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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
  • Would I not do better in here at Mutual Fund Observer? Wouldn't any of us?
    At the very least, here at MFO; one has an ongoing knowledge base from which to continue to learn and grow from to support investment decisions. MFO is just not about technical aspects and digging into various funds. I believe one of the greatest values here is to better understand the most critical aspect of investing; and that is behavorial understandings.
    The thousands of words written here, will many times contain sprinkles of behavorial thinking mixed among the discussions.
    Any words that may cause one to think differently about a specific topic or to discover a new topic related to investing helps fuel the continued growth needed for introspection to remain a successful investor over the many long years.
    One may travel to other sites and the numerous links posted here; but should always return to MFO for a more full view of the investing landscape.
    My inflation adjusted 2 cents worth.
    Regards,
    Catch
  • Eight Bells and All's Well
    Building starts all around. IPO resurgence. Hey, even home improvement loans coming back.
    If...
    Companies start increasing CAPEX, like oil houses have done recently, to help create real growth (versus EPS engineering via buy backs),
    Credit remains low, available, accommodating,
    Washington does not jump off tracks,
    Our workforce remains robust and capable,
    World remains at (relative) peace,
    Then...
    Our reluctant bull continues.
  • Process Over Outcome and Quilts
    Hi Guys,
    Earlier this week the WSJ published its quarterly mutual funds and ETFs review that incorporated 2013 data.
    Overall, it’s a comprehensive summary in a concise, useful format. But I do take issue with part of their winners and losers page. I like the 5-year and 10-year listings since these provide some performance persistence insights. I believe their last quarter and 1-year winners and losers listings are a disservice to many individual investors. It invites
    hot-hand thinking. It energizes herding instincts.
    These short-term listings that emphasize ephemeral success stories encourage putting outcomes over process.
    Consider a two-by-two matrix with good (GP) and bad (BP) processes in the horizontal direction, and good (GO) and bad (BO) outcomes in the vertical direction.
    The upper left GP-GO box reflects just rewards. The mixed BP-GO illustrates a lucky happening. The mixed GP-BO demonstrates an unlucky event. The BP-BO box might well be interpreted as poetic justice.
    As investors we can only control process. Outcomes are always uncertain, and we are subject to the whims of the financial Gods. So we should focus our resources at developing and persistently deploying a carefully constructed investment process.
    For a passive investor that’s simply assembling a low-cost composite total market Index fund array.
    For the active mutual fund proponent, it means cobbling together a portfolio with the following characteristics: low cost, low turnover, long tenured management arguably with financial degrees from Ivy league schools, and with investment philosophies and preferences similar to the clients.
    The active route is more challenging with a likelihood of Index out-performance that is in the 10 % to 30 % range depending on time horizon and number of active funds within the portfolio.
    Annual returns behave in a helter-skelter manner. If there is some order to annual rewards, it surely has escaped me. Patience is a prized virtue for successful investing.
    Asset Allocation quilts offer a great way to illustrate the year-by-year chaos of investment category return disorder. I particularly like the report issued by the RBC Wealth Management outfit in Texas. Here is a Link to their “Market Cycle Quilts”.
    https://www.rbcwmfa.com/File/Featured Reports/marketcycles.pdf
    The Market Cycle Quilts document the separate and rapid elevator rides that various classes experienced since 1999 for the following clusters of investments: Asset Classes, Indices, US Economic Sectors, Developed Countries, US Stocks, US Bonds, Income Focused, and Alternate Investment groupings.
    This is a huge body of data displayed in an attractive format. It is the most complete set of charts I’ve ever seen within the Quilt or Periodic Tables presentations. All these tables vividly demonstrate the volatility in annual returns; the first shall be last in short order.
    One of the main themes that the marketplace constantly exhibits is a reversion-to-the-mean. The S&P Persistency and the SPIVA Scorecard reports demonstrate the fragility of superior above average performance among the professional class of investment wizards. The DALBAR studies show that individual investors do even poorer when contrasted against market averages.
    I hope the Market Cycle Quilts will provide some guidance to MFOers when developing their investment philosophy and processes. Outcomes are forever uncertain. Good luck and good judgment to all you folks.
    Best Regards.
  • The Single Greatest Predictor of Future Stock Market Returns
    Hi Guys,
    Let me start with a disclaimer. I breezed through the referenced article since most of it is “old” stuff and commonly accepted market wisdom. So I do not claim that my posting is a definitive or complete review of the paper.
    Of course, the idea to replace the conventional portion of what the author elected to call the “Price Return” with investor equity percentage growth commitment and cash-bond supply growth components is dramatic and inventive. I like that. Only time will test the validity and usefulness of the proposed concept. But many kudos for trying. I’ll mostly focus my comments on this aspect of the paper.
    Take note that even the basic partitioning of the initial total equity returns equation is a departure from the standard sectioning. In John Bogle’s classic “Common Sense on Mutual Funds” book, he divides the total returns into investment and speculative subcategories. Bogle assigns earnings growth rate and dividend yield to the investment category, and reserves P/E ratio changes to the speculative category. This researcher doesn’t accept that interpretation.
    I suppose it somewhat depends on your investment philosophy. Bogle is certainly conservative and long-term oriented. The current writer’s proclivities are unknown since he chooses to be anonymous.
    This fact itself is a little troublesome. If this thesis were generated at the University of Chicago or MIT, it would be critically peer reviewed. Not so in this instance. If in time this provisional model proves to be a flawed concept, the unknown author will simply fade away and not pay any reputation price for his faulty analyses.
    On the positive side, the proposed model does take advantage of two commonly acknowledged heuristics: the wisdom of the crowds and a regression-to-the-mean. Both are used in an inverted sense. The wisdom of the crowd is reflected as the independent variable in the proposed model. It is the worldwide sum of all equity investors. However, they are typically on the wrong side of the wager. When they are heavily invested, the equity marketplace is likely overbought and a reversion-to-the-mean is the order of the day.
    The reported work sets a low hurdle for itself. It uses the current value of investor enthusiasm, as measured by their equity percentage holdings, to project a 10-year rolling return. The author sort of endows the investor with a prescience that is hard to justify. Why not a 1 year forecast, or a 3-year, or a 5-year, or a 20-year timeframe? Data mining is a possibility in this instance.
    Another consideration is that a meaningful test of the validity of the asserted model must wait and wait and wait and wait before seeing if the model bears fruit. Immediate feedback is impossible. Therefore, the learning process is delayed.
    I was disappointed that the author elected not to challenge his model with out-of-sample data. For example, he could have used data sets before World War II. High quality data of the form needed might not have been available, so, as an alternative approach, this researcher could have segregated his post WW II data into subsets and tested the accuracy of the resultant forecasts for each subset.
    Out-of-sample testing is always needed. Researchers always reserve data for that purpose. We’re all familiar with the failures of the long skirt, the super-bowl, and the Bangladesh butter production correlations to forecast equity returns when challenged with evolving data. More seriously formulated correlations like the Shiller CAPE model worked for a while and then failed. The investment roadway is littered with such failed correlations. Caution is warranted.
    Forecasters fail to forecast; there is little reason to believe that equity investors possess that skill. Black swans and exogenous events happen to destroy any hopes for accurate long range forecasts. The author takes some pride that the proposed forecasting tool does not incorporate fundamental market parameters. I tend to distrust such a correlation as a weakness.
    The author elects not to emphasize the data scatter about his correlation until the very end of the article. That scatter (standard deviation) is always an important consideration in any investment decision. Currently, based on the proposed correlation, the equity markets offer a 10-year rolling average return of 6 % with data showing scatter between a 5 % and 9 % level. That’s not a particularly shocking projection.
    As the forecast time horizon expands, the projections should reflect the historical averages. Essentially, that’s what I meant when I said that the author set himself a low hurdle. As a zeroth order prediction I could simply quote the historical averages and its standard deviation. As a first order correction to that initial estimate, I could correct either upward or downward using CAPE as a guide. This procedure is just a reversion-to-the-mean generic philosophy and might well be as reliable as the referenced research.
    Only time will tell. Unfortunately, given the time horizon for the referenced work, that wait will be painfully long. I have no horses in this race. I really do wish the author well. I like attempts to improve our market understanding. Most models fail; especially since investor sentiment is fragile and ever changing, it is a tough modeling nut.
    I hope you guys find this a little helpful. Please remember that I have not done a meticulous scrutiny of the referenced article. Daniel Kahneman would not be a happy warrior with my submittal given that it is almost solely based on my reflexive thinking on the matter.
    Best Regards.
  • Good-Bye Ben Bernanke
    Xeriscape, bow before Dr. Carrier's picture occasionally, flush less (shower with friends??), buy land in southern Oregon (coastal, not inland; it's already dry) for your heirs. It's global warming, baby (I'm channeling Dick Vitale).
    I know my aging memory is faulty, but I swear we had more snow days off school in Indiana than they do now. I think there is a change.
    Heck, you were already off topic.
  • Missed the boat on Yacktman Funds
    Good story on the Yacktman Fund Family from a year ago if you missed it...
    http://finance.fortune.cnn.com/2012/12/13/yacktman-don-funds/
    What's also exceptional is Yacktman's dedication to his family. Six of his seven children have followed him from Chicago, where he lived for 38 years, to Austin, where he moved in 2005. He's been transferring control of the funds to his second-oldest son, Steve, 42. And for the past seven years he has dedicated his life to helping his adult daughter recover from a devastating stroke that left her in a locked-in state.
    Meeting Yacktman is a lesson in humility -- he acts more like a church bishop (which he was, incidentally, at his Mormon congregation) than a multibillion-dollar investing star. His voice rarely rises above a quiet conversational level. He answers his phone himself. He doesn't employ anyone to handle public relations. His daughter Melissa, 35, recalls working for him during summer breaks, when lunchtime included inviting the passing homeless man to eat. "It'd be me, my dad, and a homeless guy at Wendy's," she says.
    Yacktman's Mormon beliefs, which he's followed since converting to the church when he was 15 years old -- seeking stability after his parents divorced and each remarried several times -- lead him to eschew alcohol and gambling. He avoids promoting his own record or ideas, which is almost never the case when a fund grows as fast as Yacktman's has. "I never want to come across as arrogant," he says from his modest third-floor office in the west hills of Austin, where landscape reprints hang on the walls.
    Each of his children can tell a story about his frugality. His son Brian, 33, remembers Don hiring him out of business school for $35,000 less than the going rate for MBAs. Another time at family dinner, the twice-a-month gathering of his children in Austin, his son Rob's wife threw away a recycling bag filled with empty soda cans. Don marched out to the garage to save it. His explanation: "No reason to waste a good bag."
  • funds news letter read 1.2014
    also allstarinvestor read
    http://www.allstarinvestor.com/ - could not find the linkage
    Editor's Corner
    2013 Is History, 2014 Awaits
    Ron Rowland
    Just a few hours remain in 2013, and financial trading has come to a close. You may remember that early in the year many analysts were calling a top nearly every time the market declined. Stocks had the last laugh though, marching upward throughout the year and rendering those gloomy predictions useless to most investors and damaging to those who heeded the advice to sell.
    It was a good year for most equity markets and a not-so-good year for other asset classes. Domestic small cap stocks were the big winners, gaining more than 38% by most measures. Slicing the small cap designation a little thinner, stocks in the Russell Micro-Cap Index boasted returns in excess of 45%. International stocks were mixed, with developed foreign markets gaining about 21% while emerging market stocks lost ground. The benchmark iShares MSCI Emerging Markets ETF (EEM) declined about 4% for the year.
    Bonds had a tough year, and nearly every segment posted losses. The U.S. aggregate bond market shed about 2% for the year. Losses were steeper among Treasury securities, as the iShares 7-10 Year Treasury Bond ETF (IEF) dropped more than 5%, even after adding in its monthly dividend. Longer maturities meant larger losses as the Vanguard Extended Duration Treasury ETF (EDV) plunged 20%. Hopefully, bond investors have gotten the message that Treasury bonds are not automatically safe. There was no hiding in international bonds either, with developed country government issues declining 3% and emerging market bonds dropping about 10%. One segment that managed to post gains for the year was corporate high yield (“junk”) bonds, with most funds targeting this segment advancing 5% or more.
    Commodities also failed to produce profits in 2013. The largest multi-commodity ETF, PowerShares DB Commodity Index (DBC), dropped more than 7%. Gold was a big story in 2013, partly because the yellow metal plunged more than 28%. Energy was the only major commodity group posting profits for the year with United States Natural Gas Fund (UNG) gaining about 10% and the United States Oil Fund (USO) advancing around 6%.
    It will be another year before anyone knows the 2014 results, but that hasn’t stopped many people from making predictions. The first trades of the year will begin in less than 48 hours. We wish you a happy and prosperous New Year.
    Investor Heat Map - 12/31/13
    Sectors
    Industrials maintained its first-place ranking, and Technology stayed close behind in second. Materials continued its recent climb, improving from fourth to third this week. Having Industrials and Materials together near the top is reminiscent of a strong global economy, and there is probably at least one economist willing to claim that is exactly what we have. Consumer Discretionary improved its absolute strength while simultaneously slipping a notch in relative strength. Health Care and Financials held their ground in the middle of the pack. Telecom and Energy swapped places with Telecom coming out on top today. The bottom of the rankings stayed much the same with the defensive groups of Consumer Staples and Utilities barely clinging to positive trends while Real Estate trails behind.
    Styles
    A couple subtle changes in the Style rankings produced a more definitive pattern. Small Cap Growth and Small Cap Blend swapped places, although they were in a virtual tie a week ago. Small Cap Value and Large Cape Growth also swapped places, and they too had identical momentum readings last week. However, these seemingly insignificant changes now put the four smallest capitalization segments at the top in order from Growth to Value. Micro Cap claims the overall leadership position while the three Small Cap categories take second through fourth. The lower half remains a somewhat disorganized mixture of Mid Caps, Large Caps, and Mega Cap. Mid Cap Value resides at the bottom, although with a momentum reading indicating an upward trend of 23% per year it really can’t be called weak.
    Global
    Europe was challenging the U.S. for the top spot a week ago, and today it has a firm grasp on the position. The U.S. dropped to second and is again facing competition, this time from the U.K. Recent strength in the British Pound has been a positive influence and could be the deciding factor over the next few weeks. World Equity and EAFE round out the top five, after which there is a large drop-off in momentum readings. Japan and Canada are next in line, just as they were a week ago. China and Emerging Markets managed to shake off their negative readings, but their new positive scores are far from being solid. Pacific ex-Japan and Latin America gained strength yet remain in negative trends.
  • A Noble Lie: Why it's OK to sin a little and "market-time"
    Hi Mark,
    Thank you so very much for posting the Morningstar Article by Samuel Lee.
    The article clearly demonstrates the market wisdom that when prices are extremely low, the likelihood of oversized returns is very high.
    The article is basically an uncluttered, focused review of an impressive body of statistical market data sets. That’s great. However, the author’s interpretation of the data is surprisingly and disappointingly incomplete.
    Whenever presenting statistical data, it is always a good policy to include some measure of the dispersion in the data to supplement the commonly cited Mean and/or Median statistic. The data’s standard deviation is the usual dispersion measurement. Quoting some average value is simply not enough.
    A quick scanning of the 3 graphs displayed in the referenced article plainly shows that the data scatter is rather large for a major portion of the collected data range. Lee failed to even mention this significant observation. Perhaps it works to weaken his main theme.
    To illustrate, just concentrate on Figure 1 which presents the correlation of forward 5-year real returns as a function of Shiller’s inverted Cyclically Adjusted Price to Earnings ratio (CAPE). The data set is fundamentally a wide cloud up to an inverted CAPE value of approximately 12 (P/E ratio of about the 8.3 level).
    It is not an exactly new concept that if the P/E ratio is so low that a highly profitable opportunity exists to buy into equities with a high likelihood of huge future rewards.
    Similar dispersed cloud formations exist within the other two figures. The dispersion aspects within each of these data sets should have been highlighted in the text. It is always a meaningful part when interpreting any statistical data.
    The author also tends to overstate the rigidity implied by the Buy-and-Hold market strategy employed by many market participants. Buy-and-Holders never believe that it is a forever pledge. If it were, profits would never be realized.
    Most Buy-and-Holders, myself included, just avoid the daily noise created by frantic media coverage and an overly aggressive trading cohort who actively seek quick rewards without hard work. That cohort are the natural experimental subjects for the Behavioral researchers. Overconfidence is a representative characteristic of this group who do a great service in making the marketplace more efficient.
    Buy-and-Holders have divergent financial goals that not only depend on their ages and purposes, but also on market dynamics. It is a cardinal sin to characterize that cohort as a single, inflexible mass with a uniform timeframe. Things are never that simple.
    Mark, regardless of my reservations, I really enjoyed the referenced piece. I learned from it. I love these big picture, meta-analysis. I truly appreciate your effort in bringing it to my attention. Thank you once again.
    Best Wishes and Happy New Year.
  • Group Think Funds
    Reply to @MarkM: I'm waiting for Ted to say it's time to close this thread. In the meantime, back in the 90s you could trade in and out of mutual funds on a daily basis (if needed) at fund families such as Strong and INVESCO. I took full advantage of the liberal fund policies back in the days. You could also "dateline" mutual funds back in the days with impunity and with no redemption fees etc. As those who were around then and actively participated, datelining was the closest thing ever to a free luch on Wall Street. Much different landscape today. I always felt it best to be a hybrid trader/investor. An investor when the position is moving in your direction, a trader when it stalls or reverses.
    Edit: I believe I mentioned this before and *not* meant in a "pejorative" manner, this is a very, very, conservative group of investors here. I just never had the luxury of being conservative because I got such a late start trying to build my limited capital back in the days. I was forced to think outside of the box.
  • When A Good Indicator Goes Bad: The Shiller CAPE Ratio
    Reply to @AndyJ:
    Agree with you there, AndyJ. I don't think all that much in general of our new Nobel Prizewinner, but CAPE was never sold as anything but a long term indicator (meaning at least 10 years). It's nothing that Benjamin Graham didn't do, but over 7 years instead of 10. The idea was to get completely through the business cycle and thus avoid the distortions in P/E that come from measuring it during boom years vs. bust years. I think that the general idea is sound, and the 'discovery' that valuations haven't mattered recently when you're well into a bull market run seems to be the most easily forgotten discovery in human history.
    They used to say that you could only have one bubble per generation because investors, having been caught up in one, would never forget it, but it seems that P. T. Barnum ("There's a sucker born every minute") and H. L. Mencken ("Nobody ever went broke betting on the stupidity of the American Public") may have had a point.
  • Monte Carlo is a Reliable Workhorse
    Hi Vert,
    Nice post. I particularly liked your closing statement: “The inherent uncertainty of the future cannot be escaped.” I completely agree; I hope my postings give proper recognition of that inescapable conclusion. Monte Carlo analyses shine under those cloudy circumstances.
    Monte Carlo methods allow a rapid assessment of risks under numerous potential scenarios. By examining a plethora of possible happenings, the odds of likely outcomes can be estimated. Hundreds, even thousands, of randomly selected cases are calculated for each input run. The value of Monte Carlo simulation rests in its exploration of these uncertain outcomes.
    Of course, the more realism, in terms of modeling influential parameters and real world data, that can be introduced into the simulation inputs, the more reliable will be the odds estimates. In World War II, convoy routes and screening strategies, and attack submarine groupings and tactics were evaluated using rudimentary Monte Carlo modeling tools.
    Along with your cautionary comments, I would emphasize that the simulation outputs are merely approximate probabilities. They should be interpreted just like horse racing odds – no guarantees whatsoever. The resultant odds change with any modifications to the input parameters.
    The power of the Monte Carlo codes is that they permit sensitivity, “what-if”, studies. Input values can be conveniently adjusted to search for exploitable trends that move the odds towards more likely and more attractive outcomes. These outcomes are forever tied to the inputs. I hope that I clearly made that point. Garbage in, garbage out always applies.
    The inputs could reflect past performance data or any perturbations that the code user elects to test. His choices and any special input preferences will be reflected in the output probabilities. Only the user can judge the merits and shortcomings of his analysis.
    I understand that neophyte users might be tempted to overly trust any output that has seemingly very precise number values. That’s a cardinal sin; it is only an artifact of the computer’s number crunching and display power. The overarching uncertainties of future returns remains a mystery. The Monte Carlo analyses merely identifies the level of that risk, and perhaps an asset allocation mix that minimizes that risk. By all means, buyer beware.
    I’m sure you realize that portfolio standard deviation estimates are part of the investor Monte Carlo inputs. The portfolio standard deviation is calculated by holding weight factors and the correlation coefficient estimates for all the various portfolio positions. These too can be parametrically examined in the overall simulation process.
    Thank you so very much for your informed and discerning contribution to this exchange.
  • Monte Carlo is a Reliable Workhorse
    MJG, by your own statement, "These tools certainly can not predict future investment returns; nothing and nobody can. But they do provide guidance and awareness of the risks..."
    Well, it seems to me that since they certainly can not predict future returns, the guidance they can provide as to future risk only will extend through the range of vague to misleading, nothing more. Sticking to the 'vague' portion of that spectrum, that's nice and no doubt better than nothing, but I can give plenty of other ways to provide vague guidance towards risk:
    1. Check the investment's standard deviation. The higher the deviation, the greater the risk.
    2. Check the investment's correlation to something else you own. Negative correlation (if continued into the future, and that's the 'if' that makes this vague) will reduce the risk of adding it to your portfolio.
    3. Higher valuations (by whatever ratio) of whatever investment increases the risks of losing money on that investment.
    And so on and so forth. I'd guess that the most dangerous things about Monte Carlo simulations are the spurious probability numbers that they spit out. The unsuspecting investor is likely to treat these as possessing an exactitude which they simply do not possess.
    For my tastes, historical drawdown ratios are a far more concrete way to get guidance as to the risks involved with investments. These are vague, too, since history at best rhymes (rather than repeats itself), but, as I say, the best way is probably more a matter of taste than anything else, which follows from the inherent vagueness of every method. The inherent uncertainty of the future cannot be escaped.
  • Mining Funds...one step forward two steps back
    Another Step Back 3:25 PM Seeking Alpha
    GDX
    Gold miner ETF sinks to five-year low, gold closes at lowest since July
    The Market Vectors Gold Miners ETF (GDX -5.5%) plunges to a fresh five-year low thanks to the newest PMI manufacturing data, which climbed to the highest reading since 2011; BTIG analyst Dan Greenhaus calls the data "stunning,” and bad for precious metals.Comex gold dropped $28.50, or 2.3%, to settle at $1,221.90 for its lowest close since July; the SPDR Gold Trust (GLD) is down 2.5% to kick off December’s trading.Silver slumped 3.7% to $19.29, also the lowest since July.ABX -5.3%, NEM -3.8%, GG -4.6%, KGC -3.4%, GFI -3.5%, NGD -8.2%, EGO -7.5%, AEM -7%, AUY -5.5%, AGI -8.9%, SLW -5.7%.Other ETFs: GDXJ, NUGT, IAU, PHYS, DUST, SGOL, UGL, DGP, GLL, GLDX, DZZ, UGLD, DGL, DGZ, AGOL, GLDI, DGLD, GGGG, RING, PSAU, TBAR, JNUG, UBG, JDST, SLV, AGQ, SIVR, ZSL, USLV, DBS, DSLV, SLVO, USV.
    Not a precious metal miner,but a continuing trend:via S A
    RIO
    Rio Tinto plans to cut capital spending 20% each year through 2015
    Rio Tinto (RIO) is the latest miner to guide capital spending lower, announcing a 20% capex cut in each of the next three years to ~$8B in 2015; iron ore output will reach ~350M metric tons/year.In an investor presentation to be delivered tomorrow, RIO says its YTD spending is ~50% lower than in 2012 and has already exceeded its target of $750M in full-year spending on exploration and evaluation.
    Casey Research
    Rock & Stock Stats
    Last
    One Month Ago
    One Year Ago
    Gold 1,252.10 1,345.50 1,729.50
    Silver 20.03 22.49 34.35
    Copper 3.19 3.28 3.59
    Oil 92.72 98.20 88.07
    Gold Producers (GDX) 22.28 25.78 48.04
    Gold Junior Stocks (GDXJ) 32.50 39.26 87.60
    Silver Stocks (SIL) 11.65 13.32 23.03
    TSX (Toronto Stock Exchange) 13.395.40 13,440.61 12,202.85
    TSX Venture 934.89 968.44 1,218.38
  • Rising Interest Rates Weigh On Real Estate Funds
    From Seeking Alpha
    Gundlach: Time to buy interest rate risk
    "People are absolutely freaking out about interest-rate risk," says Jeff Gundlach, sitting down with Robert Shiller to size up the investment landscape. Ever the contrarian, Gundlach suggests last year's 1.4% low in the 10-year Treasury yield could still get taken out. The catalyst? "You never know until after the fact; otherwise, it would be priced in the market. But there is no inflation." To see "freaking out" in a picture, check out the price charts of the mortgage REITs, particularly the two proxies for riding the long end of the curve - Annaly (NLY) and American Capital Agency (AGNC). Gundlach: "You can take advantage of pockets of opportunity in what people don't want ... If you're willing to take the interest-rate [risk], you can get yields of 11% in the agency mortgage market."Constructive on housing (but not homebuilders), Gundlach is also bullish on non-agency mortgage paper, calling it the cheapest sector in fixed income on a risk-adjusted basis. Fans of also beaten-up non-agency mREITs like American Capital Mortgage (MTGE), MFA Financial, Dynex (DX), and Two Harbors (TWO) may want to take notice.Mortgage REIT ETFs: REM, MORT, MORLLong-duration Treasury ETFs: TBT, TLT, TMV, TBF, EDV, TTT, TMF, TLH, ZROZ, SBND, DLBS, VGLT, UBT, TLO, LBND, TENZ, TYBS, DLBL
    Also A Good Read
    Thirdly, monetary policy is being enlisted to try to generate the economic growth that politicians need to meet spending and entitlement pledges made to voters.
    "Long term, it's not so much a financial crisis that we face. It's more a political and social crisis because these promises that we have made for ourselves will be broken," King told the BreakingViews conference.
    Seen in that light, if the West is in the grip of ‘secular stagnation', as Summers suggested, the welfare state will have to shrink or taxes will have to rise to pay for it.
    http://www.reuters.com/article/2013/11/29/us-economy-global-stagnation-insight-idUSBRE9AS03O20131129
  • Question on Core Bond Funds
    Regarding DoubleLine Total Return - there are two different issues here. One is whether a MBS fund is a good idea, and the other is whether Grundlach (and DoubleLine) is the best way to get such a fund.
    I'll discuss each of these below, but my personal opinion on each question is "no".
    Despite being called a "total return" fund, Grundlach (along with his flagship fund) is essentially an MBS bond manager. That's the way he ran TCW Total Return, and the way he continues running his new charge. As good as he is within this sector, a fund like this seems to be what you are asking to escape - a fund that is locked into one sector of the market (albeit able to move along the yield curve within the sector). Also one that makes heavy use of derivatives (like Bill Gross at PIMCO).
    Don't get me wrong - I like intelligent use of derivatives. The fact that Bob Rodriguez makes use of interest only bonds (a form of inverse floater) is one of the things that attracted me to FPA New Income (FPNIX). But unlike that fund, which uses derivatives in moderation to reduce risk, Grundlach and Gross seem to make their use a core part of their strategy. These tend to be less liquid and as M* notes (in its analysis of DoubleLine Total Return), puts the funds at more risk in times of stress.
    As a sector, MBS bonds command a somewhat higher yield, because of their lower (or even negative) convexity. This works to one's advantage in a stable, or even gradually and smoothly rising interest rate environment, but these bonds can take a pounding when interest rates are unstable or rapidly rising. Not a risk I would personally take now, at least not one where I would place 100% of my money as DoubleLine does.
    For the past few years, there's been an anomaly in the market that has mitigated some of the normal MBS risk. With many homes under water, people were less able to refinance, so mortgages behaved more like "normal" bonds. Housing prices have recovered in many (albeit not all) parts of the country, so MBS securities may be approaching their traditional risk levels.
    Assuming one does want a MBS fund, why Grundlach? One has to ask whether his old charge TCW Total Return, would be a better choice. With the latter, you get MetWest, which you seem to like as a management company. While Grundlach did better out of the gate (2H2010-11), that was with heavy use of derivatives - see above - and with a much smaller fund. He's now got a fund that's 4.5x as large as TCW, and has underperformed the MetWest team in 2012 and 2013. (Except for 2Q 2013, he's underperformed each quarter.)
    It's not as though he's using a different strategy - various attributes of the two funds' portfolios - sectors, duration, credit ratings, are extremely similar (though TCW seems to have a small but not insignificant amount of short maturity bonds that are lacking in the DoubleLine portfolio).
    Fundamentally though, I don't see any MBS fund meeting your interest in a fund that makes use of the full bond market. And I think their risk is rising as the possibility of "tapering" increases (simply because that roils the market).
  • sticking w/ dodge cox stock pays off big
    Reply to @Ted: Who said otherwise? It looks great, but greater than it arguably is, because it's just escaped that bad window period. Do the math, check the graphs, rather than attempting to contradict something illusory. You of all analytic types here would snort at a valentine article about 'sticking with something pays off' without sufficiently noting sample periods, reversion to mean, risk-adjusted returns in detail for tough times, overall risk compared with peers, and the like. Patience required, as M* puts it. Some would ask about its ulcer index compared with YAFFX, say.
  • A Measure Of Active Management
    Not having read the studies, I may be way off base, but IF active managers show persistence in exceeding their benchmarks, the citations in other older posts that almost no fund managers exceed index funds through two market cycles seems contradictory. Either the number of active funds is so small or the funds are so small that they escaped notice and weren't compared to indexers or the quoted study didn't include enough cycles. My vague recollection is that fewer than 1% of funds exceeded the index funds through three market cycles, but that could be an invented memory.
    Alternatively, the successful funds attracted so many assets that they had to fail due to a dearth of good ideas, requiring money to be shoved into "safe" stocks and returning to their benchmark.
  • Risk Management with MF portfolio
    Decided to go with the CAPE or PE10 slopes and sold most of my recent mutual fund gains while keeping the base positions (probably should have sold more, but I can't make myself leave good funds). I didn't sell the L/S funds, but I may reconsider the long predominant funds.
    Plan to put most of it into RSIVX and try to control my impatience.
    My pending buys require a 10% correction.
    Haven't reduced my stocks, probably a mistake, but I'm not paying 1-1.5% a year for them, and most pay a dividend.
    Didn't sell in 2008-9, but was younger then. Won't sell if it happens within 3 years. Plan to be more balanced after that.
    Fund managers generally did no better than the indexes in 2008-9. Those with significant cash now are preparing for the next correction, so they might be worth buying.
    Depending on your age and risk acceptance, using index funds with 50-70% US stocks and the remainder of your stocks in international indexes, and 20% (high risk acceptance) in bonds (most writers suggest all US, but I like some international thru Vanguard), or 40% bonds (usual ratio)) has been good in the past. If near retirement, Social Security represents a bond equivalent, as per John Bogle, who has a lot more experience and is older than I, so you should shade your investments more toward stocks.
  • Foreign Bond Exposure
    Reply to @willmatt72: Thanks for the question. I've used RPIBX only sparingly in the past and currently hold only Oppenheimer's OIBAX in that segment, which I think is the better fund. Yes - lackluster performance as you say
    Let me guess: (1) Price's fixed income funds weren't very good up until around 2004 or 2005 when Mary Miller became head of their fixed Income division. (She has since left for a position at Treasury.) Apparently, Mary's positive influence somehow escaped this fund. (2) Price's foreign investing over the years hasn't been a strong suite either, and that may have impacted this fund. (3) RPIBX holds little, if any, in lower quality and EM debt, sticking pretty much with investment grade paper. In the past this resulted in its lagging funds like OIBAX, which holds a sizable chunk of such debt. While it's true EMs have suffered this year, higher quality paper in interntional markets hasn't escaped damage either as the Dollar soared against major world currencies - a consequence of rising rates at home and falling rates abroad (especially in the developed nations of Europe where RPIBX has significant holdings.) Higher credit quality tends to increase a bond's sensitivity to interest rates and currency fluctuations.
    Those are my three best guesses as to what's going on there. It's likely some combination of all three. Let me say: I'd never expect RPIBX to be a sector leader, mainly because Price is a conservative house who generally won't play games to enhance returns in its fixed income funds (an area where additional risks are often taken in search of yield). Nonetheless, I would expect RPIBX to rank somewhere among the top 25% - 35% of its peers - which it presently does not. And all this said, I still recommend Spectrum Income (RPSIX) as a very good fund that might meet your needs. Price seems to excell at making allocation decisions. And the other international income fund it holds, PREMX, is generally very well regarded.