Muni Bond Costs Hit Investors In Wallet FYI: Highlight Copy & Paste 3/11/14: WSJ Matt Wirz: The graphic is missing from link
Regards,
Ted
Investors who put cash into municipal bonds—a widely popular strategy for those seeking safe, tax-free bets—are paying about twice as much in trading commissions as they would for corporate bonds, according to a study for The Wall Street Journal.
Regulators largely bypassed municipal debt as they transformed much of Wall Street over the past 20 years, but are studying it more closely now.
Individuals are the biggest participants in the $3.7 trillion industry, which provides funding for states, cities, hospitals and school districts across the country.
A study of 53,000 municipal and corporate bonds by S&P Dow Jones Indices for The Journal shows how much more investors are trading for the municipal assets.
Individual investors trading $100,000 in bonds of a municipality, such as Washington state, in December paid brokers an average "spread" of 1.73%, or $1,730. That compares with 0.87%, or $870, paid on a comparable corporate bond, such as one issued by General Electric Capital Corp., the data show.
Brokers of stocks and corporate bonds must disclose market pricing and give individuals "best execution" on trades, ensuring they receive the best prices possible. In the municipal-bond industry, those protections are absent, allowing brokers to pocket higher spreads by buying the bonds low and selling them high.
Individual investors, especially retirees, have long been attracted to municipal debt as a relatively safe investment whose interest payments aren't taxed. They own 45% of all municipal bonds directly and another 28% through mutual funds, amounting to a combined $2.7 trillion, according to data from the Federal Reserve.
The market is supervised by several regulators and structured differently than the stock and corporate-debt markets, and regulation of muni-bond trading has been slow to evolve.
"I think we can do more here for retail investors," said Michael Piwowar, one of five commissioners on the Securities and Exchange Commission, in an interview. "We spend an awful lot of time on the equities side of the market where spreads are counted in pennies—and in the 'muni' market, spreads are counted in dollars."
Brokerages say that municipal bonds cost more to trade because they change hands far less frequently and in smaller amounts than do other securities. They have warned that regulatory changes could hurt activity in the municipal market.
The SEC held hearings on the issue in 2010 and 2011 and proposed changes in a 2012 report, but they haven't been implemented.
Investors bought and sold $183 billion of municipal bonds last year in trades of $100,000 or less, in line with recent years, according to data from the Municipal Securities Rulemaking Board.
One of those investors was Jack Leonard, a 67-year-old resident of Ipswich, Mass., who on July 23 sold bonds promising a 5% annual interest payment from his home state in two lots of $100,000 each.
The broker buying the bonds told Mr. Leonard the best price he could get was about $1,030 per bond, or $206,000.
The following day, a broker sold the same amount of 5% bonds to investors for $1,060 a bond, or $212,000, according to an online history of trading prices maintained by the MSRB. The difference of $6,000 in the two transactions is equal to 3% of the bonds' value.
It wasn't possible to verify that both trades involved Mr. Leonard's bonds from the MSRB database, which doesn't identify trade participants. But in July, MSRB records show brokers collectively sold $1 million in Massachusetts bonds to investors at a 3% average markup from the prices they paid for them, amounting to $30,000 in profits.
"That's a lot of money, and the real question is: Why are they allowed to do it?" said Mr. Leonar
Mike Becker, a retired options trader in Boca Raton, Fla., said he has grown frustrated trying to get his broker at the Merrill Lynch unit of Bank of America to tell him the best bid being offered for the Florida state bonds he wants to sell and has petitioned the SEC to pass rules giving "the public a fairer shake." Josh Ritchie for The Wall Street Journal
The SEC oversees the MSRB, which sets rules for the industry, and the Financial Industry Regulatory Authority, which enforces them. Oversight coordination has been poor at times because the market is supervised by three regulators rather than one and the issue has had a low priority in Washington, said Hester Peirce, a former SEC staff attorney who is now a research fellow at George Mason University in Arlington, Va. "I think it's going to be under more scrutiny" going forward, she said, referring to Mr. Piwowar's push and recent proposals by the MSRB.
MSRB Executive Director Lynnette Kelly said the board "is working closely with the SEC to address market structure issues in a realistic time frame." John Nester, a spokesman for the SEC, said his group and others "work cooperatively on issues affecting the municipal securities market." Staff from Finra and the MSRB meet frequently "to ensure and sustain this collaborative approach," a Finra spokesman said.
Proposed changes face opposition from brokers, which fund both the MSRB and Finra. Firms such as Charles Schwab & Co. and Wells Fargo Advisors LLC have lobbied against some changes.
"The devil is always in the details when it comes to new regulations, but we commend the MSRB for bringing this issue forward and urge them to continue this important effort," said Jeff Brown, senior vice president of legislative and regulatory affairs at Schwab. Wells Fargo declined to comment.
Meanwhile, the lack of pricing information gives mom-and-pop investors little leverage to negotiate.
"I don't know what the market is, because they won't show me," said Mike Becker, a retired options trader. The 70-year-old Boca Raton, Fla., resident said he has grown frustrated trying to get his broker at the Merrill Lynch unit of Bank of America Corp. to tell him the best bid being offered for the Florida state bonds he wants to sell and has petitioned the SEC to pass rules giving "the public a fairer shake."
"We have policies and procedures in place that adhere to MSRB guidelines as they pertain to fair pricing," a Merrill spokeswoman said.
The MSRB proposed a municipal-bond best-execution rule last week that it hopes to enact this year or next and is working on a digital pricing platform, a person familiar with the matter said.
MSRB Chairman Dan Heimowitz, a banker at RBC Capital Markets Corp., said he is working to balance necessary changes against the risk that a rushed overhaul could spur brokers to quit the market, making it harder for individuals to trade. "That is why we go slowly and methodically, but we haven't given up on this by any means," he said.
Mr. Piwowar, a former economist who studied trading costs in corporate and municipal bonds, is pushing for fixes he hopes the SEC can enact this year, like requiring brokers to give clients more price information ahead of potential trades. He said stock and corporate-bond brokers also complained that similar reforms would stifle trading when it was imposed on their markets, "but in fact, all the evidence suggests the opposite."
Peter Coffin, a municipal-bond manager for wealthy individuals at Boston-based Breckenridge Capital Advisors, said it is about time the muni market got an overhaul. "You think of how the retail industry has gone from the local grocery store to Wal-Mart to Amazon," he said. By contrast, he said, "In municipal bonds, we're still shopping at the local grocery store."
Dodge and Cox proxy vote I'm curious about people's objection to proposal 4 (other than DODIX investors). Exactly the same restriction is being kept in place. What is being changed is how easy it will be for D&C to alter/remove the restriction in the future. (A fundamental restriction is being made nonfundamental, i.e. not needing shareholder approval to change.)
Unlike the other proposals, D&C is not saying that they want to change an investment policy now. If/when they do want to change that policy, it will be less expensive for shareholders - D&C won't need to hold another meeting and have more proxy ballots. And if they do change the illiquid securities restriction some time in the future, then one can think about selling.
(For DODIX, there is a current change - the amount of illiquid securities allowed is raised from 10% to 15%.)
I've had a chance to read and digest the proxy report now. Like you my main objection is Proposal 3. The shorting just seems like something that would tempt someone somewhere along the line. Though I'm not sure why a company with $12
5B in assets would ever need to buy anything on margin.
I have no objection to Proposal 4. I wish D&C could purchase more illiquid assets.
Thanks for the thoughtful responses. While I'll probably vote a contrarian "no," I'm willing to give D&C some benefit of the doubt..
Process and Luck over Outcome Part of the problem with this particular running conversation is that people speak generally of process without actually discussing the validity of alternative processes. That way leads to confirmation bias.
I've been taking the Robert Shiller Coursera offering on Financial Markets lately and watching the full lectures at the Yale site. Amongst other things, Shiller is very much a student of the history of thought. He walks you through the history of the EMT in
lecture 7.
Shiller is also terrific at damning with faint praise. My favorite moment here is when he talks of Malkiel popularizing the EMT in
A Random Walk Down Wall Street. Shiller tells how he met Malkiel at a cocktail party and asked for some references concerning technical analysis Malkiel cites in the book but did not footnote. Malkiel is subsequently unable to come up with even one. Shiller then goes on to suggest an alternative to the Random Walk model using first-order regression analysis.
I also particularly enjoy Shiller's deconstruction of Fama when discussing the joint Nobel Prizes on the "Week 2 Bonus" at Coursera (can't link): "There are differences in our concept of rationality."
Which leads to the Graham quote. First, it seems to me that Graham is saying simply that his system as presented in
Security Analysis is probably too complex to be useful for the average retail investor. He urges most people to be "defensive investors" in
The Intelligent Investor. However, if you wish to be more aggressive, he mentions some very simple valuation methods which might increase returns like Yield and Book Value. Second, Graham is speaking from the vantage point of the 1970s, when Efficient Market Theory was treated as something of a groundbreaking truth. As Shiller points out, beginning in the 1980s, that "truth" begins to be seriously challenged in the academy. Graham didn't live to see that.
Speaking of Swenson, he makes a guest appearance in the class to discuss the Yale Model and criticisms of it in
Lecture 6. He also makes it clear that he feels active investors can outperform (of course he would, his job depends on that), but that you have to be all active or all passive (by this he doesn't mean active or passive funds, but something akin to Graham's defensive/enterprising split), because to try to tread the line leads to behavioral mistakes. To be fair, he does cite some research looking at efficiency of markets based on manager return, with domestic equities well down the list.
The bottom line is that the original poster may or may not have been lucky, but his funds likely beat equity indices (or, more likely, U.S. market indices) over the past 1
5 years because markets are far less than perfectly efficient, and equity indices have had a lousy last 1
5 years, lowlighted by two bubbles and the worst economic recession since the 1930s. Many actively managed funds outperformed during that period by playing defense during the tech bubble and in 2008. That is something you can only get with active equity selection or successful market timing.
And when you return that to process, it is unclear to me how being a passive index investor stops you from making the same mistakes that hurt every investor's portfolio. Several MFO posters, most notably BobC, have pointed out that defensive equity funds enable skittish retail investors to curtail bad habits. The average holding period for a stock is now
5 days. I would agree that many active funds do little better, which is a major contributing cause to underperformance. But if that is the mindset, and if market-cap indices are by nature subject to bubbles and crashes, it seems likely to me that they also encourage bad investor behavior which more staid funds might avoid.
At the end of the day, though, talking about process is one thing. But you can't simply reduce it to active vs. passive when there are so many moving parts: Asset allocation; buy and hold vs. momentum; dividend reinvestment; limiting behavioral mistakes; leveraging; risk tolerance; time horizons; et al. These all make up process, and shouldn't be lost in EMT noise. It seems to me far more important investors come up with a reasonable plan that suits them and follow it.
Fixed Income Choice for 2014 Just to reinforce my point above that there is no free lunch and that all fund selection must be done in the context of a portfolio allocation plan, I recommend reading the following article before considering the above VALID recommendations for making your fixed income allocation.
You need to be logged into M* to read it (premium subscription not needed).
news.morningstar.com/articlenet/article.aspx?id=185307
Still Bullish But Far From Overly Optimistic From Seeking Alpha
Alarm bells ring over small caps"We are getting increasingly concerned about the extended nature of small-caps," writes MKM's Jonathan Krinsky, noting the Russell 2000 as of last week closed 42% above its 200-day moving average, the most in four years. A check of the records over the last 30 years when the Russell's been more than 40% above its 200-day finds forward returns 90 days out to be negative 94% of the time, with an average decline of 7%.He notes biotech makes up about
5% of the Russell 2000 and that sector's rally seems particularly unsustainable.Small-cap ETFs: IWM, IJS, TZA, TNA, UWM, VB, IJR, SLY, EES, RWJ, VBR, VBK, URTY, SCHA, TWM, IWO, IWN, IJT, RWM, SRTY, DWAS, SAA, JKL, VTWO, SLYG, RZV, SLYV, SDD, VIOO, JKJ, RZG, RSCO, SBB, VTWG, UKK, FYX, TILT, VIOG, XSLV, FNDA, VIOV, SKK, FYT, EWRS, JKK, PXSV, VTWV, UVT, TWOK, SMLV, SJH, FYC, IESM, VLU, PXSC, PXSG
http://blogs.barrons.com/stockstowatchtoday/2014/03/10/small-caps-dangerous-things-come-in-small-packages/?mod=BOL_hp_blog_stwKlarman raises alarm over asset prices, cites tech “nosebleed valuations”Mar 10 2014, 18:
55 ET
http://seekingalpha.com/news/1618413-klarman-raises-alarm-over-asset-prices-cites-tech-nosebleed-valuationsSeth Klarman is warning of an impending asset price bubble, calling out "nosebleed valuations” in high-flying stocks such as Netflix (NFLX) and Tesla (TSLA) and warning of the potential for a brutal correction across financial markets.“Any year in which the S&P
500 jumps 32% and the Nasdaq 40% while corporate earnings barely increase should be a cause for concern, not for further exuberance," the Baupost Group head wrote in a letter to clients.
Excerpted from Baupost Group's Seth Klarman letter,from Zero Hedge
http://www.zerohedge.com/news/2014-03-08/seth-klarman-born-bulls-bitcoin-truman-show-marketFrom the Seeking Alpha Klarman post;
But....In a semi-rebuttal, Vanguard's Jack Bogle agrees stocks are in "risky territory" but says investors shouldn't be trying to time the market in any case, and the problem with selling stocks based on such a prediction is you won't know when to re-enter: "Will [Klarman] call you and tell you when it's time to get back in?"
Fixed Income Choice for 2014 And then plugging say OSTIX into Chip's
Risk Profile, I can see that Osterweis has done pretty well compared with other reference funds, like Vanguard's Total Bond and Balanced Index funds:
Fixed Income Choice for 2014 Using Accipiter's
Miraculous Multi-Search, I screened for High Yield Taxable Bond Funds in Risk Group 1 or 2 that are also Great Owls...
Turned-up a pretty good list of options:
Fixed Income Choice for 2014 Yep, Hank is right. DODIX is a jewel.
Fixed Income Choice for 2014 I like multisector bond funds where the management can identify opportunities. "Small and nimble" might be one more attribute I would like my fix income fund to have. A new fund from a solid bond company (USAA) is USFIX. M* snapshot 13% equities, 20% preferred stocks,
58% Corporate, and
5% Commericial MBS, 7% US Treasury, 3% bank notes. It only has $14
5M under management. YTD it's up almost 4%. Here it is charted against two other multisector bond funds (PONDX and LSBRX) since last October:
Manager Commentary:
https://www.usaa.com/inet/pages/mc_0082
Process and Luck over Outcome Hi rjb112,
Thank you for the kind words and your trust in asking help from me. I am hesitant that I can profitably satisfy your request..
I struggle with giving specific investment advice. Please know that I am an amateur in the investment jungle. I truly believe that a number of MFO members are far more qualified than I am to give such advice. It has been my consistent policy not to make specific portfolio recommendations here at MFO and elsewhere. I fear I might do more harm than good.
There is another reason that giving and accepting internet advice is a dangerous thing. That task requires a careful and continuous interchange between the parties involved. That’s difficult to do well with only e-mail exchanges.
Direct contact with professional advisors could be useful. An advisor who uses Index products to implement his approach might serve your needs. There are just too many variables to integrate into final decisions when exchanging posts on the internet.
Since I’m a self-taught investor my financial education has developed in a haphazard manner. Therefore, there are likely some holes in my knowledge base that could compromise the performance of my portfolio as well as any that I choose to help construct with others.
Therefore, I choose to abstain. But I have no reservations about suggesting generic sources and approaches.
For example, I do admire some of the Index portfolios that have been documented by Paul Farrell in his Lazy-Man portfolios. I am especially drawn to several portfolios because they include elements that academic and industry research suggests can modestly increase expected returns while simultaneously reducing portfolio volatility. These portfolios have been frequently discussed on MFO, but here is the Link to Farrell’s ongoing scorekeeping:
http://www.marketwatch.com/lazyportfolioI am attracted to David Swensen’s Yale U’s Unconventional portfolio. It seems to touch most of the necessary bases with a small number of Index products. Here is the sub-link that presents Swensen’s Index choices:
http://www.marketwatch.com/lazyportfolioI also like Bill Bernstein’s slightly more complex Smart Money portfolio as follows:
http://www.marketwatch.com/lazyportfolio/portfolio/bernsteins-smart-moneyUsing the Farrell Lazy portfolios as a point of departure you get to pick from a bunch of respectable options. I know you recognize that this listing gets you to a reasonable starting line. Adjustments in holdings and percentages should be made to accommodate your special circumstances: Your age, wealth, education, experience, risk profile, and end objectives.
Along that line of thought, I have been recently introduced to some mutual fund research conducted by Professor Craig Israelsen. He has expanded his work to formulate an Index-based fund strategy that exploits study findings. For example his portfolios are age dependent. His work is called the 7twelve approach.
The 7twelve approach uses 12 fund groups to execute 7 fund asset classes. Eight diversifying fund groups are assigned to 4 equity classes while four fund groups flush out 3 fixed income classes. Here is a Link to this attractive portfolio organizational option:
http://www.7twelveportfolio.com/Downloads/7Twelve-Model-Intro.pdfI suggest you explore the Lazy and the 7twelve candidate portfolio options. These might satisfy your requirements.
Please understand that I still own a substantial mix of active and passive funds (
50/
50 at this juncture). I do plan to convert to a more passive portfolio (probably like a 20/80 mix) within the next year. That’s a task that awaits execution.
At this juncture, I directly own no gold products, but I just might diversify a little more following general guidelines extracted from the references that I provided..
By now you realize that I am a plain vanilla, meat and potatoes type investor. I believe that simplicity works best, and that complexity kills. My portfolio reflects that philosophy. It works for me; it might not be your cup of tea. This thinking goes a long way to explain my reluctance to participate in specific mutual fund recommendations.
Other very qualified MFO Board participations will enthusiastically fill my void.
Good Luck and Best Wishes.
Wonder if the Moose will change his signal on Europe? Yes he did! Back to US Small Caps Junkster,
If you want to spend more time in the great outdoors, that's a great reason to spend less time on the net, but the rest of us the board will be poorer (often literally) for it. Try for once a week! There's a useful add-on call leechblock which you can put on your browser and have it block sites except for certain days/times. Perhaps you'll give us 15 or 30 minutes a week.
Whatever you choose, best of luck with your investing and hiking.
Investors Seeking Safety Should Try Emerging Markets: Video Presentation
(New) Open Thread: What Are You Buying/Selling/Pondering I broadened my international equities to give me more exposure to Europe. I have noticed that in the past six months my portfolio is tending away from the SP500 and more towards the Nasdaq. This was all part of rebalancing my AA.
Process and Luck over Outcome
Millennials Take Conservative Investment Approach yes...as I said. It's merely a dream.
Which brings up a point. I sensed that the author of the article you originally referenced saw the 25 year old investing in dividend paying stocks as some sort of oddball. If so, I think that does the young investor a disservice. Perhaps I am reading too much into this.
Process and Luck over Outcome The original interview with Graham from which the above quote is taken concludes with this quotation. To the question: "Can you indicate how an individual should create and maintain his common stock portfolio?", Graham gives two approaches. The first is the one he'd used for 30 years. The interview concludes with his answer to the query: "Finally, what is your other approach?"
Graham: "It consists of buying groups of stocks at less than their current or intrinsic values as indicated by one or more simple criteria. The criterion I prefer is seven times the reported earnings for the past 12 months. You can use others--such as current dividend return above seven percent or book value more than 120 percent of price, etc. We are just finishing a performance study of these approaches over the past half-century--1925-1975. They consistently show results of 15 percent or better per annum, or twice the record of the DJIA for this long period. I have every confidence in the threefold merit of this general method based on (a) sound logic, (b) simplicity of application, and (c) an excellent supporting record. At bottom it is a technique by which true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public."
The entire short interview is easily accessible on the Graham and Doddsville site.
Millennials Take Conservative Investment Approach
Millennials Take Conservative Investment Approach thanks Ted...pretty impressive. Of course, if you're 25, the challenge is to identify those companies that will thrive (or at least survive) over the next 30 years.
