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Is Your Mutual Fund Loaning Out Its Shares?

Morningstar Investment Research

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May 25, 2012 - Is Your Mutual Fund Loaning Out Its Shares? - by Morningstar Investment Research

Morningstar assistant site editor Adam Zoll recently took a look at how mutual funds use securities lending to help pad returns. There is a sizable market for loaning out securities to cover short sales as well as for use in hedging and other investment strategies. As a way of bringing in extra revenue, mutual funds may loan shares--often through a third party known as a securities lending agent--to broker-dealers and hedge funds for use in these strategies. This benefits the fund by providing an opportunity to make a profit either through a loan fee or by investing the cash collateral. The upside of securities lending for fund investors is that some or all of the revenue generated by the practice goes back to shareholders. However, critics point out that securities lending is not the risk-free enterprise some think.

Seeking Pension Replacement in Retirement

Defined-benefit pensions are receding as a retirement solution in the private sector. Although DB plans are still pervasive in public-sector workplaces, just 35% of Fortune 1000 companies still sponsor actively accruing plans, according to Towers Watson. DB pensions and Social Security are the most important sources of guaranteed lifetime income. Both offer critical protection from longevity risk--the chance that you'll outlive your resources in retirement. Morningstar columnist Mark Miller examined options for retirees and pre-retirees who are not fortunate enough to have a pension plan. Specifically he asks how can you create pensionlike guaranteed income on your own? And what new policies and financial tools are on the horizon that might lea d to more low-risk retirement-income options?

Among the other topics we addressed this week:

The Moral of J.P. Morgan's Derivative Debacle. We should not blame derivatives for the J.P. Morgan loss any more than one would blame an insurance policy when a reckless driver has an accident.

Educating Students on How to Handle Debt. College finance expert Jeffrey Hanson says many don't understand the impact college loans will have on their futures.

Do You Know What Your Dividend-Focused Fund Owns? Once a rarity, tech stocks are more common in funds with above-average yields.

The Not-So-Secret Sauce in Equal Weighting. Equal-weighting strategies can hold appeal, but only if you understand the risk you are taking.

Value Managers Keeping Some Powder Dry. Some managers will gladly keep assets out of the market as part of a broader strategy.

Berkshire Puts Money Back to Work in Equities. With Buffett's lieutenants hitting the ground running, will a more collaborative process among Berkshire's newest investment managers prompt a rethinking of long-standing holdings?

This Foreign-Stock Group Has Some Noteworthy Players. The new small/mid-cap blend category's roster contains many intriguing options.

A Precious-Metals Fund That Straddles the Gold Debate. ASA Gold and Precious Metals Limited has been beaten down with its market, but don't count it out.

When Management Makes You Want to Sell. Morningstar readers share their thoughts on which actions mean it's time to dump a stock.

Letter to SEC: Retirement-Fund Investors Need More Details. Target-date funds should use graphics and data to better explain their investments.

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