Bob’s Journal for 6/1/23

Mutual Funds Still Lead the Pack

Exchange-traded funds have grown rapidly since their inception, and they generate a lot more headlines than traditional open-end mutual funds, but mutual funds still dominate the market.

At the end of 2022, U.S.-based open-end mutual funds held $22.1 trillion dollars. Exchange-traded funds (ETFs) held $6.5 trillion, according to the Investment Company Institute’s Investment Company Fact Book 2023.

That’s an impressive amount of assets in ETFs, especially considering how relatively young they are. But mutual funds still claim most of the market. Closed-end mutual funds lag well behind, holding only $252 billion.

Regulated investment funds of all types worldwide owned only 26% of global equity and debt markets.

Not surprisingly, because of the bear markets in stocks and bonds in 2022, the total assets held in funds globally declined by more than $10 trillion from 2021 to 2022.

Retirement accounts are a big reason for the dominance of mutual funds. In fact, retirement accounts held a total of $33.6 trillion at the end of 2022, and 72% of households had tax-advantaged retirement savings accounts.

There was $10.1 trillion invested in mutual funds in IRA and 401(k) or similar types of accounts. That’s almost half of all the money invested in open-end mutual funds.

For those interested, the Fact Book provides a wide range of data on the history, trends and current state of all types of investment funds in the United States and elsewhere.

Heirs Personally Liable for Estate’s Taxes

The heirs of an estate can be liable to pay the estate or income taxes (and perhaps other obligations) of the estate.

A recent court case involved the estate of the founder of Gulfstream, the aircraft manufacturer. The founder, Allen Paulson, died in 2000 with an estate valued at about $200 million that primarily was held in a living trust.

His widow and surviving children were beneficiaries of the estate and trust. All of them acted at one time or another as trustee or executor.

The estate tax return was filed, and an election was made to pay the $4.4 million in taxes over 15 years. The estate was able to do that because the main asset of the estate was a business.

The IRS said the estate was undervalued and eventually won a court case. The estate owed an additional $6.7 million in estate taxes, which it also elected to pay over 15 years.

Well, before the court decision, the estate was fully distributed to the beneficiaries. The estate owned no assets and missed several tax payments, so the IRS sought to collect the money from the heirs.

A district court sided with the heirs, saying they weren’t responsible for the estate’s tax obligations, but a federal appeals court recently reversed.

The appeals court ruled the tax code imposes personal liability for unpaid estate taxes on successor trustees and beneficiaries of a living trust.

The beneficiaries argued they were liable only if they received property from the trust before its creator passed away or had control of it on the date of death.

But the court said the law places liability on anyone who received or had an interest in the estate’s property either on the date the estate owner died or any time thereafter.

The heirs were personally liable for the unpaid taxes of the estate.

The Right Way to Prepare Heirs

The world’s current richest person can teach all of us how to prepare our heirs to inherit, though our estates are going to be substantially less valuable than his.

Parents frequently worry that their children aren’t prepared to inherit the wealth that likely is coming their way. Whether the inheritance is likely to be a few tens of thousands of dollars or a much larger amount, parents fret that it might be wasted, mismanaged, adversely change their children or grandchildren, or be a burden to them.

There are steps you can take to avoid those outcomes.

Bernard Arnault is chief executive officer and chairman of luxury goods retailer LVMH Moet Hennessy Louis Vitton SE. He’s currently ranked as the world’s richest person by both Forbes and Bloomberg.

As part of his parental and business duties, Arnault systematically prepared his children to run or contribute to the business and to responsibly inherit significant wealth.

Arnault started early. While the children were growing up, he scheduled them to come into his office so he could drill them on math between his meetings.

As the children became adults, he ensured they worked in one of the companies owned by LVMH. He also assigned them to work for other executives he respected and who could serve as mentors to them.

Of course, Arnault also has done significant estate planning. His shares of the company now are in entities similar to LLCs of which he and the children are owners. The entities are structured so the shares have to remain in the family for a considerable time after Arnault passes away, according to The Wall Street Journal.

Arnault follows the key elements of successful succession planning.

The children learned about money and business early in life and never stopped learning. They’ve been informed of and actively involved in the family’s businesses. They know the actions their father is taking and why he’s taking them.

The children also have the opportunity to learn from others, work outside the direct responsibility of their father and develop their own decision-making skills.

Their father’s wealth and estate plan won’t be surprises to them when he passes away. They’ll have had a lot of time to decide what they want to do, learn to work together and prepare to inherit.

The Data

The Personal Consumption Expenditure (PCE) Price Index increased 0.4% in April following a 0.1% increase in March. Over 12 months, the measure is up 4.4%, higher than the 4.2% recorded in March.

The Fed’s preferred measure of inflation, the core PCE Price Index (which excludes food and energy) increased 0.4% in April. That’s higher than the 0.3% increase in March.

Over 12 months, the core PCE Price Index increased 4.7%, as of April, up from 4.6% in March.

Personal spending increased 0.8% in April, compared to a 0.1% increase in March. After adjusting for inflation, spending increased 0.5%. Spending on goods increased 0.8% after inflation, and spending on services increased 0.3%.

Personal income was 0.4% higher in April than in March, beating the 0.3% increase recorded in March. April’s income increase was the highest in three months.

The Consumer Sentiment Index from the University of Michigan was 59.2 at the end of May. That’s higher than the mid-month level of 57.7. But it is below the 63.5 recorded at the end of April and the lowest month-end number in six months.

The Consumer Confidence Index from The Conference Board was 102.3 in May, compared to 103.7 in April.

Both the Present Situation and Expectations components of the index declined, but the Present Situation component decreased much more than Expectations.

Corporate profits declined 6.8% in the first quarter to the lowest level since the second quarter of 2021. It was the steepest drop in profits since the 7.4% decline in the first quarter of 2020.

Profits had fallen 2.7% in the fourth quarter of 2022.

Pending home sales were unchanged in April following a 5.2% drop in March, which was the largest monthly decline since November 2022.

Pending home sales in April were 20.3% lower than 12 months earlier. Though a big decline, that’s the lowest 12-month sales drop in nine months.

Home prices increased 1.5% in March after increasing 0.3% in February, according to the S&P Corelogic Case-Shiller Home Price Index. The March increase was the largest since May 2022.

Over 12 months, home prices declined 1.1%, as of March, down from 0.3% in February. This is the first 12-month decline since May 2012.

The House Price Index from FHFA showed a 0.6% increase in prices in March (compared to 0.7% in February) and a 3.6% increase over 12 months (down from 4.2% in February).

The Kansas City Fed Manufacturing Index in May was negative 2, an improvement from negative 21 in April but still indicating the sector contracted.

The general business activity index derived from the survey by the Dallas Fed fell to negative 29.1 in May from negative 23.4 in April.

That’s the lowest level since early 2020.

Durable goods orders increased 1.1% in April after rising 3.3% in March. Excluding transportation, durable goods orders declined 0.2% in April following a 0.3% increase in March.

But excluding both transportation and defense, durable goods orders increased 1.4% in April, bouncing back from a 0.6% decline in March. This measure is considered a good proxy for business investment.

Gross domestic product (GDP) grew at an annualized rate of 1.3% in the first quarter, according to the second estimate. The first estimate pegged growth at 1.1%.

Personal consumption expenditures increased at an annualized 3.8% in the first quarter in the second estimate, up from 3.7% in the initial estimate. They had increased 1% in the fourth quarter of 2022.

New unemployment claims increased by 4,000 to 229,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.794 million from 1.799 million.

The Markets

The S&P 500 rose 0.20% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.62%. The Russell 2000 decreased 1.18%. The All-Country World Index (excluding U.S. stocks) fell 1.73%. Emerging market equities declined 0.76%.

Long-term treasuries rose 0.35% for the week. Investment-grade bonds lost 0.09%. Treasury Inflation-Protected Securities (TIPS) fell 0.34%. High-yield bonds declined 0.68%.

In the currency arena, the U.S. dollar added 1.06%.

Energy-based commodities increased 0.68%. Broader-based commodities lost 0.66%. Gold declined 1.26%.

Bob’s News & Updates

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If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.