341 Polo Ralph Lauren Corp RL 8.51 441 International Flavors and Fragrances IncIFF 4.59
43 UnitedHealth Group Inc UNH 66.38 143 Duke Energy NYSE Ord ShsDUK 23.84 343 Clorox Co CLX 8.46 443 Pulte Homes Inc PHM 4.38
44 3M Co MMM 65.61 144 Cardinal Health Inc CAH 23.72 344 CONSOL Energy Inc CNX 8.46 444 Tellabs Inc TLAB 4.36
45 MCDONALDS -CORP MCD 65.57 145 CBS Class B Ord Shs CBS 23.64 345 Micron Technology Inc MU 8.45 445 Family Dollar Stores Inc FDO 4.27
46 Merrill Lynch Ord Shs MER 65.16 146 BB&T Corp BBT 23.43 346 Pepsi Bottling Group Inc PBG 8.45 446 Apartment Investment & Management Class A Ord ShsAIV 4.24
47 Eli Lilly and Co LLY 64.81 147 Johnson Controls Inc JCI 22.95 347 Terex Corp TEX 8.41 447 Lennar Corp Ord Shs LEN 4.21
48 Medtronic Inc MDT 62.79 148 Public Srvce Ent Ord Shs PEG 22.77 348 Altera Corp ALTR 8.40 448 Sealed Air Corp SEE 4.18
49 Dell Inc DELL 61.56 149 Regions Financial Corp RF 22.62 349 DTE Energy Co DTE 8.36 449 Millipore Corp MIL 4.17
50 Wyeth Ord Shs WYE 61.45 150 Weatherford International IncWFT 22.51 350 AmerisourceBergen Ord Shs ABC 8.29 450 Rowan Companies Inc RDC 4.09
51 Fannie Mae Ord Shs FNM 60.88 151 Best BUY Co Inc BBY 22.49 351 Goodrich Corp Ord Shs GR 8.27 451 Federated Investors, Inc FII 4.09
52 Amgen Inc AMGN 60.87 152 Kellogg Co K 22.32 352 Verisign Ord Shs VRSN 8.26 452 Pinnacle West Capital Corp PNW 4.04
53 US Bancorp Ord Shs USB 58.04 153 Simon Property Ord Shs SPG 22.28 353 Vulcan Materials Co VMC 8.20 453 Ashland Inc ASH 3.95
54 Bristol Myers Ord Shs BMY 57.18 154 Tyco International Ord ShsTYC 22.12 354 Newell Rubbermaid Inc NWL 8.13 454 Integrys Energy Group Inc TEG 3.94
55 Target Corp TGT 56.96 155 Paccar Inc PCAR 21.86 355 Hudson City Bancorp Inc HCBK 8.12 455 First Horizon National Corp FHN 3.88
87 Devon Energy Ord Shs DVN 36.57 187 Reynolds American Inc RAI 18.74 387 H&R Block Inc HRB 6.89 487 OfficeMax Inc OMX 2.48
88 Gilead Sciences Inc GILD 35.69 188 Juniper Networks Inc JNPR 18.73 388 National Semiconductor Corp NSM 6.86 488 Tektronix Ord Shs TEK 2.43
89 Baxter International Ord ShsBAX 35.69 189 Clear Channel Communications IncCCU 18.73 389 Windstream Corp WIN 6.83 489 Unisys Ord Shs UIS 2.42
90 COLGATE PALMOLIVE CL 35.24 190 Edison International EIX 18.41 390 Waters Corp WAT 6.64 490 Hercules Inc HPC 2.40
91 Lehman Brothers Holdings Ord ShsLEH 34.14 191 American Electric Power Co IncAEP 18.24 391 AMBAC Finl Group Ord Shs ABK 6.62 491 Compuware Corp CPWR 2.34
49 Time Warner TWX 49,969 99 DIRECTV Group (The)DTV 28,102 149 Johnson Controls JCI 19,690 199 Juniper Networks JNPR 14,085
50 3M Company MMM 49,279 100 Hess Corp. HES 27,527 150 CME Group CME 19,626 200 Electronic Arts ERTS 13,969 Company Ticker Market Cap Company Ticker Market Cap Company Ticker Market Cap Company Ticker Market Cap
(9) Summary Data 68 Funds Reported Returns, Pre-Tax Returns, & “Take Home Returns”
Assets, Reported Returns, Expenses, Fees, and Before and After Tax Returns for 68 Mutual Funds with more than $10 billion in equity assets and with a 10+ year record
As of Jan 2007:
Domestic Stock Funds with assets
of more than $10 billion(millions) 10-yr Pre-expense Annual Load or Sales(load) Pre-tax Take home 10-yr Return
Fund Assets Return Expense no Load? Fee Return Return S&P 500*American Century Ultra Inv. twcux 14762 5.2 0.99 No Load 0 4.15 3.80
Growth index 12515 7 0.22 No Load 0 6.78 6.20 9.81
Health Care index 26834 16.4 0.25 No Load 0 16.15 14.78 9.81
Prime Cap 31811 12.6 0.45 No Load 0 12.15 11.12 9.81
Reit Index 11592 14.3 0.21 No Load 0 14.09 12.89 9.81
Small Cap index 13796 10.2 0.23 No Load 0 9.97 9.12 9.81
Star 13789 9.1 0.36 No Load 0 8.74 8.00 9.81
Value Index 10391 9.3 0.21 No Load 0 9.09 8.32 9.81
Wellesley 12597 8.6 2.4 No Load 0 6.20 5.67 9.81
Wellington 45169 9.7 0.35 No Load 0 9.35 8.56 9.81
Windsor II 47436 10.1 0.35 No Load 0 9.75 8.92 9.81
Windsor 23751 9.8 0.37 No Load 0 9.43 8.63 9.81
(10) Summary of (9) Number of Funds 68
Total Assets $2.012 trillion
S&P 500 10 Year Mutual Funds 10 Year
Reported Return Reported Average
10.02 10.72
S&P 500 10 Year Mutual Funds 10 Year
Return after fees Return after Fees
9.81 9.75
S&P 500 10 Year Return Mutual Funds 10 Year Return
after fees and taxes after Fees and taxes
9.71 8.88
Discount from "Reported Average" Discount from "Reported Average"
3% 17%
A. Invest in a no-load index fund with an expense ratio of no more than 0.2%.
B. Invest in a carefully selected fund with the following requirements:
(i) The Money Manager will have a large proportion of their net worth invested in the fund of consideration.
(ii) Assets under management of no more than $10 billion at the time of investment, no load fees, and annual expense no more than 1% unless their average returns are better than 25%.
(iii) An indication that the fund will stop accepting new investors once additional capital is thought to hinder investment returns.
(iv) (With little in the form of a track record) the manager will be considered perfectly sensible and capable of explaining his methods so that a person with no knowledge of the investment process can completely understand his approach.
(v) (With a track record) The manager will have an average 10-year track record of at least a 15% return, with no significant loss in any single year. (Be also careful of any one time single year gain.)