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Why fund managers are sad you’re not on vacation

By WTOP Staff

STAN CHOE
AP Business Writer

NEW YORK (AP) — Your stock-fund manager wishes you’d buy more fun things.

Most mutual funds are failing to keep up with broad market indexes again. It’s a trend that’s gone on for years, and the most recent struggles for portfolio managers may be due to their preference for companies that sell coffee, make travel reservations and otherwise focus on non-essentials for consumers. These stocks have had some of the year’s weakest performances.

That, plus some other trends from around the mutual-fund industry:

STOCK PICKERS ARE STRUGGLING AGAIN.

Through the end of June, 60 percent of large-cap stock funds fell short of the Standard & Poor’s 500 index for one-year returns, according to S&P Dow Jones Indices. The numbers are starker for funds that focus on small-company stocks: Nearly three quarters of small-cap funds — 73 percent — failed to keep up with the S&P 600 index, while 58 percent of mid-cap funds underperformed the S&P 400.

It’s one of the risks of buying a fund where managers are trying to pick winning stocks in hopes of beating an index: They could pick wrong. And when they stumble, they still charge fees that are higher than for index funds.

So far this year, a mistake has been to focus on companies that sell non-essentials to consumers. They’re collectively known as the consumer-discretionary sector, and they have risen 2.3 percent. That’s well below the 8.1 percent gain for the S&P 500.

Too bad consumer-discretionary stocks have been among the more popular choices for fund managers this year.

Strategists at Goldman Sachs looked at hundreds of large-cap mutual funds with $1.4 trillion in investments, measuring which stocks are most and least favored by managers. They found that most funds devote a bigger slice of their portfolios to the consumer-discretionary sector than the S&P 500 does.

Priceline Group makes up 0.8 percent of the average large-cap fund’s investments, for example. That may not sound like much, but it’s double the online travel company’s weight in the S&P 500. That means Priceline’s performance will have a bigger effect on the average fund than the index, and Priceline has been relatively weak this year, up 1.2 percent. Its stock has struggled since August, hurt by worries about competition and slowing growth.

Casino company Las Vegas Sands makes up 0.3 percent of the average fund’s portfolio, versus 0.1 percent of the benchmark, and it has sunk 19.3 percent this year. A pullback in gambling in Macau, which provides much of the company’s earnings, hit the stock. Or consider Starbucks, another relative favorite of mutual-fund managers. Its stock is down 2.9 percent this year.

To be sure, mutual-fund managers are prepared to accept short-term drops. But many funds run by stock pickers have struggled to keep up with broad market indexes over the last five years, as well.

In the five years through June 30, 87 percent of large-cap stock funds have had lower returns than the S&P 500. The percentage of small- and mid-cap funds failing to beat their respective index is nearly identical, 88 percent.

EXXON MOBIL IS UNLOVED.

While mutual-fund managers are bulking up on consumer-discretionary stocks, Exxon Mobil is getting the opposite reaction. The energy giant makes up just 1.1 percent of the average large-cap fund’s portfolio, according to Goldman Sachs. That’s less than half its weight in the S&P 500.

Avoiding Exxon Mobil has been a lucrative decision for fund managers this year. Its stock is down 4.1 percent, and the price of oil fell Wednesday to its lowest settlement price since January.

Mutual-fund managers are also skeptical of famed investor Warren Buffett’s company. Berkshire Hathaway’s weight in the average large-cap mutual fund is less than half its role in the S&P 500. That choice, though, hasn’t looked wise in retrospect. The parent of Geico insurance and BNSF railroad has jumped 16.3 percent this year, double the index’s gain.

Other stocks that mutual-fund managers are generally avoiding relative to their benchmark include IBM, AT&T and Procter & Gamble.

TARGET-DATE FUNDS ARE GETTING MORE PASSIVE.

Investors saving for retirement continue to pile into target-date mutual funds, which topped $600 billion in assets last year.

Target-date funds are built for people who don’t want the responsibility or worry of divvying up how their savings are invested. Investors pick a fund that’s pegged to the year they plan to retire. When that target date is far off, such funds keep nearly all their assets in stocks. As the planned retirement-year approaches, they’ll shift more of their portfolio into bonds and other safer investments.

Savers are increasingly turning to target-date mutual funds that track stock and bond indexes, rather than those that try to pick winning stocks and bonds. Last year, index-based funds made up 33 percent of the target-date retirement fund industry, according to Morningstar. That’s up from 10 percent in 2005.

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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