April 2023 IssueLong scroll reading

Short Term Performance of Long-term Recommendations

By Devesh Shah

The eternal flaw of investment gurus, both on the web and elsewhere, is that they’re never held accountable for their bravado and bold recommendations. It is in the nature of the beast that one right guess lives on forever while an infinite number of horrendous recommendations vanish from the public mind. I think of Elaine Garzarelli, who made her fame from one right call – an impending market crash a week before the actual “Black Monday” crash in 1987 which saw the Dow drop 22% (7300 points in today’s terms) in a day – but somehow dodges rebuke for her July 1996 call for a 15-25% crash at the outset of the greatest bull market ever.

That same dynamic holds true for virtually everyone creeping (I use the word advisedly) into your inbox or newsfeed. They’re counting on your willingness to click on anything that’s sufficiently dramatic … and to quickly forget anything that never comes to pass.

Mutual Fund Observer is a non-profit organization; we exist to do good for investors, not to profit from clicks or hysteria. As a result, we hold ourselves to a higher standard. David Snowball, for example, publishes and critiques his own portfolio at the start of every year and has done so for 15 years. He also publicly announces each fund added to or dropped from his portfolio. Charles Boccadoro, our MFO Premium colleague, maintains a performance table of every single fund ever profiled here and updates it monthly. While “total return” numbers of a very limited tool, since they account for neither risk nor consistency, they’re a helpful tool in the effort to be transparent.

In that same spirit, I hope to look back on a number of articles I have written in the last 12-14 months with an eye to judging the market calls. I will capture the total return performance of the asset classes and funds. This is a way for me to honestly track what’s working and what’s not, and perhaps why, and for you to gather trust in my writing. Many of the themes continue to be relevant, so I hope you will read this article.

February 2022: Thoughts on Inflation Protection

Idea: Consider owning short-dated Inflation bonds as a way to protect portfolios against rising inflation and as a way to position Fixed Income in a Government backed security with less duration. E.g.: VTIP, STIP

Performance: 2/1/2022 to 3/31/2023

Fund/Asset Class Total Return
Vanguard Total Bond Market Index Adm (VBTLX) -8.4%
¡Shares 20+ Year Treasury Bond ETF (TLT) -22.9%
iShares TIPS Bond ETF (TIP) -6.6%
Shares iBoxx $ High Yield Corp Bd ETF (HYG) -5.5%
iShares iBoxx $ Invmt Grade Corp Bd ETF (LQD) -11.1%
Recommendation: VTIP/STIP +0.2%

What now: Short-dated TIPS are still a good placeholder for conservative fixed income portfolios, having stayed flat when all fixed income was down. Short dated TIPS are actually now significantly better than Series I Bonds in capturing inflation as the real yield on short-dated TIPS is around 1.5%, while on Series I Bonds real rate is presently 0.4%. Remember, both bonds will capture the CPI going forward. There has been chatter about dividend payout timing. Ultimately, both bondholders get paid the CPI-U. They are just lagged differently and paid at different moments.


January 2023: Long-dated TIPS bonds: A margin of safety

Idea: Almost a year later, I wrote the time for buying Longer dated TIPS had arrived at the turn of the calendar year. The margin of safety exists. This was effectively a call to increase duration risk in Inflation linked Bonds. While I chose to buy the 30-year Bonds directly for my portfolio (along with NY Municipal bonds for fixed income), the column suggested LTPZ as an option for those who chose to do something here.

Performance: YTD 2023

Fund/Asset Class Total Return
Vanguard Total Bond Market Index Adm (VBTLX) +3.2%
¡Shares 20+ Year Treasury Bond ETF (TLT) +7.4%
iShares TIPS Bond ETF (TIP) +3.4%
Shares iBoxx $ High Yield Corp Bd ETF (HYG) +3.7%
iShares iBoxx $ Invmt Grade Corp Bd ETF (LQD) +4.7%
Short-dated TIPS: VTIP +2.4%
Recommendation: Long-dated TIPS: LTPZ +5.9%

What now: Long-dated bonds with duration did well in Q1 2023 as all kinds of yields declined. There was tremendous volatility across asset classes. Government Bonds did their job. They zagged when risky assets zigged. For those who were able to rebalance into stocks at opportune times, bonds served their purpose well.

I continue to hold Long-Dated TIPS. My rationale is as follows:

A: If inflation is sticky, TIPS will earn the coupon through inflation. The price of the bonds might fall if the Federal Reserve aggressively raises rates, even as inflation coupons help. TIPS might also help in a run-away excessive inflation scenario.

Nota bene: This did not happen in Q1 despite high inflation prints. TIPS did poorly on days when long-dated bonds did poorly. Overall, TIPS held up due to both inflation and duration element.

B: If inflation comes under control, the Federal Reserve would lower interest rates and benefit all manner of bonds. TIPS would benefit too.

I understand long-dated bonds and their volatility are not for the conservative investor. You must make your own decisions as to what the right maturity of TIPS you might want to hold.


April 2022:  On Active vs Passive Equity Mutual Funds

Idea: Passive funds work better than Active.

Performance: I point to the SPIVA U.S. Year-end 2022 report from S&P Global


What does it say: Because the S&P 500 index was down 18% last year, many more active managers managed to outperform the index compared to the past. Yet, 51% underperformed in large-cap US equities. Also, “63% of mid-cap funds underperformed the S&P MidCap 400®and 57% of small-cap funds underperformed the S&P SmallCap 600® in 2022. The lowest underperformance rate among domestic equity categories was in Small-Cap Core, in which 40% of active funds underperformed. At the other end of the spectrum, the Real Estate and Mid-Cap Growth categories saw the highest annual underperformance rates of 88% and 91%, respectively.”

What now: Over the year, I have nuanced my view through learning about difference in Active and Passive in US Domestic versus International markets. I have started searching for Active Managers for international investing. I still think it’s very difficult to outperform the S&P 500 unless one takes extreme positions like holding 90% in cash or completely eschewing multiple sectors. Will look at Kinetic funds below as an example.


September 2022: Emerging Markets

Emerging Markets (EM) Investing in the Next Decade: The Game

Emerging Markets Investing in the Next Decade: The Players

Idea: To think about international diversification. To consider EM, and see if they fit in the portfolio, and how. To listen to various managers and watch their funds. This is an evolving process. Although, there were no recommendations to do anything, let us look at the performance of the asset class, the fund managers mentioned, and compare it to the S&P 500.

Performance: September 1, 2022, to March 31, 2023

Fund/Asset Class Total Return
Vanguard FTSE Emerging Markets ETF (VWO) -1.3%
SPDR® S&P 500 ETF Trust (SPY) +3.2%
Seafarer Overseas Grand Income Instl (SIGIX) +4.9%
Seafarer Overseas Value Institutional (SIVLX) +8.3%
Rondure New World Institutional (RNWIX) +6.9%
William Blair Emerging Mkts Ldrs R6 (WELIX) +1.1%
Pzena Emerging Markets Value InstI (PZIEX) +10.6%
Causeway Emerging Markets InstI (CEMIX) 0.6%
Harding Loevner Instl Emerg Mkts I (HLMEX) 3.3%

What now: It’s heartening to see that EVERY single fund manager outperformed the Emerging Market ETF and that many of them even beat the S&P 500 in the same window!! Pzena, Seafarer, and Rondure did very well out of the managers we covered then.

This is excellent news for the fund managers and their investors. We continue to follow them, learn more about them, and based on our own risk appetite, might choose to invest in them.


November 2022: Kinetics Mutual Funds: Five Star funds with a Lone Star Risk

Talking about Active management in the US. We pointed out that some of the Kinetic funds had outperformed magnificently in the run-up to this article for a number of years. But they did so in an incredibly risky manner. They held an extremely large weight in one company – Texas Pacific Land. I didn’t know and still don’t know much about how to value Texas Pacific, but Kinetics funds felt very risky and lopsided. Looking at performance since the article:

Performance: November 2, 2022, to March 31, 2023

Fund/Asset Class Total Return
Texas Pacific Land -27%
SPDR® S&P 500 ETF Trust (SPY) +10.1%
Kinetics Spin-Off and Corp Rest Adv A (LSHAX) -17.4%
Kinetics Small Cap Opportunities No Load (KSCOX) -13.2%
Kinetics Paradigm No Load (WWNPX) -17.1%
Kinetics Market Opportunities No Load (KMKNX) -13%
Kinetics Global No Load (WWWEX) -2.2%
Kinetics Internet No Load (WWWFX) -1.8%

What now: Texas Pacific declined 27% as the S&P 500 went up by 10%, and the funds are all down between 2% and 17%. The lopsided risk management sword cuts in both directions. As of December 31, 2022, holdings from Whale Wisdom (who have provided this Mutual Fund Observer columnist a complimentary subscription), it looks like there has been a small reduction in the holdings of TPL. A step in the right direction but still very far away from shore.


October 2022: Closed-End Private Real Estate Interval Funds: A Job Well Done! Thank You and Bye-bye.

Idea: Private Closed-end Interval Real Estate Funds, funds like Bluerock Total Income (TIPRX), and a few others were killing it in 2022. Many other funds of the ilk were up, were crushing the public REITs, and were receiving massive inflows given the size of their NAVs as new investors were chasing old returns.

Performance: Since then, TIPRX has lost 8.9%. They received money throughout Q4 2022, and outflows have only started in 2023 as fund performance has lagged.

What now: Well, I am bummed that although we flagged these types of funds, I didn’t flag the biggest elephant in the room, the BREIT or the Blackrock Real Estate Income Trust, which went through a lot of public scrutiny when they gated the fund, blocked withdrawals, and continue to do so even now.

Existing private REITs are still massively mismarked versus their public counterparts. We see this manifest when there are credit events and landlords like Blackrock are handing in their keys on select properties. The equity jumps from a mismarked number directly to pennies on the dollar or zero. Avoid mismarked Private REITs.

This entry was posted in Mutual Fund Commentary on by .

About Devesh Shah

Hi, I’m Devesh Shah and I’m pleased to meet you. As a professional, I was a co-inventor of the CBOE VIX Volatility Index, an equities and derivatives trader, and Partner at Goldman Sachs. My passions now mostly involve writing, teaching about investments, practicing yoga, playing the piano, and volunteering with a non-profit, Sponsors for Educational Opportunities (SEO), that opens up career and college pathways for underprivileged students of color. I am an alum of SEO. My hope for the months ahead is that I might share a few things I have learnt about investing.