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Insomnia 2007-05-30 07:50:00
Bill Gross, the founder of Pimco, is the godfather of savvy bond investors and, if you’re looking for a good bond fund Pimco should be on your list. He wrote a thought provoking piece in the May 28th issue of FORTUNE: How to Sleep Well at Night. Bill says that bonds are less volatile than stocks, provide a higher and steadier source of income, and allow you to sleep better at night. (That’s true, although I’m going to argue in coming weeks that good performing dividend paying stocks will provide a higher level of income than bonds over time, but that’s another story.)
Bill admits U.S. Treasuries, which are currently yielding under 5%, may be 50 basis points (.5%) overvalued. He also acknowledges that you can get just as good returns at the bank (I’d say in money market funds).
Why buy bonds? International recycling of dollars will drive yields lower, says Bill. Demand will drive up the price.&n Read more:Insomnia
Fund of Funds 2007-05-23 07:49:00 Wall Street’s principal product for retail investors these days is the “fund of funds.” As the name suggests, it’s a fund which owns pieces of a number of other funds with similar investment objectives. Recent examples I’ve seen include a hedge fund fund of funds, a private equity fund of funds and an international debt fund of funds.
Your broker will extol the advantages of a fund of funds, such as access to funds you couldn’t buy individually because their minimums are too high or you’re reducing your risk in a riskier investment class. Like the funds they invest in, funds of funds often have fairly hefty minimums and are illiquid. It may take you a month to three to get your money out and you can’t easily make addition investments or small withdrawals. The way I see you’re paying double fees – one to the mangers of the real funds and a second to the fund of funds manager (who may just happe Read more:Funds
Parental Discretion is Advised 2007-05-21 07:26:00 International mutual funds should be a part of every investor’s portfolio. I’ve beaten this drum before (see A Euro, A Yen, a Buck or a Pound and The CIA Guide to International Investing). But when the cover of BusinessWeek asks: What’s the Most Extreme Emerging Market on Earth? (remember the Sports Illustrated curse) I begin to get a little nervous. Let’s stick with China for a minute. The Hang Seng (Hong Kong stock market) is up 30% in the past year. This is against a current back drop of Chinese government concerns about their stock markets becoming too speculative, widening the trading range of the Yuan, and possible U.S. trade limitations.
International markets will go down at some point in time and I take the above as warning signs that a correction might occur sooner rather then later. Does this mean you should sell your international mutual funds or not buy, if you don’t yet own any?&nb Read more:Parental
, Advised
How to Hedge Your SUV 2007-05-16 08:12:00 Think gas prices will remain high or go higher? I do. Demand is growing. Gasoline consumption is up 2% in the U.S. this year. China, India and the other new economies crave energy. Ask yourself this: Are you plugging more stuff into the wall each year? Political instability in Nigeria, Iran, and Venezuela could limit supply. And, there’s only so much oil (natural gas and coal) in the ground. I’m not suggesting we’ll run out but it will become more expensive to extract it.
How can you benefit from higher energy prices? By investing in energy companies. There are two ways to do this. You can buy a Natural Resources sector fund or you can buy a Value fund which holds energy stocks. The sector mutual fund is the “pure play.” It holds energy stocks and, probably, stocks of minerals i.e., iron ore and copper, mining companies. The risk with a sector fund is that there aren Read more:Hedge
Help Wanted 2007-05-14 08:08:00 The Dow recently hit an all-time high. The S&P may be next. The Wall Street pundits are saying the markets are going higher. Stocks will go up. Interest rates will go down, based on last week’s inflation report, meaning that bond prices will go higher. But wait, Alan Greenspan says there’s a 1/3 chance of a recession before the end of the year (that’s within the next seven months, folks). A recession certainly won’t be good for stocks.
What’s an investor to do? Invest for the long term. How? By finding good professional managers, i.e., mutual fund mangers, and sticking with them. These men and women come to work every day and think about nothing except how to invest your money. (Okay, they may also think about where they’re going for lunch and their kids soccer game, but all of us think about these things at work, don’t we?)
If a doctor shouldn’t operate on hi Read more:Help Wanted
All Holds Barred 2007-05-09 06:23:00 In poker you hold when you’ve been dealt a great hand (something that never has happened to me) or you believe the chances are more likely that you’ll end up worse off if you draw cards. Good poker strategy, bad investment strategy.
There is no such thing as a hold investment. (Yes, I know hold recommendations are issued every day, but they’re copouts. I consider every investment recommendation that’s not a buy to be a sell regardless of what label’s put on it.) There are only two investment decisions – buy and sell. If you own (hold) a mutual fund and do not sell it, you’re making a buy decision. I should end right here, but I’ll continue.
If you own (hold) a mutual fund and you do not feel comfortable buying more either because of price, or outlook, sell it. (An exception would be if you held the fund in a taxable account and next week your gain would transition from short term to lo
Don't Fight the Tape 2007-05-07 07:21:00 The old adage simply means: go with the flow. Despite what we may think, despite what the economy is telling us, if stocks are heading higher, be along for the ride. If they’re heading lower, bail out.
I stated urging caution about the stock market two months ago (my opinion hasn’t changed, rising gas prices being the latest reason). Since then the Dow is up 8%, at an all-time high, and the S&P is up 7%, 25 points away from its all-time high. As I said in my April 2 posting, Hurricane Season, no one, including myself, can predict the market but we can make prudent investment decisions. I’m glad the stock market has gone higher. It’s good for all of us (except you short sellers), but I’ve used this rally to rebalance my mutual fund portfolio (i.e., take money out of the stock market) and I hope you’ve done the same.
Of course the market may go higher. Don’t fight the tape, right?&nb
A Euro, a Yen, a Buck or a Pound 2007-05-02 07:39:00 Or a Yuan. (With apologies to all you Cabaret fans.) Mutual fund investors need to be aware of the currency risks you’re taking (or not taking) when investing internationally. Is your mutual fund hedged against the dollar or not? Do you want your fund to be hedged or not? What difference does it make to you? Let’s start with the last question first.
Currencies do fluctuate is value (except for the Yuan, whose exchange rate is fixed by the Chinese government, but it will be revalued upward against the dollar at some point). For example, in 1999 €1.00 cost $.85. Today the exchange rate is about €1.00 = $1.36. (Condolences to any of you who are vacationing in Europe this summer.) Any dollar dominated investor, such as those of us in the good old USA, would have seen substantial appreciate in the Euro dominated investments (European stocks and bonds) we made a few years ago just based on currency movement.&nbs Read more:Pound
Through the Looking Glass 2007-04-30 08:00:00 Bond yields are supposed to increase with the length of time until the bond matures and you get your principal back. (When I talk about bonds I’m really mean any fixed income investment: bonds, bills, notes, CDs, and so on.) A basic, maybe the basic principle of investing is the risk/reward trade-off. You have to take risk to earn a return. The corollary is also true. The more risk you take, you greater should be your expected reward (return).
The risk/return trade-off means there should be a positive relationship between the expected return and the maturity of a bond. The longer to maturity, the higher the yield. Why? Because the longer until maturity, the greater the risk. Risks include inflation reducing the value of the bond, rising interest rates, having to sell the bond at a loss prior to maturity, and, except for US Treasuries, default by the issuer.
The yield curve (return vs. maturity) should be an upward s Read more:Glass
, Looking Glass
When is a Door not a Door? 2007-04-25 08:10:00 When it’s an Exchange Traded Fund (ETF), according to John Bogle. Mr. Bogle is the founder of the Vanguard funds and a champion of low-fee and index funds. He’s one of those people who’ve forgotten more about mutual funds then I’ll ever know.
An ETF is supposed to be similar to an index fund. ETFs and index funds are market baskets of securities designed to track the performance of a market index, such as the S&P 500. (Proponents argue that ETFs can have lower costs, greater liquidity, and be more tax efficient then index funds.)
In Mr. Bogle’s just-published book The Little Book of Common Sense Investing he argues that ETFs have been hijacked by day traders and that many ETFs will not track the indexes they’re designed to mimic and will not meet investors expectations. You can find a summary of his arguments in the April 30 BusinessWeek article What’s Wrong With ETFs? (Yes, I k
A Yen to Diversify 2007-06-06 08:51:00 As I’ve written before (Parental Discretion is Advised; A Euro, a Yen, a Buck, or a Pound; The CIA Guide to International Investing), international mutual funds are an essential part of any investor’s portfolio. There’s an excellent article on global investing in the June 3rd New York Times: An Around-the-World Ticket for your Portfolio.
As you’d expect, the stock markets of Western Europe are highly correlated to the U.S. market. Makes sense, doesn’t it? A good portion of BMW’s profits come from the U.S., so if the U.S. economy turns down (and the U.S. stock market), so does BMWs profits and its stock price on the German exchange. Also, as you’d expect, the stock market movements of emerging counties, i.e., Brazil (68%), China (53%), India (43%), Russia (35%), are not as closely correlated with the U.S. market as are the Western European markets. (Of course, they’re also more volatile.)
Read more:Diversify
Double, Double Toil and Trouble; Fire Burn and Caldron Bubble 2007-06-04 07:28:00 The S&P finally closed at a new high last week. The Dow hit another record high. The Chinese stock market sold off 6% in one day, yet the price of Chinese ADR’s (the shares of Chinese companies traded in the US) actually rose. Sounds too good to be true, doesn’t it?
Against the Gods: The Remarkable Story of Risk tells the story of financial bubbles which have occurred throughout history. The best known is the Dutch tulip bulb craze which took place in the 1600’s. (I know, the Dutch seem like such sensible people.) The Dutch became smitten with tulips imported from Turkey. The price of bulbs, depending upon color and rarity of the tulip, was bid up to ridiculous levels. After all, they don’t cure cancer and you can’t eat them (they’re poisonous). And this is where the story usually ends.
But there’s more. At one point, you could buy a nice townhouse on a good c Read more:Trouble
, Bubble
Too Much Income Can Be Hazardous to Your Financial Health - Part I 2007-06-12 08:53:00 Bonds have higher yields then stocks. Bond funds have higher yields then stock funds. This means more current income for you. Bonds and bond funds are (generally) safer then stocks and stock funds. They fluctuate less in value. That’s good, too. So what’s wrong with this picture? Bonds are fixed income securities. Their income doesn’t grow, nor does their principal value. As a matter of fact, the real value of their principal declines over time due to inflation.
Now, before you jump all over me, yes, there are inflation-adjusted Treasury securities that increase in value with inflation and floating-rate bank loan funds whose yield should increase if interest rates go up. Also, you can realize a (usually modest) gain in principal value if you buy a bond at less then its face value and hold it until maturity.
And, there are some managers who through astute analysis, forecasting and trading, add value Read more:Income
, Hazardous
, Financial
, Health
Too Much Income Can Be Hazardous to Your Financial Health - Part II 2007-06-13 06:59:00 In our last thrilling episode (Too Much Income
Can Be Hazardous
to Your FinancialHealth
– Part I) we talked about the risks of holding bond (fixed income security) funds. Simply put, the current income is nice but neither the income, not the principal increase over time, absent a good fund manger. So what’s an investor to do?
Find a good conservative mutual fund which invests in dividend paying stocks. Why? Because dividends paid by good companies tend to increase over time. Take Bank of America, for example. (I’m using a stock rather than a mutual fund for this illustration because it avoids having to talk about purchases, sales and capital gains distributions.) In 1997, Bank America paid a $.70 per share dividend. If you bought the stock near its high for that year, you paid $40 per share. Today, B of A pays a $2.24 dividend and its stock sells for around $50. Notice, the dividend has increased 3x i
Straw Houses 2007-06-18 07:51:00 The Dow and the S&P are touching record highs. Not even the specter of rising interest rates can dampen this market. The last downturn in the market occurred in February and there was just a pause for it to catch its breath and run to record highs. Isn’t life wonderful?
Well, life isn’t so good if your mortgage lender is foreclosing on you and home foreclosures are rising. Take a look at Home Foreclosures Hit Fresh High which appeared in Friday’s Wall Street Journal. Deficiencies are on the rise and almost at levels last seen in the 2001 – 2002 recession. You’d expect foreclosures to be high during a recession, but not when the economy is growing. Even more ominous is the value of the collateral backing the mortgage. Home prices rose steadily from 2002 through 2005. Real estate was the place to be. Families moved into bigger homes (with bigger mortgages) and investors bought (speculated in) res Read more:Straw
Real Estate Funds are in a Class of Their Own 2007-06-20 08:23:00 Commercial real estate (office buildings, shopping centers, etc.) is considered to be a separate asset class from stocks and bonds. Thus, an investor can gain additional diversification by investing in commercial real estate. If you aren’t able to buy a group of apartment buildings or shopping centers, and most of us aren’t, the way to invest in real estate is through a REIT (Real Estate
Investment Trust) which owns a number of properties or mortgages. Equity REITs own properties. Mortgage REITs are similar to long term bond funds. Of course, rather than trying to select one or two REITs, investing in a REIT/real estate fund is hiring a professional manager to do it for you and provides diversification. There are a number of excellent REIT/real estate mutual funds, see MUTUALdecision’s top ten Real EstateFunds
list.
One attraction of REIT funds is their relatively high current yield. But beware, check the fund to see if it
Everything Old is New Again 2007-06-25 08:17:00 The Dow declined about 2% last week and long term U.S. Treasury rates continued their climb, now yielding about 5.25%. Investors in Blackstone made a lot of money when it went public. I continue to wonder if the money in private equity is in the fees they charge, see Fund of Funds, and not the deals they do.
Going back to interest rates, Bill Gross of Pimco, is halfway to making good on his May 28 prediction that long term Treasury bonds were yielding 50 basis points too low, see Insomnia. They’re up over 25 basis points since then and I wouldn’t bet against them making Gross’ 50.
The Bear – Bear Stearns, that is – had to pump $3.2 billion into two of its subprime mortgage funds to prevent them from going belly up (and no Bear likes to be on its back). Back in March, I wrote about the coming subprime debacle, see Yellow Sub(prime)marine. The only surprise is how well contained it has been thus far, but do yo Read more:Everything
, Again
Real Smart Money 2007-06-27 14:46:00 My partner and I had lunch with the person who runs one of the preeminent university finance reach centers in the U.S. (really, in the world). He had three (okay, seven) words of wisdom for investing in the stock market: S&P index funds, small cap stock funds and momentum. Let’s take them one at a time.
Index funds, as championed by John Boogle and Vanguard, are a way for the investor to track the performance of the market. Indexers argue that most investors can’t beat the market and end up under performing and paying higher fees trying. According to our research guru, all S&P index funds show the same performance, the only difference being expenses, so pick the fund with the lowest expense ratio.
The market for small cap stocks is less efficient due to the more volatile nature of small companies and less analyst coverage. Thus, an insightful mutual fund manager can outperform a small cap average (what would go i Read more:Smart
, Money
Halftime 2007-07-02 07:44:00 The stock market put in a great performance for the first half of 2007, the Dow is up 7.6%, the S&P 6.0%, the NASDAQ 7.8%. Almost all of these gains were realized in the second quarter, a very impressive quarter given the uncertain economic and geopolitical backdrop.
The bond market did not fair nearly as well as the stock market. Treasury yields rose approximately 30 basis points across the yield curve, resulting in falling bond prices and one of the worst quarters for fixed income securities in the past few years.
Economic consensus is for continued growth. The housing drag and subprime mortgage problems will be contained, economists say. The consensus is less clear about the outlook for interest rates. The sentiment has shifted in recent weeks from a Fed cut late in the year to an increase, economic strength and inflation containment cited as why.
In the latter stages of an economic cycle interest rates rise and the stock mark Read more:Halftime
Earnings Matter 2007-07-09 08:02:00 The S&P 500 is up about 7.5% thus far this year. That’s a good return for just over six months. Will it keep going up? Consider this. The earnings of the S&P 500 companies are expected to grow by about 5% in 2007, according to a leading Wall Street brokerage firm. That means if the market was fairly valued at the beginning of 2007 and there were no big changes as to how investors think about the market, the S&P should only go up by 5% in 2007. Hence, game over. Come back next year.
But wait! Let’s examine each of the above assumptions. Was the S&P fairly valued at the beginning of 2007? Well, for the 12 months ended June 2007, it’s up 22%, so it had a pretty good run in the second half of last year and considering that 2006 was the fourth year of the current economic expansion, it’s likely the S&P was around fair value at the beginning of 2007. Okay, but doesn&rsq Read more:Earnings
ETFs: New Wave or Riptide? 2007-07-11 07:23:00 There was an excellent article discussing the pros and cons of investing in ETFs in the July 3rd Wall Street Journal: As ETFs Seek Niches, Risks Rise (unfortunately, The Wall Street Journal doesn’t allow us to link to their articles, perhaps that will change after Rupert Murdoch buys Dow Jones.) There’s over $500 billion invested in ETFs and, I believe, they will either replace open-end index mutual funds or force those funds to lower their expenses. A win for investors. ETFs generally have lower on-going expenses then index mutual funds. You’re charged a commission to buy or sell them, as for a stock, but the commission may be less then the fee charged by your broker, or fund, for buying a mutual fund (consider the share class you’re buying). ETFs are priced, and traded hourly, not at the end of the day as with open-end mutual funds.
ETFs are excellent tracking vehicles for many different kinds of investments. Want to inve
The Glass is Half Full and Half Empty 2007-07-16 07:41:00 Last week was a week of records. The Dow and S&P closed at new highs. The NASDAQ closed at its highest level in six years. Oil closed at $74 a barrel, an 11 month high. The Euro hit an all-time high against the dollar. It now takes over $1.38 to buy one Euro. (My sympathy to all of you vacationing in Europe this summer.)
Twice last week I read/heard commentators saying that rising oil prices are good – they’re a sign of a strong economy. The talking heads glass is half full (and I think it’s filled with something stronger than water). Rising energy prices worry me. They take money out of the consumers pocket, add to inflation and increase our balance of payments deficit, leading to higher interest rates. Sorry, my glass is half empty on this one, but maybe I’m just old school.
Something else happened last week, which received almost no press. Credit spreads widened. This mean Read more:Glass
, Empty
A Good Long Term Strategy 2007-07-18 07:35:00 Want to structure your mutual fund portfolio to achieve optimal returns for the next twenty years? Read on (or just skip to the last paragraph.).
There was a great article in the June CFA Institute publication Expected Rates of Return: Back to the Future by Jim O’Shaughnessy. Mr. O (I can’t call him Jim because I’ve never met him, although I’d like to.) conducts solid research, writes clearly, and (gasp!) makes recommendations. This unusual combination of talents first came to my attention when I read What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time. Although the book discusses stocks, Mr. O’s research and conclusions are applicable to mutual funds. The article published in by the CFA Institute is a synopsis of his work.
Mr. O reminds us that most money mangers lack the discipline to consistently execute strategies. That’s true f Read more:Strategy
The Perfect Storm 2007-07-23 10:43:00 The stock market turned down last week, so did the prices of non-investment grade bonds. The “junk” end of the debt market showed falling prices, widening credit spreads and a dramatic decrease in liquidity. (Conditions that often go hand-in-hand, but are troublesome nonetheless.) Subprime mortgage loans are the primary culprit. The only surprise is how little attention the press is paying to these events. Sounds like the perfect storm to me. We could be on the cusp of a full blown credit crisis.
The stock market did pay attention to earnings, as Caterpillar and Google will attest. Caterpillar’s results are instructive. The preeminent maker of construction equipment in the world reported strong international sales, offset by weak domestic demand. I think you’ll see a slowing U.S. economy and continued strong intentional growth repeated in the earnings of other Big Caps. Slowing earnings growth will ke Read more:Perfect
, Storm
Leverage Land Mines 2007-07-25 09:31:00 Financial leverage is like a land mine. You might be unaware of it until it blows up. Buying stocks on margin is an obvious form of leverage (the mortgage on your home is another) and all of us understand how risky it is to buy on margin. Simply put, leverage magnifies your gain or loss and, since you’re borrowing money which must be repaid, you can lose more than your entire investment (the investment and the loan amount). Okay, you say, point made, but I don’t leverage my investments. Are you sure?
Did you know that many mutual funds use leverage to enhance their returns? To illustrate, let’s take a look at two Nuveen municipal bond funds (Nuveen is one of the top municipal bond mutual fund companies): Nuveen Municipal Market Opportunity and Nuveen Municipal Value. Kinda hard to tell how they differ from the names, so let’s look further. Both funds are mostly invested in triple A municipal bo Read more:Leverage
Chicken Little was Wrong 2007-07-30 08:08:00 It was a stormy week in the market. The correction I’ve long anticipated, and the biggest one week loss since March 2003, materialized but the sky didn’t fall. The chart below puts the week in perspective.
Return Dow Ind S&P 500 NASDAQ
12 m Read more:Chicken
, Wrong
Portfolio Turnover: Should You Care? 2007-08-01 06:52:00 One of the mantras of mutual fund investing is to look at a fund’s turnover before you buy it. The implication is that a high turnover is bad. (Turnover
is the percentage of a fund’s holdings that are traded during a year. Funds can have a turnover greater than 100%, which means that their average holding period per investment is less than one year.) Many mutual fund screening tools have portfolio turnover as one of their filters and you can usually find a fund’s turnover (expressed as a percentage) on the fund’s snapshot page or by doing a little digging on the fund’s website.
Here’s the first argument as to why turnover is bad. Higher turnover results in higher expenses because of higher transaction costs. This is true both for stock and bond funds, although turnover is even more relevant for bond funds. Why? Transaction costs are greater and trading spreads are wider for bonds (except for US Read more:Portfolio
Same Old, Same Old 2007-08-06 07:43:00 Last week was another down week for the stock market, attributed to problems in the subprime sector rippling through the debt market. The jobs report also was a disappointment. The Dow, S&P 500, and NASDAQ are down 5.8%, 7.7% and 7.7%, respectively, from their July peak (all-time highs for the Dow and S&P). These declines exceed the February – March correction and they should because they’re reflecting more serious problems (the Feb. – Mar. adjustment was a reaction to a pullback in the Chinese market).
What to expect this week? More of the same. Subprime is finally getting the attention it deserves (even though the problem has been around for months). The market for securitizations is shaky (and all loans, not just subprime mortgages, are packaged and resold in securitized form). The big question is what will the Fed do when it meets on Tuesday? Answer: leave rates unchanged. This will be a dis
Yielding to REITs 2007-08-08 07:58:00 Income is hard to come by these days. Treasuries are yielding less than 5%. The bond market is in disarray, credit spreads are widening (meaning the price of existing bonds is declining) and there are serious liquidity issues (which also impact value).
Have you considered Real Estate funds? Many have current yields in the 5 - 8% range (primarily REIT – Real Estate Investment Trust – funds). Now, let’s be clear on this. These are equity funds and equity funds carry greater risk, and have greater volatility, than bond funds. (Of course, investors in subprime mortgage funds have found out that debt funds are not without risk!) However, equity funds also offer the potential for increasing income and capital appreciation (see Too Much Income can be Hazardous for Your Heath).
Real Estate funds cover a lot of territory and you want to make sure you know how your fund invests. I went to the MUTUALdecisi
Too Close to Call 2007-08-13 06:55:00 It’s hard to believe, but the Dow, S&P and NASDAQ all closed up for the week. Friday was a roller coaster day in the markets and, as they gyrated up and down, it was too close to call as to whether the indices would finish the week plus or minus.
The Europeans are taking our credit problems more seriously than are we, witness the downward movements on their stock exchanges and the amount of liquidity the European Central Bank poured into the system. The fact that Europe is effected by our mortgage and securitization problems demonstrates the interconnectivity of world financial markets.
The Fed injected funds into the US financial system. (The Fed is acting responsibly, notwithstanding what Jim Cramer says. As much as I respect Jim, the Fed has no obligation to bail out hedge funds or attempt to eliminate – which it couldn’t do anyway – market corrections.) The Fed is essentially providing liquidity to the ove Read more:Close
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