Since 1990, we've been encouraging and equipping our readers to take charge of their finances and investing decisions. We've tried to simplify the investing process, providing the monthly guidance needed for lay people — everyday folks not trained in Wall Street jargon — to handle the job on their own. This focus has, for the most part, been embraced by our readers. Our files are full of letters from appreciative readers who feel empowered to personally take on the investing challenge. But it's also been apparent that not everyone is cut out to be a "do-it-yourselfer."
SMI has received many requests asking variations of, "I like the Upgrading strategy you teach, but can you do it for me?" Because there hasn't been a solution for these folks, we've seen thousands of potential SMI upgraders drift away over the years, saying they lacked either the time, discipline, or intestinal fortitude to upgrade on their own. Perhaps you're one of these readers — attracted to Upgrading, but intimidated by the process, the time commitment, or some other aspect of the strategy. Or maybe you're currently Upgrading on your own, but would prefer to delegate that monthly task to someone else.
Nearly two years ago, Mark Biller, our executive editor, and I started investigating what would be required to start a mutual fund based on the Upgrading strategy we use in the newsletter. We studied the possibility for much of last year, but ultimately concluded that it would require a partner. Our main businesses — the newsletter and website — simply keep us too busy to be able to handle such a significant additional responsibility by ourselves. While the strategy was compelling, and we were confident such a fund would meet the needs of many of our readers, the daily time requirements were more than we could commit to.
In March of this year, however, we were surprised when a small financial management firm contacted us about — you guessed it — starting an Upgrading mutual fund. As we discussed the possibility and worked together over several months, we became increasingly impressed with both the quality of these Christian men and their skills as professional money managers. After considerable prayer and deliberation by our team, we felt this was something we should pursue. In June, we agreed to work with them to start the Sound Mind Investing Fund (the "SMI Fund").
The SMI Fund will be managed by SMI Advisory Services, LLC. Mark will be the senior portfolio manager. In that role, he will have ultimate decision-making authority regarding all portfolio decisions and trading practices of the SMI Fund. Alongside Mark, two of our partners — Anthony Ayers and Eric Collier — will also serve as portfolio managers. These men bring professional money management experience, and will help lighten the daily management load sufficiently so that Mark and I (and our new associate editor, who we hope to introduce to you in January) can continue our focus on the SMI newsletter and website.
We're pleased to announce that the SMI Fund will open to the investing public on November 30, 2005 and is a fund-of-funds that follows essentially the same Upgrading strategy the newsletter has taught for years. However, while the SMI Fund will share a common philosophy and investment approach as that espoused in the newsletter, there will be some significant differences between the ongoing investment management in the SMI Fund and the Upgrading recommendations that are made in the newsletter. A thorough understanding of these differences will help you determine whether Upgrading on your own is the right choice for you, or if you'd prefer to invest in the SMI Fund instead. Here are a few key differences that we have identified and believe you should consider:
• As an institutional investor, the SMI Fund will have certain advantages over an individual upgrader. For one, it will have access to many funds that aren't available to most individual upgraders. Second, the SMI Fund will frequently be able to invest in load funds without paying the loads (due to the large amounts being invested). Third, it will have access to institutional share classes, which typically charge lower expenses than the retail versions of the same funds. Fourth, institutions are often allowed to continue investing in funds even after they've been closed to retail investors. And fifth, funds with high minimum investment requirements will be accessible. In short, the Upgrading universe will be much broader for the SMI Fund than the typical individual recommendations in the newsletter.
• Another key difference relates to trading practices. In the newsletter, funds are held a minimum of three months to minimize the frequency of trading and the costs involved. Due to the favorable commission rates the SMI Fund is expected to receive, and the fact it will typically not be constrained by the short-term trading fees that are a significant consideration for individual upgraders, the SMI Fund will likely be able to respond more quickly when underlying funds need to be replaced.
• Perhaps the most significant difference is that the SMI Fund will be able to focus money more consistently on the top performing funds in each risk category. This is because the SMI Fund's portfolio will be professionally managed on a daily basis using current momentum scores, rather than only being adjusted once per month as in the newsletter. In addition, it will be free of the newsletter's constraints on the number of underlying funds that can be owned at any given time. As a result, the SMI Fund will rarely ever have to invest new money into a fund that isn't currently ranked near the top of its risk category.
For example, consider an individual upgrader with new money to invest in Category 4 this month. If she already owns Winslow Green, the top recommended fund, and wishes to diversify into a second fund, the next highest recommended fund is currently ranked 25th. That's well above the quartile cutoff, so it clearly deserves to hold onto its slot on the Recommended Funds page. But ideally new money would be invested in funds ranked at or near the very top of the category, not in a fund already sitting well down the rankings. So in this situation, the SMI Fund could simply use the new money to buy an additional fund ranked near the top of its category.
• There's one key negative difference to Upgrading via the SMI Fund — expenses. Upgrading through the SMI Fund adds an extra layer of expenses compared to Upgrading on your own. That means if you could own all the identical underlying funds as the SMI Fund without paying any additional trading costs, you would outperform the SMI Fund by the amount of its expenses, which according to the prospectus will be capped at 1.5% annualized.*
Only time will tell how much, if any, these additional expenses will be offset by the positive differences the SMI Fund offers. The safest approach is to ask yourself, "If the SMI Fund's returns are 1.5% lower than the Upgrading portfolio in the newsletter, is it worth paying that to have the Fund's advisor handle the entire Upgrading process for me?" Based on the feedback received over the years, there are many people for whom the answer to that question is a resounding yes. Dollar-cost-averagers and those with smaller accounts, two groups for whom Upgrading is particularly difficult, will likely be quite interested as well. But there will also be many who prefer to continue Upgrading on their own, and that's perfectly fine.
The SMI Fund opens to investors on November 30, and can be purchased directly from the distributor (Unified Financial Securities, Inc.) with no fee. For more information about the Sound Mind Investing Fund, including risks, fees, and expenses, call 1-877-764-3863 for a free prospectus. Or, you can download one from the www.smifund.com website. Read it carefully before you invest or send money.
The SMI Fund will also be available soon as a transaction fee fund through Schwab, Fidelity, TD Waterhouse, Scottrade, and Muriel Siebert. This should occur quickly with most of the brokers, although it may take as long as 30 days for some of the brokers to add it. If the Sound Mind Investing Fund (SMIFX) is not available at your broker when it opens on November 30, call your broker and request that they add it. Some brokers only add funds in response to requests from account holders, meaning your call may be a necessary part of the process.
So there you have it. If you're Upgrading on your own using the newsletter recommendations and are happy with the process and results, feel free to carry on. But if you've been hesitant to take on the responsibility of managing an Upgrading portfolio, or would simply prefer to have your Upgrading money professionally managed, check out this new mutual fund. It was designed with folks like you in mind.
Please note: The SMI newsletter staff is not authorized to give information regarding the Sound Mind Investing Fund on the newsletter's reader services phone line. To get information relating to the fund, please call 877-764-3863, or visit www.smifund.com.
Because the SMI Fund will invest in other mutual funds, it will bear its share of the fees and expenses of the underlying funds, in addition to the fees and expenses payable directly to the Fund. As a result, you'll pay higher total expenses than you would investing in these funds directly. You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Fund before investing. The Fund's prospectus contains this and other information about the Fund, and should be read carefully before investing. You may obtain a current copy of the Fund's prospectus by calling 1-877-764-3863. Past performance is no guarantee of future results. Your Fund shares, when redeemed, may be worth more or less than their original cost. The Sound Mind Investing Funds are distributed by Unified Financial Securities, 431 N. Pennsylvania St., Indianapolis, Indiana 46204.