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Biggest bang for your buck: 8 equity funds with the best capture ratios over the entire market cycle
I will also speak highly of PRBLX. Apart from them holding scandal-plagued WFC for longer than I liked as their #1 holding, I think it's a fine fund .... it's 90% of my Roth IRA.
This list is close to David's January commentary review of funds downside deviation. I looked at that in some detail and have the following two cents
1) AKREX concentration in several industries (20% MA and V) is concerning. A lot of it's outperformance was in the early years and it is similar recently to another fund that just missed the 10 year cutoff (see below), POLRX. Still AKREX seems to have accomplished this with a large chunk of cash onboard ( at least now)
2) FVD has six times the utility exposure of the larger market. Utilities have been o a tear but should they really be at 20 times earnings?
3) For folks who are willing to accept less upside for half the downside risk, MOATX and VWINX are stellar alternatives. Especially VWINX but I worry now that it’s 70 % bond position will not provide the ballast that allowed it to sail though 2008 with a maximum DD of only 18%. What happens when we get inflationary pressures and the bond market collapses? If it is because of increased growth the equities will make up but if it is due to our debt bomb…
5) I got scared off by DSENX opaqueness. A fund that just missed David’s 10 year cut off for his commentary is POLRX and it beats DSENX in almost every category, Upside/Downside ratio 1.24 vs 1.08, DSDEV 6.3 vs 7.4, APR 15.2 vs 15.1, MaxDD 12.8 vs 15.4. Ulcer Index 3.1 vs 3.3 Martin Ratio 4.6 vs 4.2. POLRX investment philosophy is clear and understandable although it has had the wind very much at it’s back in the last several years. Even so POLRX lost less than DSENX (14% vs 18%) in the fall 2018
@sma3, For sure, heavy FANG and similar big-tech LCG funds have done amazingly, TRBCX for example, also FBGRX, and Polen even better. DSE_X's thing would seem way different, automatic value-cycling being sort of the opposite, except PV shows 90% correlation.
If you're trying to get a handle on derivatives you might read this article from Forbes written in September 2018. They're not all bad. The article is not behind a paywall.
I understand the methodology DSENX uses but I can't figure out what percentage it holds in fixed income as ballast. With a yield of almost 2% it must be some, but if so why did it drop almost 20% fall of 2018? I tracked the SP500 almost point by point
I do have to smile a little when anybody brings up the mysterious black box of DSENX. Oh well, don't own it if it bothers you so much. It has been doing just fine for me though. If I were to try and figure out how funds like DSENX, PRWCX, AKREX, IOFAX and others do so well over time I probably wouldn't own them either.
I understand the methodology DSENX uses but I can't figure out what percentage it holds in fixed income as ballast. With a yield of almost 2% it must be some, but if so why did it drop almost 20% fall of 2018? I tracked the SP500 almost point by point
not following your last thought (underlined by me) --- if its goal is to mimic SP500 but w consistently added value, is this behavior not a good sign and what we want?
DSENX seems like a pretty straightforward fund. It has 200% exposure to "the market", or if you prefer, 100% exposure to the US equity market and 100% exposure to the bond market.
IMHO the major risk is that it is effectively 100% leveraged. How it achieves that leverage (which happens to be via total return swaps) is secondary. In essence, the swaps give it 100% (notional) exposure to the CAPE index for virtually no cash. So it is free to deploy its full NAV investing in bonds.
The aspects of this fund that I find opaque are not its use of derivatives, but rather that: - I can't find what four sectors it is effectively invested in until after the fact; is there a real-time source of what's in the CAPE index? - the bond portfolio is actively managed in a way I haven't discerned.
It behaved in the 4th quarter of 2018 about the way one would expect. It didn't deviate much from CAPE, so you can figure that the small differences were due to its bond exposure moving in small but mysterious ways. From M*, comparing DESNX to CAPE (NAV):
Oct 2018: -8.38% vs. -8.17% Nov 2018: 1.42% vs. 1.53% Dec 2018: -9.00% vs. -8.62%
Aside from overhead, it looks like the bond portfolio dragged down the return by about ½% over the quarter. Given the opacity of that part of the portfolio, a small drop while AGG was rising 1.62% shouldn't come as a shock. For example, PIGIX dropped 0.17% in that quarter.
As to the risk in total return swaps, it depends on how they're used and for what purpose (defensive or to enhance returns). VWELX, hardly an aggressive fund, may use these swaps:
"[VWELX] may also invest, to a limited extent, in derivatives. ... The Fund’s derivative investments may include ... total return swaps, and other types of derivatives. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns."
DESNX uses derivatives for the purpose of leveraging (magnifying) investment returns. Again, it's not the derivative per se that is the source of much of the risk so much as how it is used. Regardless, DoubleLine makes it pretty clear how the swaps are being used. In this sense, it's a fairly straighforward fund.
I was simply addressing the comment that the fund is opaque. Its practices and use of derivatives seem rather transparent (IMHO moreso than many funds); its bond holdings and the equity index it is tracking are not. Why those aspects are opaque is a different question. One worth asking, just different.
Right. Was just registering that since CAPE notionally buys and sells monthly, it made sense (to me anyway) why they would not report that activity in real time.
Comments
I will also speak highly of PRBLX. Apart from them holding scandal-plagued WFC for longer than I liked as their #1 holding, I think it's a fine fund .... it's 90% of my Roth IRA.
This list is close to David's January commentary review of funds downside deviation. I looked at that in some detail and have the following two cents
1) AKREX concentration in several industries (20% MA and V) is concerning. A lot of it's outperformance was in the early years and it is similar recently to another fund that just missed the 10 year cutoff (see below), POLRX. Still AKREX seems to have accomplished this with a large chunk of cash onboard ( at least now)
2) FVD has six times the utility exposure of the larger market. Utilities have been o a tear but should they really be at 20 times earnings?
3) For folks who are willing to accept less upside for half the downside risk, MOATX and VWINX are stellar alternatives. Especially VWINX but I worry now that it’s 70 % bond position will not provide the ballast that allowed it to sail though 2008 with a maximum DD of only 18%. What happens when we get inflationary pressures and the bond market collapses? If it is because of increased growth the equities will make up but if it is due to our debt bomb…
5) I got scared off by DSENX opaqueness. A fund that just missed David’s 10 year cut off for his commentary is POLRX and it beats DSENX in almost every category, Upside/Downside ratio 1.24 vs 1.08, DSDEV 6.3 vs 7.4, APR 15.2 vs 15.1, MaxDD 12.8 vs 15.4. Ulcer Index 3.1 vs 3.3 Martin Ratio 4.6 vs 4.2. POLRX investment philosophy is clear and understandable although it has had the wind very much at it’s back in the last several years. Even so POLRX lost less than DSENX (14% vs 18%) in the fall 2018
For sure, heavy FANG and similar big-tech LCG funds have done amazingly, TRBCX for example, also FBGRX, and Polen even better. DSE_X's thing would seem way different, automatic value-cycling being sort of the opposite, except PV shows 90% correlation.
Do Derivatives Mean Danger For Mutual Funds?
not following your last thought (underlined by me) --- if its goal is to mimic SP500 but w consistently added value, is this behavior not a good sign and what we want?
IMHO the major risk is that it is effectively 100% leveraged. How it achieves that leverage (which happens to be via total return swaps) is secondary. In essence, the swaps give it 100% (notional) exposure to the CAPE index for virtually no cash. So it is free to deploy its full NAV investing in bonds.
The aspects of this fund that I find opaque are not its use of derivatives, but rather that:
- I can't find what four sectors it is effectively invested in until after the fact; is there a real-time source of what's in the CAPE index?
- the bond portfolio is actively managed in a way I haven't discerned.
It behaved in the 4th quarter of 2018 about the way one would expect. It didn't deviate much from CAPE, so you can figure that the small differences were due to its bond exposure moving in small but mysterious ways. From M*, comparing DESNX to CAPE (NAV):
Oct 2018: -8.38% vs. -8.17%
Nov 2018: 1.42% vs. 1.53%
Dec 2018: -9.00% vs. -8.62%
Aside from overhead, it looks like the bond portfolio dragged down the return by about ½% over the quarter. Given the opacity of that part of the portfolio, a small drop while AGG was rising 1.62% shouldn't come as a shock. For example, PIGIX dropped 0.17% in that quarter.
As to the risk in total return swaps, it depends on how they're used and for what purpose (defensive or to enhance returns). VWELX, hardly an aggressive fund, may use these swaps:
"[VWELX] may also invest, to a limited extent, in derivatives. ... The Fund’s derivative investments may include ... total return swaps, and other types of derivatives. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns."
DESNX uses derivatives for the purpose of leveraging (magnifying) investment returns. Again, it's not the derivative per se that is the source of much of the risk so much as how it is used. Regardless, DoubleLine makes it pretty clear how the swaps are being used. In this sense, it's a fairly straighforward fund.
perhaps to prevent frontrunning and such, no ?
I was simply addressing the comment that the fund is opaque. Its practices and use of derivatives seem rather transparent (IMHO moreso than many funds); its bond holdings and the equity index it is tracking are not. Why those aspects are opaque is a different question. One worth asking, just different.