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RPHYX--- CASH POSITION AS OF 2/29/16 PER MORNINSTAR = CUT & PASTE
Asset Allocation RPHYX Type % Net % Short % Long Bench- mark Cat Avg As of 02/29/2016 Cash 46.66 — 46.66 — 4.42 US Stock 0.00 — 0.00 — 1.33 Non US Stock 0.00 — 0.00 — 0.01 Bond 51.02 — 51.02 — 92.87 Other 2.32 — 2.32 — 1.36
90.06% are securities. There are not sufficient details given to completely identify the securities, but based on M*'s analysis a reasonable guess would be that all but 2% are bonds, and the remainder are convertibles.
From one of M*'s methodology papers: "Morningstar includes securities that mature in less than one year in the definition of cash."
M*'s analysis of the fund portfolio says that its average effective maturity of bonds is 1.83 years. So we can guess that M* is calling about half of the bonds "cash". Possibly a bit less, depending on the distribution of bonds. Let's say it's 40%.
So M* describes 40% of the 90% of bonds as cash. That's 36%. Add in the 10% that Riverpark says is not held as securities, and we've got 46% cash (by M*'s definition).
One can call these short term bonds whatever one wants - cash, ultrashort bonds, securities. Regardless of what one calls them, recognize them for what they are - bonds maturing in under a year, that have better-than-cash yield but also retain credit risk.
Possibly pertinent here: In the case of "unrated" bonds (bonds not rated by a major rating agency) a fund house normally employs its own research/methodology to classify the securities as investment grade or non-investment grade. Possibly the fund's prospectus specifies what % of assets (if any) the fund may hold in unrated securities.
(Dick Strong abused that privilege and nearly brought down his money market fund once in the late 90's. I do not mean to suggest any such activity in this case.)
So it is likely that (at least for the February portfolio), a scant 3% of the bonds (by value) are internally rated. Generally though, high yield funds have a significantly higher percentage of assets in unrated bonds.
As of February 29, the fund's holdings accounted for just over 90% of its assets. That implies a cash position just under 10%. With its focus on called bonds and other ultra-short duration securities, it generates a lot of reinvestable cash every week. My recollection is that Mr. Sherman has to find $4 worth of securities each year for every $1 in the portfolio.
The fund is up 0.89% YTD and might find the first quarter up 1%. Given its risk profile, it continues to hold the highest five-year Sharpe ratio of any fixed-income fund and second-highest over the past three years. The Sharpe remains positive over the past year, but far lower than the Sharpe ratios for other sorts of fixed-income funds.
Hmmm ... it had an 8% drawdown from mid-2015 to mid-February, 2016. That's better than the average high yield fund (-11%), worse than the average multi-sector bond fund (-6.5%). Neither's a particularly great benchmark. Not good and modestly surprising. I'd probably reserve "disaster" for folks who've demonstrated bad faith or really sustained incompetence. Neither's the case here, though I don't disagree that the performance has been surprisingly poor.
To the manager as well, for what interest that holds.
I've spoken to Mr. Sherman a fair number of times. I like him and respect him, but can't always quite keep up with him. As soon as we hit "but when the shape of the derivative curve tightens, the yield-to-worst / yield-to-call ratios become irrational. Right?" my brain blinks. My best understanding is that two factors have been driving results. (1) He screwed up on two or three securities. At base, a couple CEOs used freakishly bad judgment which damaged - terminally in one case, temporarily in another - the value of the fund's investment in them. (2) Fixed-income investors have been acting like the apocalypse is imminent, which has led some portions of the market to be pounded down. There are some short-term bonds yielding over 10% now, a year ago those same bonds paid 6.5%. He's got some very conservative exposure - overlap with RPHYX - to offset some riskier stuff (the aforementioned pounded sectors) that he believes to be "money good," but the dark fantasies involving the collapse of the energy market or of the Chinese economy or of the European Union have kept prices from normalizing. When the panic passes, he might ease back on the amount of ballast and benefit from a substantial rebound in oversold securities.
He might be wrong, either in the thesis or in timing, but, at least in my best judgment, he's neither delusional nor incompetent.
Thanks @David_Snowball. Disaster was probably too strong a term; "surprisingly poor" sounds about right. So: a bit of bad luck, a couple of honest mistakes, and a big dose of waiting for the market to catch up with his estimates of value. Sounds plausible enough, though we won't know for sure for a few years yet. I am holding.
Disaster was probably too strong a term; "surprisingly poor" sounds about right.
When the panic passes, he might ease back on the amount of ballast and benefit from a substantial rebound in oversold securities.
Agree, surprising poor sounds better than disaster. Disaster is reserved for the Third Avenue's of the world. If market action is any indication the panic has already passed and the other managers, especially in the high yield sector, beat him to the punch by benefiting from the substantial rebound in oversold securities. His 1.49% over the past month pales to the 5.21% of his high yield counterparts. I have said a couple times here there is no reason to hold this fund.
M* now gives RPHYX 4 stars, up from 1 star. Total return about the same as years past so I'm guessing hi yield was prolly not a good overall sector last year.
Here's the problem with distinctive funds: they're impossible to benchmark. RPHYX is sometimes a one-star fund, sometimes a four-star fund based not on its virtue but on the fate of its largely-irrelevant peer group. It's benchmarked against high-yield funds despite the facts that (a) high yield bonds are a sliver of the portfolio and (b) it has a short to ultra-short average maturity while the group tends to intermediate term.
So yes, the world o' high yield investing sucked last year and RPHYX is being rewarded for its low volatility, modest expectations portfolio. I mention that mostly because once market conditions normalize, it will go back to being both really good and a one-star fund.
"(a) high yield bonds are a sliver of the portfolio". Does this mean that the fund is in violation of Rule 35d-1, requiring 80% of a fund's portfolio (at time of purchase) to reflect its name?
M* reports the average credit rating to be B. (Note that M* computes average rating based on overall portfolio credit risk behavior; it does not compute a dollar weighted average of the securities' ratings).
The holdings breakdown by M* are almost all (90%) junk.
So it seems the benchmarking problem arises primarily from the second attribute you describe: "(b) it has a short to ultra-short average maturity while the group tends to intermediate term."
"Q: How does rule 35d-1 apply to a fund that uses the term "high-yield" in its name?
"A: The term "high-yield" is generally understood in the financial and investment community to describe corporate bonds that are below investment grade, commonly defined as bonds receiving a Standard & Poor's rating below BBB or a Moody's rating below Baa. Therefore, a fund using the term "high-yield" in its name generally must have a policy to invest at least 80% of its assets in bonds that are below investment grade. [The exception being tax-exempt or muni funds.]"
Hmm. I'm surprised, given the apparent energy you put into your post, that you didn't simply look at the prospectus - or, heck, the profiles posted here - in order to answer your own question. Both sets of documents strike me as reasonably clear. The short version is that the fund invests in called high-yield bonds, or bonds likely to be called within the next 60-90 days. My point was that the purchase of the last payment of a called high yield bond - which is frequently the portion of a high yield bond in the fund's portfolio - does not have the risk-return characteristics of its parent. That difference might be illustrated by looking at the chart of the fund overlaid with the chart of the high-yield group.
I am aware of what the fund invests in, and have read the prospectus (though not recently). My comment was directed toward your perhaps too brief description (a).
Just as prerefunding improves the risk profile of muni bonds, this fund attempts to improve the risk profile of the bonds it holds - here by using "quick payout" in place of escrowing principal. Though there is still a short term risk of default by the issuer (no cash in the bank backing up the redemption), and for bonds that haven't been called, there's management risk (misjudging the likelihood of an imminent call).
Sometimes, prerefunded bonds are re-rated ("These bonds typically receive a AAA rating if the rating is reviewed after refunding occurs."*) But the about to be redeemed junk bonds in this fund are not rated again; they remain junk. They constitute not a sliver of junk but a whole heaping pile.
Apologies if I got too hung up on the phrasing. The last thing I want to do is start another grammar war
Comments
http://www.riverparkfunds.com/Funds/ShortTermHighYield/FullHoldings.aspx
90.06% are securities. There are not sufficient details given to completely identify the securities, but based on M*'s analysis a reasonable guess would be that all but 2% are bonds, and the remainder are convertibles.
From one of M*'s methodology papers: "Morningstar includes securities that mature in less than one year in the definition of cash."
M*'s analysis of the fund portfolio says that its average effective maturity of bonds is 1.83 years. So we can guess that M* is calling about half of the bonds "cash". Possibly a bit less, depending on the distribution of bonds. Let's say it's 40%.
So M* describes 40% of the 90% of bonds as cash. That's 36%. Add in the 10% that Riverpark says is not held as securities, and we've got 46% cash (by M*'s definition).
One can call these short term bonds whatever one wants - cash, ultrashort bonds, securities. Regardless of what one calls them, recognize them for what they are - bonds maturing in under a year, that have better-than-cash yield but also retain credit risk.
(Dick Strong abused that privilege and nearly brought down his money market fund once in the late 90's. I do not mean to suggest any such activity in this case.)
M* gets the ratings for each bond in a fund's portfolio from the fund company. When asking for this data, it says that "So-called internal or manager-derived, alphanumeric credit ratings are not to be included in those categories; rather, bonds not rated by an NRSRO are included in the Not Rated category."
https://corporate.morningstar.com/us/documents/MethodologyDocuments/MethodologyPapers/FixedIncomeStyleBoxMeth.pdf
So it is likely that (at least for the February portfolio), a scant 3% of the bonds (by value) are internally rated. Generally though, high yield funds have a significantly higher percentage of assets in unrated bonds.
The fund is up 0.89% YTD and might find the first quarter up 1%. Given its risk profile, it continues to hold the highest five-year Sharpe ratio of any fixed-income fund and second-highest over the past three years. The Sharpe remains positive over the past year, but far lower than the Sharpe ratios for other sorts of fixed-income funds.
David
Hmmm ... it had an 8% drawdown from mid-2015 to mid-February, 2016. That's better than the average high yield fund (-11%), worse than the average multi-sector bond fund (-6.5%). Neither's a particularly great benchmark. Not good and modestly surprising. I'd probably reserve "disaster" for folks who've demonstrated bad faith or really sustained incompetence. Neither's the case here, though I don't disagree that the performance has been surprisingly poor.
To the manager as well, for what interest that holds.
I've spoken to Mr. Sherman a fair number of times. I like him and respect him, but can't always quite keep up with him. As soon as we hit "but when the shape of the derivative curve tightens, the yield-to-worst / yield-to-call ratios become irrational. Right?" my brain blinks. My best understanding is that two factors have been driving results. (1) He screwed up on two or three securities. At base, a couple CEOs used freakishly bad judgment which damaged - terminally in one case, temporarily in another - the value of the fund's investment in them. (2) Fixed-income investors have been acting like the apocalypse is imminent, which has led some portions of the market to be pounded down. There are some short-term bonds yielding over 10% now, a year ago those same bonds paid 6.5%. He's got some very conservative exposure - overlap with RPHYX - to offset some riskier stuff (the aforementioned pounded sectors) that he believes to be "money good," but the dark fantasies involving the collapse of the energy market or of the Chinese economy or of the European Union have kept prices from normalizing. When the panic passes, he might ease back on the amount of ballast and benefit from a substantial rebound in oversold securities.
He might be wrong, either in the thesis or in timing, but, at least in my best judgment, he's neither delusional nor incompetent.
For what that's worth,
David
When the panic passes, he might ease back on the amount of ballast and benefit from a substantial rebound in oversold securities.
Agree, surprising poor sounds better than disaster. Disaster is reserved for the Third Avenue's of the world. If market action is any indication the panic has already passed and the other managers, especially in the high yield sector, beat him to the punch by benefiting from the substantial rebound in oversold securities. His 1.49% over the past month pales to the 5.21% of his high yield counterparts. I have said a couple times here there is no reason to hold this fund.
Here's the problem with distinctive funds: they're impossible to benchmark. RPHYX is sometimes a one-star fund, sometimes a four-star fund based not on its virtue but on the fate of its largely-irrelevant peer group. It's benchmarked against high-yield funds despite the facts that (a) high yield bonds are a sliver of the portfolio and (b) it has a short to ultra-short average maturity while the group tends to intermediate term.
So yes, the world o' high yield investing sucked last year and RPHYX is being rewarded for its low volatility, modest expectations portfolio. I mention that mostly because once market conditions normalize, it will go back to being both really good and a one-star fund.
David
"(a) high yield bonds are a sliver of the portfolio". Does this mean that the fund is in violation of Rule 35d-1, requiring 80% of a fund's portfolio (at time of purchase) to reflect its name?
M* reports the average credit rating to be B. (Note that M* computes average rating based on overall portfolio credit risk behavior; it does not compute a dollar weighted average of the securities' ratings).
The holdings breakdown by M* are almost all (90%) junk.
So it seems the benchmarking problem arises primarily from the second attribute you describe:
"(b) it has a short to ultra-short average maturity while the group tends to intermediate term."
See SEC Rule 35d-1 FAQ, Question 7
https://www.sec.gov/divisions/investment/guidance/rule35d-1faq.htm
"Q: How does rule 35d-1 apply to a fund that uses the term "high-yield" in its name?
"A: The term "high-yield" is generally understood in the financial and investment community to describe corporate bonds that are below investment grade, commonly defined as bonds receiving a Standard & Poor's rating below BBB or a Moody's rating below Baa. Therefore, a fund using the term "high-yield" in its name generally must have a policy to invest at least 80% of its assets in bonds that are below investment grade. [The exception being tax-exempt or muni funds.]"
FYI - "short term" is more fuzzy for the purpose of this rule. See
http://www.mondaq.com/unitedstates/x/10770/Antitrust+Competition/SEC+Adopts+Rule+Prohibiting+Misleading+Mutual+Fund+Names
David
Just as prerefunding improves the risk profile of muni bonds, this fund attempts to improve the risk profile of the bonds it holds - here by using "quick payout" in place of escrowing principal. Though there is still a short term risk of default by the issuer (no cash in the bank backing up the redemption), and for bonds that haven't been called, there's management risk (misjudging the likelihood of an imminent call).
Sometimes, prerefunded bonds are re-rated ("These bonds typically receive a AAA rating if the rating is reviewed after refunding occurs."*) But the about to be redeemed junk bonds in this fund are not rated again; they remain junk. They constitute not a sliver of junk but a whole heaping pile.
Apologies if I got too hung up on the phrasing. The last thing I want to do is start another grammar war
* http://www.piperjaffray.com/pdf/pre_refunded_munis.pdf