Tag Archives: total-return

How Do Fund Flows Affect Fund Performance?

A study by Morningstar acknowledges that the relationship between fund flow (or investors’ purchases and redemptions of mutual funds) and fund performance may be stronger than previously considered. However, the study based on three-year performance of stock-picking funds between 2006 and 2014 revealed that funds with high inflows, stood a lower chance of outperforming peers. Large-cap funds attracting most inflows had an average return of 7.8%. This compares unfavorably with funds with biggest outflows offering an average return of 8.1%. In many cases, outperformers tend to attract inflows. The strong rally may have run its course, leading to the tepid performance of those high inflow funds. Also, funds with massive inflows will have to employ the cash; otherwise the cash in net assets may swell and thus affect the fund’s allocation style. The positive on the other hand is that increased cash can help fund managers invest them in new stocks or financial instruments, without selling the existing portfolio. This in turn keeps the turnover ratio low. (To learn more about turnover ratio, click Does Turnover Ratio Influence Mutual Funds? ) Thus, fund flows may have an impact, but not necessarily in all cases. This is better explained in Pimco’s legal disclosures to the PIMCO Total Return Fund (MUTF: PTTAX ) investors. It says purchases or redemptions “may cause funds to make investment decisions at inopportune times or prices or miss attractive investment opportunities. Such transactions may also increase a fund’s transaction costs, accelerate the realization of taxable income if sales of securities resulted in gains, or otherwise cause a fund to perform differently than intended. While such risks may apply to funds of any size, such risks are heightened in funds with fewer assets under management.” Fund Category Performance with Highest Inflow & Outflow in August This year, the bleeding continues for funds and particularly for active funds. According to Morningstar data, open-end mutual funds saw outflows of $31.9 billion in August. Interestingly, not all fund categories that saw the largest outflows in August were in the red for August. Similarly, inflows did not necessarily mean that funds ended up in positive territory. Except for Europe stock funds, five fund categories that had the highest August inflows have posted year-to-date losses. In August, all these five categories finished in the negative zone. The magnitude of losses in August for categories with highest inflows was significantly larger than those categories that saw largest outflows. Categories with Highest Inflows in August ($ in Million) Total Return (%) August YTD August YTD Foreign Large Blend 11880 80302 -7.1 -0.8 Multi-alternative 1464 11145 -2.3 -1.3 Managed Futures 1122 6220 -2.7 -1.5 Global Real Estate 982 1644 -5.7 -4.5 Europe Stock 943 4218 -6.1 2.5 Categories with Highest Outflows in August ($ in Million) Total Return (%) August YTD August YTD Intermediate – Term Bond -6711 29175 -0.4 0.1 Large Value -3866 -22052 -6 -5.3 Multisector Bond -3484 1920 -1.1 -0.4 Large Growth -3337 -26518 -6.4 0.3 World Bond -3116 13711 -0.9 -3.1 Source: Morningstar Top & Bottom-Flowing Active Funds Below we present the list of top and bottom flowing active funds for August: Top Flowing Active Funds Net Inflow ($ in million) Performance (%) Aug-15 1 Year Aug-15 1 Year DoubleLine Total Return Bond Fund (MUTF: DBLTX ) 965 12245 -0.3 -1 PIMCO Income Fund (MUTF: PONAX ) 750 10659 -1.2 -4.2 Strategic Advisers Core Fund (MUTF: FCSAX ) 743 2549 -4.8 -5 Brown Advisory WMC Strategic European Equity Fund (MUTF: BIAHX ) 680 725 -6.6 -3 T. Rowe Price Emerging Markets Stock ( PRMSX) 649 1940 -9 -20 As we can see, all these top flowing active funds had ended in the red for August and also over the last 1-year period. The reason is not necessarily the inflows, but as we know August has been a cruel month for the broader markets. However, once we compare the performance of active funds that had the biggest outflows, we will see that their loss was much larger. This is in contrast to the trend we noticed for the fund categories in August; where categories with largest outflows suffered relatively less losses. Bottom Flowing Active Funds Net Outflow ($ in million) Performance (%) Aug-15 1 Year Aug-15 1 Year GMO Asset Allocation Bond (MUTF: GABFX ) -2,018 -1,902 -0.6 -11.3 PIMCO Total Return (MUTF: PTTRX ) -2,015 -124,484 -1.1 -4 Templeton Global Bond (MUTF: TPINX ) -1,922 -6,013 -5.4 -14 Franklin Income Fund (MUTF: FKINX ) -1,473 -3,035 -4.4 -14.8 Oppenheimer Developing Markets (MUTF: ODMAX ) -1,059 -1,824 -10.6 -27 Source: Inflow/Outflow data from Morningstar; Performance data calculated using GoogleFinance. For the first time since Bill Gross quit PIMCO to join Janus , the PIMCO Total Return Fund was not at the bottom of funds with the most outflow. It took up the second seat instead. Its 1-year net outflow leads the pack, but the loss is not as much as others. PTTAX has lost 4% over the 1- year period, whereas the others including the Oppenheimer Developing Markets Fund, the Franklin Income Fund, the Templeton Global Bond Fund and the GMO Asset Allocation Bond Fund have suffered larger losses. Coming to Zacks Mutual Fund Ranks, the DoubleLine Total Return Bond Fund, the PIMCO Income Fund and the Templeton Global Bond are the only ones that currently carry a favorable rank. While DBLTX carries a Zacks Mutual Fund Rank #1 (Strong Buy) , the latter two carry Zacks Mutual Fund Rank #2 (Buy). The Strategic Advisers Core Fund and the PIMCO Total Return Fund have a Zacks Mutual Fund Rank #3 (Hold). Meanwhile, the T. Rowe Price Emerging Markets Stock Fund and the GMO Asset Allocation Bond Fund hold a Zacks Mutual Fund Rank #4 (Sell) and the Franklin Income Fund and the Oppenheimer Developing Markets Fund carry Zacks Mutual Fund Rank #5 (Strong Sell). As said, in certain cases there is more arts than science. Fund flows may be just a fraction of a factor to help a fund’s uptrend. Inflows may not translate into gains for mutual funds. Investors do not necessarily have to buy funds that are seeing strong inflows and vice versa. Link to the original post on Zacks.com

Cushing MLP Total Return Fund: A Lesson For CEF Investors

Summary CEF investors are often attracted by the high yields in this space. SRV’s anomalously high yield and premium provided a ripe recipe for disaster. This article identifies three warning signals that investors could have heeded before the devastating event. The date is Dec. 22nd, 2014. With oil prices collapsing around you, you decide that now would be a good time to dip your toes in an MLP close-ended fund [CEF]. You read Stanford Chemist’s just-published article entitled ” Benchmarking The Performance Of MLP CEFs: Is Active Management Worth It? “, where he recommended, among five MLP CEFs yielding 5.43% to 6.85%, the Tortoise Energy Infrastructure Corporation ( TYG ) due to its strong historical total return and outperformance vs. the benchmark Alerian MLP ETF ( AMLP ). But the 5.43% yield of TYG and the 6.25% yield of AMLP are a bit low for your tastes. You decide to invest in the Cushing MLP Total Return Fund ( SRV ) with a whopping 14.02% yield , more than double that of the other two funds. With twice the yield, you might expect twice the return, right? Fast-forward to today. You have lost half of your investment. The following chart shows the total return performance of SRV, TYG and AMLP since Dec. 2014. SRV Total Return Price data by YCharts What happened to SRV? As with some other high-profile CEFs profiled recently, what transpired with SRV in early 2015 was a distribution cut that triggered a massive collapse in premium/discount value. As can be seen from the chart below (source: CEFConnect ), SRV slashed its quarterly distribution by 68%, from $0.2250 to $0.0730 in 2015. Amusingly, after paying one quarter of its reduced distribution, SRV cut its distribution again by 26%, while simultaneously changing to a monthly distribution policy (perhaps to make the second distribution cut less obvious!). Taken together, the overall change from a distribution of $0.2250/quarter to $0.0180/month represented a 84% reduction for SRV holders. (click to enlarge) The distribution cut was accompanied by a massive reduction in premium/discount value, from some +30% to -10%, as can be seen from the chart below. This explains the severe underperformance of SRV vs. TYG and AMLP since Dec. 2014. (click to enlarge) Obviously, hindsight is always 20/20. But I believe that there were some warning signs that SRV investors could have heeded before the disastrous event. Lesson #1: Consider historical performance While historical performance is no guarantee of future results, the past return of a CEF can give an indication of the management’s competency in running the fund. The 3-year total return to Dec. 2014 (the hypothetical start date of this exercise) shows that even before the distribution cut had occurred, SRV had been severely underperforming TYG and AMLP on a total return basis. SRV Total Return Price data by YCharts On a price-only basis, the underperformance of SRV becomes even more visually striking. SRV data by YCharts The above charts indicate that the high distribution paid out by SRV has prevented it from growing its NAV, despite the bull market in MLPs. Even when total returns are considered, SRV still lagged TYG and AMLP in the three years to Dec. 2014. Lesson #2: Premium/discount matters! As investors in the Pioneer High Income Trust (NYSE: PHT ) (see here for my previous article warning of PHT’s expanding premium) and more recently, the PIMCO High Income Fund (NYSE: PHK ), have found out , a high starting premium simply increases the amount that a fund can fall when adversity strikes. On Dec. 22nd, 2014, SRV’s premium/discount had stretched to a massive +28.4%. In comparison, TYG’s premium/discount was -6.1% at the time. The following chart shows the 3-year premium/discount profiles for SRV and TYG. (click to enlarge) The chart above shows that in the two years leading to Dec. 2014, SRV’s premium/discount expanded from around +15% to over +30%. On the other hand, TYG’s premium/discount declined from +15% to around -10% over the same time period. Does it make any sense to you that the perennial underperformer SRV was immune to the MLP sell-off that began in the summer of 2014, while the benchmark-beating TYG was not? No, it doesn’t make any sense to me either. In fact, SRV’s premium continued to expand even while the oil crash was already well underway. My only explanation for this was that retail investors were enamored with SRV’s high yield and pushed up its market price relative to its NAV. CEF expert and Seeking Alpha contributor Douglas Albo frequently laments the “Insanity of CEF Investors.” I believe that this example qualifies. Lesson #3: Beware of yields that seem too good to be true On Dec. 22, 2014, SRV yielded 14.02% with a premium/discount of +28.4%, meaning that its yield on NAV was even greater, at 18.00% (!). Meanwhile, TYG yielded 5.43% with a premium/discount of -6.1%, giving a NAV yield of 5.10%. Given that both funds employ similar leverage (around 30%), and are investing in essentially the same universe, how can SRV be yielding more than three times on its NAV compared to TYG? It just doesn’t make any sense. Simply put, SRV’s yield was way too good to be true. Summary I believe that there were several warnings signs that could have allowed investors to avoid SRV before the calamitous distribution cut in early 2015. These were [i] a poor historical performance, [ii] a rising premium (while other and better funds in the same category witnessed premium contraction), [iii] a yield that seemed way too good to be true. My main regret is not being able to identify this short opportunity for readers, and/or warn existing holders to exit the fund beforehand. Nevertheless, I hope that this article will help investors pick out similar warning signs in their existing or potential CEF investments to allow them to take action earlier. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Gundlach’s DoubleLine Launches First ETF

By Alan Gula Pacific Investment Management Co. (PIMCO) is facing an investor confidence crisis. The storied bond firm experienced over $150 billion of mutual fund outflows in 2014. And PIMCO’s flagship Total Return Fund is now 54% smaller than it was at its peak in April 2013, when assets under management (AUM) reached $293 billion. The exodus intensified after the abrupt and unceremonious departure of Co-Founder Bill Gross in September 2014. But one firm has benefited greatly from the turmoil at PIMCO : DoubleLine Capital. Headed by Jeff Gundlach, DoubleLine saw its 13th consecutive month of net inflows in February, following a record monthly net inflow in January. With good reason, Gundlach is being hailed by many as the new “bond king.” And just last week, Gundlach’s DoubleLine launched its first exchange-traded fund (ETF), which will surely intrigue fee-conscious fixed-income investors. DoubleLine has partnered with ETF pioneer, State Street Global Advisors, to offer the SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ). DoubleLine’s lineup includes successful open-end mutual funds and closed-end funds, but this is its first ETF. The firm will actively manage TOTL, allocating capital among different fixed-income sectors using a top-down macroeconomic approach and selecting securities via bottom-up analysis. With 114 funds, the ranks of actively-managed ETFs are growing. However, with under $20 billion in aggregate AUM, it’s still a nascent area. PIMCO’s Total Return ETF (NYSEARCA: BOND ) is perhaps the most popular actively-managed bond ETF and has $2.5 billion in AUM. Although bond fund investors are typically long-term oriented and don’t necessarily need intra-day trading liquidity, ETFs often carry lower fees than their mutual fund counterparts. This is the case with TOTL, which has a net annual operating expense of 0.55%. This compares favorably to the investor share class of the DoubleLine Total Return Bond Fund N (MUTF: DLTNX ), which carries a fee of 0.73%. The institutional shares levy a 0.48% expense ratio, but you’ll have to pony up $100,000 to meet the minimum investment requirement. DoubleLine’s Total Return Bond Fund outperformed 91% of its peers in 2014, according to Bloomberg data. Like DoubleLine’s flagship fund, TOTL is an intermediate-term bond fund… but its mandate is a bit broader. Investments can include Treasuries, mortgage-backed securities (MBS), domestic and foreign investment-grade corporate bonds, foreign government bonds, including emerging markets, floating rate securities, etc. The fund will maintain at least 20% of its assets in MBS or securities with government guarantees, whereas DLTNX aims to maintain MBS exposure of 50% or greater. DoubleLine’s tactical ETF may invest up to 25% of its net assets in high-yield bonds. The fund will target a lower duration (interest rate risk) than that of the benchmark Barclays U.S. Aggregate Bond Index. Therefore, a rising interest rate environment (which is not my forecast, but is possible) should have a muted impact. DoubleLine’s first ETF, and its latest in an array of quality offerings, is an exciting development for both the firm itself and fixed-income investors looking for additional fund choices and lower fees. At its peak, PIMCO managed over $2 trillion. At the end of 2014, DoubleLine managed a much smaller, but quickly growing, $64 billion. Of course, performance, not size, should be used as a yardstick for greatness. And there’s no doubt in my mind that DoubleLine is already a giant in the industry. Original Post