Always be sure to read the fine print
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally published: August 7, 2001
What you see isn’t always what you get when it comes to money matters. The following two situations show how important it is to look behind the headlines.
The U.S. Department of Education is announcing a new one-year program aimed at encouraging students to consolidate their loans into the government’s Direct Consolidation Loan Program. Before interest rates jumped in July, this column reminded graduates to lock in last year’s lower rates by consolidating loans through one of their lenders before the expected July increase. But that was under the traditional consolidation programs.
This new deal from the folks inside the beltway has some hidden drawbacks.
The mailing was enticing: recent graduates who consolidate their student loans will receive a rate that is lower than their current rate by 0.8 percentage points for the first 12 months of repayment. For those with the highest rate loans, that could bring the rate down to 7.45 percent in the first year of the consolidated loan. Those with lower current loan rates will also benefit from the 0.8 percent discount.
But here’s the catch. If the borrower makes the first 12 payments on time, he or she can keep that lower rate for the life of the loan. But if you are more than six days late with even one payment, the rate will jump back to the interest rate cap of 8.25 percent for the life of the loan!
Even if you had a lower rate on your current loans, or even if rates drop in the future for other borrowers, you’ll be stuck at the higher rate for 10 years.
So, if you’re a recent graduate, just starting to look for a job, and you encounter some financial difficulties that cause you to make one late payment, you could be locked in at the highest possible rate for the life of the loan.
Even the Department of Education experts are predicting that only 23 percent of borrowers will make it through that first year without being more than six days late on any payment.
A better idea is to stick with your old loans, pay on time--through an automatic deduction from your bank account--and then ask the lender for a discounted rate based on your good payment habits.
Many lenders will shave one quarter of a percentage point off your loan if you agree to an automatic deduction program. And some large lenders will reduce your rate by as much as two full percentage points if you have 48 months of on-time payments.
Here’s another situation where you’d better protect yourself by looking behind the headlines--or in this case, looking at the contents and not just at the label.
Your mutual fund may have its investment strategy right in the name of the fund: value, growth, international or global. But are the fund managers sticking to their style--or are they chasing performance by moving beyond a stodgy category and into the world of hot, high-tech stocks--just to show up better in the performance derby?
Roger Palley of Palley-Needleman Asset Management in Newport Beach, Calif., is a value manager who is understandably annoyed at this kind of style-creep.
He says his clients hire him to manage portfolios with a traditional “value” style. That is, he buys stocks with low price-to-earnings ratios, stocks that pay out a nice dividend yield, and have a low price relative to their book value (value of assets such as plants and machinery). Those are exactly the companies that have been most out of favor in recent years.
Palley says he’s noticed that many of his competitors pad their portfolios with stocks that never should make a value manager’s screen. In fact, while the average return for the large cap value fund sector was 3.98 percent through August, several funds carrying the value label managed to report returns of about 13 percent or more.
One of those large cap value funds beating the sector is Selected American Shares, which turned in an excellent 12.87 percent return for 8 months. But what’s in the fund? How about stocks like Hewlett Packard, Motorola, Oracle, Intel, Applied Materials, and Texas Instruments.
Well, maybe value is in the eye of the beholder. Compared to some even higher-fliers, these companies may seem like “value” stocks. But they certainly don’t fall within traditional value screens.
Similar surprises may be in store for mutual fund buyers who think they’re diversifying into international markets. Yes, when a fund is labeled an “international” fund, it is supposed to invest outside the United States. But when a fund is called a “global” fund, it may very well have a large portion of its assets invested in U.S. stocks.
In fact, there is no specific percentage required to be invested outside the United States in order to be labeled a global fund.
Even fruit juice drinks and soda pop have better disclosure!
What difference does it make to the investor whether the fund is truly buying companies headquartered outside the United States, or U.S. companies that do a significant part of their business abroad, or U.S. companies that don’t do very much international business? All could theoretically be inside your global fund, as the portfolio hunts for the best way to boost performance.
But if you think your mutual fund portfolio is diversified and balanced to better withstand market cycles, you may not have as much protection as you thought.
So, a word of warning to mutual fund investors. No matter what name is on the label, check inside to see the real contents. Otherwise you could be in for a surprise when the fizz goes out of the pop.
And that’s the Savage Truth.
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail at email@example.com. Her third book, The Savage Truth on Money, recently was published by John Wiley & Sons Inc.