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Seven Big Fund Surprises From 2010's First Half

Booming Treasury funds, Vanguard gets its S&P 500 ETF, stock-fund flows make a U-turn, and more.

Dan Culloton, 07/01/2010

I hope you like surprises, because there have been a more than a few for fund investors so far this year. Here, in no particular order, are some of the biggest as of mid-2010.

A Big Dog's Moving In
Maybe an old dog can learn new tricks. The oldest index mutual fund in the world, Vanguard 500 VFINX, will finally get a new ETF share class before the end of the summer if all goes according to Vanguard's plan. The fund family sought permission from the SEC in June to offer the new share class and launch 19 other new index funds with ETF shares. It had been nearly a decade since a licensing dispute with Standard & Poor's nixed Vanguard's plans to launch an ETF version of its S&P 500 Index tracker. So long that many gave up hoping the venerable mutual fund would ever get ETF shares. Existing ETFs tracking the benchmark, SDPR S&P 500 SPY and iShares S&P 500 Index IVV, have a huge head start, but Vanguard is trying to make up for lost time by offering its S&P 500 ETF for just 0.06%, one third cheaper than its rivals. If you have a Vanguard brokerage account you can buy the cheapest S&P 500 ETF available commission-free.

Billion Dollar Man
There was applause when Jeffery Gundlach told an audience of advisors at the 2010 Morningstar Investment Conference last week that his new flagship fund, DoubleLine Total Return DBLTX, had just crossed the $1 billion mark in less than three months. That's quite a pile to amass in a short time. Yet, given the 2006 Morningstar Fixed Income Manager of the Year's outsized reputation and tempestuous split from his former firm, TCW, the milestone might actually be a disappointment. Fortune reported in March that the firm expected $10 billion in new accounts this spring, so not much of the nearly $7 billion that investors have pulled out of Gundlach's old fund, TCW Total Return TGLMX, since he left last December, seems to have made it to DoubleLine yet. DoubleLine Total Return's take also is about 5% of what Bill Gross's Pimco Total Return PTTRX took in the first five months of the year.

Hello. I Must be Going.
Little more than a year after taking over Janus Worldwide JAWWX, manager Laurent Saltiel jumped ship for AllianceBernstein. That's almost as quick as the more than 200% turnover rate Saltiel logged as manager of Worldwide in 2009.PAGEBREAK

No Mas
The liquidation of a $60 million fund doesn't normally cause a tremor in the nearly $10 trillion mutual fund business. Kevin O'Boyle's March decision to shutter his Presidio Fund caught our attention, though. O'Boyle, who had not been afraid to question conventional wisdom in his short career, challenged it one more time as he took a bow. The fund had been competitive since its May 2005 birth and earned 5 stars, but it never attracted much money. O'Boyle, however, said it was flagging passion, not cash flows, that caused him to shut down. He said he could have trundled along earning a comfortable six-figure salary as long as the fund's assets stayed above $50 million, which is about half of what funds need to break even, or so fund-industry conventional wisdom has long said.

Year of the Living Treasuries
Late last year I helped survey dozens of global fund managers from all over the world for their views on current and prospective market conditions. I don't recall any of them saying long-term U.S. Treasuries looked attractive. Granted, few probably expected them to suffer the kind of losses they endured in 2009, but with Treasury yields still at generational lows, no one I spoke with expected the long-government fund category to post the kinds of returns it has so far this year. Through June 29, it was the best-performing fund group of 2010, with a gain of more than 15%. Funds that lost astonishing amounts by bond-fund standards last year, such as Vanguard Extended Duration Treasury VEDTX, have rebounded sharply as investors have fled uncertainty emanating from Europe's sovereign debt crisis. Only another financial disaster could make the bonds of the deeply indebted U.S. look good.

All that Glitters
At the start of the year we also heard from a few managers who were adding gold to their portfolios either as a hedge against catastrophe or, with money market rates close to zero, as a substitute for cash. We also heard from some who pointed out that buying the notoriously unpredictable metal as insurance when its five-year returns were high was perilous. If so, it's probably more perilous now. Gold has continued to rally, trading above $1,250 an ounce at times during June and helping to push the equity precious-metals category to a more than 10% year-to-date return through June 29. Funds such as Tocqueville Gold TGLDX, which has gained nearly 15% for the year to date through June 29, were among the best-performing funds for that period in Morningstar's database.

Gold bullion ETFs also have rallied. The ETF commodities precious-metals category is also up 10% year to date, and SPDR Gold Shares GLD is up 13% so far. The ETF also got a huge surge in inflows--$4.2 billion in May alone and $5.3 billion for the year through May. Granted, some of that new money may be from investors who are shorting gold, or betting on its decline, but its still indicative of yellow metal's allure in a period of uncertainty.

About Face
Investors seemed to be warming up to U.S. equity funds in March and April after 12 months of gains following March 2009's low. Domestic-stock funds took in $885 million and $6.4 billion in inflows in March and April, respectively. Fund buyers cooled off in a flash in May, though. After the May 6 flash crash, in which the market lost and regained roughly 1,000 points in the time it takes for a potty break, investors flushed nearly $15 billion out of U.S. stock funds in May, an abrupt U-turn that has fund executives such as Vanguard Chairman and CEO Bill McNabb worried that the industry has lost a generation of investors.


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