Tag Archives: fund

Defensive Expectations

Any fund can do very well, attract a lot of assets, then do poorly and lose the assets. For many years, I have been writing about the idea that diversifiers often do not trade like the stock market and so can offer a zigzag effect to equity holdings. A fund that can make narrow bets on a specific outcome with a large percentage of assets lends itself to being very right or very wrong. By Roger Nusbaum, AdvisorShares ETF Strategist Last week there was an article in the WSJ noting the performance struggles of one of the larger liquid alternative mutual funds. I am not going to link to the article or name the fund because any fund can do very well, attract a lot of assets, then do poorly and lose the assets – which is the arc of this fund’s story. Instead, I want to focus on avoiding that sort of loop or at least recognizing the potential for that sort of loop, so that no one is surprised if/when it happens. For many years, I have been writing about the idea that diversifiers, as I have previously called them, often do not trade like the stock market and so can offer a zigzag effect to equity holdings that can matter during periods like now. There is no guarantee of this of course, but just as was the case with the previous bear market, some diversifiers will deliver and some will not. The fund featured in the above-mentioned article had problems that included a large bet on China that went poorly and was a drag on returns. One of the fund’s objectives is lower volatility than the broad market, yet based on stale holdings reported on Google Finance, three of its top-ten holdings totaling about 13% were in China. The fund did very well for a time early in the current decade, tracking the equity market closely, but started to trail off still moving higher in 2013 and then starting to go negative in early 2014 and has been in a downtrend for the majority of the time since then. Obviously, if Chinese equities had rocketed higher, then some or maybe all of the downturn could have been offset. This places an important emphasis to not just glance at the holdings but actually understand the pros and cons of any larger exposures. Are there a lot of longer-dated bonds in your liquid alternative? If so, are you concerned about rising rates, or can the fund change that exposure? What about commodity exposures or foreign currency? None of these are bad but they need to be understood and followed closely. Additionally, it is crucial to spend time understanding what the fund can and cannot do to change exposures and the process behind portfolio changes. A fund that can make narrow bets on a specific outcome with a large percentage of assets lends itself to being very right or very wrong. Very wrong in a bull market for everything else is probably not a big deal, but during a decline like this, then it is unfortunate. Gold has taken a beating from a sentiment standpoint for how poorly it has performed for the last few years. Throughout, I noted that it was doing exactly what investors should hope; looking nothing like the equity market, which created the reasonable expectation of not looking like equities in a downturn and that is how it has played out over the last month, as the S&P 500 is down mid-single digits and gold is up mid-single digits. It is not a perfect, negative correlation but has helped. The bigger context with a post like this has always been to try to soften the blow of a large decline, not completely miss it (completely missing it would be more about luck than strategy). I continue to be a believer in this approach, as a little bit can go a long way to reduce the extent to which the portfolio trades in line with the broad market. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com . AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). The article has been written by Roger Nusbaum, AdvisorShares ETF Strategist. We are not receiving compensation for this article, and have no business relationship with any company whose stock is mentioned in this article.

DoubleLine Debuts Dynamically Managed Strategic Commodity Fund

By DailyAlts Staff Led by the new “Bond King” Jeffrey Gundlach, DoubleLine Capital has been one of the hottest asset managers since its founding in December 2009. In addition to the firm’s institutional and sub-advisory businesses, DoubleLine also makes a number of its investment strategies available via its own line of mutual funds and closed end funds. On August 31, DoubleLine Funds added one more fund to its roster: the DoubleLine Strategic Commodity Fund (MUTF: DLCMX ), a ’40 Act mutual fund managed by DoubleLine Commodity LP. Through the fund, retail investors with as little as $500 to invest via their IRAs can gain access to DoubleLine’s Strategic Commodity strategy. The new fund’s objective is to seek long-term total return. In pursuit of this goal, the fund’s portfolio manager will employ to two distinct approaches: A long-only strategic allocation to commodities and A long/short tactical allocation to individual commodities. In practice, the fund seeks returns by means of long exposures to one or more commodity indexes, and long and short exposures to individual commodities. It achieves these exposures primarily through derivatives contracts, as well as individual securities and other instruments with returns tied to commodity indexes, baskets of commodities, individual commodities, or a combination thereof. The fund’s portfolio manager is Jeffrey Sherman. Mr. Sherman is a portfolio manager for DoubleLine LP’s derivative-based and multi-asset strategies, and he’s supported in his management of the new fund by analysts and traders in DoubleLine’s Cross Asset Team. “The rationale for investing in commodities has several components,” said Mr. Sherman, in a recent statement. “A broad mix of commodities historically has shown low correlations to stocks, bonds and cash. So commodities can diversify a portfolio invested in traditional asset classes.” Mr. Sherman, who will be holding a webcast on September 29 to discuss the fund and answer questions, also noted that commodities have inflation-hedging properties, and that “incremental returns potentially can be obtained by exploiting the term structure of prices of individual commodities.” Shares of the DoubleLine Strategic Commodity Fund are available in I (MUTF: DBCMX ) and N ( DLCMX ) classes. I shares have a $100,000 minimum initial investment and a 1.11% net-expense ratio; N shares have a $2,000 minimum initial investment and a 1.36% net-expense ratio. For IRAs, the initial minimums are $5,000 and $500, respectively. For more information, visit the fund’s web page .

This PIMCO CEF Has A 12.2% Distribution And A -9% Discount

Summary PIMCO Income Strategy Fund II is a closed-end fund with a broad mandate in fixed-income investments. It has kept pace with or beaten its peers for price and NAV returns. It is selling at a -9% discount, and yielding 12% at market. Editor’s Note, September 2, 2015: The author has revised the title and content to correct the erroneous distribution rate, as explained in the comments section. There has been a huge sell-off in high-yield, fixed-income closed-end funds. Uncertainties abound in high-yield fixed-income, so most carry substantial risk and are probably best avoided at this time. The more speculative investor, however, may be inclined to shop for bargains. One such bargain could be the PIMCO Income Strategy Fund II (NYSE: PFN ). Along with its peers, PFN has seen sharp moves in its discount, which has dropped to a point well below where it was a year ago. But, in a volatile space, PFN has quite consistently turned in respectable performances while paying out high distribution yields. Performance For openers, let’s note that the fund has performed reasonably well over time. The following charts (from cefconnect.com) show its performance in comparison to the category of Fixed-Income, Multi-Sector CEFS. (click to enlarge) As we see here, the fund has outperformed the category every year since 2008 on both NAV and market returns. Recent returns have been ugly for PFN but even so, the fund has managed to outperform the category where things have been even uglier. (click to enlarge) The fund has turned in a positive NAV return for 1 year and 6 month periods while its peers have been deep in the red. Although one-year return at market is in the red, the fund’s NAV total return for the period (from cefanalyzer.com) stands at 2.50%. This compares to a median for the entire fixed-income category of -0.26%. My point here is not that PFN has shown outstanding recent performance, nothing in this space has, but that it is sufficiently well managed to have consistently outperformed its peers through good and bad times. The fund was managed by Bill Gross prior to his departure from PIMCO a year ago. It has been managed by Mohit Mittal and Alfred T. Murata since Gross left. Along with several of the other funds that had been managed by Gross, the fund suffered with the management change. When I wrote about PIMCO funds at the time ( here ), several readers expressed strong confidence in the future of PFN. Despite the deepening of the discount discussed below, that confidence does not seem to have been misplaced. Discount and Distributions The current discount for PFN is -9.93%, well below its 52 week average discount of -2.96%. The 1-year Z-score (a measure of how far the discount is from its average value) stands at -2.45, which means the current discount is nearly 2½ standard deviations below the average for the past year. One can easily exaggerate the importance of Z-scores, but they help to identify potentially attractive entry points. The current distribution rate is 12.21%, which includes a special distribution in December. Without considering the special distributions, the fund yields 10.2% vs. a category median of 8.14%. The regular distribution of $0.08/share has been stable since 2012 when it was raised from $0.065/share. One might compare PFN to another PIMCO fixed-income CEF, the PIMCO High Income Fund (NYSE: PHK ) which has run substantial premiums (as high as 67% earlier this year). PHK currently pays 24.07% as its premium has fallen to 33.15%. It too is paying a special distribution, without which its yield is 15.43%. I have considered PHK’s massive premium to put the fund’s value at risk, but its exceptionally attractive yield continues to appeal to investors. As noted above, PFN has been a consistent performer over a long time scale. PHK, by contrast, is woefully underperforming its category on any measure but distribution yield. It will be interesting to see if that 15% yield can continue to sustain the still-outsized premium. Eli Mintz emphasized the relationship between NAV Yield and Premium/Discount as an indicator of value in municipal bond CEFs. Applying his observations here generates this chart. (click to enlarge) Following Mintz’s analysis, funds falling below the trendline are worth exploring for potential value. Clearly, by this criterion, PFN represents high value and PHK represents the lowest by a considerable margin. Be aware, however, that like most single metrics, the Mintz relationship is only an indication that may provide insight into funds worth looking at in some detail. for example, from this chart one might consider the Stone Harbor Emerging Markets Income Fund (NYSE: EDF ) and the Stone Harbor Emerging Markets Total Income Fund (NYSE: EDI ) as standouts. Their yields are high (above 15%) but even a cursory look at these funds might discourage investors who look beyond yield. Summary PFN appears at this time to be a strong candidate for an investor who considers high-yield fixed income to be ripe for entry. The fund has a solid history of outperforming its peers, pays an attractive and stable distribution, and is priced at a substantial discount relative to its recent history. It has effective leverage of 19.33%, below the category median of 30.26%. Leverage-adjusted portfolio effective duration is modest at 4.16 years (data from PIMCO ). Without question, the high-yield sector is a high-risk sector. This is particularly the case in today’s unsettled market. Disclosure: I am/we are long PFN. (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. Additional disclosure: I remind readers that this article does not constitute investment advice. I am passing along the results of my research on the subject. Any investor who finds these results intriguing will certainly want to do all due diligence to determine if any fund mentioned here is suitable for his or her portfolio. As always I welcome your comments and critiques, particularly from those readers who have contrary opinions.