Re : teds Comment/Post on re-Balancing - Looking for advice

newgirl

I am having pulling the trigger myself. I just took back an account previously managed by and advisor.
I am having trouble pulling the trigger to sell out of positions, especially those with a capital gain. By the MFO premium analysis FDSWX - looks to be underperforming last 5 years, especially this year. Ditto BPIRX which is a long short - (might this do better in the brewing storm ?). Both are in taxable accounts with gains . Advice on how to proceed is welcome.

Old_Skeet

@newgirl,

I own the A shares of AIG Focused Dividend Strategy (FDSAX) while you have another share class of the same fund with symbol FDSWX. Of late this fund has started to come on pretty strong with it's rolling one week return being listed by Morningstar at 1.21%, one month at 1.88% and 3 month at 9.12%. In addition, Moringstar list its five year rolling total return at 9.43%. AIG Focused Dividend Strategy is a value fund and value has been out of favor for the past couple of years while growth has been the place to be. My position was built over the past ten years, or so, thus it is a long term position for me, held in a taxable account, and has sizeable capital gains exposure (much like you) which would be taxable if I sold. One of the things that I like about the fund is that it usually kicks off a good bit of income annually (dividends and capital gains). Another one is about a third of its equity is positioned in the Dogs of the Dow strategy.

In comparing FDSAX to some other dividend type funds (INUTX, IDIVX, LCEAX & PQIAX) I decided, for me, it was still a keeper.

Wishing you the very best as you perform your own due diligence.

newgirl

Thank you for the response. Any advice you have in terms of "process" to make these decisions, would be very much appreciated. I am trying to learn, reviewing the positions on the MFO premium platform, what I am missing is the underlaying narrative to make decisions. I am feeling a bit over my head.

bee

Why sell at all?

"Feeling a bit over your head" is not the right frame of mind to be in when considering buy & sell decisions.
Maybe to start, take what @Old_Skeet describes as:

One of the things that I like about the fund is that it usually kicks off a good bit of income annually (dividends and capital gains).

as "cash" so that you can pay the short term / long term gains yearly.

Take some time to learn the "process". Try not to get ahead of the "process" by making rash decisions.

Old_Skeet

@newgirl,

Below is a link that will take you to information on Sun America Dividend Strategy.

https://www-1012.aig.com/Products/MutualFunds/JU68/JU68_FundDetails_Overview.aspx

This will be the overview summary. On the right side of the summary page you will find a link to its fact sheet. Click on the fact sheet and read some more about the fund. Once you know the strategy then you are better prepared to form a due diligence.

Like bee said ... Why sell? I'm thinking it is one of the better dividend strategy funds around. But, whether it is right for you ... only you can decide that.

newgirl

If you don't mind continuing the conversation ( it is a learning process for me ) Macy's and Darden are the two top holdings - not likely to perform well in a market downturn.
(this whole exercise is an effort to be a bit more defensive for fear of brewing trouble)
The -1.42 Alpha /.77 sharpe ratio is not worrisome ?

Old_Skeet

Did you read the Fact Sheet? It usually repositions annually in the 4th quarter.

newgirl

Yep, I did. It said it "The portfolio's equity holdings are subject to change every month. The portfolio is actively managed and its holdings and composition will differ over time"

newgirl

I am loathe to take the gains if its prudent not too, SO aim looking to see where I might lighten up . Any opinion on BPIRX or YAFIX ?

msf

While FDSWX isn't my cup of tea, it doesn't look to be an especially bad fund. As you noted, its performance this year has been particularly poor.

If you exclude this year, its five year return (i.e. from Jan 2013 to Dec 2017) is very good. Total return of 111.6%, vs. 108.1% for the S&P 500 and 84.4% for large cap value (all data from M*). So current numbers showing poor long term performance are somewhat deceptive.

If you feel that this seven month swoon is not just a part of the routine ups and downs that a fund has, then do consider liquidating. If you think it might be temporary (e.g. because of annual reconstitution) but want to lighten your exposure, you could sell your highest cost shares.

Based on the numbers alone, I'd be inclined to take that second path if I were to sell. But I'm not that familiar with the fund. Skeet seems to have a better sense of where it's heading, though I might not give so much weight to performance within the past three months. For example, its one month performance, while reassuring (1.88%), nevertheless underperformed its peers by 1.26%.

Value has been underperforming growth for some time. So one would expect value funds to have negative alphas relative to the market (S&P 500). It's got a nice alpha relative to value funds: 1.05 vs. the Russell 1000 Value. Though with just mediocre correlation (R² around 0.7), the figures may not be all that meaningful.

Another alternative peer to consider is VEIRX.

newgirl

I missed where they said it is annual rebalancing - i read that the holdings changed monthly. The position in Macy's is a bit worrisome - retail in general, and Macy's in particular - their 10.41% in retail/apparel Plus 4.9% in regional department stores.

Old_Skeet

So you have read and studied the fact sheet along with understanding that it is a dividend strategy fund? It seeks to invest in the highest dividend companies and employees the Dogs of the Dow strategy for about one third of invested assets ... and, the other two thirds is invested choosing high yielding stocks from the broader market. Below is what Sun America states as to the funds objective.

Fund Objective: Seeks total return (including capital appreciation and current income) by employing a “buy and hold” strategy involving the annual selection of up to 30 high dividend yielding common stocks from the Dow Jones Industrial Average (DJIA) and broader market.

In addition, Morningstar rates its sustainability to be in the top two percent of its category. My own experience is that it has performed well, in the past, during market downdrafts. Will it continue to do that? Most likely; but, there are no guarantees when it comes to investing.

In checking the funds holdings (again at Morningstar) I am finding its two largest holdings one being Macy's is up ytd 61.35% and the other Darden Restruants is up 16.53%. You might wish to view the Morningstar report on the fund's portfolio holdings while performing your due diligence as it will give you a list of its top holdings along with their year to date returns.

I am not going to debate the attributes of the fund or defend it. It one of three funds that I hold in my domestic equity sleeve found in the growth and income area of my portfolio. The other two funds held within this sleeve are American Funds Fundamental Investor (ANCFX) and Federated Strategic Value Dividend (SVAAX).

Again, I wish you well in doing your due diligence.

I'm thinking if you have great concerns with the fund then perhaps it might not be for you. But, again I'm happy with it for it has generated a good income stream since I have owned it (and now being in retirement that is important to me) paying out last year about $2.00 per share in dividends and capital gains distributions combined. That computes to better than a 10% distribution yield. Plus its ten year (full market cycle) rolling total return is 12.82% putting it in the top one percent for its category.

And again, if you are not happy with it perhaps you will find something more to your liking.

Old_Joe

Perhaps one of the first things that you need to ask yourself is whether you are looking for income (do you need the income for current expenses?) or are you looking for appreciation? You seem to be concerned regarding the possible deterioration of the retail sector, and perhaps with good reason. But you need to understand that if income is your primary objective, as opposed to appreciation, then almost any income producing entity is going to have a direct relationship between risk and income. The greater the income the greater the risk.

msf

"Morningstar rates its sustainability to be in the top two percent of its category."

That seems like a bit of a non sequitur. I mean it's correct, and would make a lot of sense bringing up in the thread on PRBLX (ESG funds in general). But here, it doesn't seem to be addressing any question raised.
https://www.morningstar.com/articles/745467/morningstar-sustainability-rating.html

If you're concerned with how M* views the prospects of this fund are going forward, its analyst rating is Neutral, which is actually pretty low. (FWIW, I place very little stock in M* analyst ratings, though I do care about the thinking behind them - which I may agree with or disagree with.)

BenWP

@newgirl: my advice based on the questions you have asked and what you've said about your holdings is to do a portfolio review first, as opposed to looking at individual stocks that one of your funds holds. The three funds you mention definitely have a value tilt, but only a review of your goals and all your holdings could begin to address the question of whether or not to sell anything or to re-allocate to another style of fund. It's hard for someone who doesn't know you or your portfolio to say that one fund or another is a good fit.

Old_Skeet

@msf,

For me, part of a due diligence review covers sustainability.

newgirl stated ... "Any advice you have in terms of "process" to make these decisions, would be very much appreciated. I am trying to learn, reviewing the positions on the MFO premium platform, what I am missing is the underlaying narrative to make decisions. I am feeling a bit over my head."

With this, I felt it an appropriate comment.

msf

Thanks. I didn't see what you were responding to. That clarified things.

Old_Skeet

Hi @newgirl,

I probably not the best on the board to walk you through how to start a due diligence process. I think most retail investors need the guidance of a financial advisor and you might do well to seek one out.

There are a lot of things that are unknown about you and with that suggestions are hard to make concerning your investments. That is why I responded in a way as to what I favored about the Sun America Dividend Strategy Fund ... not is so much that it might be right for you.

Some things you might wish to do if not already done is to perform an investment risk tolerance analysis to help determine what type of investments and asset allocation might be of a fit for you. Another thing that I have found beneficial is to do a Morningstar Instant Xray on each of my funds. This is a quick and easy way to see how they are positioned and allocated. Then do an Xray on your portfolio as a whole. In this way you can see how it is positioned and allocated and how the investments owned combine into a portfolio. Then you can change holdings and amounts to see how this bubbles before making rebalance changes. Knowing your risk tolerance level is important because it will help you with finding the right asset allocation and investments. Before tweaking know what you have first and how it fits together into a portfolio and Instant Xray can help determine this.

Once you have done this then you can get down to a review of your funds and comparing them to others that you might find of investment interest. Before, I kick a fund to the curb I've got to have found a better one with strategies that I am comfortable with. Strategies that I favor might not be right for you as I am in the distribution phase in investing while you might be in the accumulation phase.

As you know many made some good and sage comments. Remember, just because a fund has performed well does not mean it will continue to do so and that is why I consider looking at its strategy to see if it is a right fit for me in the first place and that I understand it. A dividend strategy fund simply might not be right for you while it is for me. And, only you can determine that.

Even today after more than fifty years of investment experience and being considered a seasoned retail investor my advisor will ask me to justify why I am making changes within my portfolio. Sometimes they will ask me to revisit and to rethink this including tax considerations as well. Most times, they follow my first thinking.

Wishing you the very best as you continue your due diligence process.

Old_Skeet

Additional comment. Linked below is a post I made back in 2016 about my portfolio and how I have things organized. Although, somethings have changed within the portfolio itself the process has not.

https://www.mutualfundobserver.com/discuss/discussion/24926/old-skeet-s-new-portfolio-asset-allocations-2016#latest

bee

Part of the "process" in taxable accounts:

Try to:
- Hold tax efficient funds such as index funds
- Hold funds and etfs that have low turnover ratio
- Avoid holding (bond & stock) funds, etfs, and stocks that throw off a lot of short term gains (these are not tax efficient)
- Hold individual stocks for the long term...Long term capital gains and inheriting stock at their stepped up basis...both positives for taxable accounts
- Treat your temporary losers as an opportunity to tax loss harvest their losses...this will offset gains for many years if losses are large enough to "carry over".

I'm sure there are many more...

newgirl

Thanks all for the thoughtful answers, it is most appreciated.
I have been following along this past year, listening to you comments.

To be clear, I am looking through my funds to raise some cash as a defensive move.
Capital preservation is my primary goal at this point -I do not have a need for income.