It was the best of times, it was the worst of times…
So far, August is among the strangest month for fund investors since before we started MAXfunds.com in 1999. In fact, it’s in one of the strangest months since we first got into the mutual fund business over 15 years ago…certainly up there with the Asian contagion, the Russian bond default, the dot com crash, and the junk bond crash.
On the one hand, we’re very happy with our portfolios overall performance. As readers know, we have been cutting back on many hot fund categories and recently did a substantial trade across all portfolios and eased up on stocks in general. Our timing was impeccable. The day our trade alert went out the market was within a fraction of a percent of the peak in the market for this year. It was a great time to move into longer term bonds – not far off from the peak in interest rates for the year. It was a great time to get out of international stocks, go into growth stocks, and get out of junk bonds.
In July the S&P 500 was down a sharp 3.1%. Worse, small cap stocks were down over 5%. Don’t even ask about foreign markets. The FTSE or “footsie” a key European index, was down almost 6% - much of it in the last few days of July. So far August is even worse. Yesterday the Japanese market fell over 5% in one day. As we’ve noted, the vast majority of new money going into mutual funds this year was and is going into foreign funds. 2007 will likely be another year where fund investors underperform because of their performance chasing ways.
Longer term bonds were up a smart 2.4% as panicky investors bought safety. Yet all was not rosy for bonds. Anything with credit risk was hit hard – safe bonds went up in value, unsafe bonds fell. Long time holdings Vanguard High Yield Corporate fell 3.3% in July. Fortunately we told you get out of this fund before the crash. As we noted at the time of the trade announcement, we were concerned that there was no longer an increased return for the increased risk – junk bonds only paid a little more than ultra safe treasury bonds. Why take on the default risk?
We expect this market action to lead to opportunities. Let’s not forget we used to have 15% stakes in junk bond funds back when they were cheap a few years ago (and 10% stakes in emerging market bonds). We’ve been cutting back ever since and if we can get 5% or more over a treasury bond, we’ll get right back in there.
Because of our recent trades we had a very good month. Three of our portfolio were actually up in July. Only one – low minimum, which because of the restrictions we have choosing funds is not or most dynamic portfolio – was down over 1% (-1.07% to be exact). Moderate, Growth, and Aggressive growth were down just 0.50%, 0.63%, and 0.51% respectively. Daredevil was up 0.27%, Safety was up 0.75%, Moderate up 0.23%. Our stock-oriented portfolios are now all beating the S&P 500 for the year, and factoring in early August, all of our portfolio will be ahead of the benchmark.
Our stock and bond funds did well. Most of our stock funds had good months relative to the market: Janus Global Research (JARFX) was up 0.07%, Gateway (GATEX) was down 1.06%, Bridgeway Balanced was down 0.46%, American Century Long Short was up 1.34%, Vanguard Growth ETF was down 1.56%, Technology SPDR (XLK) was down 0.72%, SPDR Biotech (XBI) was down 0.92%, and Bridgeway Blue Chip 35 was down 1.53%.
In fact, only a few funds took significant hits: HealthCare Select SPDR (XLV) was down 4.33%, Buffalo Mid Cap down 2.08%, SSgA Disciplined Equity (SSMTX) down 3.31%, ICON Healthcare (ICHCX) down 3.49%, Wasatch Heritage Growth (WAHGX) down 3.93%, Vanguard U.S. Value (VUVLX) down 4.81%.
Then there was the high risk/ high return story of the month: real estate tanking. We just doubled up our short real estate fund in our highest risk portfolio Daredevil. Ultra Short Real Estate ProShares (SRS) was up a stunning 18.96% in July, wiping out the losses in other stock funds and then some. Note that this is an extremely high risk short term holding used in conjunction with our more aggressive positions.
As you can see from our longer term returns, our stock-oriented portfolios tend to beat the S&P 500 with lower risk. 2006 was the only exception, when our squeamishness on stocks didn’t pay off. However, we’ve found that not falling as much as the S&P 500 during weak periods helps us beat the S&P 500 over time more than matching it during big moves up.
But despite our relative success last month, all was not well in our portfolios. We have some serious mistakes to report and we saved the worst for last…
In our safest portfolio – Safety- we currently have a 5% stake in what should be the safest fund of the bunch: SSgA Yield Plus (SSYPX). We have owned this fund since 2002, the very beginning of the Safety portfolio. The reason we own this fund is that cash sweep accounts at most brokers offer very little return – very often investors get as low as 0.5% interest. SSgA Yield Plus can often be bought for no transaction fee (NTF) at your discount broker, and historically pays about 0.5% more than most decent money market funds. The minimum is low ($1,000) and there is no short term redemption fee. This lets customers who follow our portfolios at brokers like Scottrade, Firstrade, and TD Ameritrade earn more money on their low risk cash.
SSgA Yield Plus fell 1.48% in July. This may not sound like a big deal, but for an ultra short bond fund that holds investment grade debt, this is very unusual. Unfortunately, the situation went from bad to worse. In early August, this fund fell about 6% in one day. This was not because of a dividend. It was because the fund’s holdings – mortgage backed securities – were repriced down to reflect the major troubles in the mortgage market. This was not the only ultra short bond fund to have this problem, though it was one of the most severe.
We wrote about this situation the day after the crash on the MAXfunds.com website (one week before Morningstar and the Wall Street Journal noticed). We also had a lengthy conversation with one of the fund managers about exactly what was going on.
But all this was still too late. Quite frankly we should have known better. Not only do we watch all of our funds closely, we have repeatedly warned investors about the troubles in real estate in general and mortgage backed bonds in particular.
What could go wrong with a top rated portfolio (by major bond rating agencies who get paid to research debt for risk) of low duration bonds? You have virtually no credit risk (or so everyone thought) and little interest rate risk. Quite frankly we were more concerned about the risky bond fund portfolios like Vanguard High Yield Corporate that actually own longer term low grade bonds – the double risk whammy in the bond world. In retrospect, we should have sold it on the percentage of mortgage bonds alone - damn the experts.
What next? The fund manager reminded us that these bonds are still paying, so the price drop in the fund means a higher yield. The numbers are not in, but this fund may be yielding about 6% now. Will there be another repricing? We’re not 100% sure. We don’t think another repricing will take place in the next few weeks, but we are more concerned investors leaving the fund will lead to a sell at any price situation for the fund manager. We are monitoring this fund closely, and if necessary we will post a trade in coming days.
Another situation we are watching closely is our new long short fund – American Century Long Short Equity (ALHIX). While this fund had a great July, it has dropped sharply in early August in a bizarre situation that has also slammed many hedge funds. Basically, the shorts the fund has invested in have spiked up in price while the longs have tanked. Nobody knows why for sure, but hedge funds (and this fund) are following similar computer models and are in the same stocks. Perhaps because of losses elsewhere (mortgage bonds…) they are unwinding positions to raise cash. This fund is also on watch for possible sale and we have already talked at length with American Century. We didn’t buy a long short fund to add more stock market risk to the portfolios – we wanted less.
Bottom line, there are serious troubles in the debt and equity markets these days. While we intend to increase our stock allocations on more significant weakness, the market and entire economy are on shaky ground – more so than at any time in recent years. We don’t mind too when our high risk funds drop every once in awhile. We do mind when safer funds start misbehaving. Stay tuned.
It was the best of times, it was the worst of times…
So far, August is among the strangest month for fund investors since before we started MAXfunds.com in 1999. In fact, it’s in one of the strangest months since we first got into the mutual fund business over 15 years ago…certainly up there with the Asian contagion, the Russian bond default, the dot com crash, and the junk bond crash.
On the one hand, we’re very happy with our portfolios overall performance. As readers know, we have been cutting back on many hot fund categories and recently did a substantial trade across all portfolios and eased up on stocks in general. Our timing was impeccable. The day our trade alert went out the market was within a fraction of a percent of the peak in the market for this year. It was a great time to move into longer term bonds – not far off from the peak in interest rates for the year. It was a great time to get out of international stocks, go into growth stocks, and get out of junk bonds.
In July the S&P 500 was down a sharp 3.1%. Worse, small cap stocks were down over 5%. Don’t even ask about foreign markets. The FTSE or “footsie” a key European index, was down almost 6% - much of it in the last few days of July. So far August is even worse. Yesterday the Japanese market fell over 5% in one day. As we’ve noted, the vast majority of new money going into mutual funds this year was and is going into foreign funds. 2007 will likely be another year where fund investors underperform because of their performance chasing ways.
Longer term bonds were up a smart 2.4% as panicky investors bought safety. Yet all was not rosy for bonds. Anything with credit risk was hit hard – safe bonds went up in value, unsafe bonds fell. Long time holdings Vanguard High Yield Corporate fell 3.3% in July. Fortunately we told you get out of this fund before the crash. As we noted at the time of the trade announcement, we were concerned that there was no longer an increased return for the increased risk – junk bonds only paid a little more than ultra safe treasury bonds. Why take on the default risk?
We expect this market action to lead to opportunities. Let’s not forget we used to have 15% stakes in junk bond funds back when they were cheap a few years ago (and 10% stakes in emerging market bonds). We’ve been cutting back ever since and if we can get 5% or more over a treasury bond, we’ll get right back in there.
Because of our recent trades we had a very good month. Three of our portfolio were actually up in July. Only one – low minimum, which because of the restrictions we have choosing funds is not or most dynamic portfolio – was down over 1% (-1.07% to be exact). Moderate, Growth, and Aggressive growth were down just 0.50%, 0.63%, and 0.51% respectively. Daredevil was up 0.27%, Safety was up 0.75%, Moderate up 0.23%. Our stock-oriented portfolios are now all beating the S&P 500 for the year, and factoring in early August, all of our portfolio will be ahead of the benchmark.
Our stock and bond funds did well. Most of our stock funds had good months relative to the market: Janus Global Research (JARFX) was up 0.07%, Gateway (GATEX) was down 1.06%, Bridgeway Balanced was down 0.46%, American Century Long Short was up 1.34%, Vanguard Growth ETF was down 1.56%, Technology SPDR (XLK) was down 0.72%, SPDR Biotech (XBI) was down 0.92%, and Bridgeway Blue Chip 35 was down 1.53%.
In fact, only a few funds took significant hits: HealthCare Select SPDR (XLV) was down 4.33%, Buffalo Mid Cap down 2.08%, SSgA Disciplined Equity (SSMTX) down 3.31%, ICON Healthcare (ICHCX) down 3.49%, Wasatch Heritage Growth (WAHGX) down 3.93%, Vanguard U.S. Value (VUVLX) down 4.81%.
Then there was the high risk/ high return story of the month: real estate tanking. We just doubled up our short real estate fund in our highest risk portfolio Daredevil. Ultra Short Real Estate ProShares (SRS) was up a stunning 18.96% in July, wiping out the losses in other stock funds and then some. Note that this is an extremely high risk short term holding used in conjunction with our more aggressive positions.
As you can see from our longer term returns, our stock-oriented portfolios tend to beat the S&P 500 with lower risk. 2006 was the only exception, when our squeamishness on stocks didn’t pay off. However, we’ve found that not falling as much as the S&P 500 during weak periods helps us beat the S&P 500 over time more than matching it during big moves up.
But despite our relative success last month, all was not well in our portfolios. We have some serious mistakes to report and we saved the worst for last…
In our safest portfolio – Safety- we currently have a 5% stake in what should be the safest fund of the bunch: SSgA Yield Plus (SSYPX). We have owned this fund since 2002, the very beginning of the Safety portfolio. The reason we own this fund is that cash sweep accounts at most brokers offer very little return – very often investors get as low as 0.5% interest. SSgA Yield Plus can often be bought for no transaction fee (NTF) at your discount broker, and historically pays about 0.5% more than most decent money market funds. The minimum is low ($1,000) and there is no short term redemption fee. This lets customers who follow our portfolios at brokers like Scottrade, Firstrade, and TD Ameritrade earn more money on their low risk cash.
SSgA Yield Plus fell 1.48% in July. This may not sound like a big deal, but for an ultra short bond fund that holds investment grade debt, this is very unusual. Unfortunately, the situation went from bad to worse. In early August, this fund fell about 6% in one day. This was not because of a dividend. It was because the fund’s holdings – mortgage backed securities – were repriced down to reflect the major troubles in the mortgage market. This was not the only ultra short bond fund to have this problem, though it was one of the most severe.
We wrote about this situation the day after the crash on the MAXfunds.com website (one week before Morningstar and the Wall Street Journal noticed). We also had a lengthy conversation with one of the fund managers about exactly what was going on.
But all this was still too late. Quite frankly we should have known better. Not only do we watch all of our funds closely, we have repeatedly warned investors about the troubles in real estate in general and mortgage backed bonds in particular.
What could go wrong with a top rated portfolio (by major bond rating agencies who get paid to research debt for risk) of low duration bonds? You have virtually no credit risk (or so everyone thought) and little interest rate risk. Quite frankly we were more concerned about the risky bond fund portfolios like Vanguard High Yield Corporate that actually own longer term low grade bonds – the double risk whammy in the bond world. In retrospect, we should have sold it on the percentage of mortgage bonds alone - damn the experts.
What next? The fund manager reminded us that these bonds are still paying, so the price drop in the fund means a higher yield. The numbers are not in, but this fund may be yielding about 6% now. Will there be another repricing? We’re not 100% sure. We don’t think another repricing will take place in the next few weeks, but we are more concerned investors leaving the fund will lead to a sell at any price situation for the fund manager. We are monitoring this fund closely, and if necessary we will post a trade in coming days.
Another situation we are watching closely is our new long short fund – American Century Long Short Equity (ALHIX). While this fund had a great July, it has dropped sharply in early August in a bizarre situation that has also slammed many hedge funds. Basically, the shorts the fund has invested in have spiked up in price while the longs have tanked. Nobody knows why for sure, but hedge funds (and this fund) are following similar computer models and are in the same stocks. Perhaps because of losses elsewhere (mortgage bonds…) they are unwinding positions to raise cash. This fund is also on watch for possible sale and we have already talked at length with American Century. We didn’t buy a long short fund to add more stock market risk to the portfolios – we wanted less.
Bottom line, there are serious troubles in the debt and equity markets these days. While we intend to increase our stock allocations on more significant weakness, the market and entire economy are on shaky ground – more so than at any time in recent years. We don’t mind too when our high risk funds drop every once in awhile. We do mind when safer funds start misbehaving. Stay tuned.
july 2007 performance review
It was the best of times, it was the worst of times…
So far, August is among the strangest month for fund investors since before we started MAXfunds.com in 1999. In fact, it’s in one of the strangest months since we first got into the mutual fund business over 15 years ago…certainly up there with the Asian contagion, the Russian bond default, the dot com crash, and the junk bond crash.
On the one hand, we’re very happy with our portfolios overall performance. As readers know, we have been cutting back on many hot fund categories and recently did a substantial trade across all portfolios and eased up on stocks in general. Our timing was impeccable. The day our trade alert went out the market was within a fraction of a percent of the peak in the market for this year. It was a great time to move into longer term bonds – not far off from the peak in interest rates for the year. It was a great time to get out of international stocks, go into growth stocks, and get out of junk bonds.
In July the S&P 500 was down a sharp 3.1%. Worse, small cap stocks were down over 5%. Don’t even ask about foreign markets. The FTSE or “footsie” a key European index, was down almost 6% - much of it in the last few days of July. So far August is even worse. Yesterday the Japanese market fell over 5% in one day. As we’ve noted, the vast majority of new money going into mutual funds this year was and is going into foreign funds. 2007 will likely be another year where fund investors underperform because of their performance chasing ways.
Longer term bonds were up a smart 2.4% as panicky investors bought safety. Yet all was not rosy for bonds. Anything with credit risk was hit hard – safe bonds went up in value, unsafe bonds fell. Long time holdings Vanguard High Yield Corporate fell 3.3% in July. Fortunately we told you get out of this fund before the crash. As we noted at the time of the trade announcement, we were concerned that there was no longer an increased return for the increased risk – junk bonds only paid a little more than ultra safe treasury bonds. Why take on the default risk?
We expect this market action to lead to opportunities. Let’s not forget we used to have 15% stakes in junk bond funds back when they were cheap a few years ago (and 10% stakes in emerging market bonds). We’ve been cutting back ever since and if we can get 5% or more over a treasury bond, we’ll get right back in there.
Because of our recent trades we had a very good month. Three of our portfolio were actually up in July. Only one – low minimum, which because of the restrictions we have choosing funds is not or most dynamic portfolio – was down over 1% (-1.07% to be exact). Moderate, Growth, and Aggressive growth were down just 0.50%, 0.63%, and 0.51% respectively. Daredevil was up 0.27%, Safety was up 0.75%, Moderate up 0.23%. Our stock-oriented portfolios are now all beating the S&P 500 for the year, and factoring in early August, all of our portfolio will be ahead of the benchmark.
Our stock and bond funds did well. Most of our stock funds had good months relative to the market: Janus Global Research (JARFX) was up 0.07%, Gateway (GATEX) was down 1.06%, Bridgeway Balanced was down 0.46%, American Century Long Short was up 1.34%, Vanguard Growth ETF was down 1.56%, Technology SPDR (XLK) was down 0.72%, SPDR Biotech (XBI) was down 0.92%, and Bridgeway Blue Chip 35 was down 1.53%.
In fact, only a few funds took significant hits: HealthCare Select SPDR (XLV) was down 4.33%, Buffalo Mid Cap down 2.08%, SSgA Disciplined Equity (SSMTX) down 3.31%, ICON Healthcare (ICHCX) down 3.49%, Wasatch Heritage Growth (WAHGX) down 3.93%, Vanguard U.S. Value (VUVLX) down 4.81%.
Then there was the high risk/ high return story of the month: real estate tanking. We just doubled up our short real estate fund in our highest risk portfolio Daredevil. Ultra Short Real Estate ProShares (SRS) was up a stunning 18.96% in July, wiping out the losses in other stock funds and then some. Note that this is an extremely high risk short term holding used in conjunction with our more aggressive positions.
As you can see from our longer term returns, our stock-oriented portfolios tend to beat the S&P 500 with lower risk. 2006 was the only exception, when our squeamishness on stocks didn’t pay off. However, we’ve found that not falling as much as the S&P 500 during weak periods helps us beat the S&P 500 over time more than matching it during big moves up.
But despite our relative success last month, all was not well in our portfolios. We have some serious mistakes to report and we saved the worst for last…
In our safest portfolio – Safety- we currently have a 5% stake in what should be the safest fund of the bunch: SSgA Yield Plus (SSYPX). We have owned this fund since 2002, the very beginning of the Safety portfolio. The reason we own this fund is that cash sweep accounts at most brokers offer very little return – very often investors get as low as 0.5% interest. SSgA Yield Plus can often be bought for no transaction fee (NTF) at your discount broker, and historically pays about 0.5% more than most decent money market funds. The minimum is low ($1,000) and there is no short term redemption fee. This lets customers who follow our portfolios at brokers like Scottrade, Firstrade, and TD Ameritrade earn more money on their low risk cash.
SSgA Yield Plus fell 1.48% in July. This may not sound like a big deal, but for an ultra short bond fund that holds investment grade debt, this is very unusual. Unfortunately, the situation went from bad to worse. In early August, this fund fell about 6% in one day. This was not because of a dividend. It was because the fund’s holdings – mortgage backed securities – were repriced down to reflect the major troubles in the mortgage market. This was not the only ultra short bond fund to have this problem, though it was one of the most severe.
We wrote about this situation the day after the crash on the MAXfunds.com website (one week before Morningstar and the Wall Street Journal noticed). We also had a lengthy conversation with one of the fund managers about exactly what was going on.
But all this was still too late. Quite frankly we should have known better. Not only do we watch all of our funds closely, we have repeatedly warned investors about the troubles in real estate in general and mortgage backed bonds in particular.
What could go wrong with a top rated portfolio (by major bond rating agencies who get paid to research debt for risk) of low duration bonds? You have virtually no credit risk (or so everyone thought) and little interest rate risk. Quite frankly we were more concerned about the risky bond fund portfolios like Vanguard High Yield Corporate that actually own longer term low grade bonds – the double risk whammy in the bond world. In retrospect, we should have sold it on the percentage of mortgage bonds alone - damn the experts.
What next? The fund manager reminded us that these bonds are still paying, so the price drop in the fund means a higher yield. The numbers are not in, but this fund may be yielding about 6% now. Will there be another repricing? We’re not 100% sure. We don’t think another repricing will take place in the next few weeks, but we are more concerned investors leaving the fund will lead to a sell at any price situation for the fund manager. We are monitoring this fund closely, and if necessary we will post a trade in coming days.
Another situation we are watching closely is our new long short fund – American Century Long Short Equity (ALHIX). While this fund had a great July, it has dropped sharply in early August in a bizarre situation that has also slammed many hedge funds. Basically, the shorts the fund has invested in have spiked up in price while the longs have tanked. Nobody knows why for sure, but hedge funds (and this fund) are following similar computer models and are in the same stocks. Perhaps because of losses elsewhere (mortgage bonds…) they are unwinding positions to raise cash. This fund is also on watch for possible sale and we have already talked at length with American Century. We didn’t buy a long short fund to add more stock market risk to the portfolios – we wanted less.
Bottom line, there are serious troubles in the debt and equity markets these days. While we intend to increase our stock allocations on more significant weakness, the market and entire economy are on shaky ground – more so than at any time in recent years. We don’t mind too when our high risk funds drop every once in awhile. We do mind when safer funds start misbehaving. Stay tuned.
It was the best of times, it was the worst of times…
So far, August is among the strangest month for fund investors since before we started MAXfunds.com in 1999. In fact, it’s in one of the strangest months since we first got into the mutual fund business over 15 years ago…certainly up there with the Asian contagion, the Russian bond default, the dot com crash, and the junk bond crash.
On the one hand, we’re very happy with our portfolios overall performance. As readers know, we have been cutting back on many hot fund categories and recently did a substantial trade across all portfolios and eased up on stocks in general. Our timing was impeccable. The day our trade alert went out the market was within a fraction of a percent of the peak in the market for this year. It was a great time to move into longer term bonds – not far off from the peak in interest rates for the year. It was a great time to get out of international stocks, go into growth stocks, and get out of junk bonds.
In July the S&P 500 was down a sharp 3.1%. Worse, small cap stocks were down over 5%. Don’t even ask about foreign markets. The FTSE or “footsie” a key European index, was down almost 6% - much of it in the last few days of July. So far August is even worse. Yesterday the Japanese market fell over 5% in one day. As we’ve noted, the vast majority of new money going into mutual funds this year was and is going into foreign funds. 2007 will likely be another year where fund investors underperform because of their performance chasing ways.
Longer term bonds were up a smart 2.4% as panicky investors bought safety. Yet all was not rosy for bonds. Anything with credit risk was hit hard – safe bonds went up in value, unsafe bonds fell. Long time holdings Vanguard High Yield Corporate fell 3.3% in July. Fortunately we told you get out of this fund before the crash. As we noted at the time of the trade announcement, we were concerned that there was no longer an increased return for the increased risk – junk bonds only paid a little more than ultra safe treasury bonds. Why take on the default risk?
We expect this market action to lead to opportunities. Let’s not forget we used to have 15% stakes in junk bond funds back when they were cheap a few years ago (and 10% stakes in emerging market bonds). We’ve been cutting back ever since and if we can get 5% or more over a treasury bond, we’ll get right back in there.
Because of our recent trades we had a very good month. Three of our portfolio were actually up in July. Only one – low minimum, which because of the restrictions we have choosing funds is not or most dynamic portfolio – was down over 1% (-1.07% to be exact). Moderate, Growth, and Aggressive growth were down just 0.50%, 0.63%, and 0.51% respectively. Daredevil was up 0.27%, Safety was up 0.75%, Moderate up 0.23%. Our stock-oriented portfolios are now all beating the S&P 500 for the year, and factoring in early August, all of our portfolio will be ahead of the benchmark.
Our stock and bond funds did well. Most of our stock funds had good months relative to the market: Janus Global Research (JARFX) was up 0.07%, Gateway (GATEX) was down 1.06%, Bridgeway Balanced was down 0.46%, American Century Long Short was up 1.34%, Vanguard Growth ETF was down 1.56%, Technology SPDR (XLK) was down 0.72%, SPDR Biotech (XBI) was down 0.92%, and Bridgeway Blue Chip 35 was down 1.53%.
In fact, only a few funds took significant hits: HealthCare Select SPDR (XLV) was down 4.33%, Buffalo Mid Cap down 2.08%, SSgA Disciplined Equity (SSMTX) down 3.31%, ICON Healthcare (ICHCX) down 3.49%, Wasatch Heritage Growth (WAHGX) down 3.93%, Vanguard U.S. Value (VUVLX) down 4.81%.
Then there was the high risk/ high return story of the month: real estate tanking. We just doubled up our short real estate fund in our highest risk portfolio Daredevil. Ultra Short Real Estate ProShares (SRS) was up a stunning 18.96% in July, wiping out the losses in other stock funds and then some. Note that this is an extremely high risk short term holding used in conjunction with our more aggressive positions.
As you can see from our longer term returns, our stock-oriented portfolios tend to beat the S&P 500 with lower risk. 2006 was the only exception, when our squeamishness on stocks didn’t pay off. However, we’ve found that not falling as much as the S&P 500 during weak periods helps us beat the S&P 500 over time more than matching it during big moves up.
But despite our relative success last month, all was not well in our portfolios. We have some serious mistakes to report and we saved the worst for last…
In our safest portfolio – Safety- we currently have a 5% stake in what should be the safest fund of the bunch: SSgA Yield Plus (SSYPX). We have owned this fund since 2002, the very beginning of the Safety portfolio. The reason we own this fund is that cash sweep accounts at most brokers offer very little return – very often investors get as low as 0.5% interest. SSgA Yield Plus can often be bought for no transaction fee (NTF) at your discount broker, and historically pays about 0.5% more than most decent money market funds. The minimum is low ($1,000) and there is no short term redemption fee. This lets customers who follow our portfolios at brokers like Scottrade, Firstrade, and TD Ameritrade earn more money on their low risk cash.
SSgA Yield Plus fell 1.48% in July. This may not sound like a big deal, but for an ultra short bond fund that holds investment grade debt, this is very unusual. Unfortunately, the situation went from bad to worse. In early August, this fund fell about 6% in one day. This was not because of a dividend. It was because the fund’s holdings – mortgage backed securities – were repriced down to reflect the major troubles in the mortgage market. This was not the only ultra short bond fund to have this problem, though it was one of the most severe.
We wrote about this situation the day after the crash on the MAXfunds.com website (one week before Morningstar and the Wall Street Journal noticed). We also had a lengthy conversation with one of the fund managers about exactly what was going on.
But all this was still too late. Quite frankly we should have known better. Not only do we watch all of our funds closely, we have repeatedly warned investors about the troubles in real estate in general and mortgage backed bonds in particular.
What could go wrong with a top rated portfolio (by major bond rating agencies who get paid to research debt for risk) of low duration bonds? You have virtually no credit risk (or so everyone thought) and little interest rate risk. Quite frankly we were more concerned about the risky bond fund portfolios like Vanguard High Yield Corporate that actually own longer term low grade bonds – the double risk whammy in the bond world. In retrospect, we should have sold it on the percentage of mortgage bonds alone - damn the experts.
What next? The fund manager reminded us that these bonds are still paying, so the price drop in the fund means a higher yield. The numbers are not in, but this fund may be yielding about 6% now. Will there be another repricing? We’re not 100% sure. We don’t think another repricing will take place in the next few weeks, but we are more concerned investors leaving the fund will lead to a sell at any price situation for the fund manager. We are monitoring this fund closely, and if necessary we will post a trade in coming days.
Another situation we are watching closely is our new long short fund – American Century Long Short Equity (ALHIX). While this fund had a great July, it has dropped sharply in early August in a bizarre situation that has also slammed many hedge funds. Basically, the shorts the fund has invested in have spiked up in price while the longs have tanked. Nobody knows why for sure, but hedge funds (and this fund) are following similar computer models and are in the same stocks. Perhaps because of losses elsewhere (mortgage bonds…) they are unwinding positions to raise cash. This fund is also on watch for possible sale and we have already talked at length with American Century. We didn’t buy a long short fund to add more stock market risk to the portfolios – we wanted less.
Bottom line, there are serious troubles in the debt and equity markets these days. While we intend to increase our stock allocations on more significant weakness, the market and entire economy are on shaky ground – more so than at any time in recent years. We don’t mind too when our high risk funds drop every once in awhile. We do mind when safer funds start misbehaving. Stay tuned.