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Whitebox Tactical Opportunities Fund 4Q Commentary...A Change In Outlook

edited February 2013 in Fund Discussions
New commentary just posted. Mr Redleaf's outlook for 2013: "...we see a significantly increased risk of severe disruptions in both credit and equity markets."

http://www.whiteboxmutualfunds.com/content/assets/docs/lit/tactical/newsletters/TacOps_Commentary_Q4_2012_v1_Final.pdf

Also, transcript of recent conference call, includes additional comments by both Mr Redleaf and Dr Jason Cross:

http://www.whiteboxmutualfunds.com/content/assets/docs/lit/tactical/Whitebox Tactical Opportunities Fund Q4 Conference Call Transcript.pdf

Comments

  • Is this the same fund that Scott brought it to our attention
  • Reply to @mrc70: Yes! WBMIX. After his review, I have owned since 08/21/2012.
  • Initiated a small position in the retail class this summer.Intrigued by "Hedge Fund Style Approach"? Adding to my retirement position weekly @TD Amer.Low minimum initial and no minimum subsequent,check it out! If any of that "rosy scenario should go wrong,especially the Fed's credibility,look out below! Avalanche and Earthquake are scary words,I'll buy this insurance no matter what Ted says about high fees for cash and EFT management.Sounds like their cash management is a little more sophisticated than just parking it in FSLXX. Thanks for posting this alternative investment fund news Charles!
  • Can you please guide me to the original post(s) where Scott and others discussed about it ?
  • edited February 2013
    A fund that offers a unique point of view, has flexibility, is not heavily correlated to the market and has a demonstrated track record of success (in this case, with the company's hedge funds) is appealing. I view this fund as part of a second generation of long-short vehicles that are more flexible with the definition (this doesn't even fall into the l/s category on Morningstar, interestingly.) Funds that, despite being "long-short" funds, realize that there's going to be times where there aren't many short opportunities, and have the ability to dial up and down risk to a greater degree. I think these funds may lose more in down markets than a number of their long-short peers, but also have the potential to capture more of the upside in up markets than many of their long-short peers.

    Marketfield also falls under this category, as well. These funds definitely rely on management calls (although certainly every fund does), but I believe that the flexibility offered will be positive in the years to come.

    Otherwise, I've thought for a while that essentially A:) we didn't learn anything from 2008, it was just "how quickly can we throw money at the problem to reboot everything?" However, with the Fed doing what it was doing, you had to be invested. Now, as I said the other day, it's nearly 5 years later and the Fed is still doing QE and ZIRP and the training wheels have not been taken off. What if we do have a recession, or are we not going to have them anymore because they'll just be met with more QE?

    Seth Klarman noted the other day that, "(The) underpinnings of our economy and financial system are so precarious that the un-abating risks of collapse dwarf all other factors."

    Personally, I think, despite what markets have done, there is some degree of shakiness to the foundation because what has happened is built on what the Fed has done, but nothing more than that; there has not been real reform to the financial system to strengthen the underlying foundation.

    Or, as Jacob Rothschild recently noted, "“We are living through a
    period of unparalleled
    complexity and
    uncertainty.” These
    words remain as
    regrettably true today as
    when I wrote them in
    my report to you two
    years ago. To avoid the
    situation becoming even
    worse, governments
    continue to roll their
    printing presses in one
    form or another. Their
    actions prevent systemic
    collapse but the deeper
    underlying problems
    remain."

    That's not to say that I think people should freak out. That's not to say that I think you should sell everything. However, I think if someone is in retirement age or near retirement age especially, take a look at what you own and realize that the markets have been very comfortable the last few years. They may remain comfortable, but realize that there remain real issues here and abroad that have not really been addressed at the core level. If the market did have a substantial downturn, would you sleep well at night? If not, this may be a point, given where markets are, where you want to address that. That's not to say that a substantial downturn would be another 2008, and there are funds that allow people to remain invested, but with less risk and volatility. There's no one path to recommend, because everyone is different and everyone has different goals, different risk tolerance, etc, but I think the general idea is to remain invested but - at this point (especially if you're towards retirement age - maybe dial down risk a bit if you believe that some of what you own may not fare well if things were to turn South at this point.

    As for the Whitebox letter, I think confidence in treasuries comes down to a belief that the Fed can buy enough paper to keep rates low, but I think retail investors continue to pile into bonds because they believe that there's a level of safety in bonds that can be maintained for the foreseeable future and they're looking for yield. That "safety" can go on for longer than anyone can think it will, but eventually the Bond market will turn South. People continue to reach for yield (no surprise, given that they can't earn anything in CDs or other "risk-free return") in fixed income and REITs and MLPS, but I think personally, given the environment, I'd rather own real, productive assets and get yield from that.

    Additionally, as Marc Faber noted - and I agree with, at least for the foreseeable future - "I think that in equities you will be better off because you have an ownership in a company, than by being the lenders to companies, and the lenders, especially, to governments." If the bond market really turns substantially (and possibly suddenly), I think it will be large, institutional-level sellers that do it. It's not going to be all the retail money that has gone into bonds that will be first to leave.

    In terms of the even the "rosy" scenario discussed in the Whitebox letter, I think there are some fairly large transitions implied by that, and while they may just go smoothly, I tend to believe that large transitions by many people, at one point or another, tend to get disorderly. Hopefully not. I do agree with the favoring of well-established large caps and I think a Yacktman or "Yacktman-like" fund of big brands and established names an appealing place to be right now vs taking more aggressive risks.

    As for the Fed and Treasury losing credibility, that will likely never happen, because the Fed is the Great and Powerful Oz. The Treasury is, well, some new guy. I tend to wonder if there was ever a real loss of credibility for the Fed if it would ever be started internally, and wonder if it would be more likely an external event. But, that's neither here nor there.

    I did find the discussion of "devaluation is inevitable" if treasuries rise towards 600bps rather interesting and I would have liked the letter to go into a little more detail on that.

    There have been a lot of discussions of the implications of rates even getting back to rates considered "normal" lately, and it makes me tend to believe that if that occurs sooner than later, it would be due to things getting disorderly. I also question whether we will get the growth that is needed that is discussed in the letter, and if we do, it becomes a matter of how much is that growth actually costing, and the diminishing returns on the cost of buying the appearance of growth.

    Overall, I think that people should not freak out, but realize that there are real risks that have not been addressed in the financial system and real obstacles yet ahead. Things, in terms of the markets, have been very comfortable for a while. I'd say stay invested, but the time to look to reduce potential volatility and risk is not in the midst of crisis, it's when everything seems comfortable.

  • Reply to @mrc70: Use the search box above and enter WBMIX
  • Reply to @scott: Very interesting and informative thoughts - thank you for sharing!

    I've not been actively monitoring MFO for a while, so hope my follow-up questions are not redundant ones. Would you mind sharing more specifics on the type of investments you would be favoring at this time beyond the Yacktman reference?

    I concur with the notion of owning real assets but didn't know if you have any specific fund examples you might be comfortable mentioning?

    Lastly, at a macro level for a more moderate type investor, is there an approximate percentage of a portfolio you'd be comfortable holding in multisector bond funds like PIGIX, PIMIX, etc.? I've been favoring what I call aggressive fixed income type funds (e.g., FNMIX, TGEIX, DBLEX, TTRZX, MAINX, etc.), though some have been lagging recently. I'm not giving up on them though I do want to monitor how things go. I've also been dabbling in some FI oriented CEFs, as I don't foresee Mr. B. raising short-term rates for a while yet. Please feel free to comment on this FI approach.

    TIA,

    - Scooterj
  • edited February 2013
    Reply to @scooter: I like real, productive assets, but I think my likes have been too specific for broader funds. Brookfield Infrastructure (BIP) remains a very large holding and which was just upgraded by Raymond James (link) I like MLPs, but own Kinder Morgan given the company's remarkable size and scale. I like the "toll road" aspect of the pipelines and while they certainly have risks (headline risk, political risk, etc), you look at a Kinder Morgan that has 180 terminals and tens of thousands of miles of pipeline and, really, who could come in and try to replicate what they've built and compete on that level? Much like the rails, the major pipeline companies (Enbridge, Kinder, Transcanada and a number of others) are in a situation where it would be extraordinarily difficult for someone else to really come in.

    I will not be allocating any more to these two investments, but will let dividends reinvest, and both provide significant dividends. Brookfield is a company and has company-specific risk (as well as the added paperwork of a K-1 at tax time), but it's unique in that it's almost a fund of specific infrastructure projects - everything from ports to pipelines to toll roads - around the world, and a pure and opportunistic play on infrastructure.

    I also own a couple of other pipeline companies, one of which is a smaller recent investment in Australia's APA Group, which is the largest nat gas pipeline co in Australia (although they have some other investments besides pipelines.) That yields about 5.75%.

    There are a number of infrastructure funds (TOLLX is a popular example), but I personally just like specific names.

    Infrastructure has done well. Some other things not so much. I own Glencore, which I like from the standpoint of the company's demonstrated skill in commodities trading, as well as the company's remarkable collection of real assets, which includes hundreds of thousands of acres of owned or leased foreign farmland. They also bought grain handler Viterra (although some of that is going to be sold to other companies) and are in the midst of merging with miner Xstrata, which turned into a long, strange trip lasting the last year. Glencore has not done well, but it's a long-term (and I think very unique) play that I still like very much.

    I've noted recently that I like WP Carey, which turned into a REIT last Fall. "From the CEO: "The premise is pretty simple. We buy a company’s most important real estate, and then we lease it back to them for a long period of time, 15 to 25 years typically. During that time, the contract includes rent increase provisions, typically those would be CPI-related, but not always. Sometimes they’re fixed rental increases. So we get the benefit of that rising income over time, and that’s where you get your cycle resistance, because no matter what’s happening in a local market at a given time, if the tenant continues to pay rent as they’re expected to, then you’ll have rising income. But at the same time, because it’s a triple-net lease structure and the tenant pays the taxes, the insurance and the operating expenses, the investors are not exposed to cost inflation." The company has demonstrated - pretty consistently - success in this field.

    I continue to like the Asian conglomerates. Jardine Matheson has done better than Hutchsion Whampoa, but the latter is one of the world's biggest port operators and owns one of the world's largest health and beauty retailers. Both are trading around book value, but still are certainly not without risk. Jardine is more consumer-centric, but I like it's Dairy Farm subsidiary a good deal, which has done very well and includes some exposure to familiar brands, including a few IKEA stores in Asia.

    I like telecoms. I owned (and bailed, d'oh) on Vodafone after it has continued to disappoint and while I won't go as far as to call it a value trap, I don't think it's the value I initially believed it was - not a real serious mistake, but I'll admit it was a mistake on my part. I still own - and consider a long-term holding - another foreign telecom company that has fared better.

    I like rail, although I think I like it from the standpoint that some are seeing benefits from oil exploration (like Buffett's Burlington Northern). However, some are seeing benefits and some have lagged, especially those who had a focus on coal.

    I like some tech more than others. I like Google. I don't like MSFT. I like what I call "financial technology" a good deal. This includes investments in things like mobile banking and other advancements in payment technology (EMV, mobile payments.) I think this is a long-term story. I don't own it, but I think Fiserv is a US example of something that fits into this category (FISV). Visa and MC are as well, although I think these are still tied heavily into the strength (or not) of the consumer.

    It sounds unusual for me, but I actually like Wal-Mart. The company offers some emerging markets exposure (they own 51% of Massmart in South Africa, for example); the company's scope and logistics expertise is astonishing and I think there is still a large part of the population reliant upon WMT's low prices (and probably go there for cheaper pharmacy prices). Look at today's earnings call from Dollartree that was very positive, and Target's - which wasn't so hot. Wal-Mart's attempts to integrate more technology in the shopping experience can be seen with Wal-Mart labs, and I think WMT takes more share as places like Best Buy have trouble. It's also taking away market share - I think - from some grocers. The only other retail play that I find interesting but it's not high on my list is Fast Retailing, a Japanese company whose Uniqlo subsidiary is moving into the US and trying to take on Gap.

    Wal-Mart is boring, but I think that - with a portion of one's portfolio - is that boring can be beautiful. Procter and Gamble and General Mills are other examples, although are overbought - I think - at this point. However, large established brands that pay nice dividends that you don't have to babysit are something that I think should be considered.

    I like yield. Every single name I own offers a yield, many of them a very nice yield. If I can like the business and get paid a very nice yield to wait, that's really optimal, that's what I'm looking for.

    I like healthcare, but - with a couple of exceptions - it's something I play with a fund and would recommend owning a fund. I understand some things and some broad concepts when it comes to modern medicine, but I certainly don't have a degree in modern medicine and a lot of it I either don't feel I'm qualified by any means to analyze or it's just greek to me.

    Abbott Labs, which is now heavily nutrition (Ensure, etc) and whatnot) after it split and has considerable EM exposure is another example I like. Yacktman isn't entirely a match for this, but it remains heavily in large, established brands like PG, Pepsi, Coke, J & J, etc. There's also the SPLV low volatility ETF, as well as AQR's US Defensive Equity Fund (AUENX). Yacktman, SPLV and AUENX are not going to do as well when the market is ramping, but should allow one to sleep a bit better at night, and SPLV offers monthly dividends, which of course means the appealing ability to reinvest monthly. I think given where the market is now, if someone wants to add something new (although I'd wait for a pullback, but for those who don't want to wait...), the SPLV with its monthly dividend and portfolio of very large, established names, is an appealing option.

    I do not own a fixed-income specific fund, although there is fixed income within some funds, such as AQR Risk Parity and Ivy Asset Strategy.

    In terms of long-term themes, I like water and agriculture (there are ETF's and an Allianz fund for water, and ETF's for ag). These are volatile.

    I also continue to like funds that have greater flexibility, including funds like Marketfield. I get where people are coming from with their concerns about FPA Crescent, but I continue to strongly agree with FPA Crescent manager Steve Romick and think the fund remains a very good choice. I am also positive on First Source Wasatch Income and Parnassus Equity Income, as well as the Matthews Asian equity income funds.

    Sorry I couldn't be more help on the fund side, but I think my interests have gotten lately specific to the point where I've become interested in single names.

    Lastly, rather than the rally monkey that some sites post, I'll offer... well, Microsoft's Ballmer acting like a nutcase. Only, this time, this is "Ballmer: The ITunes Remix."



  • Reply to @scott: Thank you for your general themes and directions as it's helpful as I continue to monitor my portfolio made up predominately of funds!
  • Reply to @scooter: I've shifted a good deal to single names because I've been looking at specific themes and ideas, but I think having funds is what I'd recommend for most people and I think it's easier in ways and probably less time consuming.
  • edited February 2013
    I did not invest in this fund. I find their expenses too high for my tastes.

    I also find some intellectual dishonesty in their performance reporting that they are using price returns for S&P 500 and excluding dividends and under representing the quarterly and yearly returns. (S&P 500 total return in 2012 was 16.00% and forth quarter was -0.38%)

    They even conclude that they have beaten the S&P 500 index when the truth is the opposite. There is the question of if S&P 500 is an appropriate index for the fund. Probably not but that is another matter.
  • Reply to @Investor: I have to agree with you investor. This fund may be the greatest thing since sliced bread - or not. Seems like a gamble to me. One that I guess I don't feel the need to take. It may not be as close to a hedge fund as WBMIX, but I would choose MFLDX over this one if I were looking for a fund that plays both sides of the market. I'll add Whitebox to my watch list just for the heck of it, to see how it pans out over the next few years.
  • Reply to @scott: Scott you are a very informed and I believe perceptive investor. Thanks for all of your detailed comments and the reasoning behind them.The pure infrastructure mutual funds mentioned here and elsewhere on this board, (TOLLX,NMFIX),do not enthuse me in this space because of pedestrian returns and better alternatives. Several other ways to invest in the pipeline theme besides the individual names you mention include these ETFs.
    http://etfdb.com/etfdb-category/mlps/
    For any long term investor though,your suggestion concerning Brookfield and any of their other associated products,including INF, look spot on.
    Scott appears to have found one of the avenues that have obtained fortunes.Five of the top 76 in the attached list are pipe line related.The news tonight seems to be that the Keystone Pipeline will receive clearance. In my cynical view,the delay was just a matter of the politicians being able to get their connections lined up for profits unavailable to small investors like many of us.


    http://www.forbes.com/forbes-400/list/ Here is an excerpt;
    Milane Frantz is one of four children who inherited the massive fortune of late energy pipeline entrepreneur Dan Duncan, founder of Enterprise Products Partners. Thanks to Enterprise's massive year-on-year growth on the New York Stock Exchange, in 2012 Milane and her siblings find themselves each $1.3 billion dollars richer than in August 2011. Her father, formerly the richest man in Houston, died in 2010 at age 77. Dan Duncan grew up poor and formed Enterprise Products with two trucks in 1968, selling door to door. Today Enterprise owns more than 50,000 miles of natural gas, oil, and petrochemical pipelines. Frantz's sister Randa Duncan Williams sits on the board of the company.
    P.S.(Anyone have two trucks and a dream to share!)
    Have a great week-end everyone.
  • edited March 2013
    Reply to @TSP_Transfer: Thank you for your comments - I definitely make mistakes, but I love the research and looking globally for ideas.

    The infrastructure funds are going to vary in their returns, I think, because of what they choose to consider infrastructure (one fund holds Dish Network) and what they choose to emphasize in the category.

    I don't think TOLLX has done badly, but you can see that AIFRX (not recommending that fund because my opinion of Alpine isn't great, but I'm just offering it as an example) has offered pretty different returns, despite being in the same category. T Rowe's TRGFX has done a bit less well. The Cohen and Steers Fund (CSUCX) has done worse than any of the three. But if you look at all four funds the returns look rather different for four funds in the same category. It just really depends on what they choose to consider infrastructure and what they emphasize.

    The other, smaller infrastructure play that I just remembered is Cheung Kong Infrastructure (CKISF.pk), but it's difficult to get in the US - it barely ever trades. That was up in 2008 and every year since. This is also a company with specific infrastructure holdings in UK, Canada, Asia and Australia. It's part of the larger Cheung Kong Holdings company.

    While Brookfield Infrastructure (BIP) is absolutely a company and has company-specific risks, in a way I do view it as an infrastructure fund, but rather than holding companies in various infrastructure-related industries, it invests in specific infrastructure - it can invest in a toll road here, a port there, a pipeline there, and buy/sell opportunistically. Brookfield Infrastructure sold some of its Timber holdings last year, and the buyer was China's Sov. wealth fund (http://blogs.wsj.com/canadarealtime/2012/11/06/wsj-cic-close-to-signing-timber-deal-with-brookfield-sources/) "China Investment Corp. is close to purchasing a 12.5% stake in some timber assets in Canada from an infrastructure affiliate of Brookfield Asset Management Inc. for about $100 million, according to people with direct knowledge of the matter.

    The move marks the latest effort by the Chinese sovereign-wealth fund to step up its investment in assets that could help shield its giant overseas portfolio from rising inflation risks."

    The issue with Brookfield Infrastructure is that it can be volatile and has gone up a lot. I think there's nothing quite like it and it may be seeing money flow from continued interest in infrastructure.

    McQuarrie Infrastructure Company (MIC) is a US-focused infrastructure company, but it's structured differently. It's a corporation, not a K-1. It has done well recently but had a difficult 2008.

    As for the Keystone pipeline, I always thought it was eventually going to be approved. A few thoughts:

    1. We live in a world where if we do not want Canada's oil, someone else will. CNOOC's deal for Canada's Nexen was because they wanted to "diversify their holdings to politically stable countries."

    2. People are talking about how we are undergoing this transformation with energy and all the new findings, etc. We can still screw that up and should keep our options with our neighbors to the North open.

    3. I'm all for protecting the environment, but I don't get the protests regarding pipelines. How do people want energy to get from point A to point B? There are issues with other methods, as well. Build the pipeline, and have penalties for spills to be to the point where the companies who own the pipelines are going to try their very best not to have a spill. Maybe if they have enough spills within x amount of years then further regulations and other things come into play.

    Additionally, Susan Rice - who was going to be Obama's Secretary of State - had this: "about a third of Rice’s personal net worth is tied up in oil producers, pipeline operators, and related energy industries north of the 49th parallel" (http://www.onearth.org/article/susan-rice-obama-secretary-state-tar-sands-finances) She had/has a huge investment in Transcanada, who is building the pipeline.

    I think there are a ton of great pipeline companies, but in that regard, I'm mainly invested in Kinder Morgan because I chose to go with the largest and KMR is a way to invest in KMP without a K-1 and, oddly, KMR continually trades at a discount to KMP, despite KMR really being just an investment in KMP.

    I think there are others large and small/more speculative - Magellan Midstream (MMP), Williams and others - that are probably great, but I also don't want to have a ton of k-1's to deal with every year. The only K-1 I have to deal with is for Brookfield Infrastructure (BIP).

    As for those getting wealthy from pipeline investment, I think part of that is the inability to compete with those who hold pipelines. No one can come in and replicate what Kinder Morgan has done, or what many of these companies have done. Even the infamous Koch Industries has pipeline interests.
  • Scott, a lot of your fave infrastructure names are the largest holdings in GASFX. I am not sure if you have ever recommended that fund and if not is there any reason you are negative on it? Maybe it's their exposure to utilities which tend to top before the overall equity markets.
  • FYI: When it comes to Aggressive Allocation Funds Whitebox is at the bottom of the heap, plus it's very expensive to own
    Regards,
    Ted

    M* Aggressive Allocation Category Returns: http://news.morningstar.com/fund-category-returns/aggressive-allocation/$FOCA$AL.aspx
  • Reply to @Hiyield007: I haven't even really looked at it in great detail, to be honest, but it looks like a very fine fund. Personally, I like the pipelines a great deal - I'm not really very interested in straightforward utilities. I think GASFX is an interesting mix and less volatile than an MLP fund while offering some MLP exposure. Personally, I'm also looking for a higher yield. Overall, I'm definitely not negative on the fund and I actually think it could be a good fit for more conservative investors looking for some MLP exposure. It's just not what I'm looking for.
  • Reply to @scott:
    Thanks Scott for the reply.I personally do not consider the Koch brothers infamous but they certainly have been characterized as that or worse by the same people who will continue to extol wind and solar as the best(only?) alternatives for future energy needs.The engineers employed by the Koch Bros. will continue to be more positive for everyday life for many more people than the financial engineers in George Soro's employ for the elite.
    Here is what I could find concerning Cheung Kong Infrastructure.This is a very large Co.and as you said, with worldwide assets. Great 10 year stock chart,but like many Chinese Co.'s,has flattened out a bit since '08. BIP has performed much better in the past 5 yrs and I feel has a wider asset base including the ports,airports,and roads you have previously mentioned.
    https://www.google.com/finance?q=HKG:1038&ed=us&ei=Qc0yUbjdPIOvqQGAJw
    Here is another example of how liberally a supposedly narrow investment sleeve can be interpreted by a good manager.I finally discovered this fund late last year and would recommend it to expand one's real estate investments.You don't get the the dividends with a pure REIT fund holder but probably a better chance at growth as exemplified by the record.
    http://www.baronfunds.com/mutual-funds/baron-real-estate-fund/brefx/?tab=Holdings#portfolioHoldings
    The pipelines are probably a safer way to play the shale play.Talk about volatility,the explorers are not a game I want to play.Bought some CESDF on Fri on some slight weakness.6.29% dividend paid monthly.For now that's my play in the oil patch.Waiting for some weakness in INF.
    Good primer on shale and energy here:

    http://seekingalpha.com/article/1238721-shale-we-dance-how-best-to-profit-now-from-energy-investments?source=email_alternative_energy_investing&ifp=0
    Thanks for your involvement and your non-condescending approach.
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