Investment Help

If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.

Thursday, January 31, 2013

Performance of Highly Touted Bond Fund

Take my word for it - you have to search long and hard to find someone who would claim that Dan Fuss is not one of the smartest bond people in the business.  He is not only smart but also, at 72 years of age, has the all important experience.  In my book, he is one of the top 3 in the business.

So, why wouldn't an investor just bypass bond index funds and go with the smartest, most experienced in the business?

Good question.  It came to mind as I read "Bonds Most 'Overbought' in 55 Years, Loomis Sayles's Fuss Says" by Bloomberg writers Steve Bailey and Emma Charlton.  The article mentioned that Fuss is starting a U.K. Fund to replicate

the success of his $15 billion Loomis Sayles Strategic Income Fund (NEFZX), which beat 94 percent of its peers over the past year and 97 percent over three years.
This caught my eye and got me to look a bit closer at how the fund has performed.  So, over to Morningstar I went and plugged in the ticker symbol.  The following table shows performance (just click the "performance" tab on the Morningstar home page) on an annual basis starting with 2007 along with performance on the Barclay's Aggregate Index.

Agg. Bond  Index
So the natural question is:  how would an investor in this fund have performed starting on 1/1/2007, compared to the overall bond market?  One thing to note is that NEFZX is a Class A (Class A here doesn't mean superior!) fund with a 4.5% load.  This means that putting up $100 results gets $95.5 invested.  So, here's what starting with $100 under the alternatives looks like:

NEFZX ($95.50)
Agg. Bond Index ($100)

 **102.43 = 95.50 * 1.0726

As shown,  NEFZX has outperformed.  For an investment of $100,000, the difference ($146,110 - $142,780) amounts to $3,330.  But look at the ride the investor experienced!  It wasn't until last year where he or she pulled ahead and, at one point, was under water by more than 20% for a bond fund. The Barclay's Index, which can easily be tracked by a low-cost exchange traded fund, was never under water and had a positive return in each year.  To be fair, NEFZX does allow up to 35% in equities; and this is what apparently hammered the 2008 results.

In the real world,  emotions come into play. The pulling ahead in 2012 is for naught if the investor bailed early.

Bottom Line

As mentioned, Dan Fuss is one of the top bond managers in the business.  In my book, he's a genius.  If I was to use an active fund, it would be one of his.  The main point, however, is that good returns can be accompanied by volatility that investors and especially retirees aren't comfortable with.  Before investing in any fund, it is worthwhile looking at yearly results with the question of whether you can withstand the ups and downs.  As Bogle and others have said, the Funds do fine over time but investors in them don't, because they are in and out at the wrong times.

Monday, January 28, 2013

Failure to Launch

One of the frustrations an investment advisor comes up against is the people who come in and want desperately to get invested but cannot go through with it.  We spell out in detail exactly what must be done to have a good chance at having a nice retirement.  And we see that they get it BUT.

They understand that they have a number of years before they will draw on the funds.  They come to understand that stock picking and market timing are futile.  They know that a successful retirement requires that they get out of CDs and money markets and stop letting inflation eat away at their purchasing power.  They get that what is important are long term markets - 15 years from now - not the short term.  They even come to see that the media thrives on spooking people.  That's what the media does.

They grasp, it seems, that many people are, like them, in the camp of having a difficulty of getting off the launch pad and the solution may be to let an advisor do it for them.

BUT... when it comes to the bottom line, there's a "well now may not be the right time."  They want to know what I think.  They want me to say that the market is headed higher starting tomorrow.  I can't say this.  The market may drop 15% in the next three weeks.

My argument, based on history and an understanding of the economy, to look past the short run and think long term has difficulty standing up to "fiscal cliffs," "debt ceiling debates," a Europe that makes our debt problems look trivial, and, again, a media that thrives on hammering home any negative minutiae.
But today, maybe what they are looking for is coming.  As the media has hammered home the negatives, getting the average investor or even a lot of professional fund managers looking in one direction, positive surprises (gasp!) have snuck up on the manufacturing front and on the energy front. Politicians have shocked the pundits and shown an affinity for kicking the can repeatedly down the road when their you-know-whats get closer to the fire.

So the worm has turned.  CNBC has even started a countdown to the number of points needed for the Dow Jones Industrial Average (DJIA) to reach an all-time high.  Imagine that headline.  As the market continues higher, we know that fear will morph into greed.  It will look like Wall Street is giving away money.  This is the cycle.  This is when the "failures to launch" get their nerve up.  BUT, stocks have risen 16% in the interim.  Instead of paying $100 for that jacket last month, they are now looking at a jacket that cost $116.

If the DJIA does reach an all-time high in 2013, you can bet people will flood into the market who have no business being in.  And, very likely, they will feel smart for a while and give themselves high fives. This story is so old it must be in the Bible.  Buy high/sell low.

But it isn't all bad.  Advisors also have those they helped launch.  And that makes it worthwhile.

Friday, January 25, 2013

Are You With Buffett or With the Hedge Funds?

If you like high stakes poker, you'll like this.

Back in 2008 (great timing!), Buffett made a $1 million performance bet with Protégé Partners LLC, a fund of hedge funds.  Buffett took the Vanguard S&P 500 Index fund and Protégé chose 5 funds comprised of hedge funds to see which would have the best performance over 10 years.  At the half-way point, Buffett is up +8.69%, Protégé's picks are up + 0.13%.

Worth emphasizing and keeping in mind:
  • the difference (not unexpectedly) seems to be in the costs.  As most observers know, hedge funds have notoriously high fees, typically north of 2%, along with a percentage of profits.  This contest is turning out to be a real-life demonstration that even brilliant strategists have difficulty overcoming those kinds of costs over the long run. 
  • Secondly, although I can't say I am familiar with Protégé, I believe I can safely assert that they are considerably better positioned to pick fund managers than, say, the typical advisory firm for individuals purporting to be able to select superior active mutual fund managers. 
  • Thirdly, an investor building a nest egg would face a difficult decision at this point even though the experiment is only half way over - can he or she take another 5 years of similar results? 
  • Finally, if Buffett had a portion invested in a bond index fund over this difficult period, his returns would be considerably higher than +8.69%.  In fact, the zero coupon bond each participant put the payout funds in increased in value so much that they already have the $1 million to be paid out!  The charity receiving the loser's funds will likely get considerably more than $1 million.  This speaks to the value of sticking with an allocation.

What is the bottom line?  Low-cost index funds are not easy to beat.  Maybe the market isn't efficient, but it sure acts like it is!


On another topic, I have to say that I've immensely enjoyed watching CNBC over the past few months. On a daily basis, they have tried their hardest to convince viewers that apocalypse was around the corner whether it was an apoplectic Simon Hobbs or a ranting Rick Santelli.  They paraded on  politicians who exhibited their talents for playing up the fiscal cliff and avoiding specifically answering questions.

Viewers were poised for a huge air pocket over the last weeks of 2012.

Obviously it didn't happen.  The question is why?  I have to offer one theory I haven't seen bandied about.  Markets emphasize recent experience and put great weight on mistakes.  Indeed, 2008 is a recent example that has kept many would-be investors on the sidelines.  Even more recently, however, many investors sold out in 2011 in the midst of the hoopla surrounding the debt ceiling talks and missed the strong rally at the end of that year.  This time around they made up their minds they wouldn't be spooked.  The widely-anticipated down draft failed to materialize.  Investors held on to a greater degree as the fiscal cliff approached at the beginning of 2013.  As this happens, it seems a sort of immunity builds up.  Keep saying there is a boogey man behind the bush and eventually it loses its scare factor - especially when believing it costs money and performance rankings.

Tuesday, January 22, 2013

Economist Comedian

If you have taken a course in economics, are interested in monetary policy, or have ever wondered if economists have a sense of humor, you'll enjoy this:

Eye-Opening Article on Load Funds

Source: Movie Mezzanine
When we were kids, before the days of movie ratings, Freddie Gonzalez, Steve Lowe, and I walked to Wheaton Plaza to see Alfred Hitchcock's Psycho.  On the walk home, Steve and I had to explain the movie to Freddie who spent a good part of the show with his eyes closed and bent over trying to hide behind the seat in front of him.  He couldn't handle Norman Bates' strange handling of the death of his mother.  When Lila headed up the hill to find out what was going on in the Bates' house, Freddie was almost on the floor of the theater covering his eyes.

Freddie just couldn't uncover his eyes and take in the horror Hitchcock presented on the screen.  All of us had nightmares for weeks.

A different type of subtle horror takes place today in the world of investing with various class mutual funds.  A carryover from the days when the insurance salesman knocked on your door and sold mutual funds on a commission basis, today, load funds are still around.  Investors are still paying a 5% commission for funds when the same fund or a similar fund is available commission free.  The horror is when advisors charge investment management fees and put clients in load funds!

Someone has to go up the hill, turn the "old lady" in the chair around, and find out what is going on.

Steve Garmhausen, in "Are Sales Loads for Suckers" (Barrons, 1/19/2013), does this.  This article will save thousands of dollars for those investors willing to uncover their eyes and read and check out their own holdings.

A couple of quotes:

The more an investor learns about share classes, the more he may suspect that he's the proverbial sucker at the poker table, paying more than everyone else for the same funds. And the fact is, he may be on to something.

But the multiplicity of share classes can also create temptation for brokers to recommend shares based on what they stand to earn from the sale. So how do you ensure that you're in the most economical share class of a fund? 
(I've been accused of spoiling a movie line so I'm not going to give you the answer - please read the article).

To find out if a fund you hold does have a load, just put the ticker symbol in at The first page will show you if there is a load.  The next step is to find out why you own a load fund.

For those for whom all of this is a bit much, I would recommend an hourly consultation with a fee-only advisor or even a knowledgeable family member or friend to go over what you hold.  The fee for the hour may very well pay for itself several times over.

Saturday, January 19, 2013

Beat the Bond Market (Part II)

In the last post, we looked at a portfolio of several exchange traded bond funds, as an example of a portfolio seeking to outperform the overall bond market.  I stressed then, and re-stress here, that trying to beat any market, in my opinion, is very difficult.  I do recognize, however, that markets tend to go to extremes on occasion (read: bubbles are created) and, in deference to the tactical asset allocation approach, do present opportunities for structuring assets accordingly. Many people believe that we are in that situation today in the fixed income markets.

In the investment approach I take, there are 3 steps.  Decide on an asset allocation, decide how to invest, and monitor your investments.  Here we have an asset allocation, and are investing in low-cost, well diversified funds.  The final step is to monitor, i.e., track so that you can see if you are in fact achieving your goal of outperforming the market.  In our specific, we are monitoring the percentage of assets allocated to fixed income.

The exercise here is merely instructive to show the process.  It has only been 3 weeks since the beginning of the year, at which point the portfolio was set up.  This exercise would, at most, be updated when changes are made or on a monthly or quarterly time schedule.  Again, here I'm just setting out the process.

Calculate Portfolio Price Return

Step 1 is to gather prices.  This can be done by going to Morningstar or Yahoo! Finance, for example.

(P) 12/31 (P) 1/18

HYS 103.43 104.69 1.218 0.059
BKLN 24.98 25.17 0.761 0.012
SCHZ 52.34 52.3 -0.076 -0.004
VCIT 87.66 87.7 0.046 0.015
CSJ 105.48 105.72 0.228 0.062
MBB 107.99 108.05 0.056 0.007
FLOT 50.59 50.59 0.000 0.000
HYG 93.35 94.71 1.457 0.162



AGG 111.08 110.93 -0.135

The 1st column on the left lists the ticker symbols of the ETFs comprising the portfolio set up in the last post.  In the 3rd column are the updated prices.  The 4th column shows the calculated price returns.  For example, HYS had a price return of 1.218% over the 3-week period.  Here's the formula as entered into Excel:  =((I2/H2)-1)*100, where I2 and H2 refer to particular cells on the spread sheet.

The final column shows the contribution to total return based on the weighting of each ETF in the portfolio.  Here's the formula:  =C2*J2.  For HYS,  C2 is .049 (meaning that it represents 4.9% of the portfolio).  Thus, .059, shown above, is just .049 * 1.218.

The bottom line is that, so far, the portfolio is ahead with a return of .313% versus -.135% for the overall bond market as represented by the Barclay's Aggregate Index.

A teaching moment:  the reason the price return on AGG is negative is because bond yields have risen since the beginning of the year!

For this short time period, the result doesn't have a whole lot of meaning - I would hold back on the high 5s!  Also, there is an income component that over longer periods you'll want to add in.  For example, after 6 months you'll add one-half of the yield to get an estimate of total return.

Knowing how to use the copy key in Excel and how to sum columns makes this an easy spreadsheet to set up  and can increase your understanding of how the fixed income portion of your portfolio is performing relative to the overall market.

Disclosure:  This post is for educational purposes.  Individuals should consult with an advisor or do their own research before making an investment decisions.  My clients and I own some of the ETFs mentioned above.

Tuesday, January 15, 2013

Beat the Bond Market

Beating any market is not easy.  Philosophically, I'm of the school that markets are basically efficient, meaning that at any point in time buyers and sellers offset themselves to the extent that the market fully reflects available information including expectations.  If they didn't, then shrewd traders would be able to exploit situations on a persistent basis.  I haven't seen convincing evidence that more than a very few investors may be able to do this with any consistency and more than enough evidence that many take a severe beating trying.

I see you are still here; so, with that off my chest, let's think about beating what many people would argue (and, by the way, have been arguing for some time) is the most mis-valued market today - the bond market.

Barclay's Aggregate Index

The first step is to define the market we're trying to beat and, for most fixed income investors, that would be the Barclay's Aggregate Index.  For those not familiar with the index, it is to the bond market what the S&P 500 is to the stock market.  Ask a large cap stock manager about performance, and he or she will typically give you a comparison versus the S&P 500.  Similarly, a professional bond manager will give you a comparison versus the Barclay's Aggregate.

The second step, then, is to understand the Barclay's Aggregate Index.  To grasp the importance here, let's recall that we are talking about a major portion of most investor's assets.  For example, a 40-year-old may have an allocation of 60% stocks/40% bonds and cash.  Thus, outperforming the bond market adds meaningfully to the bottom line.

The Aggregate Index is essentially the taxable investment grade U.S. bond market with a maturity greater than 1 year.

The two most important things to know about the index is its sector composition and its duration.  In terms of sector composition, consider U.S. Treasuries.  This is a sector that has been growing as the Federal Government finances its chronic deficits and now comprises more than 35% of the index.  U.S. Treasuries happen to be the safest and most liquid taxable fixed income instrument in the world.  As such, they have the lowest yields.  So right off the bat, a major change to a fixed income position would be to hold a larger or smaller position in Treasuries.  This would be balanced by holding an offsetting position in the other sectors.

Duration, the second important thing to know, measures the approximate price responsiveness for a given change in interest rates.  The duration of the Aggregate Index is approximately 4.4 years.  It tells you that, if yields rise 1%, then the price of the index will drop 4.4% and vice versa.  Thinking about this, you realize that prices will drop more if duration is higher and yields rise than otherwise.

Today, the consensus seems to be that yields will rise (after all, they are at historical lows and the Fed is aggressively expanding the monetary base); and, therefore, the aspiring bond market beater would want to have less duration than the Aggregate Index.

So here is the composition of the Index in terms of AGG, the exchange traded fund that tracks the Index:

Source: Blackrock
CLICK IMAGE TO ENLARGE Composition-wise then, any difference in the weightings will be a different portfolio and hence a different performance.  In other words, varying the sector composition is a way to express your bets.  An example of a way to do this would be to put 75% of the bond portion of your assets in the AGG exchange traded fund and then 25% in CSJ or LQD.  These are exchange traded funds comprised of corporate bonds.  CSJ has the shorter duration.

Investing Outside the Index

Another, more aggressive, approach investors use is to go outside the index.  There is a lot of this going on today.  An example would be to invest 10% of the bond allocation in JNK or EMB.  JNK is an exchange traded fund indexed to a high yield or "junk bond" index.  EMB is an exchange traded fund indexed to emerging markets bonds (i.e., China, India, etc.).  Both of these are outside the Barclay's Aggregate Index.  And both increase credit risk and, therefore, should be used judiciously.

As you can readily see, the possibilities are endless in terms of structuring your bets relative to the Barclay's Aggregate Index.

But what about duration?  The moves just mentioned will change duration, and they should be monitored.  An easier approach, if you want to stick with the sectors in the Aggregate Index but lower the duration (because, again, you think yields will rise), would be to increase cash.  This obviously will lower duration.

Monitor versus the Aggregate

Finally, you may want to monitor whether or not your market-beating attempt is playing out.  Here is a sample  portfolio:

(P) 12/31






Note that the portfolio has a duration lower than the index at 3.57 years versus 4.4 years for the Index and has a bit higher of a yield.  To monitor, all I have to do is collect prices (from Morningstar or Yahoo! Finance) and weight using the weights under the "%" column.  I also put in the expenses of each fund because I like to keep them in front of me.

After 6 months or so, you'll be able to tell if you are a bond market guru.  To get a bit accurate, add in the yield differential.  In fact, you may want to compare to active bond mutual fund managers.

As an aside, if you are interested in the bond market but haven't explored it much, it would be a good exercise to check out the exchange traded funds listed, as they will give you an idea of what is out there.

Good luck!

Disclosure:  This post is for educational purposes only.  Individuals should do their own research or consult a professional before making investment decisions.  I and my clients own the exchange traded funds mentioned.