Mutual Fund Managers Investing in their Own Mutual Funds

Mutual fund companies are now required by the SEC to disclose how much of a stake, or the lack thereof, that fund managers have in their own funds. Unfortunately, the SEC only requires this information in the statement of additional information, which usually must be requested from the company or it can be found at http://www.sec.gov/edgar.shtml. Some fund companies are also providing this information in the fund's prospectus or on its website.

A study of 1,300 mutual funds based in the U.S. by the Georgia Institute of Technology and the London Business School found that funds in which the managers of the fund also invested in it appreciated an average of 8.7% in 2005, the year covered in the study, versus 6.2% appreciation for those funds where the managers had no money in their fund, which included more than half of all mutual funds in the study. It also found that fund performance increased .03% for every .01% increase in manager ownership, and that manager investments were highest for domestic stock funds and lowest for international bond funds, although this may just reflect the fact that interest rates were rising in 2005, which is usually not good for bond funds, since the price of bonds declines when interest rates rise.

Many fund companies are now stipulating that some of their managers' compensation must be invested in the funds they manage.

Exchange traded Notes

Barclays Bank PLC has introduced 2 exchange-traded notes (ETNs), tracking the iPath Goldman Sachs Commodity Index (GSP) and iPath Dow Jones-AIG Commodity Index (DJP).
These ETNs are 30-year senior debt securities listed on the New York Stock Exchange that will pay the return of the commodity index minus fees of 0.75%. They do not pay any interest and the unknown principal, if you can call it that, that the holding investor will receive at the end of the 30 years when the ETNs mature is what the chosen index returned plus what was invested.

The investor is basically lending his money to Barclays to be used in investing in commodities rather than buying an interest in the fund as he would with an ETF.

The main advantage of these commodity ETNs over commodity ETFs is that there, presumably, will be no taxable events for the investor as long as he holds the ETN—if the IRS accepts this, which it hasn't yet. Because commodity ETFs buys futures contracts which have a limited lifespan, the contracts have to be continually rolled over as the time remaining on the current contracts decreases, potentially generating capital gains taxes for the investor. ETNs avoid this because the investor is lending his money, not taking an ownership stake.

Although I can't say I completely understand these new securities, they seem to be like zero coupon bonds, with the principal at maturity being whatever the commodities fund based on its chosen index returns over the 30 years, plus what was invested.

However, investors with zero coupon bonds must pay taxes on them by calculating the amount of interest accrued on them each year, even though they don't receive regular interest payments. (More info about what the IRS calls original discount issues.) The IRS might pass a new rule regarding ETNs that is similar to its treatment of zero coupon bonds. The IRS likes its money! We, too!

Because ETNs are notes, their price in the secondary market will be dependent on the credit rating of Barclays, which is excellent now, but what about 10 or 20 years from now?

Unlike bonds in general, however, I don't think interest rates are a risk, except as far as interest rates affect the prices of commodities, because ETNs don't actually pay interest, nor do they have a specified principal. Their prices will be more determined by the return of the commodities index that the ETN is based on, since Barclays is promising to pay at maturity, whatever the chosen index returned during the term of the note, minus their fee of 0.75%.

Charging the Rent or Mortgage Payment with a Credit Card

American Express and VISA are now offering creditworthy customers the option to charge their rent or mortgage payment with their credit cards. American Express started allowing the charging of rent in 2003 and mortgage payments in May, 2007 with a few partners—rental developers and mortgage companies—and has expanded it gradually to 200 cities in 35 states. VISA started offering rental and mortgage payment services in 2007.

While it is a great way to earn reward points, it could also lead to greater consumer debt, and lessen the motivation of users to solve critical financial problems right away. Although the program is currently restricted to the most creditworthy customers, considering the highly competitive credit card business, it may be gradually expanded to the general population.