Tag Archives: mutual-fund

The Attractiveness Of Farmland And Other Alternative Asset Classes

Summary Over the last ten years, the returns on more exotic alternative investments like farmland, rare coins and stamps comfortably beat the returns on the S&P 500 Index. Moreover, based on a risk-return trade off, exotic alternative asset classes also come out on top. This in contrast to more traditional alternative asset classes like commodities, hedge funds, and private equity, which have performed poorly over the last decade. Finally, although investing in exotic asset classes is much less straightforward than investing in equities and bonds, there are certainly opportunities available. Recently, The Economist published an insightful graph that showed that not equities or real estate, but farmland, was the best investment in the last few decades. And, while forestry also earned a spot in the graph, The Economist could have gone a little bit further by adding other, more exotic investment classes as well. (click to enlarge) Adding Coins, Stamps and Wine No worries, with a little help from Bloomberg, I constructed an ‘Economist-like’ chart that, next to farmland and forestry, also includes fine wine, stamps and rare coins as exotic investments. To put things into perspective, I also added ‘traditional’ alternative asset classes like commodities (NYSEARCA: DJP ), gold (NYSEARCA: GLD ), hedge funds and private equity (NYSEARCA: PSP ). Equities (NYSEARCA: SPY ) and bonds (NYSEARCA: BND ) are also included. I intended to add art as well, but art is a bit of an outlier. First, who can actually afford a Monet or Van Gogh? Second, only pieces that are actually sold get to enter the leading index (Moses MEI). This implies that the most traded (and most popular) art works are overrepresented in the index. Hence, the index comes with a classical example of ‘selection bias.’ Finally, most art investment funds are scheduled to retire in the coming years. Farmland tops the list Let’s focus on the alternatives that do make the cut. The graph below shows that, over the last ten years, farmland realized the best return with an average of 17% per year. While less exuberant than farmland, the realized returns on gold, rare coins and stamps (all roughly +10% per year) are also pretty impressive. All of these alternative investments comfortably beat the 8% annual return on the S&P 500 index over the last decade. The two remaining exotic alternatives, forestry and wine, realized an average return almost equal, but also just above, that of equities. (click to enlarge) The return data lead to the straightforward conclusion that, at least over the last 10 years, these exotic alternatives performed very well. This cannot be said of the more traditional alternative investments. While ‘smart’ investors were probably laughing at you if you didn’t add any commodities, hedge funds and/or private equity to your portfolio, these investments didn’t get you anywhere from a return perspective. Private equity performed the least worst, with an average annual return of just 2%, way less than government bonds, for example. Commodities actually yielded a negative return. Of the more ‘familiar’ alternatives, gold was the only one to keep up. Risk and Return Profile So far, I have focused on return data only. However, as risk and return often go hand in hand, a ranking based on the Sharpe ratio (return divided by standard deviation) gives a more complete overview of the relative attractiveness of assets. The graph below shows the Sharpe ratios of the different asset classes over the last ten years. (click to enlarge) As much as a ranking based on the Sharpe ratio is the sounder one, the results are not that different. Most exotic alternatives rank well on their risk-return profile. Farmland, forestry and stamps take three out of the four top spots. Government bonds move up the ranking due to their low volatility. And, as before, gold is the only one of the more traditional alternative investments to do well. Hedge funds, private equity and commodities remain far behind. Based on the risk and return data, investment classes like farmland, forestry, rare coins and stamps are very attractive alternatives. However, there are a few things to keep in mind. First, a period of ten year is not that long from an investment perspective. Things could be different for other time spans (data issues arise, however, for longer historical periods.) Second, most of these exotic alternatives suffer from sticky prices (valuation changes are artificially slow). This means volatility estimates are too low in most cases. That said, the Sharpe ratios suggest it would take a serious volatility increase to push the exotic alternatives down the ranking. Investment Opportunities Now I guess many investors will anticipate another, third factor to keep in mind when looking at these exotic investment alternatives. And that is, availability. Because, how do you invest in (a diversified basket of) farmland or forestry, for example? While this question is totally legit, getting exposure to these alternatives is nowhere near as straightforward as investments in equities and bonds, there are possibilities. Some of them are actually listed. Farmland Partners (NYSEMKT: FPI ) acquires high-quality primary row crop farmland located in agricultural markets throughout North America. Adecoagro (NYSE: AGRO ) from Brazil and Cresud (NASDAQ: CRESY ) from Argentina, invest in farmland and crop production activities in South America. And there are more of these companies around the globe. They are mostly located in emerging markets, as most of the arable land can be found here. On top of that, there are dozens of private investment companies like the Hancock Agricultural Investment Group or Duxton Asset Management from Australia that also offer investment opportunities in farmland or forestry. For other exotic alternatives there are opportunities as well. For example, Stanley Gibbons Investment is a leading company focused on investing in stamps and rare coins. For wine, there is a whole range of private investment funds available. Examples are the Wine Asset Managers, The Wine Investment Fund and Lunzer Wine Investments. But there are many, many more. These companies select, buy and store a variety of wines and save you the hassle of doing this all by yourself. Hence, some of these companies do not only invest in wine but also in whole vineyards as a means of diversification. Mind you, the companies mentioned above are just examples of possibilities to invest in more exotic investment classes like farmland, stamps and wine. You should conduct your own research to find out if these companies offer investment opportunities suitable for you. Investing in these alternatives will require some serious ‘due diligence.’ But, with the disappointing returns of traditional alternative investments in mind, that effort could turn out to be rewarding! Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Is There A Holy Grail To Investment Success?

It is possible to beat the market averages, otherwise managers like Warren Buffett and George Soros would not have done so consistently for many years. Investors should maximize the geometric mean of their outcomes instead of the arithmetic mean. Leverage destroys the geometric mean of returns over time, which is why it should never be used. The efficient market hypothesis only applies to equity exclusive investors and equity fund managers. Investors who manage concentrated stock portfolios and multiple asset classes can beat the averages. As Dr. Edward Thorp discovered the secret to beating the game of blackjack, investors can use probability to beat the stock market by skewing the odds in their favor. The Holy Grail is described in mythology as the cup that Christ drank from during the Last Supper, and is described as having mystical and miraculous powers. It is the stuff of medieval and Arthurian legend. It is also metaphorically described as something magical and elusive that may or may not exist. For investment professionals, the Holy Grail would be a formula for trading the financial markets that generates superior results. But to determine whether the Holy Grail exists or not we first have to define our terms. What results would classify a trading or investment formula as the Holy Grail? Would it be a strategy that simply beats the stock market averages or beats it by a lot? Some theorists believe there is no investment Holy Grail, just as some believe there is no secret to financial success. But throughout human history there have always been people who succeeded financially and those who did not. Is there a key that separates the successful from the unsuccessful? There must be otherwise it would not be happening, the same way it has happened for thousands of years. The proponents of the Efficient Market Hypothesis (EMH) and Modern Portfolio Theory (MPT) would have you believe that it is not possible to beat the market averages and that everyone should just buy an index fund and be done with it. But if that were true there wouldn’t be managers such as Warren Buffett and George Soros and numerous others who have beaten the averages consistently for many years. If the odds were against them, then they would have lost money or their results would have mirrored the averages. It is obvious they are doing something different from the norm. The question is, what is it? Proponents of EMH argue the averages cannot be bested because they take the performance results of the equity mutual fund industry as a whole and compare it to the market averages. The problem with this reasoning is they fail to make the connection that equity mutual funds as a whole are the market. Of course, their results will not significantly differ from the averages. That is like saying someone who bets on every horse in a race cannot lose. Of course they can’t. After years of experience and extensive research, I’ve come to the conclusion that the Efficient Market Hypothesis, while valid, only applies to equity exclusive investors with broadly diversified stock portfolios. In other words, it applies to individual investors who only buy stocks, as well as equity fund managers. For example, if you are a stock fund manager with a required minimum of 100 stocks in your portfolio, then you will be at a disadvantage. Over time, your results will not significantly differ from the averages, and transaction costs will leave your results below that of the averages. Mathematically speaking, there are two ways to beat the stock market averages: Have a concentrated equity portfolio Own multiple asset classes Leveraging a portfolio will not beat the market averages, as I will explain later. For example, let’s say we have a DeLorean and went back in time to the year 1990. For argument’s sake, let’s say you wanted to invest in equities, but could only buy 5 stocks. You decided to buy Microsoft (NASDAQ: MSFT ), Intel (NASDAQ: INTC ), Apple (NASDAQ: AAPL ), Starbucks (NASDAQ: SBUX ), and Wal-Mart (NYSE: WMT ). How would your portfolio have fared? We all know the answer to that. A portfolio of these winners would have left the market averages in the dust. Of course, hindsight is always 20/20, but this example demonstrates the power of a concentrated portfolio with superior performers. The trouble is, no one could have predicted that result let alone had the wherewithal to stay with those positions. The other way to beat the averages is to own multiple asset classes. Different asset classes, such as bonds, precious metals, real estate, and cash, can not only reduce the overall risk of your portfolio, but also make it more profitable. By holding different asset classes and rebalancing them regularly, investors will be profiting from market fluctuations. This differs from the margin speculator who is betting on the direction of the market. He will always lose in the long run to the balanced investor. The purely mathematical reason for this is because big losses hurt you more than big gains help you. Let’s say you start with $1000 and enter an investment that combines a 9 percent gain with a 9 percent loss. You would end up with $992. In contrast, let’s say a speculator entered the same position, but instead used 10 times the leverage. He would end up with $190 at the end. Roughly an 80 percent net loss! This is astonishing when you think about it, especially given the number of traders out there who are holding naked margin positions. When you ask most speculators about the potential risks of their trading systems, they think simplistically that a 90 percent gain combined with a 90 percent loss will be a wash with no net gain. This is incorrect because they aren’t grasping the concept of the arithmetic versus the geometric mean. With the arithmetic mean or simple average, you add up all the outcomes and divide by the number of outcomes. Whereas, the geometric mean multiplies the outcomes and takes the root of the number of outcomes. For example, let’s take 3 numbers: 1, 7, and 13. The arithmetic mean or simple average would be 7, whereas the geometric mean would be 4.5. (1 + 7 + 13) / 3 = 7 Simple Average ³√ (1 * 7 * 13) = 4.5 Geometric Average The geometric mean is calculated by multiplying the three numbers and taking the cube root of the product. Compound return is geometric average, not simple average. Leverage always lowers the geometric mean of outcomes over time because once again, big losses hurt you more than big gains help you. Every consistently winning manager emphasizes and follows this rule. Large losses destroy a portfolio, and reducing or eliminating leverage is the first step to increasing absolute return. Investors should always choose the game with the highest geometric mean of returns. This is the Holy Grail. However, if you define the Holy Grail as an investment system with all gains and zero losses, not even in the short term, then I would agree there is no Holy Grail. But a system that significantly beats the market averages over time could be classified as such. In 1962, a mathematician by the name of Edward O. Thorp published the book, Beat The Dealer, which presented the first popular mathematical system for beating the game of blackjack. The card counter was born. Contrary to popular opinion, the card counter was not immune to losses. He could lose half his bankroll during a losing streak. But if the counter kept playing, he would beat the casino significantly. It was just a matter of time. The odds were on his side. Dr. Thorp discovered the Holy Grail of beating the game of blackjack. It was a probability puzzle and he figured out how to skew the odds in his favor. The financial markets are nothing more than one giant probability puzzle. If others have beaten it, it is entirely possible that you can too. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Investing For Retirement Using American Century Mutual Funds

Summary American Century offers a set of diversified mutual funds which can be successfully used for construction of investment portfolios with good withdrawal rates. A set of just three mutual funds, a bond, an equity growth, plus an equity value fund generates good returns with relatively low risk. From January 2005 to December 2014, an American Century portfolio with fixed allocation could produce a safe 5% annual withdrawal rate and 2.15% annual increase of the capital. Same portfolio with rebalancing at 25% deviation from the target allowed a safe 5% annual withdrawal rate and achieved 2.21% compound annual increase of the capital. Same portfolio with momentum-based adaptive allocation could have produced a safe 12% annual withdrawal rate and 3.51% annual increase of the capital. This article belongs to a series of articles dedicated for investing in various mutual fund families. In previous articles we reported our research on Fidelity , Vanguard , and T Rowe Price mutual fund families. The current article does the same for American Century family of mutual funds. The series of these articles is aimed at a broad spectrum of investors. They may be useful to small individual investors as well as to any large institution managing retirement accounts. We report the performance of the portfolios under two scenarios: (1) no withdrawals are made during the time interval of the study, and (2) withdrawals at a fixed rate of the initial investment are made periodically. Since this is the fourth family of mutual funds for which we are building an investment portfolio for retirement, we elaborate here upon the general methodology we use. The set of funds selected for building the portfolio should satisfy the following criteria: (1) It should include at least one bond fund. (2) It should include a few equity funds, generally between two to five. Those funds should have enough similarity and diversity. As an example, we may select one value and one growth fund. (3) Historically, the funds selected should have performed better than most other funds in their category. Applying these principles, we selected three mutual funds for inclusion in a portfolio of American Century mutual funds. They are the following: American Century Government bond fund (MUTF: CPTNX ) American Century Heritage fund (MUTF: TWHIX ) American Century Value fund (MUTF: TWVLX ) As in the previous articles, three different strategies are considered: (1) Fixed asset allocation. The portfolio is initially invested 50% in the bond fund and 50% equally divided between the two stock funds, without rebalancing. (2) Target asset allocation with rebalancing. The portfolio is initially invested 50% in the bond fund and 50% equally divided between the two stock funds and is rebalanced when the allocation to any fund deviates by 25% from its target. (3) Momentum-based adaptive asset allocation. The portfolio is at all times invested 100% in only one fund. The switching, if necessary, is done monthly at closing of the last trading day of the month. All money is invested in the fund with the highest return over the previous 3 months. The data for the study were downloaded from Yahoo Finance on the Historical Prices menu for three tickers: CPTNX, TWHIX, and TWVLX. We use the monthly price data from January 2005 to December 2014, adjusted for dividend payments. The paper is made up of two parts. In part I, we examine the performance of portfolios without any income withdrawal. In part II, we examine the performance of portfolios when income is extracted periodically from the accounts. Part I: Portfolios without withdrawals In table 1 we show the results of the portfolios managed for 10 years, from January 2005 to December 2014. Table 1. Portfolios without withdrawals 2005 – 2014. Strategy Total increase% CAGR% Number trades MaxDD% Fixed-no rebalance 103.55 7.30 0 -24.61 Target-25% rebalance 109.82 7.63 4 -22.03 Momentum-Adaptive 330.90 15.73 35 -13.97 The time evolution of the equity in the portfolios is shown in Figure 1. (click to enlarge) Figure 1. Equities of portfolios without withdrawals. Source: This chart is based on EXCEL calculations using the adjusted monthly closing share prices of securities. From figure 1 it is apparent that the rate of increase of the adaptive portfolio is substantially greater than the rate of the fixed and target allocation portfolios. Part II: Portfolios with withdrawals Assume that we invest $1,000,000 for income in retirement. We plan to withdraw monthly a fixed percentage of the initial investment. That amount is increased by 2% annually in order to account for inflation. In table 2 we show the results of the portfolios managed for 10 years, from January 2005 to December 2014. Money was withdrawn monthly at a 5% annual rate of the initial investment plus a 2% inflation adjustment. Over the 10 years from January 2005 to December 2014, a total of $535,920 was withdrawn. Table 2. Portfolios with 5% annual withdrawal rate 2005 – 2014. Strategy Total increase% CAGR% Number trades MaxDD% Fixed-no rebalance 24.03 2.15 0 -28.78 Target-25% rebalance 22.68 2.21 4 -27.04 Momentum-Adaptive 210.05 11.98 35 -16.41 The time evolution of the equity in the portfolios is shown in Figure 2. (click to enlarge) Figure 2. Equities of portfolios with 5% annual withdrawal rates. Source: This chart is based on EXCEL calculations using the adjusted monthly closing share prices of securities. To illustrate the effect of the withdrawal rates on the evolution of the capital we report simulation results for two strategies: fixed target with rebalancing and momentum-based adaptive asset allocation. In Table 3 we report the results of simulations of the fixed target portfolio with the following withdrawal rates: 0%, 5%, 6%, 8%, and 10%. The time evolution of the equity in the portfolios is shown in Figure 3. To illustrate the advantage of the adaptive allocation strategy and the effect of withdrawal rates on the evolution of the capital, we give in Table 3 the results of simulations for the following withdrawal rates: 0%, 5%, 10%, and 12%. Table 3. Adaptive Portfolios with various annual withdrawal rates 2005 – 2014. Withdrawal rate % Total increase% CAGR% MaxDD% 0 330.90 15.73 -13.97 5 210.05 11.98 -16.41 10 89.54 6.60 -20.24 12 41.20 3.51 -22.23 The time evolution of the equity in the portfolios is shown in Figure 3. (click to enlarge) Figure 3. Equities of momentum-based portfolios with various annual withdrawal rates. Source: This chart is based on EXCEL calculations using the adjusted monthly closing share prices of securities. Conclusion The set of three American Century mutual funds, selected for this study, perform well for all three strategies and generate sustainable returns at relatively low drawdowns. Between 2005 and 2015, the fixed target allocation with rebalancing was able to sustain withdrawal rates of up to 6% annually. The adaptive allocation algorithm was able to sustain withdrawal rates up to 13% annually without any decrease of capital. We must admit here that the performance of the portfolio selected in this article is by no means the best possible. Without doubt, there may be other selections that would have performed better. On the other hand, past performance does not guarantee future results. Finding the best portfolio even for a specified past time interval is a great undertaking. All we can do is to strive toward finding one of the best, not really the best. Same philosophy applies into selecting the family of funds. In an article at the end of the series we will present a comparative study of their relative performance. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: This article is the fourth in a sequence on investing in mutual funds for retirement accounts. To help the reader compare the past performance of various mutual fund families, I selected a benchmark 10-year time interval starting on 1 January 2005 and ending on 31 December 2014. The article was written for educational purposes and should not be considered as specific investment advice.