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On Risk

On Risk

Justice Potter Stewart’s most famous line is the one that he most regretted:

I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [“hard-core pornography”], and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that. Concurring Opinion, Jacobellis v. Ohio, 378 U.S. 184 @ 197 (1964)

In 1981 he lamented “having said what I said about obscenity—that’s going to be on my tombstone.”

Many investors have the same difficulty with risk that Justice Stewart had with “hard-core pornography,” they are not quite able to define it though they’re pretty sure they know it when they see it. Given that we seem to have entered a period when risk is going to be on a lot of minds, it’s important to understand what it actually is Continue reading →

21 In 21 Plus Annuity Modeling and New Taper Periods

We posted month ending January 2022 performance to MFO Premium site early Thursday morning, 3 February. Pretty tough month! Nearly all funds should be included in this “incremental” drop from Refinitiv, but any omissions will be incorporated in the full monthly drop on Saturday.

We hosted our year-end review webinar on 4 January. Thank you again to all who participated! I benefit from these sessions just as much as I hope you do. It was the third consecutive year in which most domestic equity funds did Continue reading →

Intrepid Income Fund (ICMUX), February 2022

Objective and strategy

The fund’s goal is to generate current income. In particular, they want to offer an attractively higher yield than comparable maturity US Treasury securities without taking significant default or interest rate risk.

The managers invest primarily in shorter duration corporate bonds, both investment grade, and high yield. They might also own other income-producing securities such as securitized loans and convertible securities. Generally, the majority of securities in the portfolio are part of smaller issues of less than $500 million.

Comments

For investors, there is only one risk: Continue reading →

Early Cycle Metrics and Expanded MultiSearch Headers

One of the earliest articles in my tenure with MFO was entitled “Ten Market Cycles.” It characterized the risk and return metrics of the S&P500 during full market cycles (comprising bear and bull markets) beginning in the mid-1950s. This piece evolved through the years using month-ending instead of day-ending prices, making it a little easier to see the big picture, and adding new cycles. The series, if you will, is Continue reading →

Comparing Fidelity Strategic and Multi-Asset Income Funds (FADMX, FMSDX, FSRRX)

This article takes a closer look at Fidelity Advisor Multi-Asset Income (FMSDX/FAYZX), Fidelity Strategic Real Return (FSRRX), and Fidelity Advisor Strategic Income (FADMX/FSIAX) which I have identified in previous articles as funds with high risk-adjusted-performance. They are managed by Adam Kramer, Ford O’Neil, and a strong team of co-managers.

This article continues the theme from the long-term trends identified in Retrospection Is a Hard Metric to Match. Recently Lance Roberts wrote Deficit Deniers & 40-Years of Economic Erosion covering the same 40 year period but emphasizes Continue reading →

Between Scylla and Charybdis

“What is this optimism?” asked Cacambo.
“Alas!” said Candide, “it is the madness of maintaining that everything is right when it is wrong.”

~ Voltaire, Candide: or, The Optimist (1762)

Suffice it to say that September was not an easy month for equity investors. The equity markets entered the month overextended in terms of valuation metrics. And by the Continue reading →

Retrospection is a Hard Metric to Match

I turned 66 last week and bought a retirement home in Colorado last month. By most measures, I am prepared for retirement with pensions, social security, and savings. I continue to work for several reasons including the uncertainties of markets facing seismic shifts. In the 50 years since I was in high school, so much has changed, both good and bad. These secular trends that have occurred in my life have significance for young and old investors. As Bear Bryant said, “Offense sells tickets, but defense wins championships.”

In Section #1 I look at seven long term trends that will Continue reading →

Rondure Overseas Fund (ROSOX/ROSIX), December 2020

Objective and strategy

Rondure Overseas invests, primarily, in the stocks of corporations located in developed markets outside of the US. The managers pursue a benchmark-agnostic, active style that allows them to invest in stocks of any size. In general, they aspire to invest in great companies at good prices. They have the freedom to invest in good companies at great prices, but the wisdom to play that game rarely.

The quantitative markers of being a great company include strong balance sheets, stable free cash flows, and high returns on capital. The qualitative markers are “compelling competitive advantages,” which might include elements of the business niche and strong, responsible leadership.

The portfolio currently holds Continue reading →

A Thirty Year Proposition

New Bull Emerges in a Market Riskier Than It Appears

The S&P 500 is once again at all-time highs.

Month ending July 2020 total return data indicated the S&P 500 index had recovered all of its March drawdown, officially marking the end of the CV-19 bear and declaring a new bull market, which began last April. Unlike bears, which are announced as soon as the market swoons 20% from previous peak, bulls are known only in retrospect … although granted definitions vary. Commonly, a bull needs to climb 20% off its last maximum drawndown and subsequently go on to achieve its next all-time high; basically, it needs to get back above water before becoming official. That happened in July.

The following table summarizes the US bear and bull markets dating back to the Great Depression, which updates the version Continue reading →

Alternative and Global Funds during a Global Recession

I am selective in the analysts that I receive market commentary from. They are overwhelmingly cautious. The buzz word “FOMO or Fear Of Missing Out” is used to describe retail investors piling into markets. The quote that sums up my feelings best comes from Liz Ann Sonders of Charles Schwab in “High Hopes: S&P 500 Hits All Time High Amid Pandemic/Recession”, published on Advisor Perspectives.

I worry about the signs of froth in the market and among some behavioral measures of investor sentiment: not to mention traditional valuation metrics that are historically stretched. This is not an environment in which greed should dominate investment decisions; but instead one for discipline around diversification and periodic rebalancing…

This article looks at a brief Continue reading →

The Sparrow’s Revenge

“The only way to success in American public life lies in flattering and kowtowing to the mob.” H.L. Mencken, “On Being an American” (1922)

Plague Investing

A question with which I am regularly peppered (and which I usually decline to answer) is how one should invest during this rather chaotic time. The short answer – circumstances continue to evolve so much, both from a public Continue reading →

Snowball’s Indolent Portfolio

A tradition dating back to the days of FundAlarm was to annually share our portfolios, and reflections on them, with you.

Four rules have governed my portfolio for the past 15 years or so.

  1. I maintain a stock-light asset allocation.

For any goal that’s closer than 10-15 years away, stock investing is speculation. Stocks rise and fall far more dramatically than other investments and, once they’ve fallen, it sometimes feels like they can’t get up. Equity income funds are typically very conservative vehicles, and yet they took four years to regain their October 2007 peaks. International large cap core funds took seven years to reach break-even while domestic large-cap core funds were underwater for five-and-a-half years. The worst-hit categories languished for nine years.

Research conducted by T. Rowe Price and shared here, on several occasions, led me to conclude that I wouldn’t gain much from a portfolio that exceeds 50% stocks. My target allocation is 50% income (half in cash-like investments, half in somewhat riskier ones) and 50% growth (half in firms domiciled in the US and half elsewhere). Based on a review of 70 years of returns (1949-2018), this allocation would typically Continue reading →

Rule #2: Know the Short and Long Term Investment Environment

While writing this article, I am reminded of Alan Greenspan’s comment about “irrational exuberance” in 1996 and Ben Bernanke coining the phrase “global savings glut” in 2005. Roughly three years later we had the bursting of the Technology Bubble and the Housing Crisis. We now have inflated asset prices due to nearly of decade of “Quantitative Easing”. The CNN Fear and Greed Index is a Continue reading →

San Francisco Treat

“Go West, young man, go West and grow up with the country.” ― Horace Greeley

My home state of California rates a close second to Pennsylvania.

On what scale?

Assets under management (AUM) by the fund companies.

At $6 trillion, it sports twice the AUM of New York.

While Pennsylvania is home to fund behemoth Vanguard, California is home to about Continue reading →

Vanguard – I can get it for you retail!

By Ira Artman, December 2019

Do we pay attention to the competitive environment? Absolutely. Are we reactive to what one competitor does? Absolutely not…

Investors always have to ask themselves when they see an offering like this [zero fee expense ratio mutual funds], ‘What’s the catch?”‘ The question becomes what else are investors going to be charged in other products? … Continue reading →

Liquidity Risks and Warnings

What’s the worst that could happen? Managers’ own words on liquidity risks

Liquidity seems like an awfully esoteric concern, something akin to “coverage ratios” or “yield to call calculations.” In general, it feels like background noise.

Your fund managers disagree. New research estimates that 50% of high-yield funds and, more importantly, 15% of all fixed-income funds are vulnerable to a liquidity crunch. To understand what that means, you first need to understand that “liquidity” means. If you need to polish up your understanding of the term – or your ability to explain it to clients – start with the section entitled What’s Liquidity? If you’re rock solid on the concept, then jump ahead to Welcome to a Liquidity Crisis. Continue reading →

Getting What You Paid For: High capture ratio funds

Investors are interested in returns: the answer to the question, “how much are you going to make me?” Sophisticated investors are interested in how those returns are delivered.

Over the current market cycle, Fidelity Blue Chip Growth (FBGRX) has returned 10.7%, among the best of all funds. AMG Yacktman Focus (YAFFX) trails it at 10.5% and costs a lot more to boot (1.27% versus 0.72%). On surface, that’s pretty clear: Fido offers Continue reading →

Sideways Markets

Every strategy should be evaluated not just on a “benefit of being right”, but at least as importantly, on a “cost of being wrong”, basis…

– The Little Book of Sideways Markets, Vitaliy N. Katsenelson

I just finished The Little Book of Sideways Markets (2010) by Vitaliy N. Katsenelson. Mr. Katsenelson is a value investor, an author and CEO of a small but classy Colorado investment advisor; he offers a singularly engaging personal bio on his well-read Contrarian Edge blog. His two books cover the same ground, but are written for different audiences: professional (Active Value Investing) and lay (The Little Book of Sideways Markets). His concern here is with markets that can go up and down for 10 or 20 years and end up near where they started. In this article, I look at investing in a turbulent market which I believe will occur over the Continue reading →

Overachieving defenders: Your late-cycle shopping list

Investors are pulled by three competing forces just now.

Force One: The market is going to crash soon enough.

Longest bull market in US history. Valuations, based on 10-year CAPE or Shiller average, have only been higher twice in market history: 1929 and 2000. Record earnings, which make stocks look cheaper, are starting to wobble. Economic policy is being made by tweet by a guy still in his jammies. Trade war. Brexit. $1,200,000,000,000 federal budget Continue reading →