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Here is a 2 page recap of a Feb. webcast DSENX. A good overview and explanation of the methodology used in the DSENX strategy. Jeffrey Sherman – Shiller Enhanced CAPE® webcast titled “A + B = C” Tuesday, February 9th, 2016
The fact sheet and prospectus both state that "The Fund’s investment objective is to seek total return which exceeds the total return of its benchmark index."
The fact sheet goes further to claim that the benchmark is the S&P 500. (In case there's any doubt, the benchmark returns it gives are S&P 500 performance figures.) But that's not the index the fund's designed to beat.
The prospectus states clearly: "The Fund seeks total return (capital appreciation and current income) in excess of the Shiller Barclays CAPE® US Sector TR USD Index (the “Index")."
This is important because it means that if one is comparing performance with the S&P 500, one is making the wrong comparison. The prospectus gives comparisons against both the S&P 500 and the CAPE® index. The fact sheet's omission of CAPE® index figures strikes me as downright deceptive.
Similarly, the webcast page shows the fund handily beating the S&P 500 since inception, but doesn't give performance figures for the CAPE® index that it is tracking. It is true that the fund has beaten this index also since inception, but by a much smaller margin, and the fund fell short in 2015.
Beating the true index that a fund is "enhancing" is what's hard. It's why AlphaTrak for example is just slightly ahead of its benchmark index (which really is the S&P 500 for that fund) over five years, while slightly behind over 10 and 15 years.
So far, DSENX has done what it has promised. It is one of a class of funds typically offered by bond houses (e.g. MetWest, PIMCO, DoubleLine) where the sponsor tries to apply its bond expertise to the equity market via derivatives.
Looking at a funds like PSTKX, it seems that it is possible to add some value above an index. PSTKX long term (15 years) has added about 40 basis pts/year. According to its prospectus, DSENX has added about half that (per year) for its first 26 months of existence (through December 2015). It has done much better in 2016, though.
So the performance (relative to an index) may be sustainable, especially with a good bond fund manager. But there is risk in the technique, which can have short term blowups. In contrast, an ETN by design has no tracking risk (beyond bid/ask spread). But it does have credit risk (backed only by its sponsor, not with any real securities in a portfolio).
I'm no fan of ETNs, so on that basis alone I'd take DSENX over CAPE. But that's me.
DSENX or any of its ilk belongs strictly in a tax-sheltered account. Holding bonds in lieu of equity, their tax efficiency is horrendous. In contrast, stock and bond ETNs are supposed to be extremely tax efficient (more so than ETFs). So that could tip the balance the other way in a taxable account.
DSENX seems like the better deal at this time- beating the CAPE index since inception, eliminates dealing with bid/ask spreads and paying brokerage commissions every time a purchase is made. The liquidity with the CAPE ETN is also an issue at this time, this looks to be a very thinly traded fund.
@TSP_Transfer: thanks for posting the recap of the February webcast. The last line of that pdf reads, "DoubleLine believes the Fund would be a compliment to other large-cap value strategies." Whether it's a compliment or a complement, only the grammarian curmudgeons will say. These funds are "outliers" for me because I hardly grasp what they try to do and I certainly couldn't do it myself or buy another fund that appears to do it. Do agree that it's a large value strategy and I have replaced some LCV funds with DSENX and CAPE in my actively managed portfolio. CAPE is hard to trade, similar to some CEFs. Limit orders will usually be filled late in the trading day when the bid-ask spread narrows. May not be for everyone.
PSTKX slightly lags SP500 since Nov 2013 while DSENX outperforms handily. Before 4y ago, though, PSTKX outperforms, as you noted. I wonder why the crossing for the last 4y. You anticipate that that outperformance should resume, sounds like.
Finally, is CAPE etn worry, and trading difficulty, actual?
@davidmoran: CAPE is not hard to trade if you are willing to pay/accept the bid/offer. If you count your pennies, however, it may be hard to get the price you think is fair. Low volume seems to create the wide spread.
@davidmoran - One of the things people don't pay enough attention to when looking at tax efficiency is what one gets, after-tax, when cashing out.
Though DSENX appears to have a similar tax cost to LCV long term figures (in the 1.5% ballpark), this is not taking into account the hidden tax liability it's carrying due to NAV appreciation. In contrast to DSENX, the LCV funds are not carrying the same untaxed appreciation. That makes DSENX less tax efficient as I'll explain below.
First a simple example - compare a savings bond with a hypothetical fund, both returning 5% pre-tax. Savings bond interest is tax-deferred until the bond is cashed out. We'll assume that our fund generates only long term gains, but that it recognizes all of its gains annually. So if it starts with $100, at the end of the year it's made $5 in cap gains, on which $1 tax is paid (20% top rate, ignoring Medicare surtax), and has only $104 invested going forward.
If the investor cashes out at the end of ten years, the savings bond will have appreciated to $169.89, but after paying 39.6% taxes on the $69.89 gain, is left with only $138 (well, $137.99). The fund, which was tax-inefficient (distributing 100% of its gains yearly) is worth $148 (okay, $148.02). Since taxes were paid on appreciation as it went along, there are no gains recognized on the sale.
The totally inefficient fund came out way ahead, because although it kept distributing income, that was low tax rate income.
What you're seeing with DSENX isn't quite as stark, but similar. The LCV funds are distributing most of their income, but that tends to be lower-tax rate qualified divs. DSENX has a similar total return, but is distributing a smaller portion of its total return. Like the savings bond, it has a greater tax liability when cashed out than do the LCV funds which are more similar to the dividend paying hypothetical fund.
Even though DSENX is paying out a smaller percentage of its total return, the tax on that payout (tax cost) is similar to the tax on the LCV distributions. That's because the DSENX distributions come from bonds, and are thus taxed mostly at the higher ordinary income tax rate.
That's the key to the tax inefficiency of funds like this. They take what ought to be a tax-efficient investment (long term stock holdings) and mimic its total return, but in a tax-inefficient way (using bonds).
FWIW, Fidelity reports that the long term (10 year) tax cost ratio for LCV funds is 1.12%, less than the 1.5 ballpark I suggested above.
---
Briefly, why I don't like ETNs' risk - they're effectively bonds of a single issuer. If you were investing in bonds, would you put so much money into the bonds of one company, or would you diversify? Why or why not? What if you really, really trusted that one company?
It's similar but not identical to a risk in buying insurance (you're just another creditor to the insurance company). But with insurance, regulators see to it that the company has a certain level of reserves, and there are also state guarantee funds. No such controls or backstops here.
Most of my own large DSENX / DSEEX holding is in Roths, but not so for my kids. Would probably be worth crunching the actual numbers for them vs TWEIX, PRBLX, also div etfs like NOBL, SPHD, DVY, etc.
Still can't discern whether CAPE etn risk is actual (may be a contradiction in terms).
@Old_Joe It took a page and 1/2 and 50@Ted posts to generate the over 480 views in this post.I had to go to page three to count 43 comments to @Ted's constant posting of basically the same old same old.While you and Ted may have a valid point in advising a mainstream approach to investing, if we all sat around a campfire and discussed SPY,TLT,various Fidelity,Vanguard,Schwab etc funds,I'll go in the woods for some sticks to roast the marshmallows.And we wouldn't need this website to exchange investment ideas that seem to interest people .
@Old_Joe Certainly not offended by you or most comments or posters on this site. I've also been amused quite often by Ted( see below ).But I've also gotten the "woodshed" treatment . I had to search this site for " ship " to recover my January post.Try the search feature for most any topic and notice some of the people that have left the site or rarely add their opinion/investment experiences. As far as I'm concerned, we've lost some people that added to discussions such as this one.I thought Ted's comment in this discussion a bit condescending. @Old_Joe PS Watching the Giants. 30 hits ! Bumgarner vs De Grom ? Dodger/Giant rivalry alive and well. The "Bum" vs the Bums .
@Ted said 'Just remember, every ship at the bottom of the ocean has a chart room !' One of your better ones Ted They found another one ! And the chartists are more bearish by the .... hour? http://www.mutualfundobserver.com/discuss/discussion/comment/73731/#Comment_73731 by ALEXANDER SMITH JAN 13 2016, 8:19 AM ET Experts hunting for Malaysia Airlines Flight MH370 have discovered wreckage on the seabed. However, it's at least 100 years old and has nothing to do with the missing jet
jeeeeeeezus, how can I have so much money in a fund where the co-manager thinks DT is going to win the election? Politics aside, what does that say about his intellect and thought processes and observational and analytical skills ? Mother.
I was just looking through some old posts for investment ideas and couldn't help but snicker a few times when I saw this one. Upon further review.....
I thought I'd post how my outlier funds, held in the specialty sleeve found in the growth area of my portfolio, that I referenced earlier in the thread (August, 2016) are performing year-to-date. Virtus Global Infrastructure (PGUAX) is up +13.3%, American Funds New World (NEWFX) is up +16.97 and ALPS/Red Rocks Listed Private Equity (LPEFX) is up +19.25%. Combined these three funds make up about 25% of the growth area of the portfolio.
I don't think you are to late to the global infrastructure party ... but, just my thinking. Anyway, my fund (PGUAX) is not the lead fund within the sector but it is performing to standard. I'm going to continue to ride this train along with my other two themes in my specialty sleeve ... emerging markets (NEWFX) and business development (LPEFX). Combined, these three funds make the sleeve the best performer in the growth area with a year-to-date retrun of 16.6%, followed by the global growth sleeve with a return of 15.6%, the large/mid-cap sleeve with a return of 14.2% and the small/mid-cap sleeve with a return of 4.2%. The year-to-date total return for the growth area computes to about 12.7%. Now, if small/mid-caps have a good second half as I think they might then good things could be happening across the board in the growth area. Anyway, I am not complaining and I am truly happy with what is happening within the growth area of my portfolio which currently consist of twelve funds (three funds in each sleeve). The spiff sleeve is currently void holdings.
Comments
Jeffrey Sherman – Shiller Enhanced CAPE® webcast titled
“A + B = C”
Tuesday, February 9th, 2016
http://doublelinefunds.com/pdf/2-9-16_Webcast_Recap.pdf
Latest fact sheet dated July 31.2016
http://www.doublelinefunds.com/wp-content/uploads/shiller-enhanced-cape-fact-sheet.pdf
The fact sheet goes further to claim that the benchmark is the S&P 500. (In case there's any doubt, the benchmark returns it gives are S&P 500 performance figures.) But that's not the index the fund's designed to beat.
The prospectus states clearly: "The Fund seeks total return (capital appreciation and current income) in excess of the Shiller Barclays CAPE® US Sector TR USD Index (the “Index")."
This is important because it means that if one is comparing performance with the S&P 500, one is making the wrong comparison. The prospectus gives comparisons against both the S&P 500 and the CAPE® index. The fact sheet's omission of CAPE® index figures strikes me as downright deceptive.
Similarly, the webcast page shows the fund handily beating the S&P 500 since inception, but doesn't give performance figures for the CAPE® index that it is tracking. It is true that the fund has beaten this index also since inception, but by a much smaller margin, and the fund fell short in 2015.
Beating the true index that a fund is "enhancing" is what's hard. It's why AlphaTrak for example is just slightly ahead of its benchmark index (which really is the S&P 500 for that fund) over five years, while slightly behind over 10 and 15 years.
The whole thing strikes me as similar to corporations reporting adjusted EBITDA instead of GAAP. If you want objective facts and figures, you need to go to the standardized, legal documents.
http://www.zerohedge.com/news/2015-01-08/wsj-looks-non-gaap-earnings-horrified-what-it-finds
Yeah, ~3.6% and ~4.1% (DSEEX) in toto since Nov '13 is the value the bond sauce has added, by my calculation. So is it worth it over CAPE?
Interesting they do not do the factsheet indexing right.
Looking at a funds like PSTKX, it seems that it is possible to add some value above an index. PSTKX long term (15 years) has added about 40 basis pts/year. According to its prospectus, DSENX has added about half that (per year) for its first 26 months of existence (through December 2015). It has done much better in 2016, though.
So the performance (relative to an index) may be sustainable, especially with a good bond fund manager. But there is risk in the technique, which can have short term blowups. In contrast, an ETN by design has no tracking risk (beyond bid/ask spread). But it does have credit risk (backed only by its sponsor, not with any real securities in a portfolio).
I'm no fan of ETNs, so on that basis alone I'd take DSENX over CAPE. But that's me.
DSENX or any of its ilk belongs strictly in a tax-sheltered account. Holding bonds in lieu of equity, their tax efficiency is horrendous. In contrast, stock and bond ETNs are supposed to be extremely tax efficient (more so than ETFs). So that could tip the balance the other way in a taxable account.
Have I equivocated sufficiently?
Regards,
Ted
>> DSENX or any of its ilk belongs strictly in a tax-sheltered account. Holding bonds in lieu of equity, their tax efficiency is horrendous.
Fido shows before- vs after-tax delta to be no worse than LV category (to the contrary, in fact), unless I misread. Incorrect?
See
https://fundresearch.fidelity.com/mutual-funds/summary/258620814
PSTKX slightly lags SP500 since Nov 2013 while DSENX outperforms handily.
Before 4y ago, though, PSTKX outperforms, as you noted. I wonder why the crossing for the last 4y. You anticipate that that outperformance should resume, sounds like.
Finally, is CAPE etn worry, and trading difficulty, actual?
Though DSENX appears to have a similar tax cost to LCV long term figures (in the 1.5% ballpark), this is not taking into account the hidden tax liability it's carrying due to NAV appreciation. In contrast to DSENX, the LCV funds are not carrying the same untaxed appreciation. That makes DSENX less tax efficient as I'll explain below.
First a simple example - compare a savings bond with a hypothetical fund, both returning 5% pre-tax. Savings bond interest is tax-deferred until the bond is cashed out. We'll assume that our fund generates only long term gains, but that it recognizes all of its gains annually. So if it starts with $100, at the end of the year it's made $5 in cap gains, on which $1 tax is paid (20% top rate, ignoring Medicare surtax), and has only $104 invested going forward.
If the investor cashes out at the end of ten years, the savings bond will have appreciated to $169.89, but after paying 39.6% taxes on the $69.89 gain, is left with only $138 (well, $137.99). The fund, which was tax-inefficient (distributing 100% of its gains yearly) is worth $148 (okay, $148.02). Since taxes were paid on appreciation as it went along, there are no gains recognized on the sale.
The totally inefficient fund came out way ahead, because although it kept distributing income, that was low tax rate income.
What you're seeing with DSENX isn't quite as stark, but similar. The LCV funds are distributing most of their income, but that tends to be lower-tax rate qualified divs. DSENX has a similar total return, but is distributing a smaller portion of its total return. Like the savings bond, it has a greater tax liability when cashed out than do the LCV funds which are more similar to the dividend paying hypothetical fund.
Even though DSENX is paying out a smaller percentage of its total return, the tax on that payout (tax cost) is similar to the tax on the LCV distributions. That's because the DSENX distributions come from bonds, and are thus taxed mostly at the higher ordinary income tax rate.
That's the key to the tax inefficiency of funds like this. They take what ought to be a tax-efficient investment (long term stock holdings) and mimic its total return, but in a tax-inefficient way (using bonds).
FWIW, Fidelity reports that the long term (10 year) tax cost ratio for LCV funds is 1.12%, less than the 1.5 ballpark I suggested above.
---
Briefly, why I don't like ETNs' risk - they're effectively bonds of a single issuer. If you were investing in bonds, would you put so much money into the bonds of one company, or would you diversify? Why or why not? What if you really, really trusted that one company?
It's similar but not identical to a risk in buying insurance (you're just another creditor to the insurance company). But with insurance, regulators see to it that the company has a certain level of reserves, and there are also state guarantee funds. No such controls or backstops here.
Most of my own large DSENX / DSEEX holding is in Roths, but not so for my kids.
Would probably be worth crunching the actual numbers for them vs TWEIX, PRBLX, also div etfs like NOBL, SPHD, DVY, etc.
Still can't discern whether CAPE etn risk is actual (may be a contradiction in terms).
It took a page and 1/2 and 50 @Ted posts to generate the over 480 views in this post.I had to go to page three to count 43 comments to @Ted's constant posting of basically the same old same old.While you and Ted may have a valid point in advising a mainstream approach to investing, if we all sat around a campfire and discussed SPY,TLT,various Fidelity,Vanguard,Schwab etc funds,I'll go in the woods for some sticks to roast the marshmallows.And we wouldn't need this website to exchange investment ideas that seem to interest people .
I abjectly apologize for having been amused by Ted's comment. I've withdrawn the offending post.
@Old_Joe
PS Watching the Giants. 30 hits ! Bumgarner vs De Grom ? Dodger/Giant rivalry alive and well. The "Bum" vs the Bums .
@Ted said 'Just remember, every ship at the bottom of the ocean has a chart room !'
One of your better ones Ted They found another one ! And the chartists are more bearish by the .... hour?
http://www.mutualfundobserver.com/discuss/discussion/comment/73731/#Comment_73731
by ALEXANDER SMITH JAN 13 2016, 8:19 AM ET
Experts hunting for Malaysia Airlines Flight MH370 have discovered wreckage on the seabed. However, it's at least 100 years old and has nothing to do with the missing jet
An update.
I thought I'd post how my outlier funds, held in the specialty sleeve found in the growth area of my portfolio, that I referenced earlier in the thread (August, 2016) are performing year-to-date. Virtus Global Infrastructure (PGUAX) is up +13.3%, American Funds New World (NEWFX) is up +16.97 and ALPS/Red Rocks Listed Private Equity (LPEFX) is up +19.25%. Combined these three funds make up about 25% of the growth area of the portfolio.
Wishing all ... "Good Investing."
Skeet
I don't think you are to late to the global infrastructure party ... but, just my thinking. Anyway, my fund (PGUAX) is not the lead fund within the sector but it is performing to standard. I'm going to continue to ride this train along with my other two themes in my specialty sleeve ... emerging markets (NEWFX) and business development (LPEFX). Combined, these three funds make the sleeve the best performer in the growth area with a year-to-date retrun of 16.6%, followed by the global growth sleeve with a return of 15.6%, the large/mid-cap sleeve with a return of 14.2% and the small/mid-cap sleeve with a return of 4.2%. The year-to-date total return for the growth area computes to about 12.7%. Now, if small/mid-caps have a good second half as I think they might then good things could be happening across the board in the growth area. Anyway, I am not complaining and I am truly happy with what is happening within the growth area of my portfolio which currently consist of twelve funds (three funds in each sleeve). The spiff sleeve is currently void holdings.
Wishing all ... "Good Investing."