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Re; Ed Studzinsky's September commentary

edited September 3 in Fund Discussions
Re; Ed Studzinsky's September commentary: "pay attention to the opportunities in real assets throwing off an income stream that are selling for less than their replacement cost (e.g. pipelines and various kinds of shipping"

I would love to hear more details on this topic.

Comments

  • edited September 3
    @newgirl

    When we add the qualifier you omitted (“on occasion”) the suggestion of Ed’s you’ve identified is placed into its proper perspective - that being just 1 in a series of suggestions for investing in uncertain times and where asset valuations generally appear high.

    On occasion; pay attention to the opportunities in real assets throwing off an income stream that are selling for less than their replacement cost (e.g. pipelines and various kinds of shipping).”

    It seems to me Ed is of the belief serious inflation will make a comeback at some ill-defined, but not too distant, point. I suspect he’s worried that the conventional “safe havens” (ie - gold, energy, real estate, commodities) aren’t really that “safe” as they are prone to drastic price swings and may already be priced to reflect future inflation expectations. As an alternative (perhaps “adjunct” is the better word here) he suggests looking at infrastructure investments (like pipelines, ports, transportation facilities in general) that benefit indirectly from rising materials prices but which may be undervalued by investors at this point.

    “I would love to hear more details on this topic”

    Yep - So would I. Maybe folks have suggestions for funds that qualify. Personally, a board member mentioned GLFOX to me sometime ago and I bought a small chunk while cutting back on my commodities fund which I felt had flown too high at the time.
  • How much does the 3.5 T infrastructure package , if passed, play into ones investment ideas ? Just maybe the passage is already priced in ?!
    Trying to stay Kool, Derf
  • Maybe a fund like FRIFX would meet Ed's definition (real assets throwing off an income stream).
  • Thanks for thoughtful response . @hank - I noted the qualifier "on Occasion" I inferred by the article , that the "occasion" might be at hand, or at least the near term horizon.
    I would welcome a deeper dive on this subject .
  • edited September 4
    @newgirl -

    No criticism of you intended. Ed’s one of my favorites. So, I appreciated your invitation to address his piece. He has an interesting writing style in which he seems to be “thinking out loud” (on script) as he goes along, rather than being tightly organized around central points. Far be it from me to critique him - but he can be hard to decipher some times.

    Can’t beat his depth of experience. The fund Ed ran (OAKBX) viewed preservation of capital as paramount. Generally it was very good at that during his long tenure. And, I sense that concern often in reading him.

    Buffett: - Rule No.1: Never lose money. Rule No. 2: Never forget rule No.1."

    (Quote attributed to Warren Buffett. Easier said than done. Certainly Buffett has experienced losses along the way.)
  • How about Nuveen Real Asset Income (NRIAX)? It has some exposure to pipelines.
  • edited September 4
    One I’m messing with just a bit but am reluctant to mention: ALAAX.

    What is it? An income producing fund with about 50% in bonds, 30% in equities, 5% cash and 15% “other”. (The “other” likely includes REITS, commodities, convertibles and a few short positions.)

    Goal? To provide income greater than what bonds alone can produce, using dividend paying stocks inside that 30% component.

    Fee: .76% due to a fee wavier. Lower than otherwise, but still too high IMO.

    What I like: Seems to have outdistanced RPSIX and other multi-asset income funds over longer periods by 2 or 3 percentage points, albeit with more risk. A decent supplement to my mostly conservative bond bunds.

    What I don’t like: In addition to the .76% fee, everybody seems to hate this fund. M* rates it 2 / 5. Lipper has it in the bottom 20% on performance (but higher on cap preservation). Max Funds gives it something like a 35% (poor) rating. Also, a few of the underlying funds stink - including some of the aggressive bond bunds that blew-up on Oppenheimer in 2008.

    PS - I like the concept and have searched for an ETF with lower fees that resembles this. But haven’t come across anything. I still have some $$ directly at Invesco which helps explain how I stumbled on this one.
  • @hank : A fund of funds made up from Invesco funds . 19 holdings. Distribution of $.03 /month.
  • msf
    edited September 5
    It's a little difficult to divine intent in a single sentence, but what the heck ... And I'll try to relate this to M*'s issues with ALAAX.

    I take Ed's comment to be a focused version of: if you find $1 worth of assets selling at 80¢, buy it. Here, if you can buy a real asset (e.g. a pipeline) for less than its replacement cost, go for it. I regard the part about income as a way to measure the intrinsic value of the asset.

    Disregarding salvage value, you're buying something which will have a final value of zero. Its value is in the income (rent) it can generate. If the present value of that income stream is not better than the price, I wouldn't buy it, even if the price is less than the cost to replace it. Note also that while the replacement may cost more than an existing pipeline, it will also have a longer lifetime, hence a longer income stream. It's not quite as simple as comparing one cost to another.

    How does all this relate to ALAAX? M*'s analysis and the objective star ratings point to ALAAX overpaying for the value it is receiving. True, it is generating a lot of income. But for that, it is investing in higher risk holdings and as hank noted poorer performing funds that eat significantly into the total return.

    It's like paying up for a premium bond to get a higher income stream. For example, the 10 year treasury yield is currently around 1.3%. In Fidelity's inventory, I find a 10 year note maturing 5/15/31, offered at 103, with 1.625% coupons. That's a fair price; its YTM is just under 1.3%.

    One would be willing to pay a bit above par (here, 103) to get that higher income stream so long as the total returns were comparable. But there's a limit. One wouldn't overpay, say 105, just to get that higher income stream.

    M*'s analysis says that Invesco has been optimizing the portfolio for total return, and then overpaying to increase the income. Since star ratings reflect total return, and total return is below what it "should" be, the star ratings are naturally lower.

    (Side note: try comparing ALAAX to PRSIX; they each have 55% in fixed income and cash, with the remainder in equities and "other". PRSIX targets total return and doesn't overpay for income.)

    Getting back to pipelines: if you can generate that higher income without overpaying for it, and without running the risk of losing out to newer, cheaper pipelines, then they're worth considering.

  • edited September 5
    @msf - Nice statement summarizing Ed’s statement’s likely intent & his preferred method of investing. “Buy for a nickel. Sell for a dime.”, me thinks.

    You may / may not have realized I’m quite fond of PRSIX which you have introduced into the equation here. I have selected it as my “benchmark“ / “tracking fund”, and it also accounts for about 8.2% of current portfolio. Price does an outstanding job with their allocation funds.

    In contrast, only 2.8% of portfolio resides in ALAAX. The difference? PRSIX as the tracking fund occupies a dedicated position in the overall allocation (pegged at 7-8%). Whereas, ALAAX is a relatively small sub-component of the larger income segment.

    As you noted elsewhere, “Old Dogs” find it hard to break established habits. I’ve been running these highly compartmentalized portfolios for a long time now, which helps explain how I can hold both PRISX and similar ALAAX at the same time while designating each to a different peculiar role in the portfolio. Notwithstanding, I’ll start comparing them on a daily basis to see if there is a stabilizing effect to be had from owning both. It does seem to me their performance diverges enough on a daily basis that there may be some benefit to keeping both.

    Performance: Per your analysis, PRSIX has the better long-term track record. I did compare 2008 performance. PRSIX fell about 20% while ALAAX held up 1-2% better - despite the drubbing some of its (former Oppenheimer) components took than. In the early 2020 downturn, however, PRSIX held up notably better. The Quarter 1 2020 market nose-dive was unusual in that a liquidity crunch affected the investment grade bond market (even stressing money market funds).

    Bond Quality: PRSIX currently holds more sub-BBB rated paper. And ALAAX does seem to respond a bit better on positive days in the investment grade bond market.

    Thanks for all the precise input.

    -

    Added: It’s beyond my research capability … But am I correct that a greater proportion of ALAAX’s performance is derived from income (including stock dividends)? So, if one fixates more on how total return is generated rather than strictly on total return, it could make a difference (albeit largely philosophical) in a very compartmentalized approach. Just saying …:)
  • Overall, PRSIX holds more sub-BBB rated paper at this time

    Actually not (see below), though ALAAX holds more IG paper, which could explain it tracking the IG bond market a bit better than PRSIX.

    While M* counts unrated bonds as junk, we really don't know. Nevertheless, using M*'s figures:

    PRSIX:
    (11.46% BB + 11.65% B + 3.72% below B + 6.96% NR) x 41.21% fixed income =
    33.79% x 41.21% =
    13.92% of the portfolio is junk bonds

    ALAAX:
    (19.05% BB + 5.32% + 0.51% below B + 3.43% NR) x 49.83% fixed income =
    28.31% x 49.83% =
    14.11% of the portfolio is junk bonds

    As a percentage of total holdings, there's more junk in ALAAX than in PRSIX. The reason why it can also have more IG than PRSIX is that ALAAX has more fixed income in toto than PRSIX.
  • edited September 6
    Good numbers. As an aside, you’ve shown that ALAAX currently holds substantially more fixed income than PRSIX.

    PRSIX = 41.21% fixed income

    ALAAX = 49.83% fixed income

    Difference = 8.62%

    Truth be told, a higher % in fixed income (ALAAX) would have led to somewhat lower returns in the period since 2008 as interest rates (even on junk bonds) have been mostly low single-digit while equities have been in a prolonged bull market (IMHO a reason to disavow them on occasion ).

    I should correct my earlier statement that ALAAX held some Oppenheimer funds in 2008. The symbol for ALAAX suggests it’s an old Aim fund that Invesco picked up prior to merging with Oppenheimer. In that case, it could not have included any Oppenheimer funds in 2008. Perhaps that highlights that care must be taken when comparing long term records, as funds can change substantially over a number of decades.

    Finally, I don’t want to leave any impression I’m endorsing ALAAX. My reservations were previously stated. Owning a small chunk is an experiment. Indirectly, it also relates to my trading being currently restricted across all accounts at Fido until at least the the end of September (for alleged violations) where PRSIX is held. Oppenheimer / Invesco have always been most accommodative and easy to trade at - say what one will about the higher fees.
  • hank said:

    Good numbers. As an aside, you’ve shown that ALAAX currently holds substantially more fixed income than PRSIX.

    PRSIX = 41.21% fixed income

    ALAAX = 49.83% fixed income

    Difference = 8.62%

    Truth be told, a higher % in fixed income (ALAAX) would have led to somewhat lower returns in the period since 2008 as interest rates (even on junk bonds) have been mostly low single-digit while equities have been in a prolonged bull market (IMHO a reason to disavow them on occasion ).

    In saying that a fund with a higher percentage of fixed income would do worse when equities are soaring, you're assuming that more fixed income means less equity, that the investment universe is partitioned into fixed income and equity. That meshes well with a broad concept of fixed income as described by BlackRock:
    What is fixed income investing?

    Fixed income is an investment approach focused on preservation of capital and income. It typically includes investments like government and corporate bonds, CDs and money market funds. Fixed income can offer a steady stream of income with less risk than stocks.
    https://www.blackrock.com/us/individual/education/fixed-income

    Here are the equity figures for the two funds, using this broad sense of fixed income:

    ALAAX "equity" (non-fixed income) =
    100% - 49.83% "fixed income" (narrow sense) - 5.17% "cash" (e.g. TRPXX) =
    45.00% "equity"

    PRSIX "equity" (non-fixed income) =
    100% - 41.21% "fixed income" (narrow sense) - 13.72% "cash" (e.g. TRP Reserve Investment Funds) =
    45.07% "equity"

    No difference, broadly speaking.

    When M* gives a breakdown by credit rating of "fixed income", it is using "fixed income" in a narrow sense. Recognizing that M* is using "fixed income" narrowly, perhaps a more complete calculation for ALAAX's junk bond holdings would be:

    "Fixed income": 28.31% junk x 49.83% = 14.11%
    "Cash":               0.00% junk x   5.17% =   0.00%
    "Equity":              0.00% junk x  45.00% =  0.00%

    Total portfolio:                             100%     14.11% junk


  • msf
    edited September 6
    hank said:


    I should correct my earlier statement that ALAAX held some Oppenheimer funds in 2008. The symbol for ALAAX suggests it’s an old Aim fund that Invesco picked up prior to merging with Oppenheimer. In that case, it could not have included any Oppenheimer funds in 2008. Perhaps that highlights that care must be taken when comparing long term records, as funds can change substantially over a number of decades.

    FWIW, in 2008, ALAAX held:

    AIM Core Bond Fund 17.91%
    AIM Diversified Dividend Fund 14.08%
    AIM Floating Rate Fund 7.32%
    AIM High Yield Fund 14.19%
    AIM Income Fund 8.65%
    AIM International Core Equity Fund 4.67%
    AIM International Total Return Fund 5.07%
    AIM Real Estate Fund 0.00%
    AIM Select Real Estate Fund 6.66%
    AIM Short Term Bond Fund 6.20%
    AIM U.S. Government Fund 7.22%
    AIM Utilities Fund 8.24%

    https://www.sec.gov/Archives/edgar/data/202032/000095012908004762/h58575nvcsrs.txt

    These in turn all changed name from AIM to Invesco in 2010. It took just 14 years after Invesco acquired AIM to make the change.

    https://www.invesco.com/pdf/BRAND-FLY-1-E.pdf?contentGuid=3841df8
    https://www.nytimes.com/1996/11/05/business/invesco-to-acquire-aim-for-1.6-billion.html
  • edited September 6
    “These in turn all changed name from AIM to Invesco in 2010. It took just 14 years after Invesco acquired AIM to make the change.”

    Thanks.Very helpful info. I’d assumed from the names (“Core bond fund” among them), that they were former Oppenheimer funds. Several seem to resemble Oppenheimer’s old funds by sound of the names. Might suggest a lack-of-imagination among fund managers.

    I could replace ALAAX with PRSIX. Than slice PRSIX’s holdings into the % dedicated to (1) the smaller income sub-component and (2) the larger % devoted to the tracking fund position. Each time I sold or bought from one position the same “refractioning” process would need to be repeated. I’ve done this with a few other funds on rare occasion and have found it to be a PIB.

    PRSIX has outperformed ALAAX over the past 10 years by 1.61% yearly on average. I ran that through a compound interest calculator and found that for every $1,000 invested the difference in total return would amount to $17.43 per year on average or $174.31 after 10 years. Not insignificant. Of course, we’re assuming both funds will continue to produce returns for the next 10 years closely resembling the past 10.

    TRRIX is remarkably similar to PRSIX in allocation percentages, fees and performance. It’s outdistancing PRSIX substantially this year. A bit of a surprise.
  • OT, let's start a pool on this prediction:

    >> At some point, we will see high rampant inflation.
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