Q: Is the Nicholas Fund worth owning?
P.R., via the Internet
A: While it has staying power, it hasn’t distinguished itself.
Albert Nicholas, who began his career in banking and still favors financial stocks, has run this low-cost fund since he founded it nearly 40 years ago. Nicholas seeks firms that are good values, with steady earnings and capable management. There is low portfolio volatility.
But he has avoided technology and energy, a strategy that hurt results in recent years. Some holdings such as Moody’s Corp. and private-mortgage insurer MGIC Investment Corp. also experienced steep losses last year.
The $1.7 billion Nicholas Fund (NICSX) is down 2 percent this year and has a three-year annualized return of 5 percent. The year-to-date results rank in the top quarter of large growth and value funds, but the three-year returns fall in the bottom 10 percent.
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“We aren’t too impressed with this fund and don’t recommend it because it is nothing out of the ordinary and operates in a competitive category,” said Greg Brown, analyst with Morningstar Inc. in Chicago. “Because Nicholas is conservative by nature, it doesn’t surprise me his portfolio is generally holding up in times like this, but we still don’t see a long-term edge.”
Albert Nicholas also runs Nicholas Equity Income and Nicholas High Income. His son, David, joined the fund in 1996 but is not involved in daily management. A group of analysts help with stock research. Because the fund favors steady-growing stocks over cyclical fast-growth choices, it will lag in momentum rallies, Brown said.
The portfolio favors stocks trading at a lower price-earnings ratio than the average stock of the Standard & Poor’s 500. Some of its contrarian bets have not panned out or have been slow to show results.
Nearly one-fourth of Nicholas Fund is in financial services, with other significant concentrations in consumer services, health care and industrial materials. Largest stock holdings recently were are Berkshire Hathaway Inc. A, Affiliated Managers Group Inc., Kinder Morgan Management LLC and Cardinal Health Inc.
This “no-load” fund requires a $500 minimum initial investment and has an annual expense ratio of 0.75 percent.
Q: I am looking for a financial planner. How are they usually compensated?
G.P., via the Internet
A: Financial planners can be compensated several different ways.
Some, known as fee-only planners, are paid for advice they give. There is generally a flat per-project fee, an hourly rate or a percentage of assets if management is involved.
Others, called fee-based planners, earn fees but also make commissions on financial products sold. Finally, there are commission-based planners, who make their money from selling products.
A financial plan is generally the starting point.
The planner should be forthright about compensation, or you should take your business elsewhere. No matter what the planner arrangement, there should be transparency, competence and trust, said Timothy Wyman, a certified financial planner for the Center for Financial Planning Inc. in Southfield, Mich.
Ask about credentials, special designations that required examinations, and experience. Find out whether you share the same philosophy and how often you would meet. Get two or more references, preferably from long-term clients.
Q: I own stock in a company that has cut its dividend. Why do companies do this? How serious is it? Is there any way to know ahead of time if a company is planning a dividend cut?
A.B., via the Internet
A: It is not a good thing if a company cuts its dividend.
It might be experiencing earnings or cash-flow problems that are making it difficult to pay out the dividend. Some financial firms in particular have been stretched lately because of the credit crunch and mortgage problems.
“If a dividend yield seems high compared to the company’s historical range, it means the share price has come down, and that could be a red flag about a future dividend cut,” said Sam Stovall, senior investment strategist with Standard & Poor’s Corp. in New York. “Also, see if the projected earnings and cash flow are close to the dividend payment, since that won’t leave the company much room for error.”
Companies must pay suppliers, employees and bondholders. That puts stockholders who receive a dividend behind a long line of people who get paid first, said Stovall, which is why the dividend is sometimes in jeopardy.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney @tribune.com.