Added to RIT Capital Partners in London. Added to Canadian National Railway. Added to T Rowe Price Cap Ap (PRWCX). Sold more of Pimco Equity Dividend (PQIDX) and Pimco L/S (PMHDX)

Thanks David for the alert on GPROX. I already have investments in GPIOX and GPEOX and I've been very happy with both for a relatively short time. I'm also a big fan of Grandeur Peak, partly because of the track record Robert Gardiner has but mostly because they are not only closing funds at very small levels but hard closing some of them, which I think gives them an even better chance to achieve great returns. I'm hoping for some thoughts from others about the good and bad of investing in GPROX, understanding that each of the positions in the fund is a very small investment with $110 million spread over 400 holdings, compared to separate investments in the subsets. For the most part it just seems like the separate investments give me the opportunity to manage my exposure to the individual pieces, but maybe letting them decide where to allocate capital is a better idea. Thanks.

What about PIMIX or PDI or the other funds run by Daniel Ivascyn? I've had my retired mother in PIMIX for a few years (she needs income but has no need for capital) and have often flirted with buying PDI on a dip, but I've never quite resolved to do it, to my regret.
Gaffney is great, I owned LSBRX for a long time, but I'm fearful that her fund (like LSBRX) will be quite correlated to the stock market and won't hold up well if the stock market crashes; LSBRX crashed (and recovered beautifully) just like stocks during the 2008-9 crisis. Which is fair enough, but most people want bonds to be safe and steady.

Thanks Old Skeet,
The main criticism I've fallen victim to for referencing this site is the fact that it's "play money". "Show me the money...where are the receipts".
O.K, fair enough.
Call me clueless, but to me this site is no different than any other data point to consider and personally I like the small investor feel the site has. I naturally take it with a grain of skeptism, but I hope everyone does this throughout Internet Investing Land.
Judging by the bold text in the Moosistory section of the site these "calls" are profitable about 50% of the time. To me, Long Term Treasuries (EDV or BTTRX) in a portfolio serve three purposes:
- They provide a coupon return better than cash so long a interest rates remain unchanged.
- They have the potential to be "bid up" as a result of a market correction when other market participants seek a "flight to safety" investment.
- They provide a coupon plus capital appreciation when interest rates fall. Remember Japan...rates could fall further here in the US if deflationary pressures reemerge.
EDV seem like a counter intuitive place to park money right now from a rising interest rate standoint, but as I mentioned above that is not the only scenario to consider. I don't subscribe to The Moose so I can't help paraphase the Moose's decisionmaking process for this switch.
Recently I posted a 5 year chart of BTTRX (Zero Coupon Long Duration Treasuries) and VTSMX (Total Stock Market Index). It appeared to me that a significant divergance exists between these two positions right now. It could go on for awhile, but for no other reason than to rebalance a portfoio I would be selling some of my equity winners (your outperforming equities funds) and buying some fix income (your underperforming fixed income funds).
Nothing wrong with employing basic periodic rebalancing.
Here the chart I was referring to that I created:

Good for momentum trades only, not for core holding. Significant risk of capital.
If you are not sure what mortgage REITs are, you may find this article useful (search for REM on Yahoo finance and click through the M* link there if you have problems with the direct link below)
Capital Destruction, Inc.
Not to be confused with regular REIT funds like VNQ, RWR, etc., which don't concentrate in mREITs.
All Real Estate funds should be looked at for total return than just yield because they tend to be volatile with potential loss of capital like equities. They can provide diversification benefits in small amounts to an equity portfolio with low correlations to equities but shouldn't be considered as a fixed income asset because of the yield.

There are a couple of different things mixed up in this reporting.
Fidelity ventures is an entity in the family that invests primarily in Series B or later and is not associated with any mutual fund. The money for this venture fund comes from the high net worth individuals working for Fidelity such as fund managers. There are no mutual fund investors involved here.
The investing by some mutual funds in late stage companies with large sums of money at very high valuations has very little to do with venture capital in terms of risk profile and is more like convertible bond/preferred stock investing and it is somewhat of a game being played. It works like this.
Say, you are a fund manager with hundreds of millions of dollars that needs to be put to work and is dragging down your performance sitting in cash. Cash instruments pay very little. Buying more equities in your asset class may increase your Value At Risk more than your limit. You can use part of that money without liquidity needs to get about 8% annual returns with very little risk and a potential to gain 50-100% more with no additional risk. The catch is you need very large sums of money ($150M-$200M per investment).
You find a late stage company that already has established a market (in revenue or users) but needs a large cash infusion to scale up and prepare the company for an exit. Part of this preparation is to create huge valuations for the company to give the impression that it is worth a lot and a huge pool of money to ensure it doesn't run out of money while positioning itself for an exit (acquisition or IPO).
Traditional VCs won't provide this funding because the expected returns for this money in an exit is very low (1x-2x) rather than the 10x-20x VCs invest for. And it ties up a large amount of money in one company. Enter money funds that have large pools of capital and are happy with a 8-10% annual return and an option to realize 50-100% with a few years.
The key for the money fund is to find late stage companies that are not going to go down because they already have a market although they are not ready for an exit in terms of recenue or buyer interest. Even a fire sale exit for the company will likely result in a $100M-$200M transaction which is considered a huge failure these days.
So, you agree to put in money in that range in a late stage financing round with preferred shares that typically have 8% dividends that add on to your equity each year. These shares also have liquidation preferences that put your shares ahead of all others in a sale. So, unless the company goes down or sells for less than the amount of money you put in (but you have selected the company to have at least that much real valuation in worst case scenario), the return of capital is pretty much guaranteed. So, in the worst expected case, you get your money back probably with the 8% returns.
You let the company decide whatever non-sensical valuation it wants which is typically $1B+ at this stage of the company. This high valuation is great marketing for the company to look like it is worth a lot, does not dilute existing investors as you typically get 10% or less equity in that round, and the huge valuation prevents any further rounds which might dilute you or have liquidation preference over you. It is understood by all that this will be the final round of funding for that company. Hence, the huge amount of funding at that stage.
The expected exit us in 2-3 years. So you have a preferred stock that will let you get 8% annual returns with very little risk of losing capital and if the company has a huge exit, you may realize anywhere from 10%-100% returns on that money with your equity stake.
Not a bad investment for a fund with a lot of cash in its hands. You just need a lot of money that doesn't need to be liquid for 3-4 years (you can pool with other funds). The other catch is that there aren't a lot of companies to invest in at this stage and real valuation to guarantee return of capital so there aren't too many of these deals being made but they make headlines when they do because of the funny money valuations.
Yes, there are bubble deflating risks.But this is not really venture investing as people understand it to be.

@heezsafe & Other MFO Members:
4/18/14 Copy & Paste: Kirsten Grind WSJ
(Mutual Funds Moonlight As Venture Capitalist)
That mutual fund in your retirement plan may be moonlighting as a venture capitalist.
BlackRock Inc., BLK -0.57% T. Rowe Price Group Inc. TROW +0.36% and Fidelity Investments are among the mutual-fund firms pushing into Silicon Valley at a record pace, snapping up stakes in high-profile startup companies including Airbnb Inc., Dropbox Inc. and Pinterest Inc.
The investments could pay off big if the companies go public or are sold, helping boost fund returns. But, as the recent turmoil in the market for technology stocks and initial public offerings has shown, such deals also carry major risks not typically associated with mutual funds.
"These are unproven companies that could very well fail," says Todd Rosenbluth, director of mutual fund research at S&P Capital IQ. If things go badly for a startup, "there may not be an exit strategy" for the fund fir
Last year, BlackRock, T. Rowe, Fidelity and Janus Capital Group Inc. JNS +1.58% together were involved in 16 private funding deals—up from nine in 2012 and six in 2011, according to CB Insights, a venture-capital tracking firm.
This year, the four firms already have participated in 13 closed deals, putting 2014 on track to be a banner year for participation by mutual funds in startup funding. On Friday, T. Rowe was part of an investor group that finished a deal to pour $450 million into Airbnb, said people familiar with the matter.
Last week, peer-to-peer financing company LendingClub Corp. raised $115 million in equity and debt, the bulk of which came from fund firms including T. Rowe, BlackRock and Wellington Management Co.
Investors put money into venture-capital funds knowing it is a bet that a few untested companies will become big winners, making up for many losers. But mutual funds, the mainstay of the U.S. retirement market with $15 trillion in assets, aren't typically supposed to swing for the fences. Instead, they put most of their money into established companies with the aim of making steady, not spectacular gains.
The risks of putting money into unproven startups were highlighted by the recent slump in technology stocks, which aggravated worries that valuations for pre-IPO companies may be inflated as well.
"We are not at the beginning of the cycle and that's probably the most diplomatic way to put it," says Chris Bartel, senior vice president of global equity research at Fidelity, noting his firm is cautious about investments.
Like other fund executives, he said startup investments represent a small portion of overall assets and that his firm targets companies that are likely to go public or be sold in the near future.
Nothing prevents mutual funds from buying pieces of startups, though the Securities and Exchange Commission limits them to keeping less than 15% of their portfolios in illiquid securities.
Mutual funds have turned to private technology companies as a way to boost investor returns while growth has stalled at larger, more well-known firms, says Mr. Rosenbluth of S&P Capital IQ.
But these deals are more opaque than most fund investments: Fund firms aren't required to immediately disclose such investment decisions to investors, and privately held companies are also more challenging to value, making it more difficult to gauge how a stake is performing.
For startups, fund companies are attractive because they have a longer-term investing horizon than venture capitalists.
Bellevue, Wash.-based startup Apptio has received funding from three mutual-fund companies. T. Rowe was an early investor and Janus participated in the company's recent funding round of $45 million last May, as did Fidelity, according to people familiar with the matter.
Sunny Gupta, co-founder and chief executive of the startup, which helps businesses manage their technology spending, said he was interested in having the fund companies on board in part because he "wanted a different style of investor" that also brought in-depth financial expertise.
Having mutual funds on board also helps on the road to an initial public offering because big-name investors can provide peace of mind to others thinking about taking a stake. With T. Rowe, for example, Mr. Gupta said "there is an incredible amount of brand recognition" on Wall Street.
Similarly, Bill Harris, the chief executive of Personal Capital, a personal-finance and wealth-management website in Redwood City, Calif., said BlackRock's knowledge of the financial world has benefited the startup since the fund company took part in a $25 million funding round last June. Mr. Harris said he hadn't sought out a fund company and that BlackRock had approached him.
The competition among fund companies is driving up valuations of recent deals, said one person with direct knowledge of startups' funding rounds.
The bellwether for the industry is T. Rowe Price, the Baltimore-based fund family that has backed 30 private tech deals since 2009, according to CB Insights.
Henry Ellenbogen, manager of T. Rowe's $16.2 billion New Horizons Fund, put money into Twitter Inc. TWTR +1.33% before it went public, and has since bought shares in other big names including LivingSocial Inc., a daily deals site, and GrubHub Inc., GRUB -4.18% a food-delivery service, according to T. Rowe.
Mr. Ellenbogen's fund returned 49.1% last year, beating its benchmark, the S&P 500, which returned 32.4%, according to fund-research firm Morningstar Inc. He invests only a small percentage of the funds' assets in any one startup and holds about 260 stocks in the fund, realizing that some of the startups might fail, according to a person familiar with his thinking.
BlackRock, never a big player in Silicon Valley in the past, has funded 10 deals in the past two years, including four this year: software company Hortonworks Inc. in March and Dropbox in January. BlackRock doesn't disclose which of its mutual funds have invested, and declined to say how much the firm put into each company. The deals generally "represent a small portion of the total portfolio of a fund, but with the intent of adding incremental returns," a spokesman said.
Fidelity, likewise, has stepped up. The Boston-based fund firm has participated in 14 privately held tech-company rounds of funding since 2010, including six last year and four this year that have closed, including One Kings Lane, a home-décor website.
Another fear among some analysts is that this rush into pre-IPO stocks has echoes of the 1990s dot-com bubble, when many fund managers got badly burned by ill-timed moves into technology shares. Janus and Fidelity had funds that suffered large losses in the dot-com crash.
A spokesman for Janus declined to comment.
Mr. Bartel of Fidelity conceded the firm is seeing valuations that "aren't as compelling," as they used to be but also said it is seeing more pitches than ever.
.

Thanks Charles,
My allocations are small making gains helpful, but from a portfolio standpoint I am -4.5% off YTD High and 0.12% off its recent YTD low. Many of these funds had some catching up to do though I can't complain about the consistent performance of GASFX and TOLSX (TOLLX).
Old_Skeet seems to get my nod for overall YTD portfolio performance.

Javelina: "ETFs rarely throw off any income or gains."
They do 'throw off' (distribute) dividends, for example if it is a stock ETF, such as VTI, VOO, IVV, etc. They have to distribute the dividends. But they only rarely have capital gains to distribute. But also, an index mutual fund, such as VTSAX, also will only very rarely have capital gains to distribute.
So much of what you discuss is really the difference between an actively managed mutual fund and a passive index ETF. It just so happens that the vast majority of ETFs are indexed, and the majority of mutual funds are active.
So index funds, whether traditional index funds such as VTSAX, or an ETF index fund, such as IVV or SCHB, are extremely tax efficient, distributing dividends but only very rarely capital gains.
The terminology is a bit confusing, because really, ETFs are mutual funds. They are just exchange traded mutual funds. So there are actively managed funds, both traditional actively managed mutual funds such as DODGX, and also actively managed ETFs, such as BOND (the Pimco Total Return ETF, an actively managed bond fund). And there are passive index funds, both the traditional index funds such as VFINX, and the passive index ETFs, such as SPY.
Vanguard has a unique situation, in that they have ETFs that are just a different share class of their traditional index funds. For example, VTI is just a different share class of VTSAX.
For the purposes you described, you would be well served with index ETFs, such as VTI, and you are correct, it would be unusual and rare for it to have capital gains distributions. But do expect quarterly dividends to be distributed. And I think you will also be quite impressed with the lack of capital gains distributions on traditional index mutual funds such as the Vanguard ones mentioned above. You can check this out at the Vanguard website.

@davidmoran.
Brother Dave.
Certainly do not want to disappoint you, just the opposite. And, I do not want to come off bearish.
I remain cautiously optimistic near term. More optimistic longer term.
It's just that I feel the downside of investing does not get talked about as much as it should.
Not the alarmist predictions. There are plenty of those everyday. But the more factual realities just based on history.
Like, most fund houses do not publish max drawdown metrics. Why?
Probably because they do not want potential clients spooked by downside potential. Highly respected funds can and do fall -60%...-70%...-80%.
Prime examples in Feb 2009: DODGX -59.2%, WAIOX -65.5%, LMOPX -78.1%.
That's heavy stuff, no? And these are/were all top rated funds. DODGX remains a M* darling. I own it. My family owns it. WAIOX was launched by Blake Walker, who went on to co-found Grandeur Peaks with Robert Gardiner. And, LMOPX was/is managed by the great Bill Miller.
Buy-and-hold investors just need to be prepared for such falls. During the turn-downs, they need to hold-on...not fret each monthly statement...for years, perhaps many years.
In M*'s words: "...investors who have investment horizons longer than 10 years, need high returns, and are comfortable with a high level of risk." I think they are seriously correct.
If investors can not handle these low points, allocations need to be made accordingly. Or, there needs to be an active drawdown protection plan...in place, defined, reconciled beforehand. Otherwise, we invariably make the worse mistakes...buy high and sell low.
And those are just examples from the last bear.
Ray Dalio of Bridgewater advocates the study of all markets across history to better understand correlations and realm of the possible.
So, let's take a look back at some other market extremes ("vulgarities")...
US. I believe equity market drew down -83% in May, 1932.
Here's what it looked like:

Recovery did not happen quickly as in recent years. It took 13 years for the market to hit a new high, forget cost of money or lost opportunity cost.
I know safe-guards were instituted to help prevent a repeat, but it always seems like each crisis is triggered by something different.
Here's NASDAQ...not really that long ago:

NASDAQ drew down -75% and has still not recovered nearly 12 years later!
We suffered through the Savings & Loan fiasco in '80s/'90s only to repeat it enforce with Sub Prime Mortgage fiasco in late 00's. Credit markets froze. Just like during the Great Depression. And, if the Fed had not stepped-up to back money market funds, we could very well have had a repeat of 1932. Don't you think?
OK. Let's agree that 2008 was an outlier. But still, outliers happen...and probably more often than we like to acknowledge, especially when we are in the midst of a bull market...and, like MJG and Seth Klarman and others observe, markets usually goes up...in fact, they are predisposed to go up.
So, we'll acknowledge the Internet Bubble was an outlier.
The -23% drawdown on a single day in Oct 1987 was an outlier.
The Great Depression was an outlier.
The folks at Long Term Capital Management thought that bond spread behavior was an outlier in 1998 after Russia defaulted. Here's how that went down:

Hmmm, gold? Twenty years of drawdown...

I really don't need to plot the endgame on Enron, Bear Stearns, Kodak...do I?
Japan. I believe it is still recovering from asset collapse in the 90's, despite the healthy run-up last year. Folks in that market remain underwater.
And then there's are the classic bubbles in history: Dutch Tulips, South Sea Company, Mississippi Company...
Call them all outliers. OK. But recognize they can happen.
So, be prepared.
Enough fun.
Hoping all the above helps get me back in your good graces...if just a little.
Charles

Never heard of it. I'll go onto Morningstar and take a fresh, unbiased look. $33.5 MM in assets; 5.75% load; 1.33% expense ratio; TTM yield, an astonishing 8.54%. There is nothing listed under the 30 day SEC yield in Morningstar. I looked at the top portfolio holdings, even googled the top holding: not easy to find information about it.
A very esoteric investment portfolio. A lot of futures contracts. Maybe some fixed income arbitrage, things I know almost nothing about. I would call the fund company and discuss the portfolio with them in depth. The portfolio is extremely unusual, and that is a big understatement. The fund has 66% in cash per M*. Major short positions. One of the fund managers has a PhD, quite unusual, and one of the fund managers at the fund's inception had a PhD. Obviously a lot of brain power here. That in and of itself doesn't say anything good or bad. Long Term Capital Management had the ultimate in brain power, and that didn't end too well. Some major "Quant" brainpower at this fund! Excellent performance history compared to M*'s tactical allocation category. My opinion is that Loads are confiscatory unless one has a financial adviser, and the load is the method of payment for those services. But of course, a fund like this so unusual that you're not going to have a bunch of no load alternatives. Personally I wouldn't invest in a fund with only $33.5 million in assets. That's not a lot of skin in the game from the managers, their families, relatives and friends, the fund family itself and all their associates, the fund board and all of their associates, etc. The fund has been in operation for 3 years and 3 months, and not enough people associated with it are making significant personal financial commitments. Not a good sign to me at all. I would need to read the Prospectus and the fund reports, perform due diligence on the fund managers, explore the googled hits to see if I could find interviews of the fund managers, analysis and opinions about the fund. I'd go to Yahoo Finance and see if there are any posts about the fund in the message boards, and generally, turn over as many 'rocks' as I could. Let us know what you find out!

FYI: Copy & Paste Jack Rivkin WSJ 4/16/14
Regards,
Ted
Voices is an occasional column that allows wealth managers to address issues of interest to the advisory community. Jack Rivkin is chief investment officer of Altegris in La Jolla, Calif.
As we enter a more volatile market, it's time for clients to start thinking about preserving what money they made in 2013. However, it's also important that advisers help their clients remain participants in the market while minimizing risk. Using long-short equity mutual funds, which emphasize risk management over market timing, allows clients to do just that.
In a long-short strategy, fund managers hold attractive investments, which they anticipate will increase in value. At the same time the managers short overvalued stocks by borrowing and immediately selling shares which they anticipate they'll be able to buy back later at a lower price. When the price of the stock drops, the manager buys and then sells the borrowed shares back to their broker. The gain is in difference between what the manager made off the initial sale of the stock and lower price it was bought back for.
When done skillfully, the strategy allows clients to maintain exposure to stocks while reducing their exposure to volatility in the market as a whole. They capture less upside when things are going well, but they also capture less of the downside in periods of volatility.
Until recently, long-short strategies were available primarily through hedge funds. However, because hedge funds are illiquid and have steep minimum investment requirements, they tend to be accessible to high-net-worth clients only. The introduction of long-short equity and long-short fixed income mutual funds has changed that.
These are vehicles designed to give regular investors access to long-short trading strategies. The minimum investment for these products is consistent with a typical mutual fund, meaning they can be used with a much broader range of clients. Not only are the funds subject to SEC compliance, the structures are designed to provide daily pricing and daily liquidity, a quality that is critical. No investor has forgotten the 2008 crash, a time when many investors wanted to sell mutual fund positions quickly and weren't able to. So the ability with long-short funds to liquidate a position at any time should help a lot of clients sleep better at night.
Despite these advantages, I think that long-short mutual funds are somewhat misunderstood. Investors and advisers hear that these vehicles mimic the behavior of hedge funds. People think of hedge funds as unregulated and dangerous and dismiss these products as dangerous as well. Long-short mutual funds are criticized for being risky when, in fact, they're designed specifically to mitigate risk.
When proposing a long-short strategy to a client, show them the performance data that reveals that the funds lost a fraction of what the overall market lost in 2008. The data will also show how quickly these funds recovered compared with other asset classes over the past five years. Aside from 2013, they've outperformed the market in each year since the crash. Over the long run, their average returns are consistent with the rest of the market and those returns come without nearly as much risk.
Asking clients to switch gears and consider strategies that cap potential upside after the year we just had is a hard sell, but it's a conversation you must have. Our message to clients should be that capital preservation does not mean pulling all of your money off the table. It's simply about finding better ways to hedge against risk.
.

I am always amused when people label something as the start of a recovery after seeing a day or two of market movement. It could be so or it could be the same as the last two dead cat bounces especially if the broader market turns south. This is where some relevant charting can be used to get the situational awareness I referred to in an earlier post today. This allows one to make probabilistic decisions.
This is a technical chart for IBB with some of the most common indicators.

This sets the moves in context. The trend is downwards and as usually happens the price keeps bouncing down the lower bounds of the channel (2x SD). These things can't really predict anything but keeps the current moves in context.
It could fall down again like the last two times or it could really be the start of a significant move up. Different people bet at different times. Some at the first bounce back, some just before the 200 SMA because often it is a strong resistance, some after it comes back up over the 200 SMA and some after seeing a confirmation, for example, moving above the 20 or 50 day SMA. There is no right or wrong decision except in retrospect.
However, this can be very useful in assessing potential upside/downside and make bets accordingly with the right stop limit suggested by the chart in case the expectation is not met. The gains come from making that bet being right not mysteriously predicted by the patterns.
It is better than looking at a day or two of market action. The context can be useful in bettering the odds for the entry (or exit).

I absolutely see and respect the logic behind buy-and-hold.
But, very hard to do during dark times.
And, it is not necessary to achieve healthy returns.
So, personally and generally, I no longer practice it.
No more riding retractions down below my comfort zone.
In any asset class.
Even if history says all will be well in time.
Better to have an exit plan that protects capital and state of mind.
Employ drawdown protection, as much as practical, to live another day.
Legitimate edges are likely rare, elusive, and fleeting.
So, better to get out of the way to invest another day.
As market recovers, ample opportunity to get back in.
Just do not need to swing at every pitch.
OK?

ETFs rarely throw off any income or gains. For a person in a high tax bracket who is committed to buy and hold, is there any reason to consider mutual fund over ETFs in a taxable account? An ETF can be held for twenty years or more while generating only negligible taxable income or gains. The same cannot be said for mutual funds and who can forget getting hit with big gains in a year like 2008 when the mutuals had to realize gains because of the run for the exits by shareholders!
I may be missing something which is why I'm asking the question. There are now fundamental index ETFs, "active" ETFs, low-vol etc. Assuming that Bogle is even close to right, 90% of mutual funds will probably be beaten by lower fee ETFs anyway over the long haul, so again I wonder, why would someone in a high bracket still consider a mutual fund over an ETF assuming you intend to hold for decades?

I agree with @bobc above as the right thing to do if one isn't actively managing their allocation. However, selecting the right allocation fund is not that easy or time efficient for individual investors depending on their needs.
As I have mentioned before this is one area where a good advisor can spend the large amount of time needed to understand a fund well enough as they can amortize this effort over multiple portfolios.
For example, if you are looking for regular income, a fund that emphasizes this with a stable NAV is better than a fund that optimizes total return. If you are in an accumulation phase, then it might be quite the opposite.
Then there is the question of tax efficiency and how volatile the fund can be being active. In addition, do the flexible funds really deliver from the flexibility especiallybqhen they have a huge asset base.
So, there is no flexible fund that fits all. You have to put in the effort to understand all of the above for a fund or find a good advisor which is not easier than finding a good fund or as my preference, create a diversified bond portfolio across multiple fixed income assets, durations and credit quality that satisfies your income needs and/or gains in the same way you create an equity portfolio and just stick to it.
The effect of a gradual rising rate is not as dire as predicted for most bond funds, especially if regular income is the goal than capital appreciation. Yes, you may have paper losses in NAV but part of the increasing dividends that is more than what you need can be reinvested.

Hi Guys,
Admittedly, I am an optimistic person. During the latter years of my other life, I was a major organizer and contributor to an endless number of aggressive, challenging engineering work proposals. I believed each would be rewarded the contract; in fact, only a small fraction of our team proposals won the contracts. Even with those disappointing outcomes, I retained my enthusiasm and confidence until retirement.
Over the last week or so, a bunch of MFO regulars have posted worrisome submittals with regard to a potential market meltdown. Presently, I am not in that camp.
I do not worry much over any looming equity Bear market bust. Surely, It might happen. However, I will survive and so will all of you with just some conservative planning, and more importantly, a little cash reserve to cover any plunge and its recovery period. Trying to time the downward thrust is hazardous duty and could deepen the impact of the market cycle’s reversals if not adroitly handled.
As Nobel Laureate economist Gene Fama said: “Your money is like soap. The more you handle it, the less you’ll have”.
As you’re all aware, I love statistics. You’re also familiar with the fact that investment markets are awash with useful and reliable statistics. I certainly deploy this vast statistical database when making my broad market decisions.
These statistics strongly demonstrate the asymmetric upward bias to positive market rewards. The short term statistics are chaotic in character and do resemble a random walk. However, as time expands, so do the odds for positive rewards. Historical data shows that equity market returns are random with roughly a 10% annual upward slope. That’s a confidence builder.
Here are a few of the stats that I find particularly compelling.
On a daily basis, the markets yield positive returns about 53 % of the time. When the time horizon expands to monthly, quarterly, and annual timeframes, the positive outcomes progressively increase to 58%, 63%, and 73%, respectively. Time has a healing influence.
Over 5-year and 10-year rolling periods, the positive outcome odds increase again to the 76% and 88% levels. Wall Street wounds heal more persuasively over longer time horizons.
It is troublesome that so many MFOers have expressed high anxiety over the possibilities of a sharp market downturn. Indeed, it is a certainty that a Bear market will occur. Over the last 8 decades, equity markets have sacrificed 20 % of its value on 4 separate occasions. In the last 113 years, the stock market has suffered Bear reversals 32 times. That record shows a 20 % downward thrust every 3.5 years on average.
Main Street pays the same penalty as Wall Street during these dark episodes since active mutual fund managers have not displayed any talent to really soften the blows.
The good news is that Bear market cycles have a short average duration; their average length is only slightly longer than a single year. The recoveries are rather dramatic with a major portion of that recovery happening near the beginning of the process. Therein is the dilemma for an investor trying to time the reversal. He needs a sharp criteria and speedy reflexes to respond to this rapid turnaround.
The other good news part of the market bull/bear cycle is the duration and magnitude of the bull segment. Its duration is over three times the Bear periodicity, and the magnitude of the gains wipe away the losses during the Bear segment. According to InvesTech’s Jim Stack, over the last century, the average duration of a market recovery is about 3.8 years.
These statistical observations form the basis for my optimism.
Those who flee to cash too early, or reenter too late pay opportunity costs in addition to trading costs. That cost is exacerbated if an investor patiently waits for the confirmatory signal of a Bull market (a 20% gain from the market’s low water marker).
Most folks agree that reversals are impossible to predict. So, why worry that problem? Perhaps we should focus our attention on things we can control. Things like building a cash, or near-cash (short term corporate bonds) reserve of a year or two to outlast any Bear market scenario. Also we could be flexible in our buying habits during stressful periods. A Toyota Camry is not a bad compromise over a Lexus when the road is rough.
Even if an investor fears an impending market meltdown, one viable option that is universally available is to do nothing; stay the course.
I am not quite so brave. If my fears are supported by numerous signal data (like inflation rate changes, super high P/E ratios, low consumer confidence, unhealthy ISM raw order index values), I would be inclined to take some action. However, that action would be both limited and incremental in character.
I believe in the 20/80 rule. In a business, 20% of the workforce does 80% of the productive work. In investing, I tend to keep 80% of my equity holdings as permanent positions. If motivated by Bear horror stories, I might incrementally shift 20% of my equity holdings into less volatile products. The changes would be made incrementally as Bear evidence accumulated and the odds shifted to favor a downward movement.
The overarching purpose of this post is to caution MFOers against acting too precipitously. All investors behaviorally tend to be overconfident and overactive prone.
I certainly welcome your perspectives on this matter. I’m not an expert, and even the experts often fail to identify market tipping points. Jesse Livermore made and lost fortunes several times during his turbulent career. Even the baseball great Babe Ruth once led his league in strikeouts.
Best Regards,

We can talk a bit about assumptions.
Funds typically use a pricing service to price their securities, whether equities, bonds, derivatives, or other securities. http://www.icifactbook.org/2006/06_fb_appa.html
These services practice a craft (not a science), just as art appraisers, tax assessors, etc. practice a craft. If the valuation (pricing for NAV) is on average fair (i.e. not biased to one side or the other), then on average the NAV will match the price fetched for actual sales (ignoring commissions, 1/2 spread, etc.)
It sounds like you're assuming that pricing services for bonds generally lag the market. For the sake of argument, let's assume this is true. (Heartland, circa 2000 comes to mind, but I digress.)
That leads to the idea that the older the last trade of a bond, the greater the lag (discrepancy between valuation and market price) on average. You seem to take this a step further, though.
You write that selling a less recently acquired bond (let's call it bond A) will suffer a capital loss in a falling market (i.e. will sell for less than its valuation), while a more recently acquired bond (let's call it Bond B) will not, or at least will suffer a lesser cap loss.
Here it seems you're making an unsubstantiated leap. Namely that bond B is the more recently traded bond. I gave the simplest counterexample - where bond A and bond B were identical. The accuracy of the valuation on each would have to be identical as well.
Perhaps my example stripped out too much (thus obscuring rather than informing). Take instead an illiquid bond B and a liquid, actively traded bond A. It is quite likely (though not certain) that bond A was traded on the market more recently than bond B, though bond A was traded by the fund less recently than bond B.
Here, the cap loss on bond B would be greater.
The accuracy of the bonds' valuation (and thus cap loss) depends on factors largely independent of the fund's specific trades. How liquid the bond is, how recently it traded on the market, depth of book, lot size, volume, etc. None of these are significantly affected by which bond the particular fund traded first.
(The cap loss due to lag would also seem to be affected by the duration of the bond, since prices move less on shorter duration bonds. I previously addressed the assumption that bond B has a longer duration - managers are shortening up on duration, so it is not clear that bond B's duration is later than bond A's.)
Just as you see me making, shall we say, unwarranted assumptions about marking to market, I respectfully suggest that you are also making some questionable assumptions about the trades that bond fund managers make, especially in the current market.

Been occupied for awhile. Let me try this briefly, for I agree with you, we are not getting anywhere, and the horse is at least out of the barn door, if not completely dead.

The ambiguity is inherent in the example you set up if buying the same bond earlier at a premium and later at par. What is the assumption behind this unusual scenario? Market inefficiencies? Interest rate changes? Manager stupidity? Is that a special case or the norm?

Interest rate change - the assumption of the whole thread - that interest rates have gone up.

In your example, the two purchases will be the same in all of those three [YTM, duration, quality] whether he bought it earlier or later if you ignore inefficiencies and trading friction. So, yes, it makes no difference which one he sells in that scenario. If that is all you are saying as an exception, fine with me.

I reduced the number of variables to a minimum. If you feel that is oversimplified (thus exceptional), we can walk through other cases, though I prefer to recognize that the horse is dead. By focusing on one variable - rate changes and not bond differences, I felt we could look at pricing without getting bogged down in lots of other factors.

In a rising rate scenario, the manager can either get a higher YTM at the same duration or same YTM at a lower duration.

Here, I believe, is the source of confusion. In a rising rate scenario, the YTW of the bond in the portfolio rises in sync with the market. That's what mark to market does. The manager cannot buy a bond with a higher YTW than the bond in his portfolio sans market inefficiencies. That is, the NAV of the portfolio (the single bond, in this simplified discussion) has already dropped. And the portfolio yield has risen.
(Note that the dividends have not risen; the NAV has fallen. Which IMHO makes introducing dividends into the discussion more of a distraction than a clarification. I'm happy to work it through with you, though I doubt either of us feel it is worth the time/bandwidth/effort.)

So the prices for older issues with lower coupon rate will adjust downwards over time depending on liquidity to bring up the YTM to the same as newer bonds with same duration.

Exactly.

This gets reflected in the NAV but you don't know the actual price until you sell it and this typically results in a further capital loss to meet the redemptions in addition to the NAV loss that has already happened in mark to market.

Here you're talking about a distortion caused by a fire sale (inefficient market in that the seller is under duress to take a below-market price). I've already conceded that point, but question whether the impact is more substantial for one bond than another, especially when the two bonds share the same quality and duration.
Some of the comments you have following this seem to address how one bond's price is indeed distorted more than another. We can likewise discuss that (and it is an interesting consideration), but it goes beyond your original statement that was based on, as you wrote above, YTM, duration, and credit quality, not date of issue, maturity, etc.

The choice for the manager is based on whether his investors are more sensitive to paper losses in NAV or reduction in monthly interest. On this we seem to agree, which was the original point.

Yes. Unfortunately, investors are not always rational, forcing the fire sales and otherwise distorting the market to their detriment (and that of others who share in the same fund/investment).

@Charles has part of the answer. But borrowing to invest is just a small part of it. Fed policies make a lot of existing money available to invest from people who have capital.
Part of it is from a need to increase returns from low yields on bonds. Part of it is from the moral hazard of Fed action like QE which reduces long term rates but also extends the time frame in which one can expect low interest rates. After all they won't increase interest rates until they reduce QE. So the probability of loss in markets from interest rate movements decreases which decreases Value at Risk measures which means more capital can be put at risk.
I am sure many here have increased their allocation to equities from some of these reasons whether aware of the reasons or not and it snowballs to create an asset bubble.
This has nothing to do with the economy, very little of this is being deployed for any productivity that contributes to economic growth. It is just a financial ponzi scheme bidding up prices.
Economic growth requires Increase in broad consumption from the masses that leads to increased production in a virtuous cycle. This requires a start to growth in income. This has not happened at all. In fact, quite the opposite.
The earlier real estate bubble allowed the masses to monetize it, giving people the money in lieu of income to consume. That stimulated the economy as a consequence. This financial market asset bubble isn't the same. The gains are concentrated in the top 5% or so since the 95% doesn't have enough capital, and so doesn't increase consumption in the same way.
What is a mystery to me is the mechanism by which the Bernanke Fed expected the money velocity to increase in the economy with their policies rather than just snowball the financial market gains as it has done.