Tag Archives: mutual-fund

Pioneer ILS Interval Fund Assets Up 18% To $64.4m

U.S. mutual fund manager Pioneer Investments reports that total net assets for its interval style insurance-linked securities and reinsurance linked investment fund, the Pioneer ILS Interval Fund (MUTF: XILSX ), have grown 18% to $64.4m. Pioneer Investments has added just under $10m to the net asset total for its ILS Interval fund in the three months from May to end of July, reaching $64.4m by that date. When Artemis last reported on this fund, at the end of April 2015, Pioneer had reported $54.66m of assets managed . Pioneer Investments launched the ILS Interval fund in late 2014 and the strategy was its first dedicated ILS and reinsurance linked investments fund. Pioneer also invests in ILS assets within other multi-asset class mutual funds. Once again the increase is mostly due to additional capital inflows into Pioneer’s ILS Interval fund, resulting in the managers making new investment allocations and taking on new positions in the quarter. Allocations to securities by the fund, which invests in a mix of catastrophe bonds, reinsurance sidecar notes and other collateralized reinsurance quota share notes, reached $62.99m at 31st July, up from $54.590m at the 30th April. During the three-month period, Pioneer added new catastrophe bond positions in Alamo Re Ltd. (Series 2015-1) , Compass Re II Ltd. (Series 2015-1) , Ibis Re II Ltd. (Series 2013-1) and Sanders Re Ltd. (Series 2013-1) . The managers of the Pioneer ILS Interval Fund also added a number of private ILS transactions during the three months, including investments in the Arlington, Clarendon and Kingsbarn Kane SAC segregated account transactions and an investment in a Series 2015-2 transaction from reinsurer TransRe’s Pangaea Re sidecar-style SPI. The Interval ILS Fund’s largest single holding remains the Gullane Kane SAC segregated account transaction, a privately transformed reinsurance deal, as well as holdings in Munich Re’s Eden Re II sidecar, Brit’s Versutus , Swiss Re’s Sector Re and PartnerRe’s Lorenz Re . Pioneer continues to find steady growth opportunities for its interval ILS fund. Alongside the other investments that Pioneer makes in ILS and reinsurance linked investments, this dedicated interval fund will stand well-positioned to take advantage of attractive opportunities to raise and deploy more capital. Pioneer Investments has over $1.6 billion in ILS and reinsurance linked assets across the fund’s and strategies that allocate to re/insurance-linked investments. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Lower Risk Versions Of A Dual Momentum Fixed Income Strategy

Summary This article presents the performance and risk of Lower Risk Versions (LRVs) of a dual momentum fixed income strategy as compared to a High Risk Version (HRV) presented previously. The difference between the LRVs and HRV is the number of assets per month; the HRV selects one asset per month, while the LRVs select multiple assets per month. The LRV-3 (3 assets per month), backtested to 1994 using mutual fund proxies, has a CAGR of 10.2%, a standard deviation of 6.3%, and a maximum drawdown of -6.1%. The minimum annual return of LRV-3 is -2.4% in 1994. All other annual returns are positive. The LRVs are more robust than the HRV, and should be used by more conservative investors, who desire reasonable growth with less volatility and drawdown. In a recent article on Seeking Alpha, I discussed a simple tactical bond ETF strategy employing relative strength momentum. This strategy is explained in detail here . I will call the original strategy the High Risk Version (HRV) of the fixed income strategy, since only one ETF is selected each month (out of a basket of five ETFs). This article presents Lower Risk Versions (LRVs) of the same momentum strategy. For LRVs, a multiple number of ETFs are selected each month in order to reduce volatility and drawdown compared to the HRV, while still maintaining a CAGR greater than an equalweight portfolio holding all five assets. My basic objectives of the LRVs are: 1. A CAGR > 10%; 2. A standard deviation (SD) that is less than the SD of an equalweight portfolio of all assets; 3. No negative years of return; and 4. A maximum drawdown based on monthly returns of less than 7%. I started out by making a slight modification to the original HRV strategy in order to turn the strategy into a dual momentum strategy. The original methodology only used relative strength (no absolute momentum) to determine what asset to select. But, in a way, the original HRV that selected only one asset each month was really a dual momentum strategy, because a short-term treasury was included in the basket of assets. In order to determine the effect of selecting multiple assets each month rather than just one asset, I needed to use a true dual momentum approach instead of a relative strength strategy. So I have switched to the dual momentum technique in this study. Dual momentum strategies have been popularized by Gary Antonacci and are well-known to many investors. Dual momentum means relative strength momentum is first used to select the top-ranked asset(s) each month, and then the top-ranked asset(s) have to pass an additional absolute momentum test (must have positive momentum) in order to be selected in any given month. I selected a basket of five fixed income assets that have relatively low correlation to each other. A major challenge in developing fixed income strategies is the short history of fixed income ETFs. This results in rather limited backtesting for the ETFs. To extend the backtesting, mutual fund proxies are used that have longer histories; this permits backtesting of the strategy to the 1990s. Shown below are the assets in the basket, both the ETF and the mutual fund proxy. Convertible Bonds: SPDR Barclays Capital Convertible Bond ETF (NYSEARCA: CWB ) – Vanguard Convertible Securities Fund (MUTF: VCVSX ) High Yield Bonds: SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) – Fidelity Advisor High Income Advantage Fund (MUTF: FAHDX ) Long Term Treasury: iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) – Vanguard Long Term Treasury Fund (MUTF: VUSTX ) Short Term Treasury: iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) – Vanguard Short Term Treasury Fund (MUTF: VFISX ) Emerging Market Bonds: PowerShares Emerging Markets Sovereign Debt Portfolio ETF (NYSEARCA: PCY ) – Fidelity New Markets Income Fund (MUTF: FNMIX ) In the original article, I used CNSAX as proxy for CWB and PREMX as proxy for PCY. But based on comments by EquityCurve in the original article, in order to get backtesting to 1994 instead of 1998, I changed to VCVSX instead of CNSAX and FNMIX instead of PREMX. So backtesting of the mutual funds now goes back to 1994. 1994 turns out to be a difficult year for bonds and I’m glad I could include it in the analysis. (All of this work was performed using the free Portfolio Visualizer software. Any investor can go online and trade the strategies in this article without any cost.) It turns out that the dual momentum strategy using this basket of assets is very robust, and good results are seen if one, two, three, four or all five ETFs are selected each month. There is the usual tradeoff between growth and drawdown depending on the number of assets selected each month. The greater the number of assets selected, the less the risk and growth. I will now present the results of the HRV that selects only one asset each month. These results are similar to the results presented in the original article, and are presented here just to be consistent with the results of the LRVs shown later in this article. The basket of mutual funds is used, and the backtesting timeframe is 1994-present. Two relative strength timing periods are employed to rank the funds: 4-months and 2-months. A 51% weighting on the 4-month ranking and a 49% weighting on the 2-month ranking is used. The 51%/49% weighting split is a good way to ensure that the 4-month timing period determines the better-ranking asset if there is a tie. The total return curves of the HRV, the equalweight portfolio (buy and hold all five assets, rebalanced annually), and the S&P 500 are shown below, together with a table of their relevant parameters and annual returns. Total Return Curve of HRV: (click to enlarge) Tabular Summary of HRV Results: (click to enlarge) Annual Returns: (click to enlarge) It can be seen that the HRV has a CAGR of 15.0%, an SD of 10.4%, and a maximum drawdown (based on monthly returns) of -13.0%. In terms of a risk-adjusted return on investment, the CAGR/SD is 1.44. This compares with holding an equalweight portfolio that has a CAGR of 7.8%, an SD of 7.0%, a maximum drawdown of -17.6%, and a CAGR/SD of 1.11. It can be seen that the HRV substantially increases growth at the expense of volatility (standard deviation). Yet the maximum drawdown is actually better for the HRV than the equalweight portfolio holding all five assets. For the LRVs, I systematically looked at various combinations of timing periods and number of assets selected each month. Overall, when two or more assets are selected each month, the strategy tends to be very robust in terms of what timing periods are used for relative strength ranking. This means the strategy works well for various sets of timing periods and results do not change dramatically when timing periods are varied slightly. With some flexibility in what timing periods to choose, I decided to use the same timing periods that I employed for the HRV in my previous article, namely 4-months and 2-months. I first show graphical results when one, two, three, four and five assets are selected each month. A logarithmic scale of total return is employed. One asset (HRV): (click to enlarge) Two assets (LRV-2): (click to enlarge) Three assets (LRV-3): (click to enlarge) Four assets (LRV-4): (click to enlarge) Five assets (LRV-5): (click to enlarge) The results of LRV-5, compared to the equalweight portfolio, identify the effect of absolute momentum. It can be seen that absolute momentum mainly plays a role in reducing drawdown, and does not significantly affect growth in the years when drawdown does not occur. The beneficial effect of absolute momentum continues to be seen as the number of assets is reduced using relative strength. When the number of assets is reduced using relative strength, higher portfolio growth is seen as expected. The highest growth, of course, comes when only one asset is selected each month corresponding to the HRV. The tabular form of the overall results is shown below: (click to enlarge) The tradeoff between performance and risk is seen in the table above. Based on the objectives stated previously, the best LRV is LRV-3 (three assets each month). LRV-3 has a CAGR of 10.2%, an SD of 6.3%, a maximum drawdown of 6.1%, and CAGR/SD of 1.62. This compares well against the equalweight portfolio that has a CAGR of 7.8%, an SD of 7.0%, a maximum drawdown of -17.6%, and a CAGR/SD of 1.11. Thus, the LRV-3 has significantly higher CAGR, lower SD, and substantially lower drawdown and higher risk-adjusted return on investment than the equalweight portfolio. The equalweight portfolio also has three negative years: 1994 (-6.4%), 1998 (-0.3%), and 2008 (-11.6%), while the LRV-3 only has one year with negative returns: 1994 (-2.4%). In comparison to the HRV, the LRV-3 has lower growth (CAGR of 10.2% versus 15.0%), but the SD (6.3% versus 10.4%) and maximum drawdown (-6.1% versus -14.5%) are greatly improved. And the risk-adjusted return on investment of LRV-3 is significantly better (CAGR/SD of 1.62 versus 1.44). And for 1994, the LRV-3 has a -2.4% return, while the HRV has a -5.4% return. One negative aspect of the LRV-3 is that more trades are required each year compared to the HRV. However, the costs will still be minimal for an account value over $100K. Based on backtest results, the average number of annual trades (buys and sells) is approximately 20 for LRV-3. In a Schwab account, this amounts to a cost of 20 x $9 = $180 per year. So, the cost is about 0.18% for a $100K account. In addition, PCY and CWB are commission-free ETFs on Schwab (and the commission-free SCHO is a good substitute for VFISX). So, the commission costs of trading LRV-3 (neglecting any other costs) are quite minimal. A final step in this study is to ensure the ETF version of the strategy gives similar results as the mutual fund version. The ETF version can only be backtested to 2010, so the 2010-present timeframe is used for comparison. The backtest results for the ETFs and the mutual funds for LRV-3 are shown below. LRV-3 Results Using ETFs (2010 – Present) (click to enlarge) LRV-3 Results Using Mutual Funds (2010 – Present) (click to enlarge) Good agreement is seen between using ETFs and mutual funds. Using ETFs, the CAGR is 7.9%, the SD is 6.2%, and the maximum drawdown is -4.5%. Using mutual funds, the CAGR is 8.3%, the SD is 5.3%, and the maximum drawdown is -4.2%. It should be noted that the performance of the mutual funds from 2010-present is less than the performance between 1994-present. This is probably caused by the Federal Reserve holding short-term rates near zero from 2009-present. When short-term rates are increased, performance should eventually increase (after, perhaps, a short time of reduced performance). Also to be noted is that LRV-3 has gone to all cash (money market) since July 2015. So, for July, August and September, the top three assets based on relative strength have not passed the absolute momentum test. In summary, the LRV-3 should be used by more conservative investors, who desire solid growth (10%) with lower risk, while HRV should be used if more growth is desired (15%) at the expense of higher risk. For those investors, who desire even lower risk than LRV-3 as well as higher risk-adjusted return on investment, LRV-5 might be a better choice. For 1994-present, LRV-5 has a CAGR of 9.0%, a maximum drawdown of only -4.4%, and a CAGR/SD of 1.80. It should be mentioned that this strategy using fixed income ETFs is best employed in non taxable retirement accounts that avoid tax issues. I would also like to thank Terry Doherty for reading over this article and making a number of excellent suggestions.

Fidelity Magellan Fund: Getting Better In A Good Market And Coasting On Past Successes

FMAGX is a storied name in the world of mutual funds. But the fund hasn’t been what it once was in a long time. It’s hardly a bad fund, and it may be turning itself around, but there may also be better options for you. The Fidelity Magellan Fund (MUTF: FMAGX ) has a hallowed place in the history of mutual funds. Former manager and mutual fund icon Peter Lynch is probably the name most associated with the fund. And while he led it to great success, he hasn’t been the manager for a long time… and performance has been less than inspiring for a long time, too. What’s it do? Fidelity Magellan’s objective is capital appreciation. It achieves this by investing in stocks. That may sound a bit simple, but that’s really what Fidelity puts out there. What this is basically explaining is that the fund owns stocks and doesn’t have specific style, region, or sector preferences. So it will own both growth and value names, invest in domestic and foreign stocks, and basically go where it thinks it can find opportunity. With an asset base of around $15 billion, however, you’ll want to keep in mind that it isn’t likely investing in too many small companies. So FMAGX is really a large cap style agnostic stock fund. Current manager Jeffrey Feingold is looking for companies with, “…accelerating earnings, improving fundamentals and a low valuation.” He believes these are the main drivers of performance, but admits that finding all three in one investment can be hard. So he works to find stocks with at least two of these factors going for them. Broadly speaking he also tries to diversify the holdings across aspects like type of company (fast growers, higher-quality growers, and cheap with improving fundamentals) and risk profile (for example, stocks with different leverage levels and earnings predictably). In the end, he explains, “…because of the way I manage the fund, security selection is typically going to be the primary driver of the fund’s performance relative to its benchmark.” How’s it done? Feingold has been at the helm of the fund since late 2011, putting his tenure at a little over three years. And in that span he’s proven pretty capable. For example, over the trailing three year period through August, the fund’s annualized total return was roughly 16.4%. The S&P 500’s annualized total return over that span was 14.3%. Assuming there was a bit of a transition period as he took over, that three period is probably a fair time frame over which to look at his performance. And its a big difference from longer periods. Despite the recent solid showing, the fund’s five-, 10-, and 15-year trailing returns all lag the index and similarly managed funds. Often by wide margins. So Feingold has been doing something right at a fund that’s been missing the mark for some time. However, there’s more to the story. The manager’s tenure has coincided with a mostly positive market. In fact, 2012 (the S&P advanced around 16%), 2013 (the S&P was up 32%), and 2014 (the S&P was up nearly 14%) were all fairly good for the market based on historical average returns. In other words, the manager has had a good backdrop in which to work. Looking to the future, however, it’s fair to say that he hasn’t been stress tested at this fund yet. So I wouldn’t get too excited by the recent performance. That said, so far this year, the fund has held up reasonably well. It’s lost less than the S&P and similarly managed funds. But I’d argue that this isn’t enough of a test to get a real feel for how the fund will handle a major market correction with Feingold at the helm. But it is at least encouraging. Not too expensive, lots of trading Looking a little closer at owning Fidelity Magellan, it’s got a reasonable expense ratio of 0.7%. Although you could argue that a fund with around $15 billion in assets could probably be run with a lower expense ratio, 70 basis points isn’t out of line with the broader fund industry. If you take the time to look at the fund’s annual report, though, you’ll notice that expenses have increased from around 0.5% in the last couple of fiscal years. But that’s really a statement to the improving performance. Magellan’s expense ratio is based on the cost of running the fund plus a performance adjustment. In other words, the expense ratio is going up because Magellan has been doing better. I think most would agree that this is reasonable. That said, Magellan’s 70% turnover looks fairly high to me based on the large cap names it’s pretty much forced into because of its large asset base. That number has been fairly constant over the manager’s tenure, as well, so this looks like a reasonable rate to expect year in and year out. There are a number of very good funds that manage to do well with turnovers in the 20% range, so the 70% figure is something I’d watch. For example, that level of trading in a falling market, as noted above, has yet to be tested at the fund. I make that comparison because a fund with a 20% turnover is clearly buying and holding companies it likes and knows well. Companies that it believes have solid long-term prospects. A fund that turns over 70% of its holdings in a year looks like it’s investing with a shorter time period in mind. You may be OK with that, but if you aren’t, then this may not be the right fund for you. If you’ve gone for the ride… Investors often buy funds and then forget they own them. If you have been in FMAGX for a long time it has probably served you reasonably well, overall. That said, you have also lived through some periods where management hasn’t lived up to the fund’s storied past. That appears to be turning a corner with a new manager running the show. However, the new manager has so far been running things in a good market. There are few solid clues as to what you might expect in a real downdraft. So improved performance is nice to see, but it’s too early to call an all clear-especially with the market turning so turbulent of late. In fact, Feingold might be on the verge of a true test of his abilities in a falling market. Only time will tell. In the end, if you own Magellan I wouldn’t be rushing for the exits. However, if complacency is what’s kept you in the fund I’d suggest looking around at other large cap funds. Magellan is hardly a stand out performer, despite the fund’s impressive history, and based on the management changes over time it may no longer be the fund you bought. So a little perspective on your options wouldn’t hurt, even if you decide to stick around.