Another Lost Decade in the Cards? Strategists Disagree
Plus, two Vanguard heavyweights disagree on proposed securities transaction tax.
Fund Times
There has been a lot of talk recently about the lost decade for the S&P 500. And with good reason. SPDRs (SPY), the $73 billion exchange-traded fund that tracks the S&P 500, lost about 9.6% over the previous decade ending Dec. 31, 2009.
Things look even worse in real terms: If you had $10,000 in 2000, you would have needed about $12,450 at the end of 2009 just to keep up with inflation, according to the federal government. That $10,000 in the S&P would have become $9,040.
What will the 
Strategists at two prominent firms have reached different conclusions.
David Nelson, chairman of the investment policy committee at Legg Mason Capital Management, thinks the market as a whole is undervalued with the current fair value of the S&P 500 at roughly 1,330 based on various assumptions.
Nelson says the firm thinks the S&P could trade in the range of 1,250 to 1,350 by the end of 2010. With the S&P trading around 1,130, that means there is at least another 15% of upside remaining before hitting fair value.
That's the base-case scenario for the investment advisor that manages about $60 billion in mutual fund assets. In a best-case scenario, Nelson's estimates are much higher.
"If we assume that the worst of the financial crisis is past and that the ERP (equity risk premium) will revert to its long-term average of 4% over time, the fair-value multiple of the S&P rises to 19.3, and the implied year end 2010 target price for the S&P 500 rises to 1,472," he writes.
Meanwhile, GMO's Jeremy Grantham says the S&P is overvalued. That is why he thinks the S&P's return for this decade will be subdued at best.
Grantham recently wrote the fair value of the S&P 500 is somewhere around 860, which would be a little more than a 20% decline from today's levels.
If he is right about this estimation, the coming decade of returns for the S&P looks eerily similar to those GMO expected at the start of the last decade. As of Dec. 31, GMO expects the S&P 500 to deliver a real (inflation-adjusted) return of just 1.3% over the coming seven years (compared with about 6% if the index was trading at fair value).
True, this is not as bleak as the negative 2% real return GMO expected in July of 2000. But it's not encouraging either--especially because GMO has been very accurate with its forecasts in the past. In June 2002, the firm estimated the S&P would deliver real returns of just 0.5% over the next seven years. It delivered 0.8%.
Bogle and Sauter Square Off on WSJ Op-ed Page
Jack Bogle, the retired founder of Vanguard, and Gus Sauter, the firm's chief investment officer, have voiced different opinions on a proposed federal transfer securities transaction tax.
A bill introduced in the House of Representatives would impose a 0.25% tax on most security transactions outside of tax-exempt retirement, health savings, and education accounts.
Proponents say the legislation could raise more than $100 billion a year to reduce the federal deficit and support new jobs. For more about this bill, click here.
The bill would end up costing shareholders of lower turnover mutual funds, like index funds, far less than shareholders of funds with higher turnover, such as many quantitative strategies.
This may be why Bogle suggested in a Tuesday Wall Street Journal op-ed that policy makers should consider such a proposal. He wrote such a tax could "enhance the role of investors and diminish the role of speculators."
The tax wasn't the main thrust of Bogle's article. It was among other proposals including a proposed "federal principal of fiduciary duty" that would get investment managers to start behaving more like shareholders. Such a standard, Bogle argues, could help to reduce fund fees and executive compensation at large corporations.
Bogle's editorial is in sharp contrast to an editorial written just a few weeks earlier by Sauter on the same subject.
In his editorial, Sauter, along with co-author Burton Malkiel, concluded a securities transactions tax would "gravely wound financial markets." Sauter thinks such a tax could make market bubbles even worse and that so-called "speculators" play an important role in improving market efficiency.
If you trade more than $100,000 worth of stocks or options a year, you could be affected by the proposed bill. Do you think a transaction tax makes sense?
Fidelity President to Retire
Rodger Lawson, president of Fidelity Investments and the second-highest ranking officer at the firm behind chairman Edward "Ned" Johnson III, will retire at the end of the first quarter.
In a letter to employees announcing his retirement, Lawson said he will remain a Fidelity employee and will serve as an advisor to the chairman, the board, and the management team.
The privately held financial-services and mutual fund firm did not name a successor but is reportedly conducting a search within the firm. Nine senior executives, including Abigail P. Johnson, vice chairman; Jacques Perold, head of asset management; and Robert Chersi, chief financial officer, will assume Lawson's duties for now.
During the past year Fidelity's mutual fund business has gained about $15.5 billion in assets. The firm currently manages about $738 billion in mutual fund assets.
BlackRock Fixed-Income Chief to Retire
Scott Amero, vice chairman and global chief investment officer for fixed income at BlackRock (BLK), announced he will retire at the end of 2010 after approximately 20 years at the firm.
Amero will give up his portfolio management responsibilities during the first quarter and will assume an advisory role at the firm for the remainder of the year. Peter Fisher, who has co-headed fixed income with Amero since December 2007, will become vice chairman of BlackRock and will continue to have responsibility for management of BlackRock's fixed-income platform.
Etc.
Effective Jan. 1, Charles D. Ellis retired as director of Vanguard and trustee of each of the Vanguard funds. Ellis is the author of numerous investment books, including Winning the Loser's Game, which has sold more than 500,000 copies.
On Jan. 14, A. Gene Caponi was named a portfolio manager on multiple DWS municipal-bond funds, including DWS Strategic High Yield Tax Free (NOTAX). Caponi joined DWS in 1998 and has more than 20 years of investment industry experience. Before joining DWS, Caponi worked at T. Rowe Price and Lehman Brothers.
Freedom Investors' Frontier MicroCap will liquidate, according to press reports. The fund, known for having a 20-year-old stock-picker join as portfolio manager in 2003 and for being one of the most expensive actively managed funds at 18.4%, has less than $100,000 in assets currently and has posted one of the worst records over the last decade by losing a staggering 37% annualized through Jan. 20.
The Supreme Court has denied review of a 401(k) excessive fee case (Hecker v. Deere & Co) in which plaintiffs alleged their employer provided them with a faulty choice of investment options. The Court is set to rule on another excessive fee case, Jones v. Harris, before summer.
Andy Ziegler, chairman, CEO, and founder of Artisan Partners, announced in a letter that COO Eric Colson will assume the role of CEO effective immediately. Colson joined Artisan in 2005. Ziegler will remain chairman of the investment manager.
Fidelity announced Joseph Tse, the original and longtime manager of Fidelity China Region (FHKCX), is back running the fund. The firm also said Colin Chickles has been named portfolio manager of Fidelity Advisor Emerging Asia (FEAAX), succeeding Kevin Chang.
Beginning Jan. 1, Fidelity adopted "capped" versions of its existing MSCI or S&P benchmarks for its Select funds. Capped benchmarks limit the concentration of top holdings in the benchmark. For example, Fidelity Select Telecommunications (FSTCX) has about 22% of assets in AT&T (T), which reflects the company's heavy weighting in the index rather than the manager's conviction in the name. The move to capped benchmarks should help reduce instances where this happens.
The following Lord Abbett funds will no longer offer class B shares for new or existing shareholders: Lord Abbett Convertible (LACFX), Lord Abbett Core Fixed Income (LCRAX), Lord Abbett Floating Rate (LFRAX), Lord Abbett High Yield (LHYAX), Lord Abbett Income (LAGVX), Lord Abbett Total Return (LTRAX), Lord Abbett Short Duration Income (LALDX).
Two RiverSource and Seligman funds are asking shareholders to vote on mergers. If approved, Seligman Global Smaller Companies will merge into RiverSource Partners International Small Cap and RiverSource Partners Small Cap Growth will merge into Seligman Frontier .
The board of Alger SmallCap Growth (ALSAX) partially closed the fund, permitting only existing shareholders to purchase new shares.
Buffalo Small Cap (BUFSX) revised its prospectus' definition of what constitutes a small-cap company. The new definition considers small-cap companies to have market capitalizations of $2.5 billion or less. Previously, the fund defined small-cap companies as either having a market cap of $1 billion or less or ranking in the smallest 20% of companies listed on a U.S. stock exchange. The portfolio managers do not anticipate the median market cap to change meaningfully, and given the funds low-turnover strategy, the revision should provide greater flexibility to keep existing holdings that have grown in market cap.
Luke Smith is off the portfolio management team at MainStay 130/30 International (MYITX).
AQR Diversified Arbitrage (ADAIX) eliminated its 1% redemption fee on the proceeds from shares redeemed within 60 days of their purchase.
E. Clifton Hoover replaced James Hutchinson as co-portfolio manager of DWS Dreman Mid Cap Value (MIDVX).
Mutual fund analyst David Falkof contributed to this report.