Building a portfolio for income

bee

I editted this to "fund discussion status" because of all the great "fund discussion" going on here...

A Fidelity article:
building-portfolio-for-income
"If you are saving for retirement, you should be taking a total return approach that considers both income and capital appreciation. If you’re in retirement, you likely have some guaranteed1 income streams like Social Security, a pension, or an annuity. But you may also want or need to generate income off your investment portfolio. And regardless of your stage in life, there may be times you want to generate income for a specific goal..."

Some income investment sectors to consider:

Derf

bee : is standard dev. for one year or more ?
Thanks Derf

bee

Reply to @Derf:
Hi Derf,

My assumption is risk over a three year period...Aug. 1, 2009 - July 31, 2012

Hiyield007

Reply to @bee: The performance numbers are annualized. Not sure about standard deviation albeit they appear to be for the entire period. Then again, although lack of volatility is my thing, I have never been a standard deviation kind of guy.

SlowLane

Reply to @Hiyield007: Preferred stocks have the best risk/reward characteristics over the past 3 years and your PPSIX holding fits the bill perfectly.

bee

Reply to @SlowLane:
Hey Slow,

Thanks for this choice.

As I screened PPSIX using bloomberg screening tool it listed two other funds, VWESX and DEERX. They are both LT corporate bond funds...a bit different than a preferred stock fund but Bloomberg groups them together.

bloomberg screen tool

Their volality and performance seem a bit better over the last three years. Both may be impacted negatively when interest rates rise.

Here they are charted together over the past three years:

Hiyield007

bee, I like to screen YTD and can't get thrilled by VWESX or DEERX as compared to PPSIX, PONDX, MWCRX, or ABTYX. That's because my screening is mostly percentage declines from highs and by that criteria the four mentioned are the shining stars. As I recall, you are a huge PONDX fan. As for preferred stocks, I believe Ted has been in PFF for ages.

SlowLane

Bee - DEERX has performed even better than PPSIX. Too bad for me - Scottrade shows that it is closed to new investors.

Thanks for the tip to use bloomberg screen tool. "Preferred Stock" is not a distinct category with other mutual fund tools and I was having trouble finding funds in this category.

BobC

One thing to keep in mind is that fixed-income type securities have had a tremendous run the last few years. So I would not expect preferred stocks, for example, to show the same kind of risk/reward profile going forward. That being said, we have used PFF in a number of client portfolios. And I would lower expectations for just about all fixed-income asset classes. I don't think anyone expects a repeat of the last 10+ years for bonds. For example, what if bond funds cannot even cover their coupon in a period of only moderately-rising interest rates? This whole topic could become a can of very dirty worms if folks do not use some caution and remain flexible.

bee

Reply to @BobC:

Hi BobC,

I agree. Can you suggest some actively managed funds that will transistion well as rates reverse? I recall an interview with Dan Fuss and his experience investing during the interest rate rise of the 80"s. He mentioned laddering as one way of staying with rate increases. Are their investment sectors that shine when rates rise?

BobC

Good question, bee. We have been allocating dollars to more flexible funds, and LSBDX would be one to consider. We like BlackRock BSIIX, Osterweis OSTIX, Artio BJBGX, and Thornburg uses a modified barbell approach with its bond funds such as TSIIX, THMIX, THIIX. Goldman Sachs GSZIX is also fairly attractive. I think flexibility could be extremely important in the next 3-5 years.

bee

Reply to @Hiyield007:

Hi HY,

Are you able to buy ABTYX with a minimum of less than $250K(USAA Brokerage)? I'm just a little short of this hurdle this week.

Hiyield007

Reply to @bee: bee, no minimum at Scottrade. ABTYX is the smallest of my four holdings (probably should have been my largest based on trend persistency) But my worry has always been that ABTYX is most vulnerable if rates ever rise as well as any unforeseen changes in legislation that could affect the tax status of munis.

msf

Reply to @BobC:

Bob, in August you wrote:

Unfortunately, we are now concerned about Artio's Total Return Bond Fund (JBGIX, BJBGX), which has a tremendous history and great management. If the asset bleed should occur there, for no other reason than perception of the future of Artio as a company, this would be a big problem for investors. We are staying in Total Return Bond for now, but we are working on an alternate strategy...just in case.

Since it sounds like you're now calling this fund a "buy" (rather than a "hold"), are you now more sanguine about it, even as the management company implodes? (Or is there positive news about Artio?)

SlowLane

During periods of rising interest rates, floating rate bank loans (senior loans) do well. Morningstar category "Bank Loan", funds like LSFYX.

Mona

Reply to @BobC:

Bob,

While M* categorizes OSTIX as a multisector bond fund, it appears essentially to be a high yield bond fund (at least at this moment) with an average credit quality of B, a duration of 2.30 years, a 5.38% yield, and a ER of 0.92%.

Would it not a better to go with VWEAX with the same credit quality, a little longer duration of 4.26 years, a 6.36% yield, and a ER of 0.13%?

Mona

Charles

Thanks guys for the headache.

bondtrader1979

How about the DoubleLine Total Return Fund DLTNX? It has a duration of around 1 so should fair pretty well with rising rates and its currently yielding around 6%.

Dave

AndyJ

Reply to @SlowLane: Great find on the chart, SlowLane. Senior bank loans look good, and so do munis, especially lower quality.

High yield (corporates) in '04-'06 are kind of intriguing: not so good in the one year in that period, 2005, when the Fed was raising short rates over the course of the whole year, but knockout figures for 2004 & 2006, when rates were rising for only half the year. (The rate-rise period was June '04 to June '06.)

So I'm wondering: was HY hot in early '04 and late '06 only, right before and right after the series of rate increases, or did the category do okay during the rate-rise phases of those years too? I can't find a quarterly breakdown of bond returns by category to do the comparison.

FWIW, the '04-'06 rate-rise period is also a reminder that the conventional wisdom these days, that the Fed's raising short rates always hits the value of long bonds, is not entirely correct. It worked that way in '94-'95, but not in '04-'06, as the first page of this Fed paper points out:

http://research.stlouisfed.org/publications/review/07/07/Rudebusch.pdf

bee

Linking through one of JohnN threads I found this:

Best Bond Funds For Rising Interest Rates
Bond Fund Types to Beat Interest Rates and Inflation
Best Bond Funds For Rising Interest Rates

AndyJ

Reply to @bee: The incorrect CW about rate rises is repeated in the article, to wit:

"Short-term Bonds: Rising interest rates make prices of bonds go down but the longer the maturity, the farther prices will fall. Therefore, shorter maturities will do better in a rising interest rate environment."

No, not always, not the last time the Fed raised rates, and it depends on what category of bond he's talking about. If the author had just added a contingency phrase like "most of the time you would expect" etc., rather than a blanket statement, it'd be okay, but he makes it sound like a rule of physics ... and it's not.

SlowLane

Reply to @AndyJ: Andy, keen observation about High Yield munis.

Andy, you are correct about 2006: High Yields were hot in late 2006 as interest rates leveled off. In 2004, however, High Yields did well in the second half of the year, in the face of rising interest rates:

AndyJ

Reply to @SlowLane: Thanks, SlowLane, good chart.

bondtrader1979

Reply to @SlowLane: Cool chart. Yea high yield bonds don't move the same way that investment grade bonds do at all. They trade more like stocks than what people traditionally think of as bonds from an interest rate standpoint.

Old_Joe

Reply to @bondtrader1979: Yes, I had learned that from Catch 22 some time back, but why exactly is that so, if you happen to know?

Thanks-

fundalarm

Reply to @Old_Joe: because lower quality companies have better chance of surviving, growing and paying their debt when the economy is good? c'mon OJ. hence there is about 70% correlation to equities. when the economy is bad, and treasuries are doing well, but these companies go bankrupt at higher rates and HY bonds are going down. the downside with HY bonds is better protected that with equities though because the recovery in bankruptcy has been at least 40%. theoretical maximum loss of equities is 100%. so for those whining about catch's portfolio -- he's figured that out by simply following his method and being probably the most successful of the crowd.

Sven

Reply to @Mona: Vanguard Hi Yield corporate, however, is closed to new investors. In term of duration risk, OSTIX would do better in rising rate environment. In the near term, 2013 for example, the rate is unlikely to go up given the current economic situation.