“Buy and hold is eternal.”

–John Bogle, December 19, 2008

Bill-“Every decision to buy anything has been wrong”-Miller is a walking reminder of the central trouble with mutual funds.

Even though his $1.3 billion Legg Mason Opportunity Trust has declined 65 percent this year, his people still love him.

To prove it, they just gave him a new fund to help manage. His name recognition means he will still be able to attract assets, even if he is probably the worst money manager on the planet right now.

Legg Mason to Add Miller to All Cap Fund Manager Team

(Bloomberg) — Bill Miller, the Legg Mason Inc. money manager whose two funds have each lost more than half their value this year, will help run a third fund as the firm tries to reverse record outflows.

Miller will be added to the Legg Mason Partners All Cap Fund on Jan. 1, Mary Athridge, a spokeswoman for Baltimore-based Legg Mason, said in an interview today. David Nelson will also be added to the management team, led by Jay Leopold.

Legg Mason is taking steps to stem customer redemptions that took $37 billion from its stock funds in the first nine months of 2008. Miller’s Legg Mason Value Trust has declined 56 percent this year after failed bets on companies including American International Group Inc. and Freddie Mac.

Miller, 58, known for guiding the $4.3 billion Value Trust to a better performance than the Standard & Poor’s 500 Index for a record 15 consecutive years, has trailed the benchmark since 2006. His $1.3 billion Legg Mason Opportunity Trust has declined 65 percent this year, while the S&P 500 has fallen 40 percent.

Wes Wellington of Dimensional Fund Advisors presents a pitch-perfect analysis of the curent economic climate, including reasons for optimism that avoid speculative forecasting.

A treasure trove of relevant adviser comunications talking points.

(Impressive Adobe podcast technology to boot.)

Vanguard’s lead in stopping the bleed of redemptions is no fluke. Ever since it was founded by index investing icon John Bogle, the fund company has attracted advisers and investors who seek the gains of the capital markets by pursuing disciplined portfolio strategies that focus on broad diversification with low-cost and transparent investment vehicles.

Market timers and stock pickers are out of place at Vanguard get togethers, so their panic, frustration, and fatalism in tough times do not get much of a hearing.

As the first to turn around the grim redemption figures from the market meltdown, Vanguard is living up to its name:

Vanguard:

1. the leading units moving at the head of an army
2. any creative group active in the innovation and application of new concepts and techniques in a given field (especially in the arts) [syn: avant-garde]
3. the position of greatest importance or advancement; the leading position in any movement or field

Vanguard Leads the Way for Fund Companies

Investors slowed their redemptions but still took out a net $41 billion in November following a gargantuan $111 billion in October redemptions, according to flow estimates from Morningstar Market Intelligence.

Vanguard was one of the few big fund companies to move back into the black with net inflows of $2.1 billion, compared with net outflows of $5 billion in October. The firm’s Treasury funds likely helped as they remained strong amid a flight to quality. Others enjoying nice modest inflows were John Hancock, Eaton Vance, FPA, and TIAA-CREF.

Among the giant shops, Fidelity shed $3 billion, but that’s a big improvement from the $18 billion in net outflows from October. However, giant American had the greatest net outflows to the tune of $7 billion, compared with net outflows of $16 billion in October.

The growning gap between income and profit amoung S&P 500 companies suggests new efficeincies and investment bargains.

S&P 500’s Worst Writedowns Signal Rally as Gap Widens

Dec. 15 — Just when U.S. companies are about to report their biggest writedowns, the losses may be the strongest signal yet that it’s time to buy stocks.

Companies in the Standard & Poor’s 500 Index are marking down assets at the fastest rate in six years, leaving operating profits 46 percent higher than net income in the third quarter, a level last seen in 2003 when the previous bull market began. Starbucks Corp., Johnson Controls Inc. and Washington Post Co. reported profits before restructuring and layoff expenses for the period ended in September that were twice their bottom line.

Earnings at U.S. companies have dropped for five straight quarters, matching the longest streak on record, as the deepest financial crisis since the Great Depression turned 2008 into the worst year for the S&P 500 since 1931, according to data compiled by Bloomberg. The ballooning gap between net income and operating profit suggests companies are getting rid of their weakest businesses, setting the stage for a recovery in stocks next year.

Lots of people are spending lots of time talking and writing about how to make 401(k)s more reliable retirement vehicles. The first notion is to implement “automation” across the board. That is, to mandate auto-enrollment, auto-contribution increases with raises.and auto-IRA contributions for smaller companies.

The IRA component would take new legislation while, as we’ve mentioned before, the other mandates would simply mean legislating 401(k) best practices that the best advisory firms already provide. There is a strong historical parallel here with the creation of mutual funds after the Great Depression of the 30s, when the new Securities and Exchange Commission enlisted the help of companies that were out ahead on investor-centered pooled investing to solve the problem of secret trusts and insider trading.

MFS (Massachusetts Financial Services) actually helped write the regulation that would later be called the “fish-bowl polcy” regarding disclosure of investments and the organized purchase and redemption of shares. This collaboration of the company and the government gave birth to the mutual fund.

Imagine having the opportunity to communicate that the 401(k) Plan your firm provides is being used as a model by policy makers and legislators in order to improve the way Americans invest for retirement.

How to Fix 401(k)s
The financial meltdown has fueled a call to change — or replace — these retirement accounts.

Has the 401(k) failed?

In the wake of the stock-market meltdown, that question is on the minds of a growing number of policy makers, academics and corporate leaders — not to mention the account holders staring in disbelief at their quarterly statements.

“The 401(k) system has had a chance, and in my view, it has failed,” says Alicia Munnell, director of Boston College’s Center for Retirement Research. “As a major source of retirement income, it has shown itself unreliable — a point the financial crisis has driven home.”

Even many fans say the 401(k), the backbone of the nation’s private retirement savings system, is coming up short in critical ways. For those who think the program is flawed, but fixable, the most glaring defect is one of access — or a lack thereof. At any given time, only about half the working-age population is eligible to participate in a 401(k)-type retirement-savings plan.

The 401(k) is also faulted for not doing enough to help participants make sound decisions. In part because the tax breaks available to those who contribute to these plans disproportionately benefit high earners, many low-income and moderate-income households save little. Others treat their nest eggs like rainy-day funds or invest too heavily in company stock.

The analysis in the WSJ is extensive. The article includes the more radical notions of a state-run 401(k) plan, as well as a rejection of the whole idea for a return to traditional pensions with no market exposure. Read the whole tihing…

In this latest installment of meltdown learning opportunities, Bernie Meldoff the hedge fund swindler crafts walls of secrecy within walls of complexity and covers them in a fog of phony expertise. If you want an investor to know why transparency is important, what better way than to revisit the brazen crimes of one of the most anti-transparency Wall Street thugs ever?

Bernie’s lesson? Transparency matters. Without it, oversight is impossible. You can’t trust what no one can verify.

Here is an excerpt from a letter from a separate hedge fund that explains the opacity that created the conditions for the possibility of Meldoff’s epic fraud.

Madoff’s organization was the investment advisor, prime broker/custodian, and executed all the fund’s trades through his broker dealer. Our due diligence process precludes us from doing business with funds that are set up with the limited oversight implicit in such a structure.

Read the rest of the letter and original post…

Renowned trader and former chairman of the Nasdaq Stock Market Bernard Madoff has been arrested and will apparently plead guilty to fraud. (This is the Wall Street everyone has been talking about lately, up close and personal.)

Madoff Confessed $50 Billion Fraud Before FBI Arrest

Dec. 12 — Bernard Madoff confessed to employees this week that his investment advisory business was “a giant Ponzi scheme” that cost clients $50 billion before two FBI agents showed up yesterday morning at his Manhattan apartment.

“We’re here to find out if there’s an innocent explanation,” Agent Theodore Cacioppi told Madoff, who founded Bernard L. Madoff Investment Securities LLC and was once chairman of the Nasdaq Stock Market.

“There is no innocent explanation,” Madoff, 70, told the agents, saying he traded and lost money for institutional clients. He said he “paid investors with money that wasn’t there” and expected to go to jail. With that, agents arrested Madoff, according to an FB complaint.

UPDATE: MADOFF’S FRAUD SPARKS FURY AMONG INVESTORS

“I expect to get back zero,” said Floridian Susan Leavitt, who invested through Madoff. “When he tells the feds he has $200 million to $300 million left out of billions, what can you expect?”

Two law firms, Milberg LLP and Seeger Weiss LLP, said Friday they had been retained by “dozens of individual investors” in Madoff Securities.

Madoff’s lawyer, Dan Horwitz, said on Thursday: “We will fight to get through this unfortunate set of events.” His client was released on $10 million bond.

Madoff is a member of Nasdaq OMX Group Inc’s nominating committee. His firm has said it is a market-maker for about 350 Nasdaq stocks.

These losses have wiped away Value Trust’s years of market-beating performance. The fund is now among the worst-performing in its class for the last one-, three-, five- and 10-year periods, according to Morningstar.

Here is the type of learning opportunity that will become increasingly available as chronicles of the demise of stock pickers and market timers continue to pour in through 2009.

Keep in mind that the losses above represent what the fund itself has given up, not the amount lost by individuals invested in the fund. That number will be significantly larger, once trading costs, high expense ratios, and taxes are factored in.

The Stock Picker’s Defeat

Fueled by winning bets on stocks other investors feared, Mr. Miller’s Legg Mason Value Trust outperformed the broad market every year from 1991 to 2005. It’s a streak no other fund manager has come close to matching.

Mr. Miller was in his element a year ago when troubles in the housing market began infecting financial markets. Working from his well-worn playbook, he snapped up American International Group Inc., Wachovia Corp., Bear Stearns Cos. and Freddie Mac. As the shares continued to fall, he argued that investors were overreacting. He kept buying.

What he saw as an opportunity turned into the biggest market crash since the Great Depression. Many Value Trust holdings were more or less wiped out. After 15 years of placing savvy bets against the herd, Mr. Miller had been trampled by it.

Read the whole thing…

With assets hollowed out to 29%, the mutual fund industry is forecast to raise fees by 10%, a move evidently necessary to maintain capital flow in the face of far fewer dollars to manage.

If active money managers cannot deliver alpha under the current cost framework, how will they reach it in a higher cost environment?

Fund Fees Expected to Rise 10% in 2009

Personal financial columns are beginning to warn investors that fund fees could rise in 2009, as mutual fund companies try to grapple with fewer assets under management.

“It’s easy these days to forget about fees when your fund might have lost 40% or more in the past year,” writes the Baltimore Sun. “But fees matter over the long run, and you can end up with a lot less money, even if you’re paying what seems to be only slightly more for a fund.”

Thus, columnists are urging investors to be more careful in the coming year to ensure they are getting just due breakpoints, just as the reverse is true for fund companies; most will be all too happy to charge higher fees on accounts where breakpoints no longer apply.

Lipper Senior Analyst Jeff Tjornehoj predicts fund fees could rise 10% next year. Added to that, he warned, service providers are likely to increase their fees, and fund companies, in turn, will simply pass those along to shareholders. Added to that, international funds are in a disadvantageous position, since the dollar has been so strong.