Tag Archives: alt-investing

Rate Hike Fears Spark 2015’s Biggest Bond Fund Outflow

According to the latest data from the Investment Company Institute, U.S.-based bond funds witnessed the biggest outflows in 2015. The year’s biggest outflow was attributed to the increasing fears about the possibility of the first rate hike in September. For the week ending July 29, $4.7 billion was pulled out of the US bond funds. This was the biggest weekly outflow since mid December and also reversed the $1.6 billion of inflows in the prior week. Certain dismal economic data, such as the decline in ISM manufacturing index and weak wage growth data, have negated the Fed rate hike possibilities momentarily. Nonetheless, the balance towards the possibilities of rate hike is stronger, which is further evident from the bond fund outflows. The primary forms of bond risk include default risk and the interest rate risk. A low interest rate environment is favorable for investments in bond funds. This stems from the fact that the market value of a bond is inversely proportional to interest rates. Government bond prices usually move up when yields drop along with lower interest rates. Outcome of Latest FOMC Meeting The Federal Open Market Committee’s two-day policy meeting gave no clear indication on the timing of the first rate hike. However, the door for a September rate hike was kept open. The policy makers said: “The labor market continued to improve, with solid job gains and declining unemployment”. The committee also said that “economic activity has been expanding moderately in recent months” and that there has been “moderate” improvement in consumer spending levels along with an “additional improvement” in the housing market. These comments did raise speculations of a possible rate hike in September or at the most in December. However, the committee also mentioned “inflation continued to run below the Committee’s longer-run objective.” The central bank’s inflation target is 2%. The Fed remained dovish about economic health, which increased September rate hike possibilities. The Federal Reserve Chairwoman Janet Yellen stated that the U.S. economy will strengthen and expects the central bank to hike interest rates “at some point this year.” Fed Officials Signal Hike in September In an interview with The Wall Street Journal, Atlanta Fed Reserve president Dennis Lockhart signaled that the Fed is preparing for a rate hike in September. He said that the given economic scenario is “appropriate” to opt for a rate hike in near future unless the economy witnesses a “significant deterioration”. He stated: “I think there is a high bar right now to not acting, speaking for myself… My priors going into the (September) meeting as of today are that the economy is ready and it is an appropriate time to make a change.” Last month, San Francisco Fed President John Williams said that a rate hike could take place as soon as September. Williams believes that inflation will soon increase to the Fed’s target rate of 2%. There was a high probability that it could go even higher by the end of next year. Williams added that full employment could be achieved even before the end of 2016. His views are of particular significance since he is a voting member of the Fed’s decision-making body. Additionally, he takes a moderate stance on such issues, consistent with the position of the current Fed Chair. Previously, New York Fed President William Dudley had said a rate hike would be “very much in play” during the Fed’s September meeting. Dudley added that this was, of course, associated with continuing evidence that the economy was continuing to recover. International Bond Funds as Alternative? As the Fed hikes interest rates, a sell-off in bond funds is likely to take place as investors switch to safer choices. Some experts have even suggested that investors should move out of such securities as soon as the rate hike takes place. The influential Carl Icahn also expressed similar views. He said the junk bond market was “extremely overheated.” However, for investors interested in the space, there are actually some alternatives they can try. International bond funds are great alternatives, as they are one of the best ways to balance losses incurred from US markets, since interest rate fluctuations differ from country to country. Considered to be among the world’s largest asset classes, international bond funds show little correlation with domestic equities and only moderate correlation with investment grade domestic debt. They also help in diversifying currency exposure and protecting assets against a long-term secular decline in the U.S. dollar. Below we present 3 international bond – developed mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) and Zacks Mutual Fund Rank #2 (Buy). Goldman Sachs High Yield Floating Rate A (MUTF: GFRAX ) seeks high current income. GFRAX invests a lion’s share of its assets in domestic or foreign floating rate loans and other floating or variable rate obligations that are rated below investment grade. GFRAX may invest a maximum of 20% of its assets in fixed income instruments regardless of their ratings. These may comprise fixed rate corporate bonds, government bonds and convertible debt obligations among others. GFRAX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy). The year-to-date and 1-year returns are 1.9% and 1.7%. The 3-year annualized return is 3.2%. The expense ratio of 0.94% is lower than the category average of 1.11%. Payden Global Fixed Income (MUTF: PYGFX ) invests in varied debt instruments and income-producing securities. A minimum of 65% of assets is invested in investment grade debt securities. A maximum of 35% of assets may be invested in junk bonds. However, the overall average credit quality of the fund will be investment grade. PYGFX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy). The year-to-date and 1-year returns are 1.5% and 3.9%. The 3-year and 5-year annualized returns are 3.6% and 4%. The expense ratio of 0.7% is lower than the category average of 1.03%. Eaton Vance Global Macro Absolute Return A (MUTF: EAGMX ) invests in securities and derivatives among other instruments to gain short and long investment exposures across the globe. The short and long investments are sovereign exposures, which include currencies, interest rates and debt instruments. EAGMX invests in many countries and has significant exposure to foreign currencies. EAGMX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy). The year-to-date and 1-year returns are 1.7% and 3.1%. The 3-year annualized return is 1.8%. The expense ratio of 1.05% is lower than the category average of 1.28%. Original Post

Money Managers Hate Me For This One Weird Trick…

Summary An S&P 500 ETF should be the cornerstone of a well-diversified long term portfolio. I will compare the most widely known S&P 500 ETF SPY against two viable alternatives IVV and VOO. The metrics I will use are as follows: expense, historical performance, portfolio composition, total assets, volume, yield, NAV, standard deviation, and correlation. … Which is recommending that you buy the index and call it day. Boring? Perhaps. Sexy? Nope. You know what is nice though? Not having to work until you die because you were unable to save enough money for retirement. Having money to send your children to college. What else? Not getting ripped off by some “savvy money manager” that charges predatory fees. Sure you can Seek Alpha all your life, but who do you listen to? Why pay exorbitant fees for hit or miss advice? There is an optimal investment opportunity out there, and best of all, you only need access to a brokerage account to buy into it. It is called a low-cost S&P 500 ETF. Premise I firmly believe an index fund like the S&P 500 ETF (NYSEARCA: SPY ) should be a core part of a balanced long-term portfolio. The S&P 500 is comprised of 500 of the healthiest, strongest, and most widely traded stocks on the market. Investing in an S&P 500 ETF gives the investor diversified exposure to this valuable class of equities while mitigating single stock risk. I mentioned in another article that the S&P 500’s historical long term annual returns (assuming a 20-year time frame) have ranged from 5.5% to 18% . S&P averages roughly 10% returns year over year. Holding a long term-position in an ETF like SPY is intuitively the best investing decision you could ever make (I will likely write several additional articles on this subject). However, in this particular article I will focus solely on cross-analyzing and comparing the 3 primary S&P 500 ETFs available. I personally hold a long position in SPY, but I think it’s valuable to consider two alternatives iShares Core S&P 500 ETF (NYSEARCA: IVV ) and Vanguard S&P 500 ETF (NYSEARCA: VOO ). Correlation The first thing I look for in an ETF is a strong correlation to its underlying index. SPY, IVV, and VOO all display a direct and positive correlation to the S&P 500, so thankfully tracking error is not going to be a major issue. Historical Performance & My Biggest Concern Comparable returns have always grouped closely together. Interestingly, each ETF has tended to marginally outperform the S&P 500 index in the short and long run. In the last five years the index and each ETF saw around 14.75% returns annually. However, I believe this percentage is uncharacteristically high due to persistently and artificially low interest rates. This phenomenon is mostly guided by Fed backed programs which I believe have produced inflationary upward pressure on stock prices. My biggest concern for this ETF is that the stock market as a whole appears overvalued, and a market correction does not seem unfeasible (at least in the short term). As a long term investor, I am maintaining my position, but do not be surprised if these ETFs do not have future returns on par with the last five years. Comparing Key Metrics As I mentioned, I own SPY . However, I love this class of ETF, so I will not be offended if you choose to buy VOO or IVV instead. I do unequivocally recommend a long position in at least one of these. Key Metrics SPY IVV VOO NAV 208.46 209.72 191.13 Total Assets 175.95 Bil 69.8 Bil 34.33 Bil Average Volume 115.9 Mil 4.1 Mil 1.6 Mil 12-Mo. Yield 1.92% 1.99% 1.96% Expense Ratio 0.09% 0.07% 0.05% Standard Deviation 8.55% 8.56% 8.56% At first glance, SPY is the most expensive choice and offers the lowest 12-Month yield. Additionally, if you reexamine the charts I included above, you will see that VOO outperforms both IVV and SPY in the long term. However, I believe SPY derives additional value from its high liquidity. This liquidity attracts institutional investors which in turn works to lower expense. After extensive research I found that SPY is more cumbersome than IVV and VOO. Each ETF is valuable in its own way which I will soon discuss. Portfolio Composition I wanted to compare each fund’s portfolio composition by sector weighting. I found that VOO, then IVV, and finally SPY (ranked best to worst) held different sector weightings. I created an excel sheet using Morningstar data to compare and contrast each. SPY SPY Portfolio Weightings Sector Weightings % Stocks Benchmark Category Avg. Basic Materials 2.76 2.99 3.26 Consumer Cyclical 11.16 12.04 11.88 Financial Services 15.63 15.21 16.26 Real Estate 2.18 3.26 2 Sensitive Communication Services 3.94 3.73 3.62 Energy 6.91 6.82 7.62 Industrials 10.73 11.31 11.57 Technology 17.9 17.36 17.05 Defensive Consumer Defensive 9.67 8.77 8.87 Healthcare 16.26 15.63 15.59 Utilities 2.87 2.87 2.29 Critics of SPY claim it is clunky and inefficiently weighted. That claim seems overly bombastic, but there is some truth to it. SPY is underweight in: Basic Materials Consumer Cyclical Real Estate Industrials Overweight in: Financial Services Communication Services Energy Technology Consumer Defensive Healthcare Equally Weighted: IVV IVV Portfolio Weightings Sector Weightings % Stocks Benchmark Category Avg. Basic Materials 2.76 2.99 3.26 Consumer Cyclical 11.16 12.04 11.88 Financial Services 15.63 15.21 16.26 Real Estate 2.19 3.26 2 Sensitive Communication Services 3.94 3.73 3.62 Energy 6.92 6.82 7.62 Industrials 10.72 11.31 11.57 Technology 17.9 17.36 17.05 Defensive Consumer Defensive 9.66 8.77 8.87 Healthcare 16.26 15.63 15.59 Utilities 2.88 2.87 2.29 IVV has portfolio allocations identical to SPY. In regards to its benchmark (S&P 500), IVV is: Underweight in: Basic Materials Consumer Cyclical Real Estate Industrials Overweight in: Financial Services Communication Services Energy Technology Consumer Defensive Healthcare Equally Weighted: VOO VOO Portfolio Weightings Sector Weightings % Stocks Benchmark Category Avg. Basic Materials 2.98 2.99 3.26 Consumer Cyclical 11 12.04 11.88 Financial Services 15.15 15.21 16.26 Real Estate 2.11 3.26 2 Sensitive Communication Services 4.02 3.73 3.62 Energy 7.85 6.82 7.62 Industrials 10.91 11.31 11.57 Technology 17.84 17.36 17.05 Defensive Consumer Defensive 9.34 8.77 8.87 Healthcare 15.97 15.63 15.59 Utilities 2.83 2.87 2.2 VOO, in my opinion, has a better allocated portfolio and more attractive weightings. Underweight in: Consumer Cyclical Real Estate Industrials Overweight in: Communication Services Energy Technology Consumer Defensive Healthcare Equally Weighted: Basic Materials Utilities (mostly) Financial Services Investment Strategy Recommendations Whichever ETF you choose, my overall recommendation will remain the same. For this reason I will mention my overall strategy before jumping into an analysis of each ETF. Buy and hold a long position and establish a DRIP ( Dividend Reinvestment Plan ). Try to make monthly contributions to increase the compounding effect over time. Do not worry or hyper focus on short term price fluctuations. It’s difficult (if not impossible) to predict what the market is going to do. In the long term, however, you should expect attractive positive returns. Additionally, you will be able to sleep better knowing you were able to mitigate single stock risk by owning a diversified ETF. SPY SPY is structurally inefficient (compared to its alternatives), but it is cheap, well-covered, and highly liquid. You really can’t go wrong with a long buy and hold position in SPY. I would recommend SPY for beginners and institutional investors. IVV IVV is cheaper than SPY and offers the highest dividend yields (marginally). IVV is also more liquid than VOO. I would recommend IVV for high net worth individuals. VOO VOO is the cheapest and most efficiently weighted option. This Vanguard ETF historically has performed the highest of the three. While, VOO is less liquid than IVV and SPY, it is still adequately liquid. VOO does a better job of tracking the underlying index. VOO is arguably the best choice of the three. I would recommend VOO for those with some investing knowledge looking to graduate from SPY. Why Bother with an S&P 500 ETF? I could talk endlessly on this subject. I’ve already written a little bit about it, but the short answer boils down to this. Seeking alpha is a difficult, risky, and sometimes perilous journey fraught with misunderstanding, bad advice, and cognitive bias . There are a few intelligent individuals out there (and on this site) that have been able to beat the market. For the most part, however, most investors do not beat the S&P 500 . So why not just buy into it? Money managers generally do not beat the S&P 500, and they will charge you a management fee that significantly bites into your returns over time. To illustrate this, let me include one of my favorite graphs. It is easy to fall into the arms of professional money managers because we are intimidated by their financial expertise and “insider knowledge.” Often they will rationalize their exorbitant and predatory fees with backwards logic. Just invest in the index. I promise you’ll be better off. Conclusion Buy and hold a long term position in either SPY, IVV, or VOO. It could be the best investment decision you will ever make. If you don’t want to fruitlessly waste time trying to beat the market; if you don’t want to fall prey to faulty investment advice or get gouged by fees; if you want to manage risk and make money with minimal financial knowledge – invest in the index. I’m really not leading you astray here. I’m not the first person to make this recommendation and I hope I’m not the last. Don’t believe me? Listen to what Warren Buffett has to say. In regards to instructions Buffett laid out in his will, “My advice to the trustee could not be more simple: Put 10% of cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund” Side note: He recommended Vanguard Afterwards : Follow me down the rabbit hole as I cover a variety of Index ETFs (Vanguard or otherwise) to perfect your portfolio. In spite of Buffett’s advice, there is a whole world of high performing, highly diversified, low cost ETFs that deserve some attention. Disclosure: I am/we are long SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

What If I Had Stayed Away From The ‘Sell’ Button?

Summary Does it pay off to sit on one’s hands and do nothing? I wanted to know and carried out a brief review of my past sell decisions. Holding clearly outperformed selling, but selling seems to have lowered both, returns and risk. Never look back? With regards to closed positions I used to follow a strict ‘never look back’ policy, because I considered it unhelpful to spend time thinking about what could have been. Recently, I broke with this paradigm. Not because I like to kick myself, but rather to test which of the following competing concepts would work better for me: Monitoring all holdings closely and trying to optimize capital gains and portfolio structure by selling when the time has come (whenever that may be) Sitting on my hands and doing nothing while accumulating shares. It may not have been a conscious decision, but I happened to follow the former approach in the past. I felt not looking after the portfolio might be irresponsible. However, when looking after the portfolio I found there were always reasons to worry. Typical reasons to sell were: Concerns about the respective company’s business model Immediate issues with unclear outcome (e.g. accounting issues, legal disputes) Perceived lofty valuations Then I wondered: What are the worst losses that I managed to avoid through trading and what are best opportunities that I missed out on? Would I be better off if I stayed hands-off? Looking back Past sell decisions can help to find answers to these questions. If you are happy to gain valuable, but potentially painful insights, you might want to carry out a review as follows: Put together the data on all positions that you ever closed. Establish the respective cost base of these positions and the profit/loss that you realized when you closed the positions. Look up the current prices of the securities you sold. Calculate what your former holdings would have been worth today. Compare with the realized profit/loss. Results This is what I did and here is what I found as I went through the 32 trades that are on my records of the past four years: I made a profit on 29 positions. The average gain was 16% with the largest gain being 58% (these are total, not annualized gains in local currencies, including all trading fees, but no dividends). I made a loss on three positions. The average loss was -19% with the biggest loss being -33%. The average profit across these 32 trades was 13%. Comparing the realized profits and losses with current prices, I figured out that I made 15 good exit decisions (=current prices are below the prices at which I sold) and 17 poor exit decisions (=current prices are above the prices at which I sold). All three stocks that I sold at a loss were among the good exits. Also, pulling the plug on my long-term government bonds in late January this year turned out to be a good move. A further pattern is that it was mostly a good idea to get rid of the more speculative plays (special situations, turnarounds). The biggest loss that I managed to avoid was -56 percentage points (=my realized profit was 9% and I would be under water by -47% now had I kept the stock). The poorest exit decisions were taken more than two years ago. Today, I find it difficult to understand what made me sell, since I cannot remember any red flags. The best explanation I can offer is that the share prices did not go up as I expected and I lost patience assuming that I missed something in my assessment. In that situation I was almost looking for black cats in dark alleyways. The biggest gain that I missed by selling was 300% percentage points (=my realized profit was 1%, but the stock has gained a further 299% since I have sold). Had I kept all the positions that I sold the total gain would have been 37% rather than 13%. Conclusions The interpretation of the results is not straight forward. Given the overall bull market for stocks and bonds in recent years, it had to be expected that keeping would win over selling on average. My brief review did only compare selling against keeping. It did not compare keeping against reinvesting of realized proceeds. Also, of course, I did not consider time frames in that I only looked at overall returns not at annualized ones. Still, there are some conclusions that I find useful: When I sold it was due to concerns (or fear if you like). The ‘never look back’ policy implied already that I could miss out on opportunities by selling, but I never realized by how much missed opportunities can outweigh risks in total even when some of the risks do eventually materialize. Being lazy, I was actually hoping to find evidence that a complete hands-off approach would be superior to my trading activity. Things turned out to be a bit more complicated, though. It feels reassuring that I proved to be right whenever I closed a position at a loss. The best and worst performers in my current portfolio have returned +191% and -17% respectively so far which compares against +300% and -57% among my past holdings. Although it was not an outspoken goal, I do feel more comfortable in the current range that seems to offer a more limited downside. Apparently, I could not expect the portfolio to be low maintenance, when (some of) the stock picks were not. Now that I have eliminated the stocks that were a bit too exciting for me, it may have become easier to stay away from the sell button. Stocks In order to keep the focus on method and results, I decided not to mention specific stocks above. If you are curious about the stocks behind the numbers, here is a small list: Largest realized gain: Novartis (NYSE: NVS ) Biggest realized loss: Finavera ( OTC:FNVRF ) Biggest avoided loss: Power REIT (NYSEMKT: PW ) Biggest opportunity I missed: Royal Wessanen ( OTC:KJWNF ) Best performer in my current portfolio: I.A.R. Systems ( OTC:IARSD ) Worst performer in my current portfolio: HCP (NYSE: HCP ). Disclosure: I am/we are long IARSD, HCP. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.