Lipper Senior Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN

Tuesday February 22, 2005

A. A well-timed issue, especially after that core-inflation report lastFriday.

A. Exactly right. And it is a real problem unless you can be 100% sure youwill NEVER need to tap the principal, can REALLY hold long term.

Q. So are there ways people can get decent income, and reduce or remove therisk to capital?

A. There are a number of ways to go, and they produce different yields andvarying amounts of capital protection.

Q. OK, how about naming some and then we can look at the details...

A. Sure. Let me do them in order of average yield, and then we can talkplus/minus or risk points...

	Open-End	Closed-End
Inverse Bond Funds	0.0 %	no such
Equity Income Funds	2.2	tiny sample
Balanced	2.2	tiny sample
Utility Funds	2.5	7.26 but leveraged & at premiums
ARM Funds	2.5	tiny sample
Loan-Participation Funds	3.2	3.8 %
Long-Muni Bond Funds	3.3	4.5 Unleveraged
TIPS Bond Funds	3.3+inflation	5.8 INCLUDING inflation
Intermed-Tm Corp Bd Fds	3.5	tiny sample
Income Funds	4.2	no such
High-Yield MuniBond Fds	4.6	6.3 leveraged
Real Estate Funds	5.2	7.3 all leveraged
High-Yld Corp Txbl Fds	6.0	6.9 Unleveraged
International Income	6.0	tiny sample
Preferred-Stock Fds	7.3 levg'd	tiny sample
Emerging Mkts Debt	tiny sample	7.6

Q. Wow, quite an assortment!

A. The funds industry is pretty creative in covering the whole range ofpossibilities...

Q. And the yields span a HUGE range.

A. That's true, and in SOME cases that reflects risk in the types of assetsowned.

Q. You have mentioned not just bond-type funds but a bunch of equity-typefunds that pay out income...

A. Right, and some of them will not protect principal very well if stocksshould fall (Equity Income, Balanced) while in some other cases the yieldsare higher but many use leverage, which adds risk (RE, Utility)

Q. Let's choose a few and talk about them...

A. Sure ...

BOND TYPES

• Inverse-Bond Funds (pretty new and aggressive). Use derivatives

to create reverse price action. Zero yield!

• ARM Funds Current yields after expenses pretty low fromall those new mortgages, but will not go lower this cycle.
• Loan-Participation Funds Really short-term, low quality loans,but probably OK FOR NOW while economy expanding.
• Long-Muni Funds Better net deal than taxables but still exposes youto long-rate curve risk
• TIPS Funds One of my real personal favorites. Inflationprotection via variable interest; but best in a tax-def'd account
• Inter-Tm Corp Between junk and Govts in quality; OK inpresent part of economic cycle
• High-Yield MuniBond Lower-quality or unrated bonds; OK as long aseconomy is expanding. Good after-tax yield.
• High-Yield Corp Bd Extra yield vs quality has shrunk a lotalready since 2002. Not very good yield here, for the risk.
• International Incm A good play if you expect the dollar to keepfalling. Rather be here than in HY domestic at same yield.
• Emerg Mkts Debt Mainly CEFs. High Yield, higher volatility due topolitical adventure. OK while world economy rises.

EQUITY TYPES

• Balanced Funds Low yield and exposes you to both stock-price andbond-rate risk. Not an INCOME buy.
• Equity Income Funds More direct exposure to stock prices. Nowtaxed at low rate but not much stability
• Utility Funds Have been out of favor. Maybe OK but not ifrates rise a lot or sharp/suddenly
• Income Funds Much more bondish than Balanced, so higheryield but more long-rate risk
• Real Estate Funds Pretty good yields; risk is a recession OR a hoteconomy with big rate rises
• Preferred-Stock Fds Almost all are CEFs; leveraged. Some usefloating rates or derivative to fight principal risk.
• Yields a good deal but choose on other factorsmentioned. Partly qualified dividends

A. I think you really need to NOT be passive and permit yourself to takecapital losses. Very few people financially CAN and emotionally WILL holdon matter what through a few years and the scariest part of the down cyclein prices.

TIPs + International Income + Utility + maybe RE (if not alreadyowned) + Prefd-Stock BUT THESE ARE MY PERSONAL CALLS AND LIPPER ANDREUTERS DO NOT MAKE INVESTMENT RECOMMENDATIONS!

Q. So what can a person do to get income with really MAXIMUM principalsafety?

A. Rates NOW are still so low that this is an unappealing trade-off.Money-Market Funds or Bank CDs (I would NOT lock in a rate for very long,though!) are the lowest-risk items. But after inflation and taxes, yourSURE return becomes a NEGATIVE return. Probably TIPS (via funds ordirectly or I-bonds) are the next best thing, but prices are not totallyguaranteed. And they pay some "income" that's not in cash, so they areexpensive to hold in a taxable account.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).