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Dividend Payers Attractive Again As Bond Yields Fall
I have been thinking of adding a utility sector fund to my portfolio ... MMUFX comes to mind along with FKUTX. But thus far have not as I have found when interest rates start to rise utility funds seem to bow to the rising interest rate environment. My experience was that their nav got whacked pretty good. This is one of the reasons I now favor diverisfied equity income funds as they seems to weather a rising interest rate environment a little better than the sector only utility funds. With this, I am still thinking and favor funds like FDSAX, NBHAX, INUTX, SPQAX and SVAAX.
What is often not mentioned in articles like this is another important fact. When bond yields fall bond funds realize capital appreciation since the bonds they bought yesterday have a higher "value" (price+coupon) than the one's they could buy today.
Capital appreciation of older issue bonds in a falling yield environment is a bond holders "alpha". If bonds are held to maturity they sell at face value...the bond holder collected their original investment plus the coupon...no harm no foul.
Many have worried themselves out of bond positions. Bonds are less important for income these days and more important to help an overall portfolio cushion against equity markets periodically faltering. When this happens investors look for a "flight to safety", they buy bonds forcing yields to fall and as a result yesterday's bonds appreciate... the bond's value goes up.
This bond appreciation provides a cushioning effect on their equity allocation and might even serve as the "dry powder" to reallocate back into equities when stocks reverse significantly.
A stock dividend will only protect a stock's value equal to it's dividend. In a stock correction, a bond's value will often times appreciate.
Dollar Cost Averaging into bonds when the stock market is moving higher by using proceeds from periodic stock profits is one way of buying bonds when they are out of favor.
How did your bond do during this last "hiccup"? Over the past month as treasury yields have lowered; the etf, EDV (long duration treasuries), has appreciated in value over 4%, while VTI (total stock market) sold off by a little over 2%.
YTD, EDV is up 22% verses VTI gain of 4%. The 22% gain in EDV is the cushion for the overall portfolio or possible the "dry powder" that an investor could reallocate if they thought stocks were a "buy" right now.
It's my feeeling LT treasury funds like EDV have a portfolio cushioning effect on stock market risk. Because of their longer duration they possess an amplification effect verses shorter duration bonds. If you are trying to protect against interest rates rising for your cash position, buy shorter duration bonds. If you are trying to cushion periodic stock market downturns (equity risk) hold longer duration bonds.
I see a place for both in a well diversified (risk adjusted) portfolio.
Many sectors/funds slip past our view, in our ever changing world of investing. Most of us are too busy with family and making a monetary living to watch everything, all of the time.
Since late February of this year, we returned some of our monies back into direct investments in TIPs funds. Yes, there are those who poo-poo such areas of investments. The argument against, generally being that such investments have such low yields; why in the world would anyone want to invest. Not unlike equity investing, we look at these from a price point. Yield from bonds, not unlike a dividend from an equity is not usually our focus with a fund holding. If both price and yield work together to some extent; well, all the better, eh? As to TIPs in general; several areas may affect their value or lack of; being a safe haven, cash equivalent holdings for some funds, pension funds and the persception of inflation. Generally, if conditions are favorable; TIPs holdings are our "cash" for parking monies. Lastly, with active managed TIPs funds; one will find a variety of holdings. As seen in the below list; duration of holdings plays an important role, and that many TIPs funds will not be 100% in this bond area; but will also hold other investment grade bond types.
It all looks very inviting and gives me a sense of timing or making the correct choice when the opportunity looks poor. Bond have not gone in the direction expected so you are a winner. How much are you willing to take for this scenario in retirement?
How much are you willing to take for this scenario in retirement?
People love insurance...especially in retirement. LT treasuries are insurance against equity risk and maybe a number of other kinds of risks. If you buy a 20 yr treasury individually at age 65 it will mature just in time for longevity risk to come due at 85. With no loss of face value and a coupon paid along the way to offset inflation. If you prefer a fund, buy a Zero Coupon Treasury fund. The fund actually liquidates in this same manner. BTTRX is one that "matures" in 2025.
To me its just insurance. EDV is "equity insurance". I'm bringing this up just after a small fire (market hiccup). Look at what the value of "equity insurance" really looks like. Here's EDV in 2009 when VTI got really burned:
How much "equity insurance" does someone need? Hmm...now that's a good question to ask someone a lot smarter than me. Please don't ask an insurance saleman.
@Old_Skeet: I have two utility funds, MMUIX and FRUAX (these are inst versions), which I added last year, and very happy. I try not to buy sectors after they have run up, they were part of my allocation plan designed with my FA last year. These, along with my VNQ were my winners so far this year. I will keep them after then run up has completed, since I never know when they will be needed again to balance out the rest I bought both, because one is strictly regualted utilities, the other more diversified, with communications, energy, etc in addition to utilities.
I remember you noting this about your portfolio from past post sometime ago. Not too long ago I held about fifteen percent in utilities and I have now reduced this down to about eight percent within equities. In addition, I have linked an article from Seeking Alpha about how some believe that utilities are now considered a good portfolio diversifier.
Bee, I don't see it as equity insurance because how much are you going to buy if for example you have a $500,000 or more equity holdings? Insurance is a premium you pay for protection. You might consider trying to cover some of a loss by buying, in your case EDV but that's not insurance. It's like a lot of these alternative funds. I could never invest enough to take a risk of betting and loosing.
I am one of the more aggressive yet most conservative on this board. As for SPLV from its closing high to its recent intraday low it declined 5.1%. I realize we are all different here and whatever suits our personality etc. and there is no right or wrong way. But at my age (or any age for that matter) I would be devastated to see a 5.1% decline in any of my positions. (actually would never allow that to happen via a trailing mental stop) And since I normally invest all or nothing, that would entail a 5.1% in my liquid net worth. We read all about the current rout in junk bonds, but the open end haven't come close to 5.1%. And then you have the junk munis that are up double digit this year and some of those (EIHYX) haven't had so much of a 1% decline along the way. Trend persistency and low volatility with little to no drawdown along the way is my preference for .........
@Old_Skeet, thanks for the article. Nice to see the vindication of adding non correlated assets is not just an idea that is out of fashion, but actually works the way its supposed to. Wont work all the time, but sure glad it worked this time.
@bee@ron You noted to bee: "Bee, I don't see it as equity insurance because how much are you going to buy if for example you have a $500,000 or more equity holdings? Insurance is a premium you pay for protection. You might consider trying to cover some of a loss by buying, in your case EDV but that's not insurance. It's like a lot of these alternative funds. I could never invest enough to take a risk of betting and loosing."
Is there any reason to hold any bonds?
If one holds any bond funds, is this not a form of insurance against an equity melt?
Is not the answer to hold all equity and sell when one's downward pain point is reached; and place the monies into cash and wait for the next upward move?
Calling LT treasuries "equity insurance" might have sent this discussion down the wrong path. Maybe a better analogy would be a portfolio shock absorber. LT Treasuries often out perform at times when equities underperform. Personally, an equity investor should expect a certain range of volatility. Bonds can help dampen and absorb some of the bigger equity bumps allowing an investor to stay "fully" invested.
Retirees recently have had to navigate through two market meltdown (catch22's term) over the last 15 years. If an investor held a portfolio consisting mainly of equities he/she would have two very large holes to fill.
To drive this point home visually I created a graph using a backtested portfolio tool which shows the impact these two meltdowns had on a 100% equity portfolio (ron's $500,000) verses two other portfolios that incorporated a mix of LT bonds and equities.
Backtesting Portfolio Tool: "This online portfolio backtesting tool allows you to construct a portfolio based on the selected asset class allocation to analyze and backtest portfolio returns, risk characteristics (Sharpe ratio, Sortino ratio), standard deviation, annual returns and rolling returns."
I am the least aggressive investor and a long term holder of many positions. SPLV is one of shorter term holdings just over 2 1/2 years and I look at as having about a 50% increase not your recent 5% decline.
@ron, SPLV seems to perform very similarly to VDIGX. Here are the two over your holding period (actually three years):
The nice thing about VDIGX is it can be backtested over 21 years. Here's a chart comparing 100% VDIGX (SPLV) vs. a 60/40 blend of (VDIGX & BTTRX) staying fully invested over the 21 years. BTTRX is a LT Treaury fund offered by American Century.
The backtesting tool (link in previous comment box) allows investors to input specific mutual funds which enabled me to create the above chart.
Comments
Old Skeet
Capital appreciation of older issue bonds in a falling yield environment is a bond holders "alpha". If bonds are held to maturity they sell at face value...the bond holder collected their original investment plus the coupon...no harm no foul.
Many have worried themselves out of bond positions. Bonds are less important for income these days and more important to help an overall portfolio cushion against equity markets periodically faltering. When this happens investors look for a "flight to safety", they buy bonds forcing yields to fall and as a result yesterday's bonds appreciate... the bond's value goes up.
This bond appreciation provides a cushioning effect on their equity allocation and might even serve as the "dry powder" to reallocate back into equities when stocks reverse significantly.
A stock dividend will only protect a stock's value equal to it's dividend. In a stock correction, a bond's value will often times appreciate.
Dollar Cost Averaging into bonds when the stock market is moving higher by using proceeds from periodic stock profits is one way of buying bonds when they are out of favor.
How did your bond do during this last "hiccup"? Over the past month as treasury yields have lowered; the etf, EDV (long duration treasuries), has appreciated in value over 4%, while VTI (total stock market) sold off by a little over 2%.
YTD, EDV is up 22% verses VTI gain of 4%. The 22% gain in EDV is the cushion for the overall portfolio or possible the "dry powder" that an investor could reallocate if they thought stocks were a "buy" right now.
It's my feeeling LT treasury funds like EDV have a portfolio cushioning effect on stock market risk. Because of their longer duration they possess an amplification effect verses shorter duration bonds. If you are trying to protect against interest rates rising for your cash position, buy shorter duration bonds. If you are trying to cushion periodic stock market downturns (equity risk) hold longer duration bonds.
I see a place for both in a well diversified (risk adjusted) portfolio.
You being a former school teacher, and myself a student of the markets, that was an excellent presentation and I score it an A.
Old Skeet
Many sectors/funds slip past our view, in our ever changing world of investing. Most of us are too busy with family and making a monetary living to watch everything, all of the time.
Since late February of this year, we returned some of our monies back into direct investments in TIPs funds.
Yes, there are those who poo-poo such areas of investments.
The argument against, generally being that such investments have such low yields; why in the world would anyone want to invest.
Not unlike equity investing, we look at these from a price point. Yield from bonds, not unlike a dividend from an equity is not usually our focus with a fund holding. If both price and yield work together to some extent; well, all the better, eh?
As to TIPs in general; several areas may affect their value or lack of; being a safe haven, cash equivalent holdings for some funds, pension funds and the persception of inflation.
Generally, if conditions are favorable; TIPs holdings are our "cash" for parking monies.
Lastly, with active managed TIPs funds; one will find a variety of holdings. As seen in the below list; duration of holdings plays an important role, and that many TIPs funds will not be 100% in this bond area; but will also hold other investment grade bond types.
Well, anyway; just a few blips about this area.
A sampling..... YTD numbers, as of Aug 5
---LTPZ, + 17%
---STPZ, + 1.6%
---TIPZ, + 6.7%
---TIP, + 6.1%
---FINPX, + 5.9%
---ACITX, + 5.6%
---BPRIX, + 6%
Note: TIP 5 year annualized = 5.6%
Take care,
Catch
To me its just insurance. EDV is "equity insurance". I'm bringing this up just after a small fire (market hiccup). Look at what the value of "equity insurance" really looks like. Here's EDV in 2009 when VTI got really burned:
How much "equity insurance" does someone need? Hmm...now that's a good question to ask someone a lot smarter than me. Please don't ask an insurance saleman.
I remember you noting this about your portfolio from past post sometime ago. Not too long ago I held about fifteen percent in utilities and I have now reduced this down to about eight percent within equities. In addition, I have linked an article from Seeking Alpha about how some believe that utilities are now considered a good portfolio diversifier.
http://seekingalpha.com/article/2400835-a-surprising-new-portfolio-diversifier
Thanks for making a comment.
Old_Skeet
You noted to bee: "Bee, I don't see it as equity insurance because how much are you going to buy if for example you have a $500,000 or more equity holdings? Insurance is a premium you pay for protection. You might consider trying to cover some of a loss by buying, in your case EDV but that's not insurance. It's like a lot of these alternative funds. I could never invest enough to take a risk of betting and loosing."
Is there any reason to hold any bonds?
If one holds any bond funds, is this not a form of insurance against an equity melt?
Is not the answer to hold all equity and sell when one's downward pain point is reached; and place the monies into cash and wait for the next upward move?
Regards,
Catch
Calling LT treasuries "equity insurance" might have sent this discussion down the wrong path. Maybe a better analogy would be a portfolio shock absorber. LT Treasuries often out perform at times when equities underperform. Personally, an equity investor should expect a certain range of volatility. Bonds can help dampen and absorb some of the bigger equity bumps allowing an investor to stay "fully" invested.
Retirees recently have had to navigate through two market meltdown (catch22's term) over the last 15 years. If an investor held a portfolio consisting mainly of equities he/she would have two very large holes to fill.
To drive this point home visually I created a graph using a backtested portfolio tool which shows the impact these two meltdowns had on a 100% equity portfolio (ron's $500,000) verses two other portfolios that incorporated a mix of LT bonds and equities.
Backtesting Portfolio Tool:
"This online portfolio backtesting tool allows you to construct a portfolio based on the selected asset class allocation to analyze and backtest portfolio returns, risk characteristics (Sharpe ratio, Sortino ratio), standard deviation, annual returns and rolling returns."
portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults
SPLV seems to perform very similarly to VDIGX. Here are the two over your holding period (actually three years):
The nice thing about VDIGX is it can be backtested over 21 years. Here's a chart comparing 100% VDIGX (SPLV) vs. a 60/40 blend of (VDIGX & BTTRX) staying fully invested over the 21 years. BTTRX is a LT Treaury fund offered by American Century.
The backtesting tool (link in previous comment box) allows investors to input specific mutual funds which enabled me to create the above chart.