By Devesh Shah

Missed Opportunity in Brazilian Interest Rates sowed the seeds of finding the right fund

Earlier this year, one of my friends, a doyenne of Currencies and Interest Rate trading, told me there was money to be made in Brazilian Real Local Government Bonds and interest rate products. In 2022, the Brazilian interest rate rose from 9.25% to a cycle high of 13.75%. Inflation was soaring there as in the rest of the world. A lot of traders lost money calling the highs in the rate high cycle and threw in the towel. Losses multiplied. But by the turn of the year, things were looking different. Inflation was coming down, the Central Bank had stopped raising rates in Sao Paulo and had stopped sounding hawkish. Since the market had been wrongfooted in 2022, interest rates seemed too high at the beginning of 2023.

“Devesh, you have to get involved in Brazilian local rates,” she pleaded. “This is a great trade.”

“But how?” I responded with frustration. “No mutual fund or ETF allows an individual investor based out of the USA to invest in local Brazilian Government bonds in Reais. There has never been a way to participate.”

She has always been liberal with her market calls and is almost always right. But trading Thailand vs. Malaysia or Aussie rates vs. Mexican rates is not my forte. I twiddled my thumbs until I determined to find an answer to the problem. I have enough background in these products to understand their complexity and the opportunity set.           

My personal career history in EM showed opportunities and risks.

Right out of college, my first job was to trade Latin American currencies and local interest rates. From 1997 to 2000, I called banks and brokers in Venezuela, Argentina, Colombia, Chile, Brazil, and Mexico to buy and sell currencies and bonds for Merrill Lynch’s customers and for the bank’s own capital. Once, we took down an entire Colombian bond auction at 32% interest rates. But I also saw the Argentine and Venezuelan devaluation, and there is nothing uglier than seeing money evaporate. Debt instruments in Emerging Markets are fascinating because there are so many countries and so many products.

Exciting and educational it may be, but perhaps it is a blessing in disguise that simple fund products don’t exist to speculate on the future path of these Emerging Market (EM) debt assets. At a bank, one could be a specialist. Not from home. I kept looking for an intelligent way to harness the opportunity set in Emerging markets debt.

Does the answer lie in a Passive ETF?

For local currency investments, the Van Eck JP Morgan EM Local Currency Bond ETF (EMLC) has almost $3 Billion in AUM. For hard currency investments, The iShares JP Morgan USD EM Bond ETF (EMB) is the go-to vehicle with almost $14 Billion in Assets. Unfortunately, neither of them inspires despite the billions invested in them. The 5-year Total Return for both are in the low single digits. There are many reasons for the poor record, but I am not looking for losers to turn around. I want to talk to winners who know how to make money.

PS: One wonders who these investors are with $17 Billion in these sorry ETFs. And why do they continue to be involved in it?

The Active Choice: Artisan EMsights Capital Group Emerging Market Debt Funds

I kept looking for active funds that would fit the shoe for EM debt and beat the pants out of the passive. With the help of the MFO Premium search engine, I found what I think is a good fund for the purpose and the portfolio.

Michael Cirami is a fund manager of three EM Debt funds at Artisan Partners. I spoke to him in mid-November to understand better what he does and why his funds might work for those in search of an adept manager in EM debt. I’d like to add that David Snowball has a companion piece that readers should read. If a reader wants a greater appreciation of what the fund tries to accomplish, there is a fantastic interview by The Wall Street Transcript. I wanted to take a slightly different approach. As an asset allocator, it matters less whether the fund chooses or avoids Nigeria or Guyana. The important thing for investors in our seats is to understand what this fund does and how it fits into our overall portfolio.

Can we start with why the passive investment approach does not work well in EM Debt?

Passive ETFs generally follow Benchmarks. In EM Debt, there are four benchmarks:

Benchmarks are riddled with problems: Countries which issue the most debt tend to have the biggest positions in the index. Just because a country is highly indebted does not make them more investment-worthy. Perhaps, quite the opposite. Benchmarks may assign very low weights to some countries or all together ignore other countries while still keeping defaulted countries in the benchmark. There are arbitrary rules on minimum size and maturities included in the index. Bonds in the benchmark also have a lot of risk to non-EM factors: like US interest rates of the Euro currency rate. Finally, the benchmark carries many bonds with low spreads to US treasuries which do not offer attractive yields to debt investors.

These are some of the reasons why Passive ETFs have not performed well in EM.

What do you do that’s different?

We are benchmark agnostic. We start with a blank piece of paper and determine the best investments in EM across sovereign hard currency bonds, local currency bonds, corporate bonds, and derivatives which allows us to hedge or add to FX risk, Credit risk, or interest rate risk. Our investment universe is around 130 countries. Furthermore, we hedge out the US Interest rate risk across all our investments (more about this later).

We manage three different investment strategies:

1. Artisan Global Unconstrained (“Unconstrained”)
2. Artisan Emerging Markets Debt Opportunities (“EMDO”)
3. Artisan Emerging Markets Local Opportunities (“Local”).

As of October 2023, the assets under management (AUM) are: Unconstrained $301 million, EMDO $82 million, and Local $412 million. We manage mutual funds, separate accounts, and European UCITS.

Only Global Unconstrained and EMDO are available to US Mutual Fund investors.

The EMDO fund is a long only fund in the EM debt asset class. It’s 100% EM alpha and beta.

The Global Unconstrained fund is a long-short fund across EM and Developing Markets (DM). This fund can be a mix  80% EM and 20% DM. Because it’s Long Short it carries less beta risk than the EMDO fund. It also allows us to capture alpha on both sides of the market as our analysts are focused on country by country and security by security research.

We believe that investing in mid-size countries like Brazil and Mexico might set up every now and then. But these tend to be generally more efficient. Our sweet spot is in the highly inefficient countries, tens of smaller countries, which can offer true diversification to a portfolio, and where the chances of over and undervalued securities are highest.

How big is your investible universe set for this asset class?

We believe the Sovereign Hard Currency market is about $1 Trillion dollars. Local currency bonds ex-China is about $2 Trillion, and perhaps $3 Trillion if we include India. The size of the asset class is not relevant to what we do as we try and find the best opportunities in EM.

You started the funds in March and April 2022. Let’s take a look at the returns of the two funds and compare them with a few passive ETFs.

The EMDO and Global Unconstrained have fared substantially better in a hostile broader environment for bonds. Tell us something we should learn from this observation.

Over the last ten years, the EMBI (which is 90% in hard currency sovereigns and 10% in corporates) generated a total return of 24%. A hard currency bond is priced on a spread to US Treasuries. Over this period, about 44% of the return generated in the EMBI came from US interest rates. The passive is heavily exposed to the movements in US interest rates and thus is a confusing barometer with EM-specific performance.

Take the example of a new 10-year Turkish bond in US Dollars. It may be issued at a spread of over 4% (400 basis points) to the US 10-year, which has a current interest rate of 4.5%. The combined yield or interest earned would be 4 + 4.5% = 8.5%.

The EMBI would invest in a bond like this. So, a lot of the yield of the Turkish bond is coming from the level of the US 10-year interest rates. If US interest rates risk, and US bonds fall, so will the Turkish bond, even if the fundamentals might improve in Turkey on the margin.

In our funds, we hedge out our interest rate risk. If we bought the Turkish bond, we would short the 10-year US Treasury bond against it and mostly, but not fully insulate ourselves from the long-dated US Bond market.

We would then invest the proceeds generated from the sale of the 10-year US Treasury into short-term US Money market funds. This way we reduce the duration risk of all the positions.

We can still earn the 4% spread, and we could earn 5.25% from the current overnight cash rate, or a total of 9.25% now. We thus convert a fixed rate bond portfolio to a floating rate portfolio.

By choosing our countries based on opportunity set and not market cap weight, and by hedging duration risk from our investments, our funds behave differently from the passive ETFs.

What returns can be expected for an investor willing to invest in the fund for 5-7 years?

We understand that investors expect to meet a certain hurdle rate to step out of their comfort zone and invest in EM debt.

There are two components to our funds: Hard currency bonds and local bonds. Both have a wide dispersion between countries.

First, Sovereign & Corporate hard currency bonds trade from 300-400 bps over US Treasuries to as wide as 1000 bps. We think a blended rate is about 500 bps.

Second, local interest rates may be as low as 2% and as high as 9-10%. Additionally, there would be some FX movements on our investments. We see the Excess return to US Treasuries there to be between 300 to 500 bps.

Blending the two, we hope to earn an excess return over Treasuries with a spread duration of about 2.2 years. In a very good year, that could lead to mid-teens in returns. In a poor year, given the high yield, it might be in the small single-digit negative territory.

Returns are generally not going to be as extreme as Emerging Market Equities.

Besides the difference in volatility between Bonds and Equities, is there a difference in composition?

Compared to EM Equities, EM Debt is less volatile and also not as concentrated in Asia. Here is a chart with Top 10 country exposures:

How correlated are the funds with other large asset classes?

The Global Unconstrained fund has a low beta and low correlation to US assets like the HY Index, the 10-year Treasury, and the S&P 500 Index.

Depending on the existing portfolio structure of investors, our EM debt funds can be a good diversifier. They can be a low duration, low beta, low correlation, high Sharpe ratio asset to own.

We believe that active management wins by not losing. We hope to protect the downside and compound capital over the years.

Note to reader: Since I was looking for a way to allocate to local and sovereign debt positions in Emerging Markets on a long-only basis, I am an investor in EMDO.

When I asked Michael where he is invested, he said, “I have been a fixed-income investor in my career. We tend to be a bearish breed, but I have money in both of the funds.”

How does he plan to deal with a large institutional investor deciding to pull the sell trigger on the portfolio given the highly illiquid and geographically diverse nature of the EM debt investments? Portfolio distribution in kind only works in theory. I am sure that’s not an option.

We invest in sovereign/corporate bonds and derivatives that span the liquidity spectrum. Many of these markets are highly liquid. I have managed in this style for nearly two decades in all different market conditions, and EM markets can be more liquid than some other traditional credit markets. Having said this, we would not have difficulty managing a large sell in the portfolio.

Conclusion

My journey started with the quest for a public market fund that offered intelligent exposure to EM Debt. The Artisan EMDO and Unconstrained seem to be the solution in the right direction. There might be other funds too, but I would be watching both funds very closely as a current investor. With Debt funds, there is less hyperbole. We are never going to have really great years. The hope is to compound capital outside of equities in a steady and solid manner. Michael Cirami and the team seem to have a handle on that process.

By David Snowball

My colleague Devesh Shah sat down with Artisan’s Michael Cirami for a long conversation. Mr. Cirami is a managing director of Artisan Partners, a portfolio manager on the EMsights Capital Group, and lead portfolio manager for the Artisan Emerging Markets Debt Opportunities, Global Unconstrained, and Emerging Markets Local Opportunities Strategies. Two of those three strategies, Debt Opportunities and Global Unconstrained, are manifested in mutual funds.

Prior to joining Artisan Partners in September 2021, Mr. Cirami had a distinguished career at Eaton Vance. He is also a member of the Board of Directors of the Emerging Markets Investors Alliance. The organization seems to strongly emphasize collaborative action to improve transparency and sustainability in emerging markets.

As a complement to their long and thoughtful discussion, we’ll share the answers to two questions. First, what’s the case for investing in EM debt? Second, what’s the case for investing with the Artisan Emerging Markets Debt Opportunities Fund (APFOX)?

The Case for Emerging Markets Debt

1. Emerging markets debt is a major and mature asset class.

   The exact size of the universe is unclear. Emerging market investor Ashmore Group estimated it at $30 trillion in 2020, while the Institute for International Finance has over $100 trillion now. Yes, Covid, but really?

   The EM government bond market is USD 13.0trn (44% of the total), while the corporate bond market is USD 16.6trn (56% of the total). Financial sector corporates in EM have issued USD 10.7trn of total outstanding corporate debt with the balance of USD 5.9trn issued by non-financial corporates. (Ashmore Group, EM Fixed Income Universe 9.0, 8/202o)

   The report showed 75% of the Institute for International Finance’s emerging market (EM) universe saw an increase in debt levels in dollar terms in the first quarter, with the overall figure crossing over $100 trillion for the first time. China, Mexico, Brazil, India and Turkey posted the biggest increases, the data showed. (Reuter, “Global Debt on the Rise,” 5/17/2023)

   The IMF Global Debt Monitor report laments:

   Adequate debt data are typically lacking for many emerging market and low-income countries. (Global Debt Monitor, 12/2022)

   Broadly speaking, historical problems like debt defaults have largely faded as more markets have matured and have taken seriously the conditions imposed by international lenders.

   Mr. Cirami, in speaking with Devesh, makes two points: he believes his investable universe is something in the $3 trillion range and, further, that the overall size of the universe is largely irrelevant to his ability to find attractive, mispriced assets.

2. Emerging markets have stronger fundamentals than developed markets.

   The question to ask before lending someone money is, are they going to promptly repay it? The answer to that is informed by how much debt they’re already in and what their record of repayments has been. (Those are the dominant factors driving an individual’s credit scores as calculated by Experian, TransUnion, and company.) Emerging markets carry far less debt than developed markets, such as the US and Europe. The developed markets’ debt-to-GDP ratio is over 120%, while the emerging markets are under 70% debt-to-GDP ratio.

   Emerging markets have held up surprisingly well against a series of challenges that might previously have led to a debt crisis. Kenneth Rogoff, former chief economist of the International Monetary Fund and Professor of Economics and Public Policy at Harvard University, marveled at the available calamities that might have upended the emerging markets but haven’t:

   … wars in Ukraine and the Middle East, a wave of defaults among low- and lower-middle-income economies, a real-estate-driven slump in China, and a surge in long-term global interest rates – all against the backdrop of a slowing and fracturing world economy.

   But what surprised veteran analysts the most was the expected calamity that hasn’t happened, at least not yet: an emerging-market debt crisis. Despite the significant challenges posed by soaring interest rates and the sharp appreciation of the US dollar, none of the large emerging markets – including Mexico, Brazil, Indonesia, Vietnam, South Africa, and even Turkey – appears to be in debt distress, according to both the IMF and interest-rate spreads. (“Emerging markets have ignored the ‘Buenos Aires consensus,’” Financial Review, 11/28/2023)

   Research Affiliates calculates a 4.5% real return for EM local debt over the next decade, with a Sharpe ratio of 0.32. Of the development markets, only Japan is poised for returns competitive with those (4.6%), with the US and European markets projected to return 1.6 – 3.4%. If correct, EM debt will return about 50% more than developed markets debt, though with higher volatility.

   That higher volatility has to be read in context: the long-term returns in EM debt tend to match those of US high-yield debt but with about half of the volatility. So EMD is more volatile than investment grade debt, with higher returns, but dramatically less volatile than high-yield, with comparable returns.

3. Most investors are underexposed to emerging market debt

   You need to approach this argument with care.

   In an ideal world, your portfolio is composed of a mix of assets that give you the most bang for the buck. That doesn’t mean betting it all on the assets you pray will return the most on their own; it often means including some assets that will zig when the market zags. EM debt tends to be a ziggy asset. The mix of assets that give you the best risk-adjusted returns defines “the efficient frontier,” which is simply an analysis of what mix of assets gives the best results given the amount of risk you’re willing to take on. The mix is different if you’re willing to (or if you think you’re willing to) live with 15% annual volatility than if you’re comfortable with 6%.

   Eric Fine and Natalia Gurushina, from the Emerging Markets Fixed Income team at Van Eck, calculate the efficient frontier for fixed-income investors for the period from 2003-2022. By their calculation, “for a fixed income portfolio with a low desired volatility of around 6.5, the optimal allocation to EM debt should have been 8%” (The Investment Case for Emerging Markets Debt, 2023). Sophisticated investors such as US pension funds are typically at 3%, and individual investors have a vanishingly small exposure.

   That parallels our biases in EM equity investing. Morgan Stanley estimates that US investors have 6-8% exposure to EM equity, with an optimal exposure of 13-39% based on metrics such as GDP, implied marketing weighting, or efficient market theory (“Emerging Market Allocations: How Much to Own?” 2021).

The Case for Artisan Emerging Markets Debt Opportunities Fund

Passive investors in emerging markets have been plagued by underperformance in both absolute and risk-adjusted terms. That’s true in both equity and debt. The problem in both cases is that the benchmark indexes are poorly designed to favor “scalable” investments; that is, they tend to favor large, indebted issuers in larger markets. Mr. Cirami argues that there are a series of errors embedded in the EM benchmark:

We think there are interesting investments out there. Importantly, we don’t think they’re all represented well by the standard EM debt benchmarks—which exclude significant investable swathes of the markets. To take just one example, consider the hard currency space (wherein, incidentally, we think the benchmark does a slightly better job of representing the asset class): the benchmark excludes countries’ euro-denominated paper issuances, which means countries like Albania, North Macedonia, Montenegro and Benin are underrepresented for (in our opinion) no great reason. As a result, the EM investable universe is actually much broader than represented by the most common benchmark. Additionally, the benchmark has a considerable number of low -spread securities, while also including some from countries that have defaulted. (“Emerging Market Debt: Beyond the Benchmarks,” 5/30/2023)

And it turns out that market selection matters a lot. Wellington Management calculates “spread dispersion” in emerging markets; that is, how much more you can get by investing in one market than in another.  Wellington Management shows that the spread dispersion is at 15-year highs:

The Artisan team seeks “idiosyncratic opportunities with compelling risk-adjusted return potential.” The team covers 100 markets but invests with only 40 issuers. Morningstar celebrated Mr. Cirami’s historic success in taking out-of-benchmark positions when they provided compelling opportunities:

Unlike many managers in the emerging-markets local-currency bond Morningstar Category, the team looks beyond the relatively concentrated JPMorgan GBI-EM Global Diversified Index, considering investment opportunities in virtually every emerging country that has capital markets. When the team finds the benchmark countries unattractive, it adds out-of-index positions in sovereigns, typically frontier markets such as Serbia or Ukraine, as well as corporates, while keeping the portfolio’s market sensitivity close to the benchmark’s.

The strategy’s out-of-index exposure has historically provided incremental gain on the upside, like in 2019, and acted as a buffer during tough years, as in 2013 and 2015.

That independence has led to an outstanding short- and long-term track record. In the shortest term, the fund dropped 0.35% in the third quarter of 2023, against a benchmark decline of 2.25%. Since its inception, APFOX has decisively outperformed its peers and near-peers.

Artisan EMD Opportunities is categorized by Lipper as an EM local currency debt fund. The related category is EM hard currency debt, with the difference being whether the debt was issued in the local currency or in US dollars. Dollar-denominated debt tends to be a bit more stable but yields less. Between the two groups, there are 111 funds and ETFs.

Of them, Artisan EMD Opportunities has the strongest record since its inception.

	APFOX	Peer ranking
Annualized returns	9.8%	#1 out of 111 funds (combined local/hard)
Standard deviation	6.3%	#5 in the combined group and #1 in the local currency debt group
Down market deviation	3.1%	#2 of 111 and #1 in the local group
Maximum drawdown	2.7%	#1 of 111
Sharpe ratio	0.93	#1 of 111
Ulcer Index	1.2	#1 of 111

Source: MFO Premium data calculations and Lipper global data feed

The pattern mirrors the work Mr. Cirami did in managing the multi-billion-dollar Eaton Vance Global Macro Absolute Return, Eaton Vance Global Macro Absolute Return Advantage, and Eaton Vance Emerging Markets Local Income funds.

Bottom Line

Artisan prides itself on its ability to identify, partner with, and support management teams that have the prospect of being “category killers.” They’ve done so with exceptional consistency. For relatively sophisticated investors seeking dedicated exposure to EM debt, Artisan EMD Opportunities is likely to remain among the most compelling options.

Investors interested in Mr. Cirami’s services but wary about pure EMD exposure should investigate Artisan Global Unconstrained Fund, which applies the same discipline but has the freedom to invest across markets worldwide. Both funds have Silver analyst ratings from Morningstar, and both have substantially outperformed their peers since inception.

By Charles Lynn Bolin

In November, I began volunteering at the Loveland Habitat For Humanity, helping to build houses for those who might not be able to afford them without a hand up. Former President Jimmy Carter and First Lady Rosalynn have volunteered or worked with Habitat For Humanity since the 1980s. Housing prices have roughly doubled in the past ten years putting home ownership out of the reach of many potential buyers. I also volunteer at Neighbor To Neighbor, which helps those on the fringe of homelessness stay sheltered. Pandemic-era savings are expected to be depleted during the first half of 2024, but for many, losing work, even temporarily, can mean eviction, losing utilities, and going hungry. This puts a human perspective on financial metrics.

My target allocation to stock is 50% within a range of 35% to 65% based on my investment model, which loosely follows the guidelines of Warren Buffet’s mentor, Benjamin Graham. Warren Buffet is usually sitting on a pile of cash prior to recessions because he tends to reduce his exposure to stocks when valuations are high. The Motley Fool reported that Warren Buffet was a net seller of stocks during the third quarter, and “Buffett added $29 billion to his position in short-term U.S. Treasury bills last quarter, bringing his total investment to more than $126 billion.” With the recent run up in stocks and my Roth Conversion, my equity allocation has crept up to 40%. I remain overweight in short-term Treasuries and Certificates of Deposit. I have no plans to make any changes until next year when ladders of bonds and certificates of deposit mature.

In this article, I look at the economy, the labor market, and two metrics that highlight inflection points to look for early signs of changes in the markets. I use the Mutual Fund Observer MultiSearch tool to identify funds that are trending now. I am interested in global bond funds and long-duration bond funds as possible additions over the next six months. US equities have done much better than international equities over the past decade in part due to an increase in valuations, stronger dollar, and high monetary stimulus (Quantitative Easing). I look for this to normalize over the coming decade. One fund that caught my attention this month is the emerging markets mixed-asset Fidelity Total Emerging Markets Fund (FTEMX), which is roughly 40% in bonds.

This article is divided into the following sections:

• Section 1, Economy and Recession Watch
• Section 2, Post Pandemic Consumers
• Section 3, Inflection Points
• Section 4, Review of Author’s Funds
• Section 5, Trending Lipper Categories
• Section 6, Fidelity Total Emerging Markets Fund (FTEMX)

Economy And Recession Watch

Credit keeps the economy going as businesses borrow to expand and consumers borrow to keep spending. The Federal Reserve raises the interest rate that banks charge each other to borrow or lend excess reserves overnight, known as the Federal Funds rate, in order to make borrowing more expensive, thereby slowing down the economy and reducing inflationary pressures. Figure #1 shows that by the time the Federal Reserve starts to lower the Federal Funds rate, a recession often follows.

Figure #1: Federal Funds Rate with Recession Shading

Figure #2 contains the Philadelphia Federal Reserve Survey of Professional Forecasters estimates for real gross domestic product growth (solid blue line) to be around 0.8% to 1.5% in the first half of next year, and the Reserve Bank of New York estimates for the probability of a recession (solid black line) to be 57% to 68%. The Consumer Price Index (dashed purple line) is currently 3.2%, and the one-year expected inflation rate is 2.8%. Inflation is expected to be “sticky,” and rates will remain “higher for longer.” The chart shows that economic growth will be low and the probability of a recession relatively high. It should be clear by the end of the second quarter of 2024 whether there will be a recession or a “soft landing.”

 Figure #2: Real GDP Growth Forecast and Recession Probabilities

Figure #3 is my composite of six valuation methods, with +1 being favorable (low valuations) and -1 being unfavorable (high valuations). In my perspective, current high valuations are not justified in a slow growth environment with high bond yields and with the Federal Reserve likely to lower the Federal Funds rate in the second or third quarter of next year.

Figure #3: Author’s Valuation Indicator

Post Pandemic Consumers

The Federal Reserve Bank of San Francisco, using the Bureau of Economic Analysis, estimates that pandemic-era savings have declined from a high of $2.1T in August 2021 to $430B in September 2023. However, analysis suggests that the bottom 80% of households by income have depleted their pandemic-era savings. Figure #4 is my Consumer Health Indicator which is a composite of ten indicators that suggest how well consumers may be able to continue their current spending habits. The strength of the consumer is not high but has been improving since mid-year.

Figure #4: Author’s Consumer Health Indicator

Paxtyn Merten listed a detailed description of industries laying off employees in “The 19 Industries Laying Off the Most Workers Right Now” for Stacker. The following industries laid off more than 100,000 employees each in August: 1) Professional and business services, 2) Accommodation and food services, 3) Retail Trade, 4) Health care and social assistance, and 5) Construction, and 6) Transportation, warehousing, and utilities. According to Business Insider, here is a list of some of the companies reducing staff this year: Amazon, Charles Schwab, Roku, Farmers Insurance, T-Mobile, CVS, Binance, Robinhood, Ford, JP Morgan, Morgan Stanley, Spotify, Gap, Jenny Craig, 3M, Lyft, Deloitte, Whole Foods, Ernst & Young, McKinsey, Electronic Arts, Walmart, Sirius, Accenture, Citigroup, General Motors, Yahoo, Twitter, Disney, Zoom, Docusign, eBay, Dell, Rivian, Intel, FedEx, PayPal, IBM, Google, Capital One, Microsoft, Blackrock, Goldman Sachs, BNY Mellon, and Direct TV.

Figure #5 is my composite employment indicator that points to clouds on the horizon for labor. Businesses usually reduce Temporary Help Services and Hours Worked before laying off full-time employees, and these are falling. Growth in persons employed has slowed.

Figure #5: Author’s Employment Indicator

Inflection Points

I built the Declining Indicator (Figure #6) to measure the percent of months that indicators are negative. It is highly negative, showing that key indicators are either declining or have peaked.

Figure #6: Author’s Declining Indicator

Figure #7 is my Market Turning Points indicator which composites the values of leading and coincident indicators to give an estimate of major inflection points. While the level is low, it is not negative, suggesting that conditions for a market downturn are not yet fully developed.

Figure #7: Author’s Market Turning Points Indicator

Review Of Author’s Funds

The funds in Table #1 are those that I currently own in Bucket #1 (Living Expenses) and Bucket #2 (Expected Withdrawal in 3 to 10 years held in multiple accounts), along with fixed income ladders. Vanguard Balanced Index Fund (VBIAX) is included as a baseline. My strategy has been to lock in higher yields in longer-duration bond funds as the Federal Reserve pauses rate hikes. What I would like to add during the next six months is Global/International bond funds and longer-duration bond funds, but the time is not right. I use management services at Fidelity and Vanguard for Bucket #3 (longer-term) funds.

Table #1: Review of Author’s Funds – Metrics for One Year

Grant Park Multi Alternative Strategies (GPANX) has not performed well this year, but it is a good fund with a long-term performance record, so I will keep it. Upon dips, I will add to American Century Avantis All Equity Markets ETF (AVGE), and Columbia Thermostat (COTZX/CTFAX) will increase its allocation to equities.

Trending Lipper Categories

Table #2 contains the top-performing Lipper Categories for the 635 funds that I currently track. The first group of funds is short-term, quality fixed income. The Ulcer Index measures the depth and duration of drawdowns over the past two years, while the Martin Ratio measures the risk-adjusted performance over the past two years. The next group of categories (International bond funds and long-duration Treasuries) are not trending favorably, but I include them to fill gaps in my portfolio. Next are intermediate government and corporate bond funds which have higher duration or quality risk than the first category. Global and international equities have recently tended to perform better than domestic equities.

Table #2: Trending Lipper Categories – Ulcer & Martin Stats – Two Years

Fidelity Total Emerging Markets Fund (FTEMX)

Only a handful of emerging market mixed-asset funds are available to individual investors. One of my criteria for selecting an emerging market fund is to have low exposure to China. Fidelity Total Emerging Markets Fund (FTEMX) has 14% allocated to China, which is below the 22% that most EM funds have. In Table #3, I show two emerging market mixed-asset funds compared to two emerging market equity funds for the past ten years. I am not concerned about the low annualized returns because I expect emerging markets to outperform over the coming decade.

Table #3: Emerging Market Mixed Asset Funds and Selected Equity Funds (10 Years)

Figure #8 is a graphical representation of the above funds. Emerging market mixed-asset funds have performed well over the past decade until interest rates went up. I will monitor FTEMX with interest but have no plans to purchase it in the near term.

Figure #8: Emerging Market Mixed Asset Funds and Selected Equity Funds

Closing Thoughts

I like the prospects for bonds relative to stocks in the intermediate time horizon. In November, I sold Allianz PIMCO TRENDS Managed Futures Strategy (PQTAX) and bought Fidelity Investment Grade (FBNDX), which is an intermediate duration fund with 39% Treasuries and 31% corporate bonds. Over the next six months, I expect to add Global/International bond funds and/or a quality long-term bond fund.

I created a long-term financial plan that includes Roth Conversions and accelerated withdrawals to minimize long-term taxes and increase the tax efficiency of estate plans. In July, I set up an appointment to do a Roth Conversion on October 27^th, expecting the markets to go down. I was fortunate that the S&P 500 fell roughly ten percent, allowing me to convert more shares for the same conversion amount. The market then recovered. I plan to do another Roth Conversion in mid-2024 if the market dips as I expect.

Hiring Fidelity and Vanguard to manage my long-term investment bucket(s) freed up my time to pursue other interests. I enjoy volunteering and giving back to the community. I am learning a lot and meeting a lot of interesting volunteers.