You have the details correct. Let me try to describe this from the conceptual perspective (which may or may not help - different people understand things in different ways).
Think about "regular" companies (like corporations). If you own shares of a company, you get dividends. Not interest - that's for the bond holders.
Mutual funds are just companies ("regulated investment companies" - RICs). You own shares of a fund, you get dividends. Even MMFs are mutual funds, and they pay dividends.
Under the 2003 Tax Act, dividends from domestic (and some foreign) corporations are to be treated as "qualified" dividends - taxed at a lower rate (and reported in box 1b on your 1099-DIV). It doesn't matter whether the corporation makes the money it distributes from selling widgets or from receiving interest on bonds it holds. The rationale given was that corporations are already paying taxes on their earnings, so investors shouldn't have to pay full freight a second time when they receive those earnings as dividends.
But RICs are not corporations (and they don't pay corporate income taxes). For RICs, the Act says that only fund dividends that represent qualified dividends from the portfolio's corporate holdings are qualified (reported in box 1b). Since this income comes from corporations that have paid corporate taxes on it already, it makes sense to treat these dividends as qualified, even though they get to you via a mutual fund.
Bond interest isn't corporate dividends (and no corporate taxes have been paid on this income). So when a fund distributes this to you as a dividend, it's not qualified. For that matter, capital gains generated by the fund are not qualified corporate dividends either.
But there's an older special rule for capital gain dividends (IRC Section (b)(3)(B)) . It says that long term gains are to be reported in box 2, and taxed as capital gains. That makes sense as well, since the fund is acting as your "proxy" - buying and selling securities for you.
What doesn't make a whole lot of sense, but has been in the rules "forever" is that short term gains generated by the fund get no special treatment. So they get reported as ordinary dividends (box 1a), and since they don't represent dividends from underlying stock, they don't get the special "qualified" treatment. Since they don't show up as short term gains on your 1099, you can't write off short term losses against them.
The tax laws are complex, and there are a lot of competing interests embedded. But they can make a certain amount of sense - or perhaps one just needs a warped mind to appreciate them :-)

@DavidV
irs.gov
There is a pamphlet available for download that will tell you what you need to know, for your particular circumstances, including the forms required for reporting and how to fill them out. Based on what you wrote, I think you need to read them...umm ... thoroughly (for the first time?). It is time to sit down and do the homework.
I wish I could tell you that you'll only have to endure this challenge once, that from year-to-year there is little variation in the amount of losses that can be used to offset gains; however, with this do-nothing Congress, well.... that might not be the case for long--- (be afraid) they might actually do something.

My 1099-DIV tax form shows that most distributions from bond mutual funds are characterized as nonqualified dividends. If I am correct nonqualified dividends, similar to short-term capital gain distribution, are taxed as ordinary income and cannot be offset by investment loses, that makes them very disadvantageous for investors. Examples of such funds: PONDX, RSIVX , LSBRX, DSL, and bond portion of balanced funds PRWCX, VWINX.
Please explain whether it is always the case for bonds funds or I miss something.

The article was written by John D. Markese, president of the American Association of Individual Investors, and first published in April 1997. That's the "evergreen" part of the URL; reprints of what they consider classic articles. He wrote regularly but nothing popped out as deeply insightful (a phrase that might appear one day on my headstone).
If I read the attached article correctly, Mr. Markese currently makes $340,000 as a member of NASDAQ's board, but that figure might include compensation from serving on the board of C8 Venture Capital.
David

Hi Mark,
Thanks for the questions.
Q 1) Yes (taxable & self directed ira accounts)
Q 2) Although it was posted in the front part of this thread ... I have provided it again below.
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of four sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve and a specialty sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and the amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve, each investment area, and the portfolio as a whole monthly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to cash the cash area builds cash within the portfolio to meet the portfolio’s monthly cash distribution needs with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle from, or settle to, the cash area.
Here is how I have my asset allocation currently broken out in percent ranges, by area. My neutral targets are cash 15%, income 30%, growth & income 35%, and growth 20%. I do an Instant Xray analysis of the portfolio monthly and make asset weighting adjustments as I feel warranted based upon my assesment of the market, my risk tolerance, cash needs, etc. Currently, I am neutral in the cash area, light in the income area and heavy in the equity area. I am thinking that once year end mutual fund capital gain distributions are paid out this will somewhat reduce the equity area and raise the cash area.
Cash Area (Weighting Range 5% to 25%)
Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual)
Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 20% to 40%)
Fixed Income Sleeve: EVBAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX
Hybrid Income Sleeve: AZNAX, CAPAX, FKINX, ISFAX, PASAX & PGBAX
Growth & Income Area (Weighting Range 25% to 45%)
Global Equity Sleeve: CWGIX, DEQAX, EADIX & PGUAX
Global Hybrid Sleeve: CAIBX, IGPAX & TIBAX
Domestic Equity Sleeve: ANCFX, CFLGX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 30%)
Global Sleeve: ANWPX, PGROX, THOAX, DEMAX, NEWFX & THDAX
Large/Mid Cap Sleeve: AGTHX, BWLAX, HWAAX, IACLX, SPECX & VADAX
Small/Mid Cap Sleeve: AJVAX, IIVAX, PCVAX & PMDAX
Specialty Sleeve: CCMAX, JCRAX, LPEFX, SGGDX & TOLLX
Old_Skeet

Hi Derf,
Thanks for the question.
From my perspective it takes the lot to make the whole. Lets take a six fund sleeve and in this case my large/mid cap sleeve in the growth area of the portfolio. In this sleeve I subscribe to the five percent min held but ideally place it more towards ten percent.
Since, I can not access my portfolio through Morningstar, at this time, I am not able to provide exact details. However, the largest holding within the sleeve is SPECX at about 25% followed by AGTHX and then all the way down to BWLAX which is the newest and smallest holding and currently represents about eight percent of the sleeve. The advantage of the sleeve is that when one fund falters then there are the others that are able to provide support and to continue to propel the sleeve as a whole. The large/mid cap sleeve itself represents about forty percent of the growth area and about eight percent of the overall portfolio. While the growth area as a whole current represents a little better than twenty percent of the overall portfolio. The global growth sleeve represents a little better than thirty percent, and both the small/mid cap sleeve and the specialty sleeve represent about fifteen percent each where these minority two sleeves only represent about three percent each of the overall portfolio they are a part of the lot of both the growth area and the portfolio as a whole.
If it got to the point that I was to start eliminating funds the small produces and those with the least amount of capital gains within each sleeve would go first.
I hope this helps answer your question.

Several years ago (2009-2010 period) a discussion with a couple in their late-60's came into place. They were frugal with their expenses, had modest pension income, receiving SS and had been investors otherwise for many years. They were nominally smart about choices for their investment side of life, and had a good understanding of market movements.
They had decided to smooth the ride with the investment side and downsize the portfolio. They were not trying the "shoot out the lights" with oversized gains in the marketplace, but enough gains to offset inflation and have a decent return after taxation. The plus for them was ease of monitoring.
At the time, the discussion mostly revolved around the point at the time, that "economies" were still very much in a damaged zone from the market melt of 2007 & 2008. The likelyhood that low interest rates (central bank stimulus) would have to remain in place for an extended period of time, in particular from the damage done to the private sector budgets; the regular wage earners and their ability to spend into the economy.
The choice was made to maintain a U.S. centered, simple portfolio. One could place this portfolio into the consevative or moderate allocation, depending upon one's view of such a mix (50/50). At the very least, one can not argue that the E.R.'s are too high (.05%/.08%).
The results are listed below using VTI and BND; which will find this portfolio at age 5 years, this July.
--- 2010 averaged return = 11.89%
--- 2011 averaged return = 4.39% equity market melt in July
--- 2012 averaged return = 10.23%
--- 2013 averaged return = 15.69%
--- 2014 averaged return = 9.25%
--- 2015 averaged YTD = 1.76%
M* 5 year anualized to date = 10.31%
They remained pleased.
Take care,
Catch

Hi Pop Tart,
Like kevindow I think we're just at the beginning of QE for Europe, I think it will continue for a long time and I think the Euro will weaken and European stocks will do well all along the way. My preference is HEDJ because they only hold Euro area stocks that derive more than 50% of revenue outside of the Euro area, meaning their businesses benefit not only from the weak currency but as well from the multiple expansion.
IMHO, Europe has pretty big problems. They have mostly bad demographics, the ECB has been clear they need reform in addition to QE and they have strong nationalistic interests that make creating real and sustainable growth easier said than done. Greece is a timely example. They can't live with austerity now because they need to stimulate the economy, but without serious reform the rest of Europe (and in large part the Germans) just end up subsidizing their problems. QE is going to help exporters, it will help anything related to tourism and it will feed multiple expansion, but without real fiscal changes the problems aren't going away. Since I don't believe there will be real reform anytime soon, I think QE will have to continue and the Euro will devalue until someone manages the political capital to push real change.

@Old_Skeet
Just a little experiment I'm trying.
The differential to me is the risk premium, so peeling off the the risk premium is an actionable strategy that hopefully acts to lower my overall portfolio risk as well as capture gains.
Much like an equity position provides a higher risk/reward profile than most bonds, certain bonds have a higher risk/reward profile than other bonds. I think of it as an additional quarterly "dividend" for holding a riskier asset. In this case, the "additional dividend" is the performance differential between two bond funds with different risk/reward profiles.
PSHDX has a lower risk/reward profile than PONDX, but occasionally PONDX will under perform PSHDX. This has usually been a brief single quarter occurrence. When this changes and PONDX shows continual under performance I will notice it (since I monitor it) and I will act by possibly reducing or eliminating PONDX.
I'm looking for persistent out performance as a reason to hold riskier assets. I use less risky assets as a guage and as the place where gains are gathered. The less risky asset can then serve as a place to distribute income (in retirement) or a place to turn for dry powder.
To take this one step farther, image a three fund risk sleeve: PCKDX, PONDX and PSHDX. I first identify these funds as part of my PIMCO risk/reward sleeve. I choose funds that move farther out on the risk/reward spectrum and also are top performers in their respective sectors. So long as the higher risk fund out performs the lower risk fund(s) I maintain a position in the higher risk asset. Quarterly I compare the relative performance of PCKDX to PONDX and PSHDX. If the differential are positive I gather the gains by selling into the less risky asset on the sleeve ladder. Last quarter I had to skip a rung (moved gains from PCKDX to PSHDX) as illustrated in the chart below for Q4 2014:

Additional information:
http://www.sec.gov/Archives/edgar/data/747546/000114420415010742/v402218_497.htm
Parnassus Funds
February 18, 2015
Supplement to the Prospectus dated May 1, 2014 (as Amended and Restated September 19, 2014)
Parnassus Mid Cap Fund
This Supplement provides new and additional information beyond that contained in the Prospectus and should be read in conjunction with the Prospectus.
Merger of Parnassus Small Cap Fund into Parnassus Mid Cap Fund
The Board of Trustees of the Parnassus Small Cap Fund (the “Small Cap Fund”) and the Parnassus Mid Cap Fund, each a series of Parnassus Funds (the “Trust”), has approved a proposal for the Small Cap Fund to be merged into the Mid Cap Fund. In connection with the merger, all of the Small Cap Fund’s assets will be transferred to the Mid Cap Fund, and shareholders of the Small Cap Fund will receive shares of the Mid Cap Fund in exchange for their shares, on a tax-free basis. The merger is expected to occur on or about April 24, 2015. The expenses of the merger will be borne by the investment adviser to the funds.
The Trust will file a prospectus as part of a Registration Statement on Form N-14 with the Securities and Exchange Commission in connection with the proposed merger. The definitive Form N-14 Prospectus (when available) will be sent to shareholders of the Small Cap Fund. Shareholders of the Small Cap Fund are urged to read the Form N-14 Prospectus when it becomes available, because it will contain important information about the proposed merger.
Parnassus Mid Cap Fund Principal Investment Strategies
The Parnassus Mid Cap Fund’s principal investment strategies are revised to read in full as follows:
“The Parnassus Mid Cap Fund normally invests at least 80% of its net assets in mid-sized companies. The Fund considers a mid-sized company to be one that has a market capitalization between that of the smallest and largest constituents of the Russell Midcap Index (which was between $284 million and $36 billion as of February 18, 2015) measured at the time of purchase. The Russell Midcap Index includes approximately 800 of the smallest companies in the Russell 1000 Index. The Fund will not automatically sell or cease to purchase stock of a company it already owns just because the company’s market capitalization grows or falls outside the ranges of the Russell Midcap Index, which are subject to change. The Fund may normally invest up to 20% of its net assets in smaller- and larger-capitalization companies. The Fund invests mainly in domestic stocks of companies that are financially sound and have good prospects for the future, and may invest up to 20% of its assets in foreign securities of similar companies. Using a value-oriented investment process, the Fund seeks to invest in equity securities that have the potential for long-term capital appreciation. To determine a company’s prospects, the Adviser reviews the company’s income statement, cash flow statement and balance sheet, and analyzes the company’s sustainable strategic advantage and management team. Upon initial investment, stocks must be trading below their intrinsic value, which means that the Adviser seeks to purchase stocks trading at discounts to the Adviser’s assessment of the companies’ estimated value. The Adviser also takes environmental, social and governance factors into account in making investment decisions. The Fund will sell a security if the Adviser believes a company’s fundamentals will deteriorate or if it believes a company’s stock has little potential for appreciation.”
* * *
The date of this Supplement is February 18, 2015.
Please retain this Supplement for future reference

The new guys at Thornburg aren't all that terribly new. Here's the corporate bio for each.
Ben Kirby, CFA, a managing director of Thornburg, has been a portfolio manager of Developing World Fund commencing in 2015. Mr. Kirby joined Thornburg in 2008 as an equity research analyst, was promoted to associate portfolio manager in 2011 and was promoted to portfolio manager in 2013. Mr. Kirby holds an MBA from Duke University and a BA in computer science from Fort Lewis College. Prior to graduate school, Mr. Kirby was a software engineer at Pinnacle Business Systems in Oklahoma City, Oklahoma.
Charles Wilson, PhD, a managing director of Thornburg, has been a portfolio manager of Developing World Fund commencing in 2015. Mr. Wilson joined Thornburg in 2012 as an assistant portfolio manager and was promoted to portfolio manager in 2014. Mr. Wilson holds a PhD in geophysics from the University of Colorado at Boulder and a BS in geology from the University of Arizona in Tucson. Mr. Wilson previously served as a co-portfolio manager for Marsico Capital Management in Denver.
I don't know enough about the culture at Thornburg to anticipate the shareholders' reactions.
David

Hi Bitzer,
Under another post of mine, you asked how my funds were performing with respect to their benchmark? Within this post I have listed my funds owned. It is easy to pull their respective Morningstar report and one can easily see how they have faired against their benchmark.
For the portfolio as a whole I have it benchmarked against the Lipper Balanced Index. Year-to-date the Index is up 1.78% while my portfolio is up 2.42%. At times, I lead the Index and at times it leads me. Last year the Index was up 7.1% while I was up 6.5% which includes the gains I had made from my spiff positions.
I hope this answers your question; and, perhaps my above blurb, directed to Ted, about my portfolio will provide some insight as to how I have organized and govern it.
Old_Skeet

http://www.sec.gov/Archives/edgar/data/1199046/000119312515052553/d870226d497.htm
497 1 d870226d497.htm UNIFIED SERIES TRUST
MARTIN FOCUSED VALUE FUND
Supplement to the Prospectus dated August 19, 2014
Supplement dated February 18, 2015
The Board of Trustees has determined to redeem all outstanding shares of the Martin Focused Value Fund (the “Fund”) and to cease operations of the Fund due to the adviser’s decision that it is no longer economically viable to continue managing the Fund as a result of the Fund’s small asset size and the increasing costs associated with advising a registered investment company.
As of the date of this supplement, the Fund is no longer accepting purchase orders for its shares and it will close effective as of March 31, 2015. Shareholders may redeem Fund shares at any time prior to this closing date. Procedures for redeeming your account, including reinvested distributions, are contained in the section “How to Redeem Shares” of the Fund’s Prospectus. Any shareholders that have not redeemed their shares of the Fund prior to March 31, 2015 will have their shares automatically redeemed as of that date, with proceeds being sent to the address of record. If your Fund shares were purchased through a broker-dealer and are held in a brokerage account, redemption proceeds may be forwarded by the Fund directly to the broker-dealer for deposit into your brokerage account.
The Fund is no longer pursuing its investment objective. All holdings in the Fund’s portfolio are being liquidated, and the proceeds will be invested in money market instruments or held in cash. Any capital gains will be distributed as soon as practicable to shareholders and reinvested in additional Fund shares, unless you have requested payment in cash.
IMPORTANT INFORMATION FOR RETIREMENT PLAN INVESTORS
If you are a retirement plan investor, you should consult your tax adviser regarding the consequences of a redemption of Fund shares. If you receive a distribution from an Individual Retirement Account (IRA) or a Simplified Employee Pension (SEP) IRA, you must roll the proceeds into another IRA within 60 days of the date of the distribution in order to avoid having to include the distribution in your taxable income for the year. If you are the trustee of a qualified retirement plan or the custodian of a 403(b)(7) custodian account (tax-sheltered account) or a Keogh account, you may reinvest the proceeds in any way permitted by its governing instrument.
* * * * * *
This supplement and the Prospectus provide the information a prospective investor should know about the Fund and should be retained for future reference. A Statement of Additional Information, dated August 19, 2014 has been filed with the Securities and Exchange Commission, and is incorporated herein by reference. You may obtain the Prospectus or Statement of Additional Information without charge by calling the Fund at (855) 367-6383.

Hi Ted,
Thanks for stopping by.
I had to turn to Google to find out who Arch Crawford was. For those interested I have provided a link to his site. It is interesting that our apperance favors along with our voice and speach pattern ... but, I hate to disapoint you .... I am not this person.
http://www.crawfordperspectives.com/
On the portfolio it is what it is and meets my needs. The performance numbers from Morningstar did not include the added return benefit of my special investment positions, spiffs as I have frequently called them. For 2014 my distribution yield was north of five percent and I look at the portfolio as a diverisfied income generator. It has worked well for me through the years and I see no reason to make any major changes at this time. However, I do plan to reduce my allocation to domestic equities over the coming months and raise my allocation to some other assets.
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of four sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve and a specialty sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and the amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve, each investment area, and the portfolio as a whole monthly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to cash the cash area builds cash within the portfolio to meet the portfolio’s monthly cash distribution needs with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle from, or settle to, the cash area.
Here is how I have my asset allocation currently broken out in percent ranges, by area. My neutral targets are cash 15%, income 30%, growth & income 35%, and growth 20%. I do an Instant Xray analysis of the portfolio monthly and make asset weighting adjustments as I feel warranted based upon my assesment of the market, my risk tolerance, cash needs, etc. Currently, I am neutral in the cash area, light in the income area and heavy in the equity area. I am thinking that once year end mutual fund capital gain distributions are paid out this will somewhat reduce the equity area and raise the cash area.
Cash Area (Weighting Range 5% to 25%)
Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual)
Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 20% to 40%)
Fixed Income Sleeve: EVBAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX
Hybrid Income Sleeve: AZNAX, CAPAX, FKINX, ISFAX, PASAX & PGBAX
Growth & Income Area (Weighting Range 25% to 45%)
Global Equity Sleeve: CWGIX, DEQAX, EADIX & PGUAX
Global Hybrid Sleeve: CAIBX, IGPAX & TIBAX
Domestic Equity Sleeve: ANCFX, CFLGX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 30%)
Global Sleeve: ANWPX, PGROX, THOAX, DEMAX, NEWFX & THDAX
Large/Mid Cap Sleeve: AGTHX, BWLAX, HWAAX, SPECX, IACLX & VADAX
Small/Mid Cap Sleeve: IIVAX, PCVAX & PMDAX
Specialty Sleeve: CCMAX, JCRAX, LPEFX, SGGDX & TOLLX
Total number of mutual fund investment positions currently held equal fifty two.
Have a grand day, Ted ... and, thanks again for stopping by.
Old_Skeet

BARRINGTON FINANCIAL ADVISORS, INC.
a Registered Investment Advisor
(Celebrating 42 years of Professional Service)
MARKET COMMENTARY
FEBRUARY 2015
King Dollar is a two-edged sword. The very strong dollar has helped to cause the dramatic fall in oil prices. Like oil, all commodities are priced in dollars, so copper, iron ore, coal, grains, etc., are all lower in price, which has given the U.S. a very low inflation rate as well as adding after-tax dollars to the consumers’ pocketbook. Engineers know for every action, there is an equal and opposite reaction. This does not always occur in financial markets but it has this time. Our strong currency is slowing our exports since other countries need to spend more of their currency to purchase our exports. This causes inflation in other countries, which is slowing their growth and lowering their consumption. Also, the fall in oil prices is causing domestic companies to dramatically lower capital spending this year resulting in announced lay offs in drilling and oil field service companies. This is problematic because the hydrocarbon industry has been the largest provider of high paying jobs over the last five years.
What was initially announced as a 2.6% GDP increase in the fourth quarter, will probably be reduced as more data on our export activity is more available. However, going forward, there are several factors which point to a continued increase in U.S. growth. Back on February 6th the U.S. Labor Department announced a stronger-than-expected increase of 257,000 jobs for January. They also increased the new hires number for December and November by 147,000 jobs. This is the largest labor increase in a three-month period since 1997. The Labor Department also stated wage gains were beginning to see higher growth. Outside of the energy business, labor hires are increasing. Retail, construction, manufacturing, and healthcare all showed an increase in hirings. The lower gasoline prices has allowed consumers to be able to increase their savings without crushing spending. They are also buying larger vehicles again. Truck and SUV sales have increased over the same periods a year ago. These vehicles are more profitable to the automobile manufacturer, which allows them to increase their profit as well as increase hiring.
As we mentioned earlier the strong dollar has contributed to the dramatic fall in the price of oil. However, slower demand from a slowing world economy along with increased production in Canada and the U.S. quickened the fall in price as surpluses rose. We believe there are several factors, which will cause prices to stabilize and start to rise sooner than many analysts are predicting. The Energy Information Agency (EIA) last week announced that gasoline consumption in January showed a dramatic increase over a year ago. The International Energy Agency (IEA) is predicting world-wide consumption to increase to around 94 mm barrels/day by the end of the year, an increase of about 1.5 mm barrels. In addition, political problems around the world are beginning to slow production. Libya has slowed exports by about 500,000 barrels/day over the last two months and the EIA announced domestic production decreased by 33,000 barrels/day last month. For these reasons we believe the price of oil has currently stabilized around the $50 per barrel price and has started to rise back up toward the $70 to $80 per barrel that we think it will reach by year end. This price increase will be aided by a somewhat weaker dollar between now and year end.
The oil price collapse has caused some investors to throw out the baby with the bath water. As a patient investor, there are bargains available in the market. As oil prices have fallen, so have Natural Gas Liquids (NGLs). Ethane had fallen to about $0.40/gallon, down from over $1.50/gallon last year. This gives the U.S. chemical industry a distinct advantage over other areas of the world that use Naphtha to derive Ethylene. One sector of the economy that benefits from lower prices is the chemical industry. Westlake Chemicals (WLK) and LyondellBasell (LYB) are still our favorites in this sector. Their plant expansions are coming on line now thru mid-2017. This added capacity will lower their cost even more and enable them to take better advantage of the abundance of domestic NGL production. We feel both of these companies are still oversold. We do not feel that the price of oil is going to remain low enough for long enough to have any sort of negative impact on their earnings so we will be adding to these positions as cash becomes available.
The mid-stream sector was hard hit as well. These companies derive most of their income from fee-based revenue through their pipelines and NGL processing. They are largely shielded from the price of the hydrocarbon. Several mid-stream companies we follow are building capacity to take advantage of the domestic expansion in production and demand in the NGL space. Our two favorite names in this space are Enterprise Products Partners (EPD) and Kinder Morgan (KMI).
With the large drop in oil prices, almost all of the E&P companies have slashed their capital expansion spending for the coming year by at least 25% to over 50%. They will not ramp back up until oil prices rise and stabilize. As the price of oil gains ground back to the mid-$60s, several producers that have very good leases will again be very profitable. We are now slowly increasing our positions in several players in this area. Names we recommend are Concho Resources Inc. (CXO), EOG Resources (EOG), and Linn Energy (LINE). For an investment in the Marcellus shale, Gastar Exploration (GST) and Range Resources (RRC) are where we are currently adding money.
We are emphasizing investments in companies with good cash flow, good cash distributions and companies that operate in areas where they have a competitive advantage due to much lower energy costs and raw material input costs. We prefer companies with price earnings ratios that are at levels that are attractive compared to the low interest rates on investment grade bonds. BSG&L and BFA are long-term investors and we believe that if you are patient, build cash and buy good companies on pull backs, your portfolio will have good growth over the long term. Author: Ben Dickey, CFP/MBA/CHFC, Chairman of the Investment Committee, BSG&L Financial Services LLC.
We welcome any concerns, or comments you may have. Please feel free to call (713) 785-7100 or email us at any time.
Have a Blessed Day,
William C. Heath, CFP®
Chairman & CEO

@BobC, you may be right that AEP needed a breather, but the stock lost approx. 4% on the day of the jobs report when thoughts about interest rates were changing. I don't think you can reasonably argue that the pullback that day, and possibly the continued pullback in subsequent days had nothing to do with interest rate expectations. I also don't think that means anyone needs to sell stocks they feel are good investments, but I think the point of the article was that if you've invested in those higher yielding S&P 500 stocks for the dividend income then its important to be aware of the capital risk as well.

Today's was Seafarer Overseas Growth & Income (SFGIX) fund's third anniversary; it launched February 15, 2012. Steady asset growth despite a tough stretch for the emerging markets. Annual returns since inception are, per Morningstar, 8%. The category average for the same period is 1%. The big gains came in the first year but he's steadily outperformed since then, too.
I'm not sure why the fund won't debut as a Five Star, Great Owl but I've been surprised before.
With luck, Andrew will join us for a conference call in April. You'd certainly be welcome to join if you'd like to talk with him.
As ever,
David

David,
In your opinion would SFGIX (SIGIX) be a replacement for MAPIX?
I currently own MAPIX and MACSX.
Mona

Today's was Seafarer Overseas Growth & Income (SFGIX) fund's third anniversary; it launched February 15, 2012. Steady asset growth despite a tough stretch for the emerging markets. Annual returns since inception are, per Morningstar, 8%. The category average for the same period is 1%. The big gains came in the first year but he's steadily outperformed since then, too.
I'm not sure why the fund won't debut as a Five Star, Great Owl but I've been surprised before.
With luck, Andrew will join us for a conference call in April. You'd certainly be welcome to join if you'd like to talk with him.
As ever,
David

MJG & rjb,
Am I understanding correctly that both of you use a combination of actively managed funds as well as index funds? I've considered the merits of such a strategy in the past and am aware individuals such as Charles Schwab are advocates of the combination.

Hi Roy,
Yes, you are correct. I use a combination of actively managed funds as well as index funds. And like MJG, as time goes on, my percentage of indexed equity investments has been increasing and my percentage of actively managed equity investments has been decreasing.
And I plan to continue this, that is, use an increasingly larger percentage of indexed equity funds rather than actively managed equity funds. I'm particularly disenchanted with the negative tax implications of actively managed equity funds, that is to say, the fact that they distribute taxable capital gains.
And I'm increasingly overjoyed that the Vanguard Total Stock Market Index fund and Vanguard S&P 500 Index funds have not distributed any capital gains in over 10 years, and I only have to pay taxes on qualified dividends.
Last year was particularly distressing with respect to the large amount of taxable distributions from the actively managed equity funds (capital gains distributions........I'm not distressed by dividends, as if a company wants to pay dividends, that's great). To add insult to injury, on top of the generally large amount of taxable capital gains distributions from the actively managed stock funds, they generally underperformed the indexes by a significant amount. If you are going to distribute taxable capital gains to shareholders, at least outperform the indexes.
MJG has been partly instrumental in helping to change my thinking. I have read literally dozens of his posts where he has shown that skill is increasingly difficult to demonstrate in active fund managers, and luck often explains things when they do outperform the market.
I think Jack Bogle was 40 years ahead of his time. They called his S&P 500 index fund, which opened in 1976, "Bogle's Folly". No one wanted an "average" performance. Everyone wanted to pick funds that beat the market. But obviously all funds cannot beat the market, and after fund expenses, some of which show up in the expense ratio and some of which do not (such as brokerage fees, losses due to bid-ask spreads, losses due to the fund itself affecting the market price of the stock, etc), the vast majority do not.
And Bogle once speculated that taxes alone possibly subtracted about 2% per year from the returns on actively managed mutual funds versus index funds. I don't have a follow up on that, or data to know the true figure.
It's difficult to pick actively managed funds that are going to beat their respective index funds, in advance. It's very easy to pick them after the fact, retrospectively!! Even the pros can't do it well. And even equity mutual fund managers cannot do a good job picking funds that will beat their respective indexes.
Even Morningstar can't do it, in my opinion. Morningstar has a newsletter that may be called something like "Morningstar Fund Investor", and they have model portfolios. They have not beaten their respective indexes, and that newsletter is written by probably the top fund picker at Morningstar. He can't beat the market by choosing a portfolio of actively managed stock funds.
Anyway, yes, I own both actively managed and indexed equity funds, but am generally disenchanted with active management, primarily due to the fees involved. If there were no fees to actively managed funds, they would beat their respective indexes. Expenses are the reason they underperform as a group. It's not that the managers don't know what they are doing.......it's the fees involved, the expense ratio plus the other fees not found in the expense ratios.

take care Roy,
Happy Investing

For investors who desire a moderate allocation portfolio who do not desire to put in the effort to identify funds that have a history of doing better.......

Does investing in funds that have a history of doing better result in a portfolio that performs better in the future?
John Bogle is fond of saying that "past is not prologue"
And MJG has frequently posted about the lack of persistence in mutual fund performance, in other words, invest in a list of the best performers over the past 10 years, and it is not likely they will be in the list of best performers for the coming 10 years.
https://www.bogleheads.org/forum/viewtopic.php?uid=50214&f=10&t=156573&start=0
What Experts Say About "Past Performance"
Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."
Barra Research: "There is no persistence of equity fund performance."
Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.
Wm. Bernstein, author of The Four Pillars of Investing: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."
Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."
Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."
Prof. John Cochrane, author: "Past performance has almost no information about future performance."
S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"
Jonathan Clements, author & Wall Street Journal columnist: "Trying to pick market-beating investments is a loser's game."
Eugene Fama, Nobel Laureate: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."
Gensler & Bear, co-authors of The Great Mutual Fund Trap: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."
Ken Heebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.
Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."
Burton Malkiel, author of the classic Random Walk Down Wall Street: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."
Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to under-performance in the subsequent period."
After fifteen straight years beating the S&P 500 Index, Bill Miller's Legg Mason Value Trust (LMNVX) is now (1/25/2015) in the bottom 1% of its category for 10-year returns .
Ron Ross, author of The Unbeatable Market: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistance in mutual fund performance."
Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."
Standard & Poor's: "Over the 5 years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods."
Larry Swedroe, author of many finance books: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."
David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."
Tweddell & Pierce, co-authors of Winning With Mutual Funds: "Numerous studies have shown that using superior past performance is no better than random selection."
Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."
Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.
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along with MJG, I also hold actively managed funds. But I think one thing that needs to be talked about much more is the tax implications (the drop in performance) of all the taxable distributions that actively managed funds tend to make.
The Vanguard Total Stock Market Index fund and the Vanguard S&P 500 Index fund have not had a single capital gains distribution in more than 10 years. The only taxes you pay are on qualified dividends. This is a HUGE issue.
In the typical performance figures we see before tax returns. Would be interesting to see after tax returns, given a specified tax bracket. As we all know, you only keep the after tax returns.