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WealthTrack: Q&A With Kathleen Gaffney, Manager, Eaton Vance Bond Fund: Video Presentation
Another term for an overvalued market that keeps on getting more overvalued is "a bull market." 6% above fair value, if that is indeed FV, is not enough, in itself, to bring a bull to a halt.
That said, some other event (recession, geopolitical crisis, etc.) could bring it to an end, and I'd bet we're closer to the end of this bull than its start.
Then again, if I were such a great market timer, I wouldn't need to work for a living, and I am feeling a bit nervous so probably will raise a little cash soon, but I intend to stay overweight equities for a while longer.
Using this rule an applying it today for the S&P 500 Index ... by my math ... If stocks are at a TTM P/E Ratio of 19.2 plus 2% for inflation (Both Trailing Numbers) then this puts the combined number at 21.2. With this, stocks would be about six percent above their fair value and puts the fair value number for the S&P 500 Index somewhere around 1880.
Currently, M* is reporting stocks, in general, are about three percent overvalued.
So, it seems this Rule of Thumb will be close to perhaps the real number if you were to accept M*'s number as the gospel.
The number you report for M*, 3% overvalued, is global stocks. It's for the universe of all stocks that M* analyzes, which is US plus foreign stocks. Foreign stocks currently generally have significantly lower P/E ratios than US stocks.
I am happy to learn that you have found the reference links beneficial. One of the goals of the site is to help others transverse the path of investing. Perhaps, information you might provide to someone else might indeed be helpful to them.
Here are a couple of ways I have recently raised cash within my own portfolio.
The first one is to sell into strength. I reviewed my portfolio and selected funds that I was overweight in and/or no longer wished to hold. I used the S&P 500 Index as my measure of the market (you can select an index that best fits) and for every 25 point increase I’d sell some of the unwanted funds usually about an amount equal to one percent of my total equity positions.
Here is an example of how this works. Let’s say the S&P 500 Index is now at about 2000 and when it reaches 2025 I'll sell a sum equal to about one percent of all my equity positions and let the residual 0.25% gain ride. I’ll keep doing this until my targeted cash position has been reached.
Another one is to set all bond, stock, and fund investment positions, etc. to pay their distributions to cash.
Combine the two of these together and I have found that it did not take long for me to grow my cash allocation by four, five or perhaps even ten percent over a one year period of time.
I hope this might help you with some ideas as to how you might grow your cash allocation.
That was a rhetorical question, Old Skeet, meaning for starters that someone thinking of raising cash should have a solid view of what in his/her portfolio is (most) overvalued before selling. In other words, a plan is desirable before changing a default allocation. In my case, with a balanced portfolio, I don't see a compelling case for raising a lot of cash right now, although that's subject to change.
@kevindow, don't know when you please a trade at Fidelity on EVBIX. Maybe thing has changed a bit since you posted. It now required $250K for IRA account in addition to $49.95 transaction fee.
@Sven, I just test traded EVBIX again in my Fidelity SEP-IRA, and the minimum I see before placing the trade continues to be $500 + TF. Perhaps they have different minimums for specific retirement accounts.
@kevindow, thank for the clarification. One would think Fidelity treats all retirement accounts the same. I will talk with the rep and they are really good with that. Thanks again.
@Sven, I just test traded EVBIX again in my Fidelity SEP-IRA, and the minimum I see before placing the trade continues to be $500 + TF. Perhaps they have different minimums for specific retirement accounts.
@kevindow, thank for the clarification. One would think Fidelity treats all retirement accounts the same. I will talk with the rep and they are really good with that. Thanks again.
I believe this is because @kevindow is doing this in a SEP-IRA, not a traditional IRA. In my IRA, it also says that the minimum is $250K, plus a transaction fee.
Of all the insults.......we not only have to come up with $250K, but will be charged a transaction fee to boot! [humor]
There are a few that make comments form time-to-time ... and, you are one of these. And, in the spirit of trying to be helpful ...
Well ... How was I to know?
No problem, Skeet; thanks for the helpful attitude. But if you read the wording of my comment closely, it was a comment on the general nature of the idea of "raising cash," clearly not a request for advice. Just so you know ...
I reread your comment and although you did not ask for suggestions to raise said cash … I made my comment as this is an open forum that allows for comments. Please know … I’ll govern differently going forward on future commets you might make. Sorry to have responded.
EVBAX is down nearly 3% more than it's (Lipper) category average in the last month (challenging market environment). I realize that one month is a very short period of time and will hold. Any thoughts?
EVBAX is down nearly 3% more than it's (Lipper) category average in the last month (challenging market environment). I realize that one month is a very short period of time and will hold. Any thoughts?
Thanks for pointing this out. Had no idea. A very rough month and 3 months for the fund. Underperforming the total bond market index by 5.85% over 3 months. That's a lot for a bond fund over 3 months. Speaks to how 'unconventional' some of the unconstrained and multi-sector bond funds are, and how these funds may diversify or not diversify the stock portion of a portfolio.
EVBAX is down nearly 3% more than it's (Lipper) category average in the last month (challenging market environment). I realize that one month is a very short period of time and will hold. Any thoughts?
Thanks for pointing this out. Had no idea. A very rough month and 3 months for the fund. Underperforming the total bond market index by 5.85% over 3 months. That's a lot for a bond fund over 3 months. Speaks to how 'unconventional' some of the unconstrained and multi-sector bond funds are, and how these funds may diversify or not diversify the stock portion of a portfolio.
Very eye-opening numbers over the past three months, I must say.
According to M*, EVBAX has 19.4% in stocks and 21% in "other". Unconstrained for this fund means outside the bond universe.
John, this info adds to our recent discussions of unconstrained/multisector bond funds. They can cut both ways. Not used to seeing that manager 99th percentile in her category.
Look at the 1 day performance of the Barclay's US Agg index, which is the U.S. Total Bond Market index.....up .04% EVBAX -.83%, which is almost as bad as the stock market did yesterday.
I think she's probably a great bond manager, and this is probably a great fund.....but one has to go in with eyes open. How has this fund diversified away stock market risk the past 3 months? And that is the conventional purpose of holding bond funds, to diversify away stock market risk.
I think a lot of these funds have that option to go into equities. I guess that high of a percentage took me by surprise. I don't know if they have limits. M* didn't list the stocks individually so it is hard to see what direction she is going in.
I think a lot of these funds have that option to go into equities. I guess that high of a percentage took me by surprise. I don't know if they have limits. M* didn't list the stocks individually so it is hard to see what direction she is going in.
Do we know what " other" is?
John, that is one thing I find frustrating about M* We don't know what "other" is. I find the same issue with lots of other mutual funds.
One thing I notice is that when a fund invests in exchange traded funds, exchange traded notes, other mutual funds, etc, that shows up as "other". There must be a lot of "other" things that also show up under "other". Quite remarkable that she has 19% stocks in what you would think was a bond fund. Do we want to start calling this a conservative asset allocation fund?!
I'm sure we could find out what the "other" is....by going to the website, reading the fund reports, and if necessary, calling the fund company. I've discovered that it's harder to find out what is in bond funds than stock funds. But even the "other" in stock funds can be challenging.
Just summing the domestic, foreign, and preferred stocks = 25.53%
Add to that 11.32% in convertibles and you have a fund with a market beta approximately = 0.64 (per portfolio visualizer regression analysis). That's on the high side for me for a multi-sector bond fund.
Looking at ASDVX which I own, it says they may also invest in certain equity securities such as preferred stock, convertibles, or equivalents. Now does that mean almost 20% of the portfolio? I suspect not. Then again Kathleen Gaffney is well respected so she must know what she is doing. I went to the website and I see Caterpillar, Constellation, Ingersoll Rand, Kinder Morgan to name a few. That list is from Aug. 31. I think these are stocks as the coupon rate is 0%. On ASDVX the website does not show any stocks at this time.
@Mike_E, that is good info on the 11.32% convertibles, 6.1% preferred stocks. So really 25.53% stocks as you mentioned above. How is one supposed to fit this into their asset allocation? Eaton Vance is a load firm. Wonder what advice they are giving all their dealers, about how to use this fund. Where does it fit into a portfolio?
Thanks also Mike_E for that info. My guess is that they were buying stocks to boost returns but the recent selling has hurt them. That is a big question @rjb112, how do you fit this into your asset allocation? It is almost a income/growth fund.
By the way, Kathleen Gaffney's firm is going to launch IIRC 18 "ETMFs", exchange traded mutual funds. I believe these will be active mutual funds, traded on an exchange....really just active ETFs. We will probably have an active ETF managed by Kathleen Gaffney in there. I think one way or another, active ETFs are going to gain traction and be significant investment vehicles.
These ETMFs sound like a natural progression in the products coming out.
I think so too John. I'm looking forward to them as a welcome advance. Personally, I'd like to see actively managed ETFs expand in a big way. Right now, if you have an account at brokerage A, it costs too much to purchase a Vanguard mutual fund, or any mutual fund not in the no transaction fee platform. Often $50 just to buy or sell a mutual fund not on the NTF platform. Too much. Active ETFs will put away all that nonsense, and equal the playing field. And I want to continue to see ETFs as a whole expand, advance and improve. Sure, there's a lot of bad products coming out, but also good products. All of these make investing better for the little guy and tend to equal the playing field.
These ETMFs sound like a natural progression in the products coming out.
Also, Vanguard has a patent or a trademark on ETFs that are simply another share class of an index mutual fund. No one else can do that, due to the patent or trademark. But when that patent expires, I think tons of ETFs will come out that are simply different share classes of already existing mutual funds. And I think that will be a very welcome development. I'd like to see active ETFs come out that are simply different share classes of active mutual funds. A big impediment to active ETFs is that active managers don't want to share their portfolios publicly, and ETFs have transparency. I bet they discover a way around that to make it feasible to them.
Interestingly, I just went back through this thread and the early discussion regarding the stock portion. Gaffney has increased equities in the portfolio at a time when the markets started to turn south. Of course she couldn't have known this would have happened.
Interestingly, I just went back through this thread and the early discussion regarding the stock portion. Gaffney has increased equities in the portfolio at a time when the markets started to turn south. Of course she couldn't have known this would have happened.
They need to change the name of the fund.
I agree John. Or do something so their clients know. There must be a lot of unsuspecting clients of Eaton Vance, a full service load company, who think they are in a plain vanilla bond fund to reduce stock market risk. They market their funds thru Broker Dealers. There's a lot of selling and marketing going on. Not sure how many people have taken apart the contents of this fund and really know what's in it. People who go to full service Brokers and pay loads are not generally going to do this with their investments. Hopefully the brokers who are collecting the loads are, and educating their clients. Wouldn't bet on it.
John, do you know this thing has a 4.75% load? I can't stand loads. I know we can get it load waived, but the full service clients are paying the load, and probably have no idea it is available without it.
Comments
That said, some other event (recession, geopolitical crisis, etc.) could bring it to an end, and I'd bet we're closer to the end of this bull than its start.
Then again, if I were such a great market timer, I wouldn't need to work for a living, and I am feeling a bit nervous so probably will raise a little cash soon, but I intend to stay overweight equities for a while longer.
Why? Because the number you report as the TTM P/E, 19.2, is for the S&P 500.
http://online.wsj.com/mdc/public/page/2_3021-peyield.html
The number you report for M*, 3% overvalued, is global stocks. It's for the universe of all stocks that M* analyzes, which is US plus foreign stocks. Foreign stocks currently generally have significantly lower P/E ratios than US stocks.
Having said that, I owe you a debt of gratitude, because you are the one who 'turned me on to' both the WSJ location of their index P/E values, as well as M*'s fair market value graph
http://www.morningstar.com/market-valuation/market-fair-value-graph.aspx
So my friend, I can only say a big Thank You to you.
I am happy to learn that you have found the reference links beneficial. One of the goals of the site is to help others transverse the path of investing. Perhaps, information you might provide to someone else might indeed be helpful to them.
Old_Skeet
Here are a couple of ways I have recently raised cash within my own portfolio.
The first one is to sell into strength. I reviewed my portfolio and selected funds that I was overweight in and/or no longer wished to hold. I used the S&P 500 Index as my measure of the market (you can select an index that best fits) and for every 25 point increase I’d sell some of the unwanted funds usually about an amount equal to one percent of my total equity positions.
Here is an example of how this works. Let’s say the S&P 500 Index is now at about 2000 and when it reaches 2025 I'll sell a sum equal to about one percent of all my equity positions and let the residual 0.25% gain ride. I’ll keep doing this until my targeted cash position has been reached.
Another one is to set all bond, stock, and fund investment positions, etc. to pay their distributions to cash.
Combine the two of these together and I have found that it did not take long for me to grow my cash allocation by four, five or perhaps even ten percent over a one year period of time.
I hope this might help you with some ideas as to how you might grow your cash allocation.
There are a few that make comments form time-to-time ... and, you are one of these.
And, in the spirit of trying to be helpful ...
Well ... How was I to know?
Kevin
Of all the insults.......we not only have to come up with $250K, but will be charged a transaction fee to boot! [humor]
Thanks, AJ
I reread your comment and although you did not ask for suggestions to raise said cash … I made my comment as this is an open forum that allows for comments. Please know … I’ll govern differently going forward on future commets you might make. Sorry to have responded.
Old_Skeet
Look at the 1 day performance of the Barclay's US Agg index, which is the U.S. Total Bond Market index.....up .04%
EVBAX -.83%, which is almost as bad as the stock market did yesterday.
I think she's probably a great bond manager, and this is probably a great fund.....but one has to go in with eyes open. How has this fund diversified away stock market risk the past 3 months? And that is the conventional purpose of holding bond funds, to diversify away stock market risk.
Do we know what " other" is?
We don't know what "other" is. I find the same issue with lots of other mutual funds.
One thing I notice is that when a fund invests in exchange traded funds, exchange traded notes, other mutual funds, etc, that shows up as "other". There must be a lot of "other" things that also show up under "other". Quite remarkable that she has 19% stocks in what you would think was a bond fund. Do we want to start calling this a conservative asset allocation fund?!
I'm sure we could find out what the "other" is....by going to the website, reading the fund reports, and if necessary, calling the fund company. I've discovered that it's harder to find out what is in bond funds than stock funds. But even the "other" in stock funds can be challenging.
AS OF 8/31/2014; MORNINGSTAR CATEGORY: MULTISECTOR BOND
Cash 19.12%
Convertibles 11.32%
Domestic Bond 19.41%
Preferred Stock 6.10%
Foreign Bond 21.02%
Foreign Stock 3.21%
Others 3.61%
Domestic Stock 16.22%
https://fundresearch.fidelity.com/mutual-funds/view-all/277905246?type=o-NavBar
Scroll halfway down the page.
Just summing the domestic, foreign, and preferred stocks = 25.53%
Add to that 11.32% in convertibles and you have a fund with a market beta approximately = 0.64 (per portfolio visualizer regression analysis). That's on the high side for me for a multi-sector bond fund.
http://www.portfoliovisualizer.com/factor-analysis
Mike_E
So really 25.53% stocks as you mentioned above. How is one supposed to fit this into their asset allocation? Eaton Vance is a load firm. Wonder what advice they are giving all their dealers, about how to use this fund. Where does it fit into a portfolio?
Personally, I'd like to see actively managed ETFs expand in a big way. Right now, if you have an account at brokerage A, it costs too much to purchase a Vanguard mutual fund, or any mutual fund not in the no transaction fee platform. Often $50 just to buy or sell a mutual fund not on the NTF platform. Too much. Active ETFs will put away all that nonsense, and equal the playing field. And I want to continue to see ETFs as a whole expand, advance and improve. Sure, there's a lot of bad products coming out, but also good products. All of these make investing better for the little guy and tend to equal the playing field.
They need to change the name of the fund.
John, do you know this thing has a 4.75% load? I can't stand loads. I know we can get it load waived, but the full service clients are paying the load, and probably have no idea it is available without it.