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Wealthtrack - Weekly Investment Show - with Consuelo Mack
@BenWP@MikeW Ben - I'm hanging with ARTYX myself - currently down 1.71% since my ill timed purchase but I'm hoping it's just a patch as the fund is up 4.58 YTD. Of course, the S&P is up 11-12% so my move to EM after being in an EM Index fund for so long has not been the best of my 2021 buys.
Looking at AVUV ... wow +93% in the last 52 weeks with an ER of .25%
I looked at AVUV awhile back and decided against it. The 2020 drawdown of AVUV was over -42% that took over 12 months to recover. That is somewhat worse than its benchmark, Vanguard small cap value index ETF, VIOV: -37% and 12 months recovery period.
Thank you for this informative interview on Polen's approach to investing. It is a growth oriented portfolio but with a value tilted. Mr. Ficklin's discussed their stock picks in relation to the pandemic and why these companies will do well. Abbott Lab is one example where it excels in current environment; Microsoft is on the tech side.
The Persistence and Predictability of Closed-EndFund Discounts - Burton G. Malkiel:
Unlike a regular (open-end) mutual fund, which sells new shares at net asset value (in some cases plus a sales charge) and also redeems shares at the net asset value (in some cases minus a redemption fee), a closed-end fund issues a fixed number of shares that then trade in the stock market just like an ordinary stock. Holders of shares who wish to liquidate must sell their shares to other investors. The shares are typically issued at net asset value (NAV) plus a fee to defray underwriting costs. Thus, the fund begins life selling at a premium. But typically, within months, the stock of the fund persistently sells at a discount to NAV.This persistent discount appears to violate the law of one price and constitutes the closed-end fund puzzle.
While I don't think I'll be buying ZROZ any time soon (long term Treasuries and zeros suggested: 19:30 mark, 20:30 mark), I do agree with Kessler's characterization of savings bonds as savings, not investing (21:20 mark).
There was a difference between a saving bond and investing ...They took it out of your paycheck, that was savings ... I cashed in those savings bonds and I actually paid for the car ... I bought the car with my savings.
Savings are what you know will be there when you want them. You know that they're going to be there. Investments? I don't know, you just don't know.
I count savings bonds as part of my cash allocation. They're very similar to CDs, at least once one gets past the one year holding period during which time one cannot redeem them.
Though CDs generally don't meet the technical definition of cash equivalent because they don't mature within three months, I view them as cash because the maturity date has little import. They are convertible to cash with zero fluctuation in value (aside from an early withdrawal penalty) unlike instruments where how much the value fluctuates depends on the time until maturity.
Likewise, I regard savings bonds as cash equivalents, or as Kessler puts it, "savings".
LOL - Enjoyed. I don’t watch Consuelo Mack much … however I thought her demeanor during the interview similar to that of a well trained therapist listening quietly and obligingly as the patient on the “couch” (Kessler) vented his pent-up frustrations … (not that I would know).
What’s interesting is how divergent the bears seem to be in their “remedies” for the now long anticipated cataclysmic stock selloff. Kessler likes long-dated bonds. Others, including Dalio and Fleckenstein, like gold. Kensler sees either stagnation or deflation while others see hyper-inflation.
One recommendation that troubled me was to own long dated zero coupon bonds. He may, of course, be proven correct. But these are dangerous in the hands of unsophisticated investors. The way they’re issued has the effect of creating enormous leverage. They’re extremely volatile on both the upside and downside. I’m surprised he didn’t sound some note of caution. Personally, I wouldn’t touch a 10-30 year zero with a 10-30 foot pole.
Thanks @bee / My immediate goal now is to get caught up listening to some of Mack’s other recent interviews.
FWIW Here’s a 2012 list of The 10 Most Bearish Stock Market Doomsayers.
One recommendation that troubled me was to own long dated zero coupon bonds. He may, of course, be proven correct. But these are dangerous in the hands of unsophisticated investors. The way they’re issued has the effect of creating enormous leverage. They’re extremely volatile on both the upside and downside. I’m surprised he didn’t sound some note of caution. Personally, I wouldn’t touch a 10-30 year zero with a 10-30 foot pole.
ZROZ is down over 9% YTD. I think that in addition to saving and investing, he needs to add speculating to his vocabulary. I usually see 30 year bonds described as speculative because their incremental return over 10 year bonds is not worth the additional risk, unless one is placing a bet that rates will fall.
In a sense, zeros are pure, unleveraged bonds, and coupon bonds can be thought of as a hedge, like building a CD ladder:
Zeroes
• Conceptually, the most basic debt instrument is a zero-coupon bond--a security with a single cash flow equal to face value at maturity.
• Cash flow of $1 par of t-year zero: [no cash over time until maturity t-years, then $1]
• It is easy to see that any security with fixed cash flows can be constructed, and thus priced, as a portfolio of these zeroes.
A Coupon Bond as a Portfolio of Zeroes
Consider: $10,000 par of a one and a half year, 8.5% Treasury bond makes the following payments:
[$425 coupon at 0.5 years; $425 coupon at 1.0 year, $10,425 coupon & principal at 1.5 years]
Note that this is the same as a portfolio of three different zeroes: – $425 par of a 6-month zero – $425 par of a 1-year zero – $10425 par of a 1 1/2-year zero
ZROZ is down over 9% YTD. I think that in addition to saving and investing, he needs to add speculating to his vocabulary. I usually see 30 year bonds described as speculative because their incremental return over 10 year bonds is not worth the additional risk, unless one is placing a bet that rates will fall.
9% down for the year is much worse than majority of domestic bond funds. Several of my bank loan bond funds are up 3% while yielding 3%. Does Zero coupon bonds behave differently from other bonds in rising rate environment? Fed said 2 hikes in 2023 last week.
"Does Zero coupon bonds behave differently from other bonds in rising rate environment?"
Yes and no. Like all vanilla bonds, their price moves opposite to interest rate changes, and their longer the duration the more they move. So qualitatively, they behave the same as other bonds.
But for any given maturity, zeros will have the longest duration and thus be the most sensitive to rate changes. So there is a quantitative difference between zeros and coupon bonds even though they behave the same.
It's like asking whether a leveraged investment behaves differently from a nonleveraged one. (In this sense @hank had a good analogy.) They behave the same, it's just that one is more "responsive" than the other.
So ETFs investing in long term zeros (GOVZ, ZROZ, EDV) have lost over 9% this year, while other ETFs investing in similar maturity Treasuries but not stripped (VGLT, SPTL, TLT, SCHQ) have lost "only" around 7%. ETFdb government bond funds sorted by worst returns.
Taking a page from David Giruox of T. Rowe Price interview.
Fidelity Floating Rate bond fund, FFRHX T. Rowe Price Floating Rate fund, PRFRX
PRWCX itself invests some amount of bank loans too. Beware bank loans are considered junk bonds. They have short duration <1 year and considered on the safer end of junk bonds. YTD return of both the funds listed above are 3.6 and 2.8%, respectively.
In theory, bank loans are not subject to interest rate risk because they are floating rate loans. Their theoretic effective duration should be zero. Their actual duration is not zero, but it is close.
Still, as you point out, they are junk bonds and thus correlate with equities. In 2013 Christine Benz (M*) wrote:
During the past decade, bank-loan funds have exhibited a slightly negative correlation with the Barclays Aggregate Index and an even lower correlation (-0.35) with long-term Treasuries. The 10-year correlation with short-term bonds is higher (0.57) and higher still for equities (0.61) and high-yield bonds (0.87).
This is why your bank loan funds are rising. We can also look at it from the interest rate perspective. As the economy improves (and equities rise in value), the interest rate spread between junk and IG bonds declines. There is less risk in the loans defaulting so they don't need to pay as much extra in interest over IG rates.
MFO Premium has a wealth of data to evaluate many fund candidates within the same asset class. Thanks to @Charles, it is the most comprehensive database I have come across.
Comments
Looking at AVUV ... wow +93% in the last 52 weeks with an ER of .25%
POLRX
Understanding Growth with a Value-centric characteristics.
The Persistence and Predictability of Closed-EndFund Discounts - Burton G. Malkiel: www-stat.wharton.upenn.edu/~steele/Courses/956/Resource/CEF/MalkielXu.pdf
Closed-End Fund (CEF) Investing: 14 Criteria For Better Yield:
https://wantfi.com/closed-end-fund-investing-guide.html
Just saw that Barry Ritholtz has all his podcast transcripts in one place:
https://ritholtz.com/category/podcast/mib/
Though CDs generally don't meet the technical definition of cash equivalent because they don't mature within three months, I view them as cash because the maturity date has little import. They are convertible to cash with zero fluctuation in value (aside from an early withdrawal penalty) unlike instruments where how much the value fluctuates depends on the time until maturity.
Likewise, I regard savings bonds as cash equivalents, or as Kessler puts it, "savings".
What’s interesting is how divergent the bears seem to be in their “remedies” for the now long anticipated cataclysmic stock selloff. Kessler likes long-dated bonds. Others, including Dalio and Fleckenstein, like gold. Kensler sees either stagnation or deflation while others see hyper-inflation.
One recommendation that troubled me was to own long dated zero coupon bonds. He may, of course, be proven correct. But these are dangerous in the hands of unsophisticated investors. The way they’re issued has the effect of creating enormous leverage. They’re extremely volatile on both the upside and downside. I’m surprised he didn’t sound some note of caution. Personally, I wouldn’t touch a 10-30 year zero with a 10-30 foot pole.
Thanks @bee / My immediate goal now is to get caught up listening to some of Mack’s other recent interviews.
FWIW Here’s a 2012 list of The 10 Most Bearish Stock Market Doomsayers.
ZROZ is down over 9% YTD. I think that in addition to saving and investing, he needs to add speculating to his vocabulary. I usually see 30 year bonds described as speculative because their incremental return over 10 year bonds is not worth the additional risk, unless one is placing a bet that rates will fall.
In a sense, zeros are pure, unleveraged bonds, and coupon bonds can be thought of as a hedge, like building a CD ladder: http://people.stern.nyu.edu/jcarpen0/courses/b403333/01zero.pdf
Yes and no. Like all vanilla bonds, their price moves opposite to interest rate changes, and their longer the duration the more they move. So qualitatively, they behave the same as other bonds.
But for any given maturity, zeros will have the longest duration and thus be the most sensitive to rate changes. So there is a quantitative difference between zeros and coupon bonds even though they behave the same.
It's like asking whether a leveraged investment behaves differently from a nonleveraged one. (In this sense @hank had a good analogy.) They behave the same, it's just that one is more "responsive" than the other.
So ETFs investing in long term zeros (GOVZ, ZROZ, EDV) have lost over 9% this year, while other ETFs investing in similar maturity Treasuries but not stripped (VGLT, SPTL, TLT, SCHQ) have lost "only" around 7%.
ETFdb government bond funds sorted by worst returns.
Fidelity Floating Rate bond fund, FFRHX
T. Rowe Price Floating Rate fund, PRFRX
PRWCX itself invests some amount of bank loans too. Beware bank loans are considered junk bonds. They have short duration <1 year and considered on the safer end of junk bonds. YTD return of both the funds listed above are 3.6 and 2.8%, respectively.
Still, as you point out, they are junk bonds and thus correlate with equities. In 2013 Christine Benz (M*) wrote: https://thereformedbroker.com/2013/11/08/the-thing-about-bank-loan-funds/
This is why your bank loan funds are rising. We can also look at it from the interest rate perspective. As the economy improves (and equities rise in value), the interest rate spread between junk and IG bonds declines. There is less risk in the loans defaulting so they don't need to pay as much extra in interest over IG rates.
This is likely not the best chart to show for the trend in junk/IG spreads, but it will do:
https://fred.stlouisfed.org/graph/fredgraph.png?g=ESFb