MONEY Portfolios

For $50 You Can Push For More Female CEOs — But Is It a Good Investment?

Indra Nooyi, chairman and chief executive officer of PepsiCo.
Indra Nooyi, chairman and chief executive officer of PepsiCo. Bloomberg—Bloomberg via Getty Images

Two new products let you invest in companies led by female executives. Whether this is a good idea depends on what you hope to achieve.

On Thursday, Barclays is launching a new index and exchange-traded note (WIL) that lets retail investors buy shares — at $50 a pop — of a basket of large U.S. companies led by women, including PepsiCo, IBM, and Xerox. This should be exciting news for anyone disappointed by the lack of women in top corporate roles.

After all, female CEOs still make up less than 5% of Fortune 500 chiefs and less than 17% of board members — despite earning 44% of master’s degrees in business and management.

The new ETN is not the only tool of its kind: This past June, former Bank of America executive Sallie Krawcheck opened an index fund tracking global companies with female leadership — and online brokerage Motif Investing currently offers a custom portfolio of shares in women-led companies.

The big question is whether this type of socially-conscious investing is valuable — either to investors or to the goal of increasing female corporate leadership. Is it wise to let your conscience dictate how you manage your savings? And assuming you care about gender representation in the corporate world, is there any evidence that these investments will actually lead to more diversity?

Here’s what experts and research suggest:

Getting better-than-average returns shouldn’t be your motivation. Beyond the promise of effecting social change, the Barclays and Pax indexes are marketed with the suggestion that woman-led companies tend to do better than peers. It’s true that some evidence shows businesses can benefit from female leadership, with correlations between more women in top positions and higher returns on equity, lower volatility, and market-beating returns.

But correlation isn’t causation, and other research suggests that when businesses appoint female leadership, it may be a sign that crisis is brewing — the so-called “glass cliff.” Yet another study finds that limiting your investments to socially-responsible companies comes with costs.

Taken together, the pros and cons of conscience-based investing seem generally to cancel each other out. “Our research shows socially responsible investments do no better or worse than the broader stock market,” says Morningstar fund analyst Robert Goldsborough. “Over time the ups and downs tend to even out.”

As always, fees should be a consideration. Even if the underlying companies in a fund are good investments, high fees can eat away at your returns. Krawcheck’s Pax Ellevate Global Women’s fund charges 0.99% — far more than the 0.30% fee for the Vanguard Total World Stock Index (VTWSX). Investing only in U.S. companies, the new Barclays ETN is cheaper, with 0.45% in expenses, though the comparable Vanguard S&P 500 ETF (VOO) charges only 0.05% — a difference that can add up over time:

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Note: Projections based on current expenses and a $10,000 investment.

If supporting women is very important to you, you might consider investing in a broad, cheap index and using the money you saved on fees to invest directly in the best female-led companies — or you could simply donate to a non-profit supporting women’s causes.

If you still love this idea, that’s okay — just limit your exposure. There is an argument that supporting female leadership through investments could be more powerful than making a donation to a non-profit. The hope is that if enough investor cash flows to businesses led by women, “companies will take notice” and make more efforts to advance women in top positions, says Sue Meirs, Barclays COO for Equity and Funds Structured Markets Sales in the Americas. If investing in one of these indexes feels like the best way to support top-down gender diversity — and worth the cost — you could do worse than these industry-diversified offerings. “Investing as a social statement can be a fine thing,” says financial planner Sheryl Garrett, “though you don’t want to put all of your money toward a token investment.” Garrett suggests limiting your exposure to 10% of your overall portfolio.

MONEY ETFs

As BlackRock Goes to War With Vanguard, Mom-and-Pop ETF Investors Win

Even with $1 trillion in exchange-traded fund assets, BlackRock is being forced to slash costs on ETFs to compete with low-cost leader Vanguard.

Even as BlackRock is set to amass $1 trillion in exchange-traded fund assets in its iShares business, U.S. retail investors increasingly prefer to send their money to low-cost leader Vanguard.

With $998 billion in ETF money, BlackRock has more than the next contenders, Vanguard and State Street, combined.

But the company has struggled to compete with Vanguard, known for its investor-friendly low-cost investing, for mom and pop’s nest eggs. Retail investors now account for more than half of the $1.8 trillion in ETF assets under management in the U.S, according to consulting firm PwC.

So far this year, Vanguard has pulled in about $30.3 billion in net new ETF money in the U.S., or about 43% of the market, while iShares is second with $24.7 billion, or about 35%.

That reflects a trend that’s been going on for years: At the end of 2009, BlackRock had 47.7% of total U.S. ETF assets under management, compared with 11.7% for Vanguard. By the end of May, BlackRock’s market share was down to 38.9%, compared with 20.6% for Vanguard, according to Lipper.

“Our aspiration is to be number one in flows, and we can’t get there without being higher in the retail market place,” said Mark Wiedman, the BlackRock executive who heads the iShares business globally, speaking at the company’s annual meeting in New York in June. “We are starting to change our voice for that audience and I would say historically we frankly haven’t done that good a job.”

The market share loss comes in spite of BlackRock’s two-year effort to win retail investors.

BlackRock introduced a line of low-cost “buy and hold” investor-aimed ETFs in 2012, and since then has been cutting the fees on its ETFs, revamping its sales team, and pushing a new branding campaign. The firm has cut expenses on 12 funds since 2012, ranging from its S&P Total U.S. Stock Market ETF then to its high-dividend ETF in June 2014.

BlackRock says its flows have improved since it started its new retail effort.

One of the most significant price reductions was in its iShares High Dividend ETF. The cost to investors for that fund dropped to 0.12% of assets a year from 0.40%, a move that would cost BlackRock $11.2 million annually, based on the $4 billion in the fund. Last quarter, iShares ETFs generated some $765 million in base fees revenue.

“Every basis point that you cut a fee impacts revenues, but we don’t really look at that — we look at the profitability of our ETF business over the long term,” BlackRock executive Frank Porcelli, head of U.S. Wealth Advisory Business, said at Reuters’ Global Wealth Management Summit in June.

Asked about how fee cuts would affect BlackRock’s profits, he said it was “not relevant.”

With $4.4 trillion in total assets among its various product lines, BlackRock remains the world’s largest asset manager and is unlikely to be eclipsed by Vanguard anytime soon.

BlackRock has nearly tripled the size of the iShares business since it bought it from Barclays five years ago, largely by selling to big institutions, such as the Arizona State Retirement System, which plunked down $300 million to seed three iShares funds last year. It has also won institutional and retail investors abroad; BlackRock has a strong presence in Europe, Asia, Canada and Latin America. Total BlackRock ETF assets outside of the U.S. are about $280.5 billion, about 36 percent of the $700 billion total market.

Analysts say that iShares’ size and scale makes the effect of fee cuts in the near-term fairly minimal on the overall business, but that a prolonged price war could hurt the firm.

“It’s a tough spot to be in,” said Edward Jones analyst Jim Shanahan. “There is some growth potential there, but it is slow to materialize and it has to be powerful enough to offset the addition of a lot of these products with fees less than the current weighted average fee rate.”

Vanguard, which unlike BlackRock isn’t publicly traded, offers significantly cheaper funds. The average expense ratio of a Vanguard ETF is 0.14%, or $14 for every $10,000 invested, compared with the industry average of 0.58%. BlackRock’s average expense ratio is 0.32%.

“When talking about large, commoditized ETFs, low cost makes a big difference, and Vanguard is a little bit more competitive,” said Gabelli & Co analyst Macrae Sykes.

“Investors recognize Vanguard as the low-cost leader — whether for index funds, for active funds, for bond funds, for money market funds, or for ETFs,” said Vanguard spokesman David Hoffman. “We like to say that we’ve been lowering the cost and complexity of investing for 38 years. We are also increasingly being recognized for our commitment to providing high-quality products that can play an enduring role in a portfolio.”

MONEY mutual funds

For Big Gains This Year, Fund Investors Go Small. Like Tiny

Stock pickers who manage funds with really small asset bases and make big bets on a tiny group of stocks are shooting the lights out. But for how much longer?

For U.S. mutual fund investors, this is shaping up to be a year when it pays to go small.

Not with small-company stock funds. No, tiny mutual funds with less than $100 million in assets under management are either leading or are among the top three or four best performers in every major U.S. stock category tracked by Morningstar for the year, through June 10.

How come? The outperformance of these tiny funds run by managers that few investors have ever heard of likely reflects the fact that, as passive investing in index and exchange-traded funds becomes increasingly popular, fund managers with small portfolios are swinging for the fences by taking concentrated bets on only a handful of stocks in order to stand out.

When all goes well, that can lead to strong outperformance even after a small fund’s higher-than-average fees; when it does not, those funds are likely to fall among the worst-performers.

At the same time, stock pickers tend to reap the biggest rewards in the later stages of a bull market, when rallies are less broad.

Each of the small funds leading their categories this year have 30 or fewer stocks in their portfolio. The $25 million Biondo Focus fund, for instance, has gained 9.8% for the year with its portfolio of 19 stocks, trailing only two other funds among the 1,743 in the Morningstar large-cap growth category. Its top holdings include a 14% stake in J.P. Morgan Chase , 12% in Pacira Pharmaceuticals , and 10.3% in Gilead Sciences .

By comparison, Fidelity’s $107.5 billion Contrafund, a mainstay of retirement accounts, holds no more than 4.5% in any one of its 298 holdings. The fund is up 3.4% for the year, putting it in the 57th percentile of the large growth category. Over the last three years, however, Contrafund has returned an average of 17.1% a year, while the Biondo fund has gained an average of 13.5% over the same time frame.

“When you are running a concentrated fund, you are taking greater risk opportunity for greater reward. If you pick the right stocks your winners are going to shine,” said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

Picking only a handful of stocks tends to work better in the U.S. than in the emerging markets or Europe, Rosenbluth added, where a fund manager has to be right on not only a company, but on the performance of countries as well. Internationally, large funds by giants like Fidelity and T. Rowe Price Group Inc are leading the pack in categories ranging from emerging market stocks to European equities.

The managers of small funds, for their part, cite some advantages to their size. Brian Boyle, the lead portfolio manager of the $21 million Valley Forge Fund, whose 19.9% gain for the year leads all other large value funds, said he can be more nimble than the other 1,290 competitors in his category.

He has been able to build up nearly 10% of his portfolio in oil and gas company Birchcliff Energy even when just 5,000 shares of its stock change hands each day on average, he said, a position that a larger fund could not do without becoming a significant owner of the shares. Birchcliff shares are up 91% for the year.

“At some point there could be a constraint in terms of fund size, but we’re nowhere near it,” he said.

MONEY funds

3 Bad Reasons We Pay So Much For Mutual Funds

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Why do investors let active managers reel in their assets? Getty Images

The numbers say that cheap index funds are your best bet. So why are people still willing to pay fund managers so much?

Every time the market makes a big turn, this happens: A bunch of money managers previously hailed as brilliant get caught betting the wrong way. This time it’s hedge fund managers making “macro” bets. For example, the $13 billion fund run by Paul Tudor Jones is down 4.4%, according to the Wall Street Journal, while the general stock market is up 5.4% and bonds are up 3.4%.

Meanwhile, in the prosaic world of mutual funds available to you and me, the evidence is overwhelming that most managers can’t beat the market. Over the past five years, according to S&P Dow Jones Indices, about 73% of blue chip stock funds trailed the S&P 500 index. You can buy a passive S&P 500-tracking index fund for almost nothing—as little as 0.05% of asset per year—and get roughly all of the market’s return. Funds that instead use human being to pick stocks often charge 1% to 1.4%, for worse results.

In a post on his Pragmatic Capitalist blog, Cullen Roche wonders why people keep buying these funds that cost more and deliver less. His explanations sound right—you should read them—and boil down to people being poorly informed and too emotional about investing. Not everyone knows how hard it is to beat the market, and the ones who do are overconfident about their ability to do better.

But I’d like to propose a few more reasons people like active funds, which go beyond overoptimism. I’m not advocating for these active approaches. In each case, if this why you use active funds, I’ll suggest an alternative way of coming at the problem.

1) Using an active fund as a de facto financial adviser.

Many if not most fund managers these days are “closet indexers,” meaning they stick pretty close to a stock benchmark like the S&P 500, with just a few deviations they hope will goose performance enough to justify their fees. But there is a subset of managers with a broader mandate. They mix up U.S. stocks, foreign stocks, bonds and other assets. Some, like the popular T. Rowe Price and Fidelity “target-date” funds, shift among these assets according to a pre-set formula based on their investors planned age of retirement. Others move around based on their views about whether, say, U.S. stocks look expensive or cheap. But in either case, their investors may not really be coming to them for market-beating stock picks. They are using those funds to help find the right split among stocks and bonds.

In other words, these funds are stand-ins for the financial advisers who help people set up their portfolios. The advice isn’t personal, but really good personal advice is hard to get if you don’t already have a big portfolio.

The better alternative: Buy a target date fund that uses cheap index funds instead. Or an index-based “balanced fund” with about 60% in stocks and 40% in bonds. Even if that’s not quite the optimal mix, the advantage of low fees is often more important. Or you can build your own cheap three fund portfolio using the index funds on the Money 50 recommended list.

If what you really want is a fund manager who knows when to get you out of stocks before they drop, well, the truth is neither fund managers nor advisers are likely to time these turns consistently well. Investors who want to preserve capital in bear markets are better off just dialing back their stock exposure as a matter of policy.

2) Going active to get a tilt.

Not everyone wants exactly the level of risk the stock market delivers. Investors willing to live with more volatility to get a higher return might, for example, want to add more small companies to their portfolio. Likewise, there is some evidence that a bias toward value stocks can deliver better returns over the long run. For a long time, buying an active mutual fund was really the simplest way for most people to get a slightly different mix of risk and return characteristics than the market offered.

Those days are over. You can buy an index-based exchange-traded fund to capture almost any slice of the market or stylistic tilt. I’m skeptical of whether most of these funds are worth the bother, but many are cheaper and more reliable than pure active funds.

3) That enterprising feeling.

I’ve been a convinced indexer for so long that sometimes I forget how cynical the approach can sound to the uninitiated. You’re just tossing your money into the market and betting that on average it works out. Mutual fund managers, on the other hand, say they are scouring companies’ “fundamentals,”and “kicking the tires,” and “thinking of ourselves as owners of businesses.” (Never mind that for many fund managers holding a stock for a year is what counts as a long-run strategy.) At first blush, this doesn’t only sound like a smart way to make money… it sounds like the right thing to do. A way to be a good steward of wealth and to help build the American economy. I’m often struck by how people seem to admire Warren Buffett not only as a smart businessman with a rare stock picking ability, but as a kind of spirit guide. Not for nothing is his annual shareholder meeting called the Woodstock of Capitalism.

Roche has what I think is a deep insight that might make you think differently about this. The money you put into equities via your 401(k) or IRA isn’t really “investing,” just saving with more risk and an incrementally better expected return than bonds. That’s because you aren’t handing any funding to the company, but buying an old claim on it from someone else.

…the reality is that when you buy stocks or bonds on a secondary market you are allocating your savings into what was really someone else’s “investment” and it’s very likely that the easy money has already been made and these real “investors” are cashing out. Real investors build future production, make great products, provide superior services and only sell their majority interest in that production at a much later date (often on a stock exchange via an IPO).

Whether you buy an active fund or an index fund, you’ll be at a pretty distant remove from the companies you indirectly own. On average, you won’t have much chance of a big return, and some tire kicking here and there won’t add a lot of value. There’s nothing wrong with that. Most of us don’t have the time or the interest to be even part-time entrepreneurs. There’s no shame—and a lot of gain to be had—in keeping it cheap and simple and moving on.

MONEY alternative investments

Wise Up About Funds that Claim to Take “Smart” Risks

A new group of funds that claim to outperform the broad market while taking less risk are worth exploring—if you're willing to look under the hood.

Ever since the dot-com crash more than a decade ago, Wall Street and the mutual fund industry have been on a relentless push to plug what they are now calling “smart” beta strategies. These funds promise reasonable returns with lower risk through a variety of techniques.

But pursuing a smart-beta strategy isn’t as simple as just buying a fund with that name and thinking it will outperform conventional index funds. There’s always a trade-off in costs, risk and return, so you need to dig much deeper to get beyond simplistic marketing pitches.

For example, let’s say you were seeking an alternative strategy to traditional S&P 500 index funds that weight the holdings in their portfolios by market valuation.

In such traditional “cap-weighted” S&P 500 funds, the top holdings would be Apple at about 3% of the portfolio, followed by ExxonMobil at 2.6% and Microsoft at just under 2%. Every other stock in the portfolio would represent a slightly lower percentage of the total holdings.

The idea behind cap-weighting is that the biggest U.S. stocks by popularity ought to represent the largest portions of a broad-market portfolio. This is what economist John Maynard Keynes called a “beauty contest,” with investors bidding up the prices of the most glamorous stocks. The downside is that these companies may be overpriced and may not have as much room to grow as other, bargain-priced stocks.

One alternative in the smart beta fund category is a so-called equal-weighted stock index fund such as the Guggenheim S&P 500 Equal-weight ETF , which holds the same stocks as the S&P Index, only in equal proportions. This design somewhat side-steps the overpricing issue because it’s less exposed to beauty contestants, especially when they falter a bit.

To date, both the long- and short-term performance of the equal-weighted strategy has been better than cap-weighted index funds. The Guggenheim fund has beaten the S&P 500 index over the past three, five and 10 years. With an annualized return of 9.7% over the past decade through June 6, it’s topped the S&P index by more than two percentage points over that period. But it costs 0.40% in annual expenses, compared with 0.09% for the SPDR S&P 500 Index ETF.

Once you start to ignore the beauty pageant for stocks, is there an even “smarter beta” strategy?

What if you picked the best stocks based on a combination of value, sales, cash flow and dividends? You might find even more bargains in this pool of companies. They’d have strong fundamentals and might be more consistently profitable over time.

One leading “fundamentally weighted” portfolio, which also resides under the smart beta umbrella, is the PowerShares FTSE RAFI US 1000 ETF , which also has outperformed the S&P 500 by about two percentage points over the past five years with an annualized return of 20 percent through June 6. It costs 0.39% annually for management expenses.

The PowerShares fund owns some of the most-popular S&P Index stocks like Exxon Mobil, Chevron and AT&T , only in much different proportions relative to the cap-weighted indexes. The RAFI approach focuses more on cash, dividends and finding undervalued companies, so it’s not necessarily looking for the most-popular stocks.

Although looking at the rear-view mirror for index-beating returns seems to make equal- and fundamental-weighted strategies appear promising long term, you also have to look at internal expenses to see which strategy might have the edge.

Turnover, or the percentage of the portfolio that’s bought and sold in a year, is worth gauging in both funds. Generally, the higher the turnover, the more costly the fund is to run. That eats into your total return. The PowerShares fund has the advantage here with an annual turnover of 13%, compared to 37% for the Guggenheim fund.

Over the long term, “fundamentally weighted smart beta strategies are likely to outperform the equal weighted approach,” note Engin Kose and Max Moroz with Research Affiliates, a financial research company based in Newport Beach, California, which largely developed the concept of fundamental weighting and is behind RAFI-named indexes.

But just considering costs doesn’t end the debate on equal- and fundamentally weighted funds. While they may be higher-performing than most U.S. stock index funds over time, they are not immune from downturns. Both lost more than the S&P 500 in 2008 and 2011.

While it may be difficult to predict how these funds will perform in a flat economy or a sell-off, they are worth considering to replace your core stock holdings, and may be the wisest choices among the smarter strategies.

MONEY alternative assets

Why You Don’t Need "Alternative" Funds

Mutual funds that mimic hedge funds are Wall Street's hot new thing. Too bad they hedge away your best shot at returns.

So-called liquid alternative funds are the latest product Wall Street is pushing on retail investors. In 2013, about $40 billion of new investments flowed into the funds, up from $13 billion the previous year. The funds employ the kinds of strategies used by hedge funds, the less-regulated portfolios reserved for institutions and high-net worth investors. For example, in addition to owning investments outright, they’ll go “short”—that is, bet on stocks or market indexes to go down.

Hedge funds have benefited from the mystique of exclusivity, and for a while boasted pretty great returns. Lately, though, their returns aren’t all that impressive compared with what you can make just owning an S&P 500 index fund.

And mutual funds that mimic these strategies haven’t exactly shot the lights out either. For instance, the average market neutral fund, which seeks to deliver gains in both good and lousy markets, has returned only around 2% a year over the past five years, according to Morningstar. That’s about a tenth of the gains of the broad market during that time.

Financial sophisticates will call that an unfair comparison. Fine. But there’s a reason besides performance to give clever-sounding hedge-like strategies a pass.

Consider this deal: I’ll sell you this very nice antique vase. And I’ll let you in on a secret, too. A magic fairy lives inside the vase, and will grant the owner a wish.

You do not really believe in magic fairies. But you might still buy the vase at the right price, because, hey, it’s a nice vase. And if there’s a chance about the fairy…

When you buy a regular stock fund, you’re buying the vase. Most of what you get is the market’s return. When the market goes up, most funds make money. And when the market goes down, most funds go down. Managers try to add a bit of performance on top, by making smarter picks than the competition. But for the most part, if you know how the S&P 500 did this year, you can make a pretty good guess about how your fund did. Even if your manager isn’t all that skilled, you can still do okay so long as the market rises.

Buying a hedge fund, on the other hand, is like paying for the magic fairy without getting the vase.

The classic hedge strategy tries to eliminate or reduce the market factor. There are lots of ways to do this, including chasing illiquid assets or hopping among wildly different asset classes. In a long-short or market-neutral strategy, a manager might look at Apple and Microsoft and decide that Apple is a relatively better investment than Microsoft. By buying Apple and “shorting” Microsoft, the manager can in theory make money in both rising and falling markets, as long as Apple falls less than Microsoft in a down market, and rises more than Microsoft in an up market. (Many hedge strategies are head-spinningly more complex than this, but this captures the rough idea.) Investing in a hedge fund might reduce your market risk, but in return it bets more heavily on the manager’s investment-picking skill.

Skilled managers aren’t as elusive as magical fairies, but for practical purposes they may as well be. After fees, the vast majority of regular mutual funds don’t beat their benchmark indexes. The reason is simple: Almost by definition, the average money manager must deliver the market’s average, minus fees. Though some managers do outperform over time, it’s hard to tell which ones were lucky and which ones have a skill that will persist over time.

It might be that managers of real hedge funds, who have some control over when money comes into and out of their funds, can use the extra flexibility they have to find an edge. But it is doubtful that in the world of mutual funds, which must be able to hand investors their cash back on any given day, that there is a special secret pool of skilled managers who only work for funds where shorting and leverage and other exotic tactics are allowed.

MONEY funds

Fleeing Bill Gross is for the Birds

Recent fund outflows, and the hit to the bond king’s reputation, don’t make a compelling case to bolt Pimco Total Return.

This column originally appeared in the June 2014 issue of MONEY

If you’ve been following the soap opera at Pimco, you know the narrative that’s emerged: Bond king Bill Gross is a bully whose megalomania drove out his former co-CEO, and now shareholders are following Mohamed El-Erian out the door.

Investors have yanked nearly $60 billion out of Total Return so far. Even Paul McCulley’s recent return to Pimco as the firm’s chief economist wasn’t enough to stop the bleeding.

Some in the pundit class say it’s time to join the exodus. Here’s why this story line and its conclusion are wrong.

1. These outflows aren’t about personality.

Gross may or may not be a jerk (I can’t say), but the reason money is leaving Total Return isn’t the manager’s spat with former heir apparent El-Erian. Cash started exiting long before that became known.

Gross has simply underperformed in the past year because of ill-timed moves in and out of the Treasury market. “The numbers are the real story,” says Manhattan Beach, Calif., financial planner Phillip Cook.

2. You don’t need a saint’s reputation to trade securities.

“Wall Street is filled with temperamental chefs, but many of them do a fine job managing money,” says planner Lewis Altfest.

About three years ago tales of bad behavior emerged from the messy divorce between bond investor Jeffrey Gundlach and his company TCW. In the end Gundlach started his own firm, and his flagship fund has beaten 96% of its peers since.

3. Neither Gross’s slump nor the outflows are reasons to panic.

Michael Herbst, Morningstar’s director of active funds research, says red flags go up when a fund loses 10% to 15% of its assets. Total Return has lost closer to 20%, but Herbst says, “We don’t believe the outflows are damaging the fund.”

That’s because Gross’s still-gigantic $230 billion portfolio invests in high-quality, intermediate-term bonds that tend to be easy to sell, so the sales themselves don’t depress prices. “If this were a high-yield or emerging-market debt fund, that might be a different story,” Herbst says. Meanwhile, Gross has still beaten more than half of his peers in five of the past seven years, and nearly 90% over 10.

Morningstar cut Pimco’s stewardship grade citing uncertainty surrounding the firm’s leadership and high fees on its retail funds. Yet Morningstar reaffirmed Total Return’s gold rating.

The Take-Away

If you invest in Gross’s talents through Harbor Bond — a sister fund that is a third as cheap as Total Return’s C-class shares and is on our ­MONEY 50 list of recommended funds — there’s even less reason to sell.

In fact, owners of Total Return should use Harbor for new investments. Lower expenses add a margin of safety, and why pay retail when you don’t have to?

MONEY

How to Get in Trouble in Your 401(k)

American Airlines flight attendant Brigette Laurent felt confused about her 401(k) choices before she started following the advice of an investment newsletter. photo: pat molnar

Make a trade now and again? You should know that the mutual funds in your plan may disallow or penalize certain actions; your plan administrator, with your employer’s input, may have set other rules.

Check with HR to find out what applies to you, but beware these often-restricted moves:

Making a “roundtrip” transaction

The rule: Funds or administrators may limit your ability to sell out of a fund and then buy back in within a short period, called a roundtrip.

For example, the first time you sell a Fidelity fund and then reinvest more than $1,000 into the same fund within 30 days, you’ll get a warning; subsequent roundtrips result in restrictions on how often you can trade in the future.

(The Fidelity plan at Time Inc. — MONEY’s parent company — limits employees to one trade a quarter after the third roundtrip.)

Related: American Airlines employees locked out of 401(k) funds

The reason: Roundtrips require managers to buy and sell assets, and therefore hike up administrative costs for the fund, says Mike Alfred, co-founder of BrightScope, which ranks 401(k) plans.

Selling soon after you buy

The rule: With certain funds, if you sell before owning for a minimum period — usually 30 or 60 days — you’ll pay a fee of up to 2% of the price of the shares.

The reason: Redemption fees are often levied on funds with holdings that are not as easily bought or sold, such as small-cap stocks and international equities, says Susan Powers, senior VP of investment consulting at Fidelity. The lack of liquidity could result in such funds taking a big performance hit as a result of short-term trading.

Buying too much company stock

The rule: Public companies often put a cap on how much employer stock that workers can own, says Powers. The restriction is usually built into the plan, so that you wouldn’t be able to invest more than, say, 25% of your money with your company.

The reason: In a post-Enron world, says Powers, 401(k) plans are designed to prevent employees from holding 100% of their portfolio in their employer’s stock.

MONEY Ask the Expert

Investing Beyond Your Target-Date Fund

Many investors combine their target-date fund with one or more other investments. illustration: paul blow

Q. “I already invest in a target-date retirement fund. What should my next fund be?”– Errick Chiasson, Baldwinsville, N.Y.

A. Target-date funds are designed to provide not only a fully diversified portfolio in a single fund, but also an investing strategy. Their mix of stocks and bonds gradually becomes more conservative as you age, protecting your savings as you near retirement. So in theory these funds work best if you put your entire 401(k) into one.

In the real world, however, many savers don’t take such an exclusive approach. A recent Vanguard survey found that just under half of target-date investors in its 401(k) plans combine target funds with one or more other investments, in some cases even another target fund.

While mixing another fund with a target fund can be a reasonable choice, you have to be careful that doing so doesn’t leave you with an unruly mishmash instead of a coherent portfolio.

Straying from the target

One good reason for going beyond a target fund is to adjust how much risk you’re taking.

Let’s say you’re a young investor who likes the target-date concept because it frees you from having to create a portfolio on your own, but you’re anxious about having 90% of your money in stocks, a typical allocation for investors in their twenties and thirties. Transferring, say, 20% of your target fund’s balance into a diversified bond fund would give you a considerably less volatile portfolio.

Conversely, you could make a similar shift into a total stock market index fund to boost your 401(k)’s growth potential. This add-on strategy is a more effective way to tweak risk than picking a target fund with a later or earlier retirement date.

Once you get beyond this sort of simple fine-tuning, however, things can get hairy. Some investors employ a “core and explore” strategy in which they use a target fund as a foundation and then add funds that focus on certain sectors, such as emerging markets or real estate.

Problem is, most target funds already spread their assets widely both here and abroad. So you could end up doubling down on niche markets.

Besides, you may not enjoy enough extra return to make up for the added time and trouble of monitoring and re-balancing a considerably more complicated portfolio.

If you do go that route, plug all your retirement investments, including those outside your 401(k), into Morningstar’s Portfolio X-Ray tool (available free at troweprice.com). That way you can see your overall allocation and make sure you’re not inadvertently overweighting any areas.

But once you’re investing in so many other funds that your target fund essentially becomes a bit player, you may be better off simply building a portfolio from scratch.

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