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EVV And EVG: 2 More Eaton Vance Funds That Sound Alike, But Aren’t

Eaton Vance Limited Duration Income Fund sports a nearly 9.5% yield. Eaton Vance Short Duration Diversified Income Fund’s yield is around 8%. The risks involved favor the lower yield. Financial markets are in a state of flux right now. With the Federal Reserve continuing to keep interest rates at low levels, some might argue that there’s no need to worry. However, the Fed is keeping rates low because of weak global growth — certainly not a good thing. And how long can rates stay this low before unintended consequences start to rear their ugly heads? If you are the least bit concerned about the markets and interest rates Eaton Vance Limited Duration Income Fund (NYSEMKT: EVV ) and Eaton Vance Short Duration Diversified Income Fund (NYSE: EVG ) both sound like good places to hide in a storm. But that’s worth a closer look… Birds of a feather? EVV and EVG both share a similar mandate, providing investors with a high-level of current income. Capital appreciation is a secondary consideration for each. In addition, both closed-end funds, or CEFs, try to provide broad exposure to the fixed income markets while limiting interest rate risk. EVV’s duration is targeted to be between two and five years, while EVG is a little more conservative in that its duration is expected to be no more than three years. Although that’s a difference, it’s not exactly a huge one. At the end of the second quarter, EVV’s duration was around 3.2 years and EVG’s was around 2.1 years. Both funds, meanwhile, make use of leverage, something that can increase gains in good times but exacerbates losses in bad times. EVV and EVG even share five of six managers (EVV has six people steering the boat, EVG only five). One big difference between the pair is size. EVV has more than six times the assets of EVG, which helps explain why there’s an extra hand at the wheel. But this isn’t the only difference you’ll want to be aware of. The big obvious one for most investors will be the distribution yield. EVV’s yield is around 9.4%, roughly 17% higher than EVG’s 8%. That said, the yields are based on NAV at both funds, which are trading at over 10% discounts and are more reasonable, with EVV’s NAV yield at around 8.1% and EVG’s NAV yield of just about 7%. Based on this quick look, you might just go for the higher yield from the larger fund. But don’t jump just yet. A quick look at the engine Although duration is very important in the bond world, since it gives you an idea of the impact that interest rate changes will have on your return, it isn’t the only factor to watch for. (The longer the duration, the more impact interest rate changes will have.) Another important one is credit quality. While short durations can help to limit the risk of lower quality debt, since it will get paid off relatively quickly, it doesn’t remove the risk. And with investor concern high, low-quality debt has been taking a big hit. Perhaps rightly so. And that’s an important comparison point at EVV and EVG. At the end of the second quarter, EVV’s portfolio was made up of about 30% investment grade debt. So 70% of what it owns could be characterized as high-yield or “junk.” To be fair, BB, the highest-quality high-yield debt, makes up about 30% of that, but it still has heavy exposure to risky borrowers. EVG, on the other hand, had about half of its portfolio in investment grade issuers. There was another 25% or so in BB issuers. Of the two, EVG’s exposure to credit risk is much less than its sibling’s. That helps account for the lower yield, too, since higher-quality bonds tend to pay less interest than lower-quality fare. For investors concerned about a coming market storm, then, EVG appears to the less risky option. True, it has a lower yield, but that might be a worthwhile trade-off if you were looking at EVV and EVG to find a “safe” short-duration CEF bond fund to hide in. That said, there are some other factors to consider, too. For example, EVG’s portfolio is about two-thirds U.S. debt. EVV’s U.S. exposure is higher at around 85%. You could look at this difference in one of two ways. On the one hand, more diversification is better. On the other, sticking close to home may prove to be a more astute choice if the U.S. turns out to be the cleanest dirty shirt if, in my opinion when, the markets hit more turbulence. Then there’s the issue of long-term performance. Over the trailing 10 years through September, EVV’s annualized NAV return, which includes reinvested distributions, was about 6.4%. EVG’s annualized return over that span was about 5%. But that was then, and this is now. For example, over the trailing six months through September, EVG’s NAV loss was around 1.7% and EVV’s loss was nearly 3%. In September alone, EVV lost nearly 2% of its net asset value. EVG fell about 0.5% in September. So it looks like EVG has the edge when risk starts to matter, but EVV’s risk taking has paid off over the longer term. That, of course, is the big trade-off in investing: Risk vs. reward. Right now, I’d err on the side of caution and give EVG the edge if you are watching this pair. That said, if you buy EVG, you might want to keep an eye on EVV for a time when the skies are a little more clear.

ETF Issues: What You Don’t Know Might Hurt You

ETFs can be great options for investors. But you have to know what you are buying. iShares, for example, isn’t making that easy, though it’s doing the best it can. Exchange traded funds, or ETFs, are an incredible work of human ingenuity. They are pooled investment vehicles that trade close to net asset value while being traded all day long. And while there are good reasons to like these hot products, there are also reasons to dislike them. And a single data point provided by iShares shows one of those reasons. I don’t hate ETFs To start, I don’t hate ETFs. I just don’t like them as much as most investors seem to. And certainly not as much as Wall Street does, based on how many ETFs have been brought to market in recent years. Yes, they are cheap to own and provide quick and easy diversification. But it’s so easy to buy an ETF that people aren’t looking closely enough at what they are buying. That may not matter much if you pick up the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), a clone of the S&P 500 Index. But with more and more esoteric ETF product being created by rabid Wall Street salesmen, taking the time to get to know what you own is starting to matter more and more. For example, I recently wrote about the fine print in the prospectus of the Global X Yieldco Index ETF (NASDAQ: YLCO ). Essentially, this ETF is focused on buying 20 stocks in a new and niche sector that doesn’t really have 20 stocks to buy. YLCO is all about the story, not so much about the substance, in my eyes. Maybe YLCO will be a great ETF at some point, but right now it’s a risky proposition that all but the most aggressive investors should avoid. So, yes ETFs can be good. But Wall Street has been perverting this goodness in an attempt to make a buck. iShares isn’t evil But don’t think it’s only exotic fare about which you need to be concerned. Even more “normal” stuff can lead you astray. For example, the iShares NASDAQ Biotechnology ETF (NASDAQ: IBB ) has some problems of its own. Now iShares is the ETF arm of giant asset manager BlackRock (NYSE: BLK ). And, for the most part, BlackRock is a stand up company. But that doesn’t mean every product it sells is a good investment option. For example, a quick look at IBB’s overview page shows a P/E ratio of 25. That might not be too surprising given that biotech companies are high growth. You wouldn’t expect a P/E of 10 for this group. In fact, you might even say it’s on the low side for the sector, which is known for housing money losing companies looking for a big score via the creation of new drugs. Which is why you should click the little information icon next to that P/E stat. That’s where you’ll learn that the P/E ratio doesn’t include companies that don’t have earnings. So, essentially, the P/E really tells you less about the ETF’s portfolio than you might at first believe. Interestingly, the same issue pops up throughout iShare’s data on P/E. For example, the iShares U.S. Oil & Gas Exploration & Production ETF (NYSEARCA: IEO ) has a P/E that’s listed at a little over 8. With 70% of its assets in the oil and gas exploration sector, where companies are bleeding red ink, you have to step back and wonder what’s going on. A low P/E makes sense for an out of favor sector, but does that average really tell you the whole story? The thing is the warning about P/E is a standard disclosure on the iShares site and holds true for everything from a niche biotech fund to the company’s S&P 500 Index clone. And iShares really isn’t doing anything malicious. It’s a database issue. You can’t calculate a meaningful P/E if a company doesn’t have any E to work with. So in order to get the job done, in this case calculating an average P/E, you toss the garbage numbers. And, thus, you create a P/E by using only those companies with earnings. Which, unfortunately, biases the number you have just created so that it may offer a misleading picture of the portfolio. So I’m not hating on iShares, there’s not much else it could do to provide site-wide data. And at least it goes the extra step of disclosing this little problem. But it should make you step back and take pause. If you own that biotech fund or the oil and gas fund, the stats you are using to validate your purchase may, in fact, not be reliable. This issue can be found at open-end mutual funds, too, so don’t think ETFs are the only problem child. The best example comes from Morningstar. This research and data house is very open about the way it calculates most of its data, you just have to look. And when it comes to average P/E, they have a workbook available that explains, “If a stock has a negative value for the financial variable (EPS, CPS), the stock will be excluded from the calculation.” EPS is earnings per share and CPS is cash flow per share. So any site that uses Morningstar data will be impacted by this issue… like Fidelity (read the fine print at the bottom of the data page). The question is to what degree is there a problem. In some cases it’s a minor issue. In the case of IBB, roughly half of the ETF’s holding don’t make any money and are excluded from the P/E calculation, according to The Wall Street Journal . That makes the P/E figure provided by iShares pretty much useless in my eyes. And it points out yet another problem that ETF investors may not realize when they buy what is currently a hot Wall Street product. Know what you own For many investors ETFs are seen as a short cut. A punt option that doesn’t require much thinking. In many cases that’s true, but in many others it isn’t. Which is why knowing what you own is so important. Can you accept the average P/E for an S&P 500 Index fund at face value? Yeah, probably. But what about an ETF honed in on an industry that’s filled with money-losing companies, like biotech? I don’t think that passes the sniff test. You’d be better off doing a little more digging into the portfolio to get a good understanding of what’s in there. Again, I don’t hate ETFs. But they are so popular and have been pushed so hard by Wall Street that I fear investors don’t have any clue what they own. Too many people have been lulled into complacency by slick marketing and an avalanche of new products. I don’t think that’s a story that ends well. If you own an ETF, I recommend taking a deeper dive just to make sure you really own what you think you own.

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.