WSJ 2 SUNDAY, JANUARY 25, 2015 THE AGGREGATOR Raising TurboTax Prices, Intuit Kicks a Hornet’s Nest The ECB and You What happens in Frankfurt doesn’t necessarily stay in Frank- furt. While the European Central Bank—based in Frankfurt—announced actions on Thursday to boost the eurozone economy, the effects are already being felt in U.S. financial markets, and could benefit Americans. A Wall Street Journal report Wednesday that the ECB was considering a new stimulus package gave U.S. stocks a modest lift and triggered a pullback in U.S. government bonds, causing their yields to rise. U.S. Treasury yields influence borrowing costs throughout the economy. Stocks and bonds rallied and the euro dove after Thursday’s move. Among the reasons for the stronger dollar and weakening euro were market expectations that the ECB would make such a move at the same time the U.S. Federal Reserve is preparing to start raising interest rates. A strong dollar can benefit U.S. consumers by lowering the price of imports and the cost of traveling abroad. But it also can curb U.S. exports and corporate profits. Fed officials generally believe the benefits to the U.S. economy of stronger eurozone growth would outweigh the negatives of a stronger dollar. Collectively, the Heads in the Clouds Top 10 cities globally by total height of skyscrapers built in 2014. 1,400 1,200 1,000 800 600 400 200 0 Source: Council on Tall Buildings and Urban Habitat | WSJ.com Reuters 19 countries that share the euro represent one of the U.S.’s largest trading partners, and as a group are at risk of a third recession in six years. If the ECB’s new bondbuying program works as intended, it should spur economic activity there, which should mean more business for U.S. companies and possibly more demand for U.S. workers. More broadly, Fed officials see the threat of weaker growth The Headwinds Battering Active Mutual-Fund Investors It’s widely accepted these days that most actively managed mutual funds routinely deliver below-average results and underperform their benchmarks. But C. Thomas Howard, director of research at Denver-based AthenaInvest, begs to differ: Chuck Jaffe “Ninety percent of funds are superior stock pickers,” he says, and 80% are good enough to cover the fees they charge investors. Mr. Howard cites a wide range of research, some of it his own, showing that 80% or more of equity-fund managers beat their Erin Beach BY CHUCK JAFFE benchmark until fees and costs come into play. But if 90% of managers are good stock pickers, expense ratios alone don’t explain why so many funds are mediocre. That, says Mr. Howard, is the result of what he calls “the portfolio tax,” a drag on performance created by three significant burdens: 1 Asset bloat. When funds get big, the chances for superior performance shrink. That’s why, Mr. Howard explains, so many small funds get off to a great start, attract assets because of their success and then regress when the manager struggles to extract market-beating returns from a larger portfolio. 2 Closet indexing, where active portfolios act mostly like an index fund because financial advisers and investors want returns in line with expectations for the sector or the market. “You’re asking managers to track an index and beat it at the same time, and coming close to the index is the easy, safe part of the job,” says Mr. Howard. “Pursuing the other goal of beating the index means diverging more from the index; if they do that and surprises happen—and they do—that’s when investors are most disappointed.” 3 Over-diversification. Mr. Howard says virtually all of a manager’s outperformance comes from the portfolio’s top 20 holdings. Adding stocks contributes little to performance, and may even hurt it. David Snowball, founder of MutualFundObserver.com and a champion of small, lesser-known, concentrated funds, says that while Mr. Howard’s suggestion that most active managers can beat the market is counter-intuitive, the effects Meters an jin W ux W i u Ch han on g Gu qing an g Na zho nc u ha ng Do h Ja a ka rta Ne Tor o w Yo nto rk Ci ty prepare their taxes online faced similar issues last year. As news of the change started to spread two weeks ago, longtime users took their outrage to the Internet. On Amazon.com, reviewers posted more than 1,200 negative comments, complaining of “bait-and-switch” and “price gouging.” (Journal readers sounded off in a blog post.) “The company seems intent on fleecing the customer by increasing the price with no product improvement,” says Don Rickelman, a retired entrepreneur in Naples, Fla. In the past, he says, he has used TurboTax Deluxe to report his investments, but now, like many other users, he is considering alternatives. TurboTax spokeswoman Julie Miller says customers surprised by the change can call the company at 800-445-1875 and “we will work with them on a caseby-case basis.” Several who have called said they were given free downloads of TurboTax Premier. —Laura Saunders The Wall Street Journal Ti Intuit, maker of the popular TurboTax tax-preparation software, has infuriated many longtime users by requiring them to buy more-expensive software to complete their 2014 tax returns. Starting this year, people who prepare their taxes on a personal computer can’t use TurboTax Deluxe if they want to electronically file common tax forms, including Schedule C for a business, Schedule D for capital gains and losses or Schedule E for rental property. Instead, they must upgrade to the Premier or Home & Business versions— which cost up to $30 more than the $50 Deluxe version as of Thursday. Customers with simpler returns face a similar issue: They can no longer use TurboTax Basic if they want to itemize deductions (such as mortgage interest or charitable donations) on Schedule A, instead of claiming the standard deduction of $6,200 for a single filer or $12,400 for a married couple. Now, they will need to upgrade to TurboTax Deluxe, which costs up to $30 more than the $20 Basic. People who use TurboTax to of the portfolio tax are real. “The industry is about making profit for the fund adviser, and fund advisers make profits by drawing and holding assets, and the way you draw and hold assets is by not scaring people,” Mr. Snowball explains. “So if you can get a couple of decent years together and a decent story and then slide quietly into mediocrity, it’s a recipe for success for your fund company, and a recipe for disappointment for investors.” Instead of looking for the mostskilled managers, Mr. Howard says, investors should “look for funds that impose the least portfolio tax, and when those burdens start to rise as the fund becomes successful and grows, there comes a point where you get out and move on.” Barring that, he adds, buy index funds and don’t worry about beating the market. overseas as the biggest risk to U.S. economic prospects, which for once are looking firm. In addition to the eurozone’s woes, Japan’s economic growth is anemic and many major emerging-market economies, including China’s, are slowing. A more vibrant eurozone would fuel the global economy, stimulating global demand for U.S. goods and services. On the other hand, if the ECB measures disappoint, the eurozone economy could remain sluggish or even contract, acting as a drag on global and U.S. growth for years to come. —Pedro Nicolaci da Costa Real Time Economics blog WSJ.com The Flap Over 529s President Barack Obama’s push to tax college-saving accounts, including the popular “529” accounts, would affect millions of Americans now stashing money for their children’s education, stirring debate about how to structure federal student aid and how to define the middle class. The proposal, which has sparked a public backlash but faces dim prospects in Congress, targets 529 accounts that boomed after Congress passed the tax breaks starting in 2001. States promote the plans as a way for middle-class parents to afford escalating college costs. The president’s push, part of a broader tax overhaul unveiled last weekend, would strip the main federal tax benefit from the plans by taxing any money earned from future contributions. Currently, earnings aren’t taxed and the White House says existing funds would be shielded from the new tax. —Josh Mitchell WSJ.com Land of Giants The world built a record 97 buildings that were 200 meters (656 feet) or taller in 2014, and for the seventh year in a row, China completed the greatest number of them, according to a new report from the U.S.-based Council on Tall Buildings and Urban Habitat (see chart, above). China’s output of 58 skyscrapers was a 61% increase from its previous record of 36 buildings in 2013, according to the report. If you were to stack all of China’s new skyscrapers on top of each other, they would reach 13,548 meters (44,449 feet) into the sky—close to the altitude limit for most commercial airliners. While One World Trade Center in New York, at 541 meters tall (1,776 feet), was the tallest building completed in 2014, the Chinese city of Wuxi was home to three of the 10 tallest buildings erected last year. —Alyssa Abkowitz China Real Time blog WSJ.com Email: [email protected] BARRON’S INSIGHT ENCORE Callaway: Teed Up, Ready to Play You Need the Right Tools to Retire BY DAVID ENGLANDER Callaway Golf (ELY) After struggling for a number of years, Callaway Golf is getting its swing back. Since CEO Chip Brewer joined in 2012, the Carlsbad, Calif., maker of golf clubs and balls has been turning its fortunes around. When Callaway (ELY) reports its 2014 earnings in a few weeks, the company is expected to post its first annual profit since 2008, of $14 million, or 17 cents a share. This year, earnings could nearly double to 30 cents a share, with more gains expected in 2016. Now selling for around $8, Callaway’s shares were down about 10% in 2014, as industry weakness masked company improvements. Those issues look temporary, while the turnaround appears to have legs. In the next two years, the stock could rise 50% or more. Callaway is a global market leader in golf equipment, generating roughly half its sales outside the U.S. It sells its irons, woods, drivers, and putters under the Odyssey and Callaway brands. Clubs account for just over 60% of sales. The rest of its revenue comes from golf balls and accessories such as golf bags and gloves. Sales totaled an estimated $890 million in 2014. Daily share price As of Friday, 1 p.m.: $8.01 $11 10 9 8 7 6 2014 ’15 Source: WSJ Market Data Group Mr. Brewer, an industry veteran who had turned around Adams Golf, has moved Callaway out of underperforming businesses and shifted the company’s focus to its core brands. Callaway has been churning out new products such as the X Hot and X2 Hot line of fairway woods, Apex irons and a reintroduced Big Bertha driver. The new clubs have been well received by golfers, helping Callaway boost its U.S. market share to 18.8% in the third quarter of 2014, from a low of 13.9% in 2012. The gains helped to drive sales up an estimated 6% last year. Mr. Brewer has been making operational improvements, overhauling the supply chain and streamlining manufacturing. In the quarter that ended in September, gross margins ticked up to 43%, compared with 40% a year earlier, reflecting the efficiencies. Management has said there’s plenty of room for margin improvement. Much depends on Callaway’s ability to boost sales. Last year, however, was a difficult one for the golf industry. Problems at a rival golf-club maker, TaylorMade, stemming from a poor product launch, led to heavy discounting. Also, fewer people are playing golf today than in the past, based on industry statistics. Rounds played fell 4.9% in 2013 and 1.5% in 2014, through November. The drop has been blamed on bad weather, but it could also reflect the aging player base. Callaway owns valuable assets, including a nearly 20% stake in TopGolf, a golf-themed entertainment venue in Dallas, Texas, started in 2000. According to Boyar Research, Callaway’s stake could be worth about $2 a share. Not including TopGolf, Boyar puts Callaway’s intrinsic value at $12 a share. David Englander is a staff writer for Barron’s. For more stories, see barrons.com. TAX TIP IRS Giveaway: Free Filing Software BY TOM HERMAN Grappling with confusing tax forms and instructions may seem like the textbook definition of cruel and unusual punishment. But there are a few ways for most taxpayers to make the task less burdensome. For example, around 70% of all taxpayers are eligible for free federal income-tax-preparation and electronic-filing software through a program known as “Free File.” For the do-it-yourself crowd, Free File is definitely worth considering—as long as you are comfortable with using software. Over the years, readers who have used the free software have told me they generally have found it very helpful, especially for relatively simple tax situations. Free File (IRS.gov/FreeFile) is a partnership between the Internal Revenue Service and a group of 14 tax-software companies, known as the Free File Alliance. The companies are offering products at no charge. But they aren’t available to everyone. “If you earned $60,000 or less last year, you are eligible to choose from among 14 software products,” the IRS says. “If you earned more, you are still eligible for Free File Fillable Forms, the electronic version of IRS paper forms,” the IRS says. “Anyone, regardless of income, can use it,” a spokesman adds. This option is “best suited to those who are com- fortable with, and familiar with, the forms.” The IRS began accepting income-tax returns this year on Jan. 20. Each of the 14 companies offering software products has “its own special offers, generally based on age, income or state residency,” the IRS says. Some companies also offer free state tax-return preparation. The Free File program will be available through October 2015. Officials say that more than 43 million people have used Free File since 2003. Send your questions to us at [email protected] and include your name, address and telephone number. Questions may be edited; we regret that we cannot answer every letter. BY TOM LAURICELLA You wouldn’t play golf without a full set of clubs. Don’t go into retirement without a fully equipped retirement tool kit. Among those tools: a realistic budget paired with an efficient plan for withdrawing money from savings; an experienced accountant, attorney and source for financial advice; investments that match your cash needs and stomach for losses; up-to-date estateplanning documents; and a nonfinancial plan for staying engaged during retirement. “It’s important to have a thoughtful plan in mind before you pull the trigger” on retirement, says Clarissa Hobson, a financial planner at Carnick & Kubik in Colorado Springs, Colo. “Having a plan…makes for a much more easy transition.” paycheck from an employer to make up the difference. “Often times, people’s risk tolerance does shift as they are moving into retirement,” says Ms. Hobson. Budgeting Team of Experts The foundation of a retirement plan is a budget. On one side of the ledger: How much will come from Social Security, pensions and savings? On the other: How much will be spent? That budget should be revisited frequently. Ms. Hobson drills down into clients’ spending habits before retirement and has them take time to see how a planned budget matches actual spending. She says retirees should include infrequent expenses— such as annual insurance premiums—that may not show up on the latest bank statement. Ron Myers, an adviser in Fort Lauderdale, Fla., says retirees need to account for bigger expenses that pop up rarely or without warning. That could include a new car, roof repairs or big dental bills. Retirees “need to make sure their reserve account [can handle] not just one surprise, but another that comes up right after the first one,” he says. Asset Allocation Even before retirement, investors should shift to an investment portfolio that matches both income needs and the means to weather inevitable market declines. In all likelihood, there will be no Harry Campbell Many people go through their working years with only cursory visits to an accountant or attorney, and often no financial advice. But don’t be afraid to ask for help in retirement. Consider taxes. Many people with an accountant make just one visit a year; others skip the visit entirely, thanks to do-it-yourself tax-preparation software. An experienced tax accountant can produce real savings, says Mr. Myers. “For many people, [retirement] is the first time in their lives where decisions they make have a profound impact on their taxes,” he says. For instance, poorly timed withdrawals from tax-deferred accounts or pension payouts could mean paying more taxes on Social Security benefits. Even for basic estate-planning documents, stick to attorneys experienced drawing up wills, power of attorney and other planning documents. And it may be time to consider getting financial advice. Neil Hokanson, co-founder of financial planners Hokanson Associates in Solana Beach, Calif., says he often has clients who are comfortable doing their own finances. “Then after a while they don’t want to do it anymore,” he says. “It’s a job.” Estate Planning Updating planning document are a must. That includes a will, power of attorney and a health-care proxy. Beneficiaries on retirement accounts and insurance should be kept current. “There are a lot of people who have never done planning, or did their plan when their kids were babies,” says Ms. Hobson. “Those plans may no longer be applicable, or the laws might even have changed.” Mr. Hokanson urges spouses and family members to discuss “contingency plans” for finances and health care, should there be a serious illness or accident. A Nonfinancial Plan “People are starting to understand that if they don’t have a clear vision of what they like to do that could keep them busy beyond the first couple of months of retirement…they run the risk of becoming couch potatoes and depressed,” says Eve Kaplan, a financial planner in Berkeley Heights, N.J. Mr. Hokanson sees many retirees helped by a “spiritual team.” “It is a group of friends one meets with regularly, like a weekly breakfast get-together, to discuss what’s really important to them,” he says. “That’s especially important for guys who tend to live emotionally isolated lives.” Email: [email protected]
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