Day Two started with a 7:00 a.m. breakfast sponsored by Litman Gregory. (I'll spare you the culinary commentary.) Litman runs the Masters series funds and bills itself as "a manager of managers." The presenters were two of the guys who subadvise for them, Matt Eagan of Loomis Sayles and David Herro of Oakmark. Eagan helps manage the strategic income, strategic alpha, multi-sector bond, corporate bond and high-yield funds for LS. He's part of a team named as Morningstar's Fixed-Income managers of the year in 2009.
Eagan argues that fixed income is influenced by multiple cyclical risks, including market, interest rate and reinvestment risk. He's concerned with a rising need to protect principle, which leads him to a neutral duration, selective shorting and some currency hedges (about 8% of his portfolios).
He's concerned that the Fed has underwritten a hot-money move into the emerging markets. The fundamentals there "are very, very good and we see their currencies strengthening" but he's made a tactical withdrawal because of some technical reasons (I have "because of a fund-out window" but have no idea of what that means) which might foretell a drop "which might be violent; when those come, you've just got to get out of the way."
He finds Mexico to be "compelling long-term story." It's near the US, it's capturing market share from China because of the "inshoring" phenomenon and, if they manage to break up Pemex, "you're going to see a lot of growth there."
Europe, contrarily, "is moribund at best. Our big hope is that it's less bad than most people expect." He suspects that the Europeans have more reason to stay together than to disappear, so they likely will, and an investor's challenge is "to find good corporations in bad Zip codes."
In the end:
- avoid indexing - almost all of the fixed income indexes are configured to produce "negative real yields for the foreseeable future" and most passive products are useful mostly as "just liquidity vehicles."
- you can make money in the face of rising rates, something like a 3-4% yield with no correlation to the markets.
- avoid Treasuries and agencies
- build a yield advantage by broadening your opportunity set
- look at convertible securities and be willing to move within a firm's capital structure
- invest overseas, in particular try to get away from the three reserve currencies.
Eagan manages a sleeve of Litman Gregory Masters Alternative Strategies (MASNX), which
we've profiled and which has had pretty solid performance.
For what it's worth,
David
Comments
"broadening your opportunity set" = ?
"be willing to move within a firm's capital structure" = ?
Be flexible and look at both bonds (convertibles, whatever) and stocks of a particular company.
"build a yield advantage by broadening your opportunity set"
Uh, diversification and multiple strategies, perhaps? (shrugs)
From the original post: "He finds Mexico to be "compelling long-term story."
I'm looking at FEMSA (FMX) if it heads into the $70's.
"Many bond funds--in particular those holding lots of short-term securities--have average effective durations of 1 year or less (and floating-rate funds often have durations very close to zero). But a handful of funds have effective durations that venture into negative territory. Morningstar's database includes four funds that reported having negative average effective durations as of their most recent portfolio reports. They are Great-West Templeton Global Bond (MXGBX) (negative 2.92 years), Scout Unconstrained Bond (SUBYX) (negative 2.70 years), Putnam Diversified Income (PDINX) (negative 0.23 years), and Eaton Vance Global Macro Absolute Return Advantage (EGRAX) (negative 0.04 years)."
http://news.morningstar.com/articlenet/article.aspx?id=600751
Comparative chart of bond fund positions.
http://finance.yahoo.com/q/bc?t=6m&s=SUBFX&l=on&z=l&q=l&c=RNSIX,mainx,ffrhx,rphyx&ql=1
We have risk profiles of something like 7700 in a series of spreadsheets (divided by age of the fund). I was reluctant to post the .xlsx file by itself. One reason was that many folks who find a 125 page document with 60,000 datapoints a bit unwieldy. As a result, chip and Charles are working on making it searchable ("show me ARTVX" or "show me all small-cap value funds" or "show me everyone with a Sharpe ratio about 1.2"). We're also planning of a series of articles (starting in July with "What's in Your Long/Short Fund?") each of which will present a table with all of the funds in a particular group.
The other reason is intellectual property concerns. Charles has an enormous investment in this project and I'm not enthused at the prospect that it would be easy for someone to vacuum it up. It's probably impossible to prevent, but posting it as a single file would pretty much make that inevitable.
Soon!
David
We're sure trying to figure out a good way of handling the data. In general, I'm perfectly comfortable sharing it with folks who are comfortable with Excel, understand the definitions of the various measures and ... well, aren't pirates.
There's an intriguing possibility on the horizon, a software package called Pageflex. At base, it would allow us to place Charles's work in a database and would then allow folks to buy reports on individual funds. We'd set up a template, you'd pick a fund, and it would automatically call and format the current data. Something akin to Morningstar's one-page fund profiles. Not sure, but I would like to treat folks as fairly as I could.
David