8 minute read
As we stepped into 2024, I was extremely excited about celebrating a significant milestone in investing.
And that is the 100-year anniversary of mutual funds.
Now, just to be clear, I am not just excited because an investment that permanently changed the way we invest is turning 100 years old, but also because I become excited when I find something slightly older than I am.
But all jokes aside, nothing can be more generationally opposite than mutual funds and DunhamDC, and certainly nothing is like them working together when it comes to coherence and synergy.
So, let us take a closer look at these two special things.
Did You Know Mutual Funds Were Imported to the United States? (1)
The roots of mutual funds can be traced back to Dutch innovation in the 18th century, notably with Adriaan van Ketwich's creation of an investment trust in 1774. His emphasis on diversification highlighted the appeal to investors with limited capital by pooling assets among many investors for strength.
This concept gained traction, with similar examples emerging in Switzerland in 1849 and Scotland in the 1880s, further solidifying the importance of pooling resources and diversification in investment strategies.
Mutual Fund’s Immigration to the United States (1)
The U.S. saw its initial closed-end fund, the Boston Personal Property Trust, in 1893 which primarily invested in real estate and resembled a hedge fund by today's standards.
However, steps toward the modern mutual fund occurred with the establishment of the Alexander Fund in Philadelphia in 1907, introducing semiannual issues, which meant you could only buy in twice a year and allowed withdrawals on demand.
Making it Better in the USA (2)
In the bustling prosperity of the Roaring Twenties, fueled by optimism and innovation, the thriving US stock market hit an all-time high, and these closed-end funds thrived.
However, beneath the surface these closed-end funds, which were the popular pooled investments, posed risks to American families – such as managers engaging in questionable practices, selling speculative securities with hidden risks, and avoiding disclosure.
Edward Leffler – who was an American former salesman of aluminum pots and pans and later securities - recognized the flaws and envisioned an ethical investment approach. His vision included a transparent fund allowing new investors and guaranteeing shareholders the right to sell shares back at any time, ensuring fairness in pricing.
Thus, thanks to Leffler, in 1924 we witnessed the birth of the first modern mutual fund, The Massachusetts Investors Trust. This fund introduced a concept that would democratize investing and would grow to become a cornerstone of many investment portfolios.
And that includes DunhamDC.
The Protective Shield of Mutual Funds
A few years later - after the 1929 Wall Street Crash and the Great Depression - regulations aimed at protecting mutual fund investors began emerging. For example:
The Securities Act of 1933 (3)
Also known as the "Truth in Securities Act," which ensured investors receive specific information about publicly offered securities.
The Securities Exchange Act of 1934 (3)
The act established the SEC, granting it regulatory authority over mutual funds, the stock market, and brokerage houses.
The Investment Company Act of 1940 (4)
Investing in mutual funds feels secure thanks to the safeguards established by the Investment Company Act of 1940. This legislation ensures that each mutual fund operates independently from its management, with assets held by a separate custodian. Thus, even if the management company faces financial issues, the fund's money remains untouched in a dedicated trust for investors.
Meanwhile, strict reporting requirements add an extra layer of security.
· For instance, mutual funds must submit detailed semiannual reports to the SEC, provide financial reports to shareholders, and undergo annual audits by external firms.
How Does DunhamDC Tie Into This?
So why would an exciting, revolutionary investment program like DunhamDC choose to partner with a 100-year-old investment? It is because it adds to the appeal of this exciting strategy.
DunhamDC Listens to the Echoes of the Past
Just as mutual funds revolutionized the landscape of investing, we believe DunhamDC may have the same impact on the investing world.
· For instance, Buying Fear and Selling Greed creates a sensible strategy inspired by Warren Buffett, who was influenced by the father of value investing, Benjamin Graham.
DunhamDC adheres to Warren Buffett’s axiom, “Be fearful when others are greedy and greedy when others are fearful.”
DunhamDC Does Not Chase Trends but Instead Sculpts Them
But it is more than a timeless strategy of Buying Fear and Selling Greed.
DunhamDC is, in our view, like mutual funds 100 years ago. A potentially new financial revolution - and which is why it pairs well with the 100-year-old mutual funds.
For instance, DunamDC's unemotional, algorithmic approach is the only strategy we are aware of specifically designed to own fewer stocks when the market cycle hits a new high and own more stocks when the market hits bottom.
It accomplishes this by adjusting its equity exposure, increasing it during market declines when stock prices are generally lower, and subsequently selling portions of its equity holdings during market upswings and price increases.
In our view, this is the complete opposite of what most investment strategies do. Most own the most stocks when the mark cycle hits its high, and fewer or no stocks when the cycle hits bottom and starts its journey to a new high.
Thus, DunhamDC is designed to:
· Take the edge off of sequence risk
· Take advantage of Benjamin Graham's concept of “Mr. Market” (read more here).
· Reduce emotional biases and cognitive flaws impacting investing decisions.
· Potentially help accelerate investment recovery time.
So, happy 100th-anniversary mutual funds, and please call the Dunham Business Development Team (858) 964 – 0500 to learn more about the pairing of mutual funds and DunhamDC.
You can click here to download the DunhamDC brochure and here for our one-page "Mr. Market" illustrated piece.
DunhamDC - Buying Fear and Selling Greed
Sources:
(1) A Brief History of the Mutual Fund, by James McWhinney, January 29, 2022, https://www.investopedia.com/articles/mutualfund/05/mfhistory.asp
(2) First Fund: The Origins and Legacy of Massachusetts Investors Trust (MIT), by MFS, January, 2024, https://www.mfs.com/en-us/individual-investor/about-mfs/our-history/first-fund-the-origins-and-legacy-of-massachusetts-investors-trust.html
(3) What Are the U.S. Government Regulations of Mutual Funds?, by Jane Meggitt, May 31, 2019, https://finance.zacks.com/us-government-regulations-mutual-funds-5563.html
(4) What is the Investment Company Act of 1940?, by Aaron Levitt, September 3, 2014, https://www.mutualfunds.com/education/investment-company-act-of-1940-introduction/
DunhamDC Disclosure:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Past performance may not be indicative of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There may be economic times where all investments are unfavorable and depreciate in value.
DunhamDC (“DunhamDC”) is a proprietary algorithm of Dunham & Associates Investment Counsel, Inc. (“Dunham”) that seeks to mitigate sequence risk, which poses a threat to an investor's returns due to the timing of withdrawals. The algorithm employs what Dunham considers to be a pragmatic strategy, generally making incremental increases to the equity allocation when global stock market prices decrease and decreasing it when global stock prices increase. This approach is objective, unemotional, and systematic. Rebalancing is initiated based on the investment criteria set forth in the investors application and is further influenced by the DunhamDC algorithm.
Due to the large deviation in equity to fixed income ratio at any given time, investor participating in DunhamDC understands that a large deviation in equity to fixed income ratio can have significant implications for the risk and return profile of the account. Accordingly, during periods of strong market growth the account may underperform accounts that do not have the DunhamDC feature. Conversely, during periods of strong market declines, the account may also be underperforming, as the account continues to decline, due to the higher exposure in equities. Similarly, if the fixed income investments underperform the equity investments, it is possible that the accounts using the DunhamDC feature may underperform accounts that do not have the DunhamDC feature, even though they may have adjusted the exposure to equity investment before a decline. Therefore, the investor must be willing to accept the highest risk tolerance and investment objective the account can range for the selected strategy. Please see the Account Application for the various ranges.
DunhamDC uses an unemotional, objective, systematic approach. The algorithm does not use complex formulas and is designed to create a consistent process with limited assumptions based on historical data.
DunhamDC may make frequent purchases and redemptions at times which may result in a taxable event in the account and may cause undesired tax-related consequences.
Trade signals for DunhamDC are received at the end of each trading day with the implementation of the trades not occurring until the next business day, which means that there is a one-day lag that may result in adverse prices.
DunhamDC operates within predefined parameters and rules, some or all of which may not be available to review. While this approach can reduce emotional biases and enhance consistency, it may limit adaptability to changing market conditions, economic considerations, or unforeseen events. Extreme conditions may require deviations from the program’s prescribed approach, and such adaptability may be challenging to incorporate. The DunhamDC algorithm is programmed based on specific criteria and rules, it may not capture certain qualitative or contextual factors that can impact investment decisions or movement in the markets. Beyond the initial assumptions used to develop the algorithm, it lacks other inputs or considerations that human judgement and discretion may be necessary to evaluate. DunhamDC may utilize historical data, statistical analysis, and predefined rules. It does not make any predictions and may add to certain investments before they perform poorly or may divest from other investments before they perform well. Dunham makes no predictions, representations, or warranties as to the future performance of any account.
Accounts invested in DunhamDC are subject to a quarterly rebalance to its target allocation at the time based on DunhamDC in addition to the signals provided by DunhamDC at any given time.
Dunham makes no representation that the program will meet its intended objective. Market conditions and factors that influence investment outcomes are subject to change, and no program can fully account for all variables and events. The program requires making investment decisions based on factors and conditions that are beyond the Account Owner’s and Dunham’s control.
DunhamDC is NOT A GUARANTEE against market loss or declines in the value of the account or a timing strategy. Investor may lose money.
Asset allocation models are subject to general market risk and risks related to economic conditions.
DunhamDC has a limited track record, with an inception date of November 30, 2022.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.