Hello,
About a month ago, or so, Parker Binion who is one of the fund managers on KCMTX began to post on our board.
For those that have an interest in KCMTX, as I do, I thought I'd post recent news on his fund in that it made it's annual distribution on December 13th in the amout of $1.69.
Looking back over the last five years KCMTX has paid out $4.57 in distributions while it has grown its nav from a starting value of $12.24 to current value of $13.06 (after distribution). With this it has demonstrted it's ability to to grow its value while at the same time make reasonable payout to its investors that might be seeking an income stream coming from capital gain distributions. Know that these annual distributions vary in amounts.
This fund is listed as a multialternative fund by Morningstar and one that actively engages the global markets. Since, it can hold just about anything the mangers choose I consider it a hybrid type fund. With a turnover ratio of 318% indicates that it is very active in changing its positioning. This fund reminds me a lot of Marketfield and Ivy Asset Strategy which I use to own but no longer do. As these funds grew in size they also became bloated, from my perspective; and, with this, it took longer and longer for their managers to reposition them. As their performance waned I sold them off.
I have linked below KCMTX's Morningstar Fund Report.
http://www.morningstar.com/funds/XNAS/KCMTX/quote.htmlI wish all ... "Good Investing."
Old_Skeet
Comments
Happy holidays everyone. I wish you all a prosperous and healthy new year!
I wonder if Parker would comment on what they think is a reasonable level of assets to manage with this strategy so they don't end up in the same situation as Marketfield or Ivy.
And I'll bring up again. I, and probably many if not most here at MFO have been burnt by the lure of alternative funds before (I didn't own Marketfield or Ivy but you made my point). This one could be different, but I'm sticking with by George Bush quote:
We manage less than $100M in the fund currently. I don't know the exact level when capacity would would start to effect performance, but it's a LONG way off (i.e. billions). If we ever got there, I can't say what we'd do. Closing the fund to new investment would be one option. OMG - one of my favorite Bush-isms @MikeM!
PRWCX is a great fund! I'm proud that anyone would compare us to that fund.
Thanks for making comment.
What I favor about KCMTX is not it's total return although it is a leader in it's classificaton; but, its ability to generate income. This comes form it being actively engaged in the markets making a good number of buy and sell transactions (turnover 318%) thus generating capital gains. When you fully retire ... I'm thinking you will start to look for some more income generation over what your present portfolio generates. If my memory is correct it was in the 1.56% range when I Xrayed it.
One of the great things about investing is that we can each configure our portfolio to fit our own desires. You seek more growth while I'm seeking income along with some growth. From a 2017 distribution yield perspective I compute PRWCX at 6.4% and KCMTX at 11.5%.
Indeed, both are great funds with each carrying 5*'s from Morningstar.
Thanks again for making comment.
https://investor.vanguard.com/investing/taxes/investment-income
Generally, my traditional ira account generates enough income (interest, dividends, capital gain distributions) to meet my annaul RMD. With this, my principal stays in tack and often times my principal grows each year. The ira distributions are taxed at my normal income tax rate.
In my taxable account, certain types of income gets treated diffently for taxation. Again, the above link will provide more details on how investment income gets taxed. Some of it is below my normal rate while some of it is tax free ... and, again, some of it is taxed at the normal rate.
I strive to have a good variety of it; and, I am also mindfull not to excced the medicare income threshold where I have to pay increased medicare premiums. I believe for 2017 for a single filer it is $70,000 and for joint (husband & wife) $140,000.
Hopefully, others that are reading this will find benefit in our exchanges.
Wishing you the very best this Holiday Season.
Skeet
You noted: " If I'm withdrawing money from an IRA, why do I care if KCMTX has a bigger distribution than PRWCX if their total return is the same?"
Put me on the list for "total return". I don't care how the return arrives. When the money becomes a RMD from an I.R.A., the amount is a line item on a tax form.
Regards,
Catch
And more than likely most of your social security benefits will be includied when computing your (modified) adjusted gross income which your Medicare income brackets are based on. Going from the lowest bracket to the next will cost an additional $53.50 in Medicare Part B premiums of whatever you had been paying and an additional $133.90 if you slip into the third. There is also an increase of your Part D premiums when you go into a higher income bracket. Unfortunately nothing some of us can do and will have to pay more onerous Medicare premiums based on rising income due to RMDs. One of the few times it doesn’t pay to be single - at least for me.
Your are correct $85,000 or less for single and $170,000 or less joint. Glad to know the caps have have been increased.
My apologies.
Skeet
https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html
@catch22, I have been of the same page as you. For withdrawals from tax-differed plans it is total return that matters. I see nothing to the contrary or anything about breaking down growth returns versus income through distribution when taking withdrawals from and IRA/401k in any of my searches. @Old_Skeet I'm still missing your point why this matters for withdrawals in general. I see where it is comforting to you to know you are drawing from an income stream only and aren't drawing down principle, but in general, why would it matter where the RMD or any draw-down came from if all taxed the same? Actually, you aren't drawing from your income, you are drawing from your IRA as a whole.
If you invest in a bond, you know that you will receive that same interest payment, month after month, regardless of how the price of the bond fluctuates before maturity. When it matures, you can roll it over and continue on.
If you invest in something that doesn't pay enough interest/dividends to meet your cash needs, then you'll have to sell assets to make up the shortfall. Investing for income and investing for total return may have the same long term performance, but with an equity investment you may be forced to sell at an inopportune time. (You may also wind up selling at a fortuitous time when the market is soaring.)
Investing in income producing securities is one of many ways to manage this risk. If you're really set on a fixed income stream, especially for your base level expenses, annuities can also provide that comfort level.
Regarding IRMAA (Medicare surcharges for higher incomes): 2007 was a significant year, as Junkster mentioned. But that's because IRMAA began in 2007 as part of the Medicare Modernization Act. The thresholds were initially tied to inflation, and rose through 2010. For example, in 2008, the thresholds were $82K (single) and $164K (couple), lower than today's $85K/$170K.
https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2007-Fact-sheets-items/2007-10-01.html
The IRMAA thresholds were frozen at the 2010 levels for 2011-2019 by the ACA. Perhaps we should have more discussions about ACA ramifications. (Oh noooooo!)
https://www.kff.org/health-reform/fact-sheet/summary-of-the-affordable-care-act/
If you just consider mutual funds you should, in theory, expect a higher return over time from a more volatile asset, but the question of which you prefer seems just like any other investment decision- what return do you need, what's your risk tolerance and what's your time horizon? KCMTX has been almost as volatile as the S&P 500 over the last 3 years, more volatile over the last 5 and the returns are lower while its mostly been a risk-on environment and invested in equities. PRWCX has been a good amount less volatile so you've been getting something for the cost of lower returns.
As a general rule I'm a believer that funds like KCMTX are intended to outperform when there's a significant downturn that lasts long enough for the portfolio to move away from equities and into other asset classes that will do far better. The last 8 years has been pretty difficult because most of the downturns, even the more painful ones, have been relatively quick and that causes whipsaws rather than advantage. One day that's going to change and when it does then we'll really see how good KCMTX's process is. If it performs really well during a big market downturn its volatility and risk-adjusted returns will also look a lot different. At this point, though, I think you have to be really happy if it captures a good portion of the upside and doesn't get whipsawed too often. I don't think it should be a big surprise that it has more volatility and lower returns.
“Certain types of investment income receive more favorable tax treatment than others.”
TRUE
“Some withdrawls form (sic) ira's are taxable some are not.”
TRUE - But it has to do with the type of IRA (for example Roth vs Traditional)
“The below link will give more information as to how interest, dividends and capital gains are taxed as well for withdrawals from ira's.”
https://investor.vanguard.com/investing/taxes/investment-income
YES - But, the link (from Vanguard) does not say that income generated within an IRA is taxed differently from capital gains generated within an IRA. To the best of my knowledge, income and capital gains accumulated within an IRA are treated essentially the same at the time of distribution. If investing outside your IRA (or similar plan) there is a big difference income and cap gains in tax treatment at time of withdrawal. But within IRAs or similar plans there’s no distinction made when the fund’s are withdrawn.
I understand @Old_Skeet ‘s point about not wanting to sell down his “capital” or “growth” assets (ie: equities) to meet his yearly income requirements. From an allocation standpoint that makes perfect sense. But, I agree more with @MikeM’s overall take that for most of us, it matters little whether our IRA distributions were initially generated thru income or capital gains. In fact, I’m not aware of any tax records maintained by custodians that would make this workable. Can I not exchange from my IRA ultra-short bond fund at Price tomorrow into their (identically registered IRA) blue chip or international growth fund without the transaction being reported to the IRS?
Personally, I take annual IRA distributions pretty much “across the board”. Typically, I’ll pull from the better performing asset classes as a means of rebalancing.
So we have a down turn and this fund adjusts and performs admirably, meaning it loses less than maybe a balanced fund would. Now the positive effect of that safety on your portfolio is only felt if you have significant skin in the game, right? If you have 1, 3 maybe 5% in the fund, how does that protect your over-all portfolio versus maybe what a balanced fund would do? Own 10, 20, 50%... now you will profit in a down market with an alternative fund's benefit (if it works) .
Really just pondering about ownership of alternative funds in general I guess. Especially if you don't have enough ownership to significantly mean something to the whole. As I've said earlier, I've been burned before with this type of fund. I now would rather trust a well managed balanced fund and my own allocation to equity-bonds-cash. To each there own though. Sure looks like a very good fund, in an up market anyway.
I recently tried to digest an Alt strategy which suggested shorting or buying puts of HYG (Junk Bonds).
I believe the strategy would pair the shorted or put position of HY bond (HYG) along with owning an equity position and /or puts of the equity (IWM is mentioned below).
Is this one of the possible strategies that an Alt Funds would employ?
From one link: BOA Analysis Report reference by ZeroHedge:
it-has-never-been-cheaper-hedge-market-crash-using-one-trade
ISTM that investing for income is one response to this question. People in retirement need a certain minimum amount of cash monthly, they have a higher need for cash to more than barely get by, and beyond that want cash to enjoy their retirement. The more assured the cash stream is, the lower the expected long term result (and less money expected for that third tier - cash to have fun). That's what I was trying (apparently unsuccessfully) to illustrate with bonds.
I also mentioned annuities as a way to address some of the risk aversion. An annuity that pays out enough to meet just the first tier of needs (survival cash) can allay some people's concerns about having an adequate cash flow. As with most risk/benefit tradeoffs, that comes with the expectation of lower total returns.
Now to get into the weeds
Would one automatically take the less volatile investment if two investments had the same expected long term returns? Not necessarily. Volatility is not identical to risk, and volatility (std dev) may not always be a useful figure. Since we're talking in the abstract here, I'm not going to worry about whether there are real world investments that behave as follows:
One investment returns 2%/month 50% of the time, and 0.0098% 50% of the time. You don't know which one for each month, but over the course of a decade it returns 230% (that's basically 1% compounded 120 times)). The other returns a rock steady 1%/mo, except for a random spike (down 50% one month, up 104.02% the next month).
The std dev of the first investment is 1.00 (since the monthly return each month is 1 ± 1). The second investment's std dev is 10.53. Yet I'd take that investment. All I would have to do is wait out the dip (crash?) for a month and I'd have a smoother ride. Keeping a one month buffer is all I'd need.
So much of this is subjective. Given two investments that you somehow know will have the identical performance over, say, ten years, and you will not be selling over that period of time, their paths to that return (volatility) don't objectively matter.
Which gets us back to addressing sequence risk. Some people will bifurcate (or trifucate) their portfolio into buckets to manage that risk, drawing from the most stable bucket and disregarding the volatility of the other bucket(s). Others will prefer investments that try to temper downside movements. It sounds like KCMTX might serve them well, at least if it provides the downside protection you described.
I also think your last point about splitting the portfolio into buckets or sleeves with different "goals" and different approaches is a smart way to do things. We're told to keep much more than a one month cushion in "cash" and we all have to be able to deal with the unexpected from time to time (I had my car inspected in October and ended up with a new muffler) so hopefully most people aren't walking a tightrope every month.
@MikeM, I think by definition if you own something that's an insignificant portion of your portfolio then it's not going to make much difference. One caveat, though, is that it's not really about the individual fund, its about the totality of your portfolio. I think, at least for myself, I'd be far more willing to put 20% in a balanced fund or several of them because I feel like I understand them better, I've read a lot more about the benefits of a "balanced" portfolio over many years and in most cases alternative funds aren't going to tell you enough about their process/algorithm to understand it at a level that might make you feel comfortable enough to make a big allocation. Funny enough, we don't actually know the details of how a balanced fund makes it's decisions either but I feel like I know more than I really do.
I certainly don't want to give anyone advice and this isn't what I'm doing with my own portfolio, but there's no reason you can't have both balanced funds and alt funds in a portfolio. They'll do different things for you depending on the type of alt fund(s) you choose but the combination could provide better diversification than just relying on balanced funds or a combination of stock and bond funds.
You mentioned early on that you like to compare these alt funds against a balanced fund like PRWCX. It might also be worthwhile to compare it to a very simple alt strategy like SMA10 or SMA12. You pay a lot for these complicated algorithms and if they can't beat something that you could do on your own with very little effort then they'd have to have something else really special to keep me interested. That could be a super smooth ride, far better tax efficiency or even the potential to generate positive returns in a big downturn, but in a lot of cases complicated isn't better.
Thanks to all that have made comments on this thread.
I now have a few trailing comments that I'd like to make.
One of the things that goes back to a comment I made was that "some distributions are taxed while some are not" is that non deductable contributions when removed in a sense are not taxed but become factored in with the normal distribution thus reducing the part that gets taxed. Since, I made some non deductable contributions to my traditional ira through the years this is something my accountant has to deal with each year as I take distributions. (I do not think this was covered in the link I provided).
Again, since I hold enough income generating securities that kick off a good amount of interest, capital gains and dividends (I take all fund distributions in cash.) thus far I have not been forced to take any in kind distributions. In addition, I use that sleeve system and KCMTX would become a member of the global hybrid sleeve which is found in the growth & income area of the portfolio. Although, the size of the position when it comes to the overall portfolio would be small it would have a greater influence within its sleeve which now consists of CAIBX, PMAIX & TIBAX. I would build KCMTX's position over time through excess income generation over and above the required needed for RMD's. So, having a good income stream is beneficial because it provides the opportunity to add new positions without having to sell other securities to make the buy (from my perspective).
On my comment about how certain types of income gets taxed this applies more to taxable accounts; but, since interest, dividends and capital gains are a part of total return along with capital appreciation I felt it worthy of comment.
One of the great things about investing is that choices can be made in a fashion that allows each of us to obtain our goals. The comments I made center around what I do; and, by no means was I saying that they would be right for others to follow. With this, there is no one right way (or wrong way) to have success (or failure). We can each govern as we feel best.
I wish all well this Holiday Season ... and, most of all "Good Investing."
Skeet
The gist of your above post appears to be that within a Traditional IRA you have made some non-deductible contributions. That’s allowed - although for tax simplicity it might have been better to maintain a separate non-deductible IRA instead of co-mingling those funds.
In either case, all interest and dividends generated within the non-deductible IRA (or non-deductible portion of a co-mingled IRA) would be taxed as ordinary income at the time of withdrawal (same as for normal deductible IRA distributions). Only the initial contribution would be exempt from federal taxes. So I’m still having trouble understanding why it would make any difference in the end whether one spent down dividends earned in a non-deductible IRA or took distrubutions from (various types of) assets within a Traditional IRA.
- “Earnings are taxed as ordinary income if you withdraw them from a non-deductible traditional IRA ..... “
- “If you made nondeductible contributions or rolled over any after-tax amounts to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. These nondeductible contributions are not taxed when they are distributed to you. They are a return of your investment in your IRA.[3 Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free.”
https://www.bogleheads.org/wiki/Non-deductible_traditional_IRA
I don’t think this is the direction you intended the thread to go. But, like MikeM, I’m having trouble understanding the emphasis placed by some on dividend stream inside an IRA. If it somehow helps maintain a predetermined allocation it’s useful. But from a purely tax standpoint it doesn’t appear to have any impact.
total of all nondeductible contributions across all trad IRAs / total value of all trad IRAs
There is a rational desire not to "eat into principal". You don't want to deplete your assets that generate future dividends and growth. That said, it should make no difference whether you harvest your profits (while leaving principal untouched) in the form of interest, dividends, or capital gains.
Own a bond, and you get interest while the principal remains intact (though shrinking in real value).
Own a bond fund, and you get that same interest, but for legal reasons payments are called "dividends".
Own a stock, and you get cash dividends while keeping the same number of shares (which may go up or down in value).
Own a stock fund, and you those cash dividends passed through to you as fund dividends.
Buy 100 shares of a stock @$20 ($2000 principal), sell 20 shares when it goes up to $25, and you've got $100 in cap gains and also your original principal (80 shares @$25).
If that stock is in a fund and the manager sells those 20 shares, you get the $100 cap gains in the form of a fund "dividend", and your fund shares are worth what you paid for them (no change in principal).
If the fund manager doesn't sell and distribute the profits, then the fund shares go up 25%. You sell 20% of your fund shares, get the same $100 capital gain, and your remaining fund shares are still worth what you paid originally (no change in principal).
All of these retain your principal investment - whether you get interest, dividends, cap gains dividends, or take capital gains yourself. Yet somehow it feels different when the fund manager sells a stock (generating a cap gains div) vs. when you sell a fund share yourself.
I'm guessing that therein lies the source of differing perspectives.