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Dear Shareholder:
Back to Basics: I find it has been several years since we reminded you of the following simple fact: You cannot buy a fixed income fund that charges a load and do nearly as well as buying a similar fund that is 100% no-load. For a stock fund this might not always be true, but this will always be true of a bond fund. Why? Because when you invest in a bond fund you are buying a fixed income. Here is what happens:
Assume a $10,000 investment in two tax-free bond funds of similar average maturity and portfolio quality. One fund has a 4% front-end load
And one does not. Both advertise the same yield; say 5%.
No-Load Fund Load Fund
Amount Paid In $10,000 $10,000
Net Amount Invested $10,000 $9,600
Income Earned in 1 Yr. $500 $480
Less: Load Paid $0 $400
Net if Redeemed in 1 Yr. $500 $80
Income Earned in 5 Yrs. $2,500 $2,400
Less: Load Paid $0 $400
Net if Redeemed in 5 Yrs. $2,500 $2,000
Net if Redeemed in 10 Yrs. $5,000 $4,400 etc.
I think you can see that, while the deficit as a percent of total income declines over time, you never catch up. And if you need to redeem your shares in only a year or two, you absolutely get murdered in the load fund.
There are often periods when bonds earn more than stocks. In the last twelve months two of our Bond Series have a total before-tax return of over 19% to higher bracket taxpayers. (Stock market results are always reported “before tax”.) Compare this with The S&P 500 (-14.2%), Dow Jones Industrials (+1.7%) and Nasdaq Composite (-%58.1%). At this writing these indices are look worse.
Have you seen CDs lately? The current economic slowdown, decline in bank loans and Federal Reserve rate cuts have all resulted in lower CD rates. The banking system simply doesn't need the money. On an after-tax basis you can do over twice as well with one of our short-term tax-exempt funds as you can with the average one-year CD.
Analysts?: Investors are indebted to The New York Times and Fortune for a series of articles on the shameful use of analysts to run up the stock price of companies their employers had underwritten in public offerings (IPO's). Fortune recently had an article on Mary Meeker, the famous Internet Analyst for Morgan Stanley. Ms Meeker admits to "giving support" to those companies her firm had brought to the market through IPO's, as well as writing good reviews for companies Morgan Stanley was soliciting for future business. With the growth of CNBC and other financial channels, a lot of biased "analysis" has gotten credibility that it otherwise might not receive.
Bonds vs. Stocks: The June issue of Smart Money notes a leading aggregate bond index is up 11% (thru April) while the S&P 500 was down 20%. Using this measure, bonds outperformed stocks by 31%. But that is just one unusual year, you say? It's not at all. Using the same measure, Smart Money says that in the past 36-month period the bond investor would have outpaced the stock investor by four percentage points a year. Should you dump stocks? Not in my opinion, but conversely, you should NEVER be without some bonds in your total investment portfolio. You may tire of hearing me say that, but I am daily amazed at how many people, old and young, have forgotten it.
This is not to say that I do not expect stocks to recover. I do expect stocks to recover, I just don't know when. I suppose the key to this question is "when will the economy recover?" That isn't easily answered either. Ask the Japanese, who have waited years for recovery. Their economy was once considered second in strength only to the USA.
IRA , Roth IRA, rollover IRA's from 401K's : If you are a shareholder in one of our funds, and were not referred to us through a broker or investment advisor, we can offer you shares in the various Federated Investors Funds through a special arrangement free of any sales charges. Federated does share a .25 of 1% portion of their annual fee with us under a shareholder servicing agreement. We use Federated equity funds along with our own Intermediate Government Bond Fund in shareholder's 401 K rollovers and IRA's. It's a way to do that without wrap fees, commissions or load charges, all in one place.
One Consolidated Statement. Is it the Greatest? For over a year now, we can be cleared through the National Securities Clearing Corporation. We did this so that your broker could buy shares of our funds for your account and have them delivered, just as he could buy you shares of General Motors stock. But our offering of this service has taken a reverse spin. Brokers are talking a few of our shareholders into putting our shares with them in a "fee only" account with other securities already in that account. The sales pitch is, "all your securities will appear on one statement". So you are supposed to pay an extra $1,500 every year (on a $100,000 account) to see one line on a summary page? Come on! And your broker will see to it that you quit receiving these shareholder letters.
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