Matt Golab Discusses His Recent Article, "Mutual Funds Are Not As Diversified As We Thought"
Chief Advisor Matt Golab of Aaron Matthews Financial Resources in Elk Grove California discusses Mutual Funds and the often understated lack of diversification that is present in many of the top funds.
ELK GROVE, Calif. - Aug. 8, 2014 - PRLog -- A Mutual Fund is a collective of investor funds that are set to work through purchasing stocks, bonds, or other positions. The Mutual Fund portfolio is guided by the funds prospectus and handled by a professional fund manager.
Two assumed benefits of buying a mutual fund is because of the minimal investment required to access a professional managed portfolio. The other reason is the assumed ability to have the mutual fund diversified through the knowledge of the manager and the prospectus.
However Mutual Fund Managers, the Prospectus, and the Providers can often miss the mark and the investor gets disappointed. This happened recently to a Mutual Fund that is offered by one of the worlds most recognized providers, Franklin Templeton.
According to an article by Marketwatch.com on August 8th, "Franklin Double Tax-Free Income FPRTX is one such spectacular failure. It performed well against its peers from the end of 2008 until May 2013, then embarked on an 18.7% drop for the rest of the year, a period when the average muni-bond fund fell 4.7%, according to investment researcher Morningstar. That has let the $286 million fund's returns through July in the bottom 1% over one-and three years, and the bottom 3% over five- and 10 years."
How could this be? Where was the manager? The problem is the fund reports it had nearly 64% of it's funds in Puerto Rican Bonds at the same time that bells started ringing that Puerto Rico was in a declining financial environment. According to Morningstar this dangerously high allocation was more than any other muni fund.
About this time the three main credit agencies S&P, Moody's and Fitch all dropped the credit quality of Puerto Rico's GO Bonds to lower than investment grade. They believed they would have a hard time producing liquidity for these bonds and the continued pressure for their economy.
Rebecca Radosevich, a Franklin Templeton spokeswoman, explained why the fund was closed to new investors:
"The fund was closed because it could no longer continue to meet diversification requirements established by the fund's prospectus given the patterns of issuance Puerto Rico had been employing."
This is a massive warning to Advisors and Investors that Mutual Funds may not hold the type of diversification many assume them to have. This lack of diversification is often magnified when multiple mutual funds are in a portfolio. This is called overlap, multiple mutual funds can own the same stocks or bonds, and because of this overlap diversification is minimized.
How do you fight these diversification dangers? Get your portfolio professionally and independently analyzed and stress tested for market changes, risks and fees, and diversification.
Matt Golab was recruited to write a chapter in Tom Hopkins recent book, Victory which became a National Best Seller. Matt also received the Editors Choice Award for his contribution to Victory.
He is often featured in Retirement Advisor Magazine, a publication which attracts the top financial planners in the country. Matt has been featured in newspapers around the country passing on the principals for a successful retirement. Golab is often asked by national websites that focus on the education of consumers to present his knowledge on the areas of retirement and retirement income plans.
Matt is frequently featured in The Wall Street Journal, CNBC, MSN Money, The San Francisco Chronicle, Newsweek, TheSmartRetiree, and appeared nationwide on ABC, CBS, Fox, and NBC as well as USA Today.