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Thursday, May 15, 2008 Welcome to the Fidelity Independent Adviser Hotline Report! We did not make any changes to our model portfolios this week. In this Issue: Don’s Outlook A seemingly benign report on inflation and easing oil prices energized investors yesterday, and the major equity market indexes closed higher. The Dow Jones Industrial Average gained 66 points, or 0.5 percent, to 12,898. Hewlett-Packard held back the Dow, which at one point during intraday trading was up more than 160 points. Investors have knocked about $12 billion off HP’s market value since the computer maker announced a proposed $13.3 billion takeover of Electronic Data Systems. The S&P 500 increased 6 points, or 0.4 percent, to 1,409, and the Nasdaq Composite Index eked out a small gain of 2 points, less than one tenth of one percent, to close at 2,497. Apple, which accounts for about 4.5 percent of the Nasdaq’s value, slipped on profit-taking. The latest data from the Labor Department has allayed some investor concern over rising inflation. The consumer price index, a gauge of retail inflation that the federal government uses to adjust a host of inflation-linked payments, including Social Security benefits and yields on inflation-protected bonds, rose 0.2 percent last month. The “core” CPI, which excludes food and energy costs, increased by 0.1 percent. On a year-over-year basis, the core CPI is growing at a rate of 2.3 percent, slightly above the Federal Reserve’s supposed target range of 1 to 2 percent. Many commentators, however, are skeptical of the CPI data. According to the Bureau of Labor Statistics’ own numbers, fuels and utilities have increased 8.6 percent since April of 2007; fuel oil and other fuels have increased 42.8 percent; and gas (piped) and electricity have increased 6.6 percent. The way the Labor Department weights energy, food, health care, and other categories of expenses in the overall CPI figure may be artificially minimizing the effect that recent and dramatic cost increases are having on actual consumers. Trading has been light on the New York Stock Exchange in recent sessions, an indication that investors are not necessarily convinced the market is in an uptrend. About 1.2 billion shares changed hands on the NYSE yesterday, whereas the average daily volume last year was 1.9 billion shares. Some market participants believe that stocks may not be able to make a decisive move higher until oil returns to the $100 per barrel range. For the next several weeks, there are not any major events—big earnings reports or interest rate announcements—on the economic calendar that could serve as catalysts for a sustained rally. Although it’s still high, the price of oil was heading in the right direction yesterday, falling $1.58 to settle at $124.22 per barrel on the New York Mercantile Exchange. The Energy Information Administration said that domestic supplies rose by around 200,000 last week. Prices at the pump are also on the rise. The national average per-gallon price hit a new all-time high of $3.72 last week, while diesel fuel hit $4.33 per gallon. Diesel is up $1.55 from the same period a year ago. There is some indication that speculative investing is keeping the price of oil artificially high, but global supplies of crude oil also remain tight. The next meeting of OPEC, the cartel that produces roughly a third of the world’s petroleum, is scheduled for September. Saudi Arabia, the leading OPEC member and the only producer with enough spare capacity to affect prices, rebuffed President Bush’s last request to boost production. If prices continue to rise, however, OPEC may find itself unable to resist entreaties from its western trading partners to open its oil spigots. If you would like to know which mutual funds make up our newsletter model portfolios, please call us at (800) 548-3797.
College Saving: Which Plan Is Right for You? The vast majority of 529 plans are tax-free savings vehicles. They allow you to invest savings through a selection of mutual funds; many offer target-date funds that adjust your investment mix automatically based on the amount of time before your first tuition payment. The plans shelter any investment earnings from taxes, provided you use withdrawals for qualified higher-education expenses (which include just about anything directly related to attending college). Your student can use all the money in the account to pay for costs at any accredited college. Performance of the savings plans depends upon the market performance of the underlying investments. Investors can choose to invest through any state’s 529 plan, not just their own state’s. That’s great news—but the array of choices can feel overwhelming. The best bet is usually to review your own state’s plan first, because it may offer advantages to residents, possibly including tax credits or deductions, matching funds or a break on annual fees. Currently 30 states and the District of Columbia offer residents such benefits. State plans’ enticements shouldn’t be your only consideration, however. In particular, examine expenses and fees, which may offset advantages offered by your home state. The College Savings Plan Network’s Web site (www.collegesavings.org) offers details on each state’s plan, and the National Association of Securities Dealers offers a very useful Web-based tool for analyzing plan costs; search online for “NASD 529 Plan Expense Analyzer.” Morningstar analyst Dan McNeela recommends that investors look for expense ratios of less than 0.70 percent for plans built around index funds. For plans that use more-expensive actively managed funds, he recommends expenses of no more than 1.1 percent of assets. A recent Morningstar analysis of 529 plans notes that high costs have an enormous impact on long-term performance. Low costs, it says, potentially outweigh the benefits of state tax breaks, while high expenses may cause providers to take on more risk in an effort to boost returns enough to overcome their expense hurdle. Many states offer both advise r-sold plans and no-load plans. The latter may offer considerable savings. (Arizona, California, Delaware, Massachusetts and New Hampshire offer no-load plans managed by Fidelity.) There are no federal contribution limits, although some states do set limits of their own (generally $200,000 or more over the lifetime of the plan). When it comes to financial aid, 529 plans are treated as parental assets. That’s good news for your effort to secure aid: For the 2007-2008 school year, parents are expected to contribute 5.6 percent of their assets to a dependent’s college education, while students are expected to kick in 20 percent. And if your young beneficiary decides college isn’t the right choice? You have two options: You can withdraw the funds, which means you’ll typically be subject to income tax and a 10 percent penalty on earnings, or you can switch beneficiaries altogether. 529 plans allow you to change the beneficiary to a member of the beneficiary’s family—siblings, aunts and uncles, first cousins, whoever—without penalty. Coverdell Education Savings Accounts A Coverdell ESA allows the account holder to invest in a nearly unlimited selection of stocks, bonds, mutual funds or cash equivalents. That means these accounts are particularly well-suited to experienced investors who feel comfortable making their own choices. ESAs are administered by a variety of financial institutions, including brokerage firms, banks and mutual fund companies, so you may want to consult an investment adviser regarding your options. One important caveat: In 2011, Coverdells will roll back to their pre-2002 tax status, unless Congress decides differently. That means families will no longer be able to claim tax benefits on ESA distributions in the same year they take the Hope or Lifetime Learning tax credits. What’s more, the limit on annual contributions will fall to $500, and pre college expenses no longer will qualify. So if you do decide to invest through a Coverdell ESA, it may be wise to hedge your bets by contributing to a 529 account as well. Uniform Gift to Minors Another item to note: Since UGMA/UTMAs are custodial accounts, control of the assets switches to the beneficiary when he or she turns 18 or 21, depending on the state. So if Junior wants to use the money for a round-the-world backpacking trip rather than that Ivy League education, there’s nothing you can do about it. Sage Words for the Week Unemployment is capitalism's way of getting you to plant a garden. —Orson Scott Card Portfolio Spotlight—ICON Core Equity (ICNIX) Six months ago, ICON Core Equity’s managers—Derek Rollingson, Robert Straus, Zach Jonson and Todd Burchett—told shareholders that the multiyear market leadership by energy, materials and industrials could be due for a change. Given the market’s volatility, which has only become more pronounced since that statement, and given what these managers saw as value in sectors long out of favor, they had been “waiting for more definitive indicators before aggressively targeting” the market’s shift. However, they’ve now made their move. By the end of March, ICNIX’s allocation to financials—especially diversified banks—was up to 25.4% of assets, from 17%. They also nearly doubled their exposure to consumer discretionary stocks, to 11.9%, while reducing stakes in information technology (from 20.8% to less than 9%) and industrials. The changes haven’t all worked yet: ICNIX was off 9.5% year to date through May 13, compared to a 3.7% loss for the S&P 500. But this management team and its investing formula have outpaced the broader market in the past, with a five-year annualized return of 12% that’s more than 1.5 percentage points better than the S&P 500’s annualized return. It’s worth waiting to see how the changes work out for the long haul and how the group reacts to further developments. The managers use a unique, proprietary formula to find stocks that combine value and momentum; then they move to maximize the sectors, subsectors and stocks they’ve identified as both inexpensive and on the move, using a set of three screens. The team uses a series of quantitative screens to identify areas of the market trading at the lowest valuations, based on price-to-earnings, price-to-sales and price-to-cash-flow ratios as well as on past and projected growth in profits, cash flow and revenues. That system identifies which stocks are cheap relative to their growth prospects. But the ICON process doesn’t stop there. In order to avoid buying cheap stocks that stay cheap, the managers check the returns of attractively valued sectors and subsectors to identify the ones that exhibited the greatest momentum during the previous six months. This helps identify the inexpensive stocks that Wall Street has begun to notice and snatch up. Finally, ICON examines the screened stocks’ quality, weeding out shares of companies with potential problems that aren’t yet reflected in the numbers. Using these screens, the managers roll into subsectors that offer the most attractive combination of value and momentum—and out of subsectors that are getting pricey or beginning to stall. ICON takes a market-cap neutral approach; as a result, the fund lands in Morningstar’s mid-cap blend category. That may be misleading, however: ICNIX recently held 35.8% of assets in giant caps, 29.1% in large caps, 23.7% in mid caps, and nearly 12% in small- and micro-cap stocks, and sported an average market capitalization of $21.6 billion. Nevertheless, that can change quickly. For example, the average market cap has been as low as $10 billion in the last 18 months. In fact, ICNIX’s all-cap, all-sector strategy defies easy categorization, and shareholders should realize that its frequent over- and underweighting of sectors or of a certain capitalization can’t always be perfect: There will be times when it trails its benchmark, as it has in early 2008, but the fund’s strong long-term returns make it an aggressive core holding.Performance (as of 4/30/08)
Source: Morningstar
Operations and Expenses ICON Core Equity has an expense ratio of 1.24% compared to a 1.42% average for the category. It has a turnover rate of 117% versus a 96% category average. It does not carry loads, nor does it have a short-term trading fee, but it does require a $2,500 minimum investment. Management Derek Rollingson has managed this fund since October 2002; Robert Straus has managed the fund since October 2002; Todd Burchett has managed the fund since January 2006; and Zach Jonson has managed the fund since January 2007. Top Ten Holdings as of 4/30/08 IBM CORP. 2.35%
Sources: iconadvisers.com Fidelity Independent Adviser Sector Momentum Tracker Newsletter The Sector Momentum Tracker Newsletter Annual Performance: -0.76% Net-of-Fees, Year-to-Date Return Through May 9, 2008 The Fidelity Independent Adviser Sector Momentum Tracker is a strategy which entails investing in high-quality, top-performing, growth-oriented mutual funds. Weekly, we will give you advice on how to allocate your portfolio in the appropriate funds based on tested buy-and-sell signals. Our approach to sector investing is technical and focused exclusively on improving long-term results. The Sector Momentum Tracker follows a real-time trading strategy that monitors and evaluates 41 Fidelity Select sector funds at all times, then determines which sectors you should invest in. That means you don’t have to worry about guesswork because our proprietary system’s automatic buy, sell, and hold recommendations tell you exactly what to do and when to do it. Fidelity has 41 sector funds. Each week we rank these funds from best to worst, 1 – 41. Here, for your review, we list the top 4 (1-4) and bottom 4 (38-41) ranked funds in our weekly Sector Momentum Tracker newsletter. (NOTE: This should not be confused with our Power Index system, in which, as you know, the higher the number the better.) We also present, by way of comparison, the previous three weeks rankings for these same funds. This allows you to see the trend.
As always, you may also visit our website for additional information at http://www.fidelityadviser.com Please take a moment and add this email address to your address book or “white list”: info@fidelityadviser.com And for more information about email delivery problems or to make sure that our emails are not being blocked, please click here. You can now update your Email preferences in our Email Preference Center. In the preference center, you can specify which hotlines you would like to receive. Once updated, you will only receive the content you specify. Fidelity Independent Adviser is completely independent of, and not affiliated with, Fidelity Investments or any of the Fidelity mutual funds listed above. Performance Disclosure.All models and tables presented in this publication are the product of Fidelity Independent Adviser Newsletter, LLC, an independent company operated by Donald R. Dion, Jr., President of Dion Money Management, LLC (DMM), a registered investment adviser that manages assets for individuals, families, trusts and non-profit organizations. The Fidelity Independent Adviser is completely independent of and not affiliated with Fidelity Investments. The model performance returns are compiled by Fidelity Independent Adviser from historical returns of a determined mix of selected mutual funds or exchange-traded funds based upon investment strategies. These results include the reinvestment of all dividends and capital gains. Beginning 3/31/2007, portfolio returns are net of Dion Money Management’s highest fee, 0.4375% per quarter. The model results do not represent actual recommendations or trading. Model results do not reflect the impact of material economic and market factors that impact DMM's decision-making if DMM were actually managing clients' money. Because DMM manages its actual client portfolios according to each client's specific investment needs and circumstances, model results may in some cases differ significantly from the results our clients achieve, due in part to timing of the recommendations by DMM, market conditions, client money market balances, and timing of client deposits and withdrawals. In addition, client portfolios may contain less or more funds and may contain different funds in order to meet client needs. Model performance results may have inherent limitations. No representation is made that any account will or is likely to achieve profits or losses similar to those shown, and there are frequently significant differences between hypothetical performance results subsequently achieved by following a particular strategy. Model trading does not involve financial risk, and no model trading record can completely account for the impact of financial risk associated with actual trading. Other factors related to the markets in general or the implementation of any specific trading strategy that can adversely affect actual trading results cannot be fully accounted for in the preparation of model performance results. The volatility of the S&P 500, Wilshire 5000, Russell 2000, Dow Jones and Nasdaq indices may be materially different from that of the client's account, the securities holdings of which may differ significantly from those of the indices. The indices' results shown reflect reinvestment of dividends unless otherwise noted. These indices have not been selected to represent appropriate benchmarks to compare the clients' performance, but rather are disclosed to allow for comparison of the client's performance to that of well-known, widely recognized indices. This material has been prepared solely for informational purposes. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. All investments involve risk including loss of principal. |
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The Fidelity Independent Adviser is read monthly by thousands of investors, like you, who value our advice and rely on my model portfolios to assist them in developing or adjusting their own portfolios to reach their investment goals. It is important to be informed before making financial decisions. That’s why the Fidelity Independent Adviser prides itself on giving investors the necessary information to further their financial profits – and we’ve been doing this for over 10 years. |
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