We are making the following trade in our Conservative Portfolio. These trades should be executed before August 31st, 2007.
<b>Sales</b>
<ul>
<li>Sell entire short allocation: American Century Long-Short Equity (ALHIX) from 5% to 0% of entire portfolio.
</ul>
<b>Buys</b>
<ul>
<li>Increase global allocation: Janus Global Research (JARFX) from 5% to 10% of entire portfolio.
</ul>
<b>Why:</b>
The recent market troubles have shown the shortcomings of funds that short. In addition to dropping high yield bonds (which have since fallen), we cut back on “normal” long-only stock funds in this portfolio in our last trade at the end of June. Because the stock market was getting overvalued we went with a long short fund because in theory investors would have a little less downside than a stock fund.
Everything had been fine with American Century Long Short until the big market upset. In a bizarre five day fall – much of it in one day -this fund dropped about 13%. While this would be expected with long-only higher risk funds in the recent market swoon, a fund that is not leveraged and is equally short and long should have done just fine. It would be almost impossible throwing darts at stocks and building an equal long short portfolio to create a situation where investors could lose 13% in a few days, even during market mayhem.
We talked to the fund company and did our own research and apparently the stocks the fund was shorting were also being shorted by huge leveraged quant hedge funds. As these funds unwound positions - possibly from losses in other areas like subprime debt – these stocks moved way up, even in a down market. Basically everybody using quantitative models was shorting the same stocks.
In recent days this fund has recovered most of the losses and to the casual observer looks fine. We are getting out of this fund because any fund that can fall 13% in a few days without the S&P500 falling even more has no place in a conservative portfolio. We are keeping this fund for now in other portfolios as it may be that this strategy works 98% of the time and offers us some extra return in normal up and down markets. We are reviewing other funds as well, but there are generally slim pickings in funds that short.
We are not putting the proceeds of this sale into bonds as interest rates are now too low, but may do so if rates go back well over 5% on 10 year government bonds as when we did our last trade. As stocks are lower now than a few weeks ago, we are going to increase our stake in a Janus fund that has been working well for us. This fund has become a global fund in recent months, but is still in large cap growth stocks – about half from the U.S. If stocks run up and interest rates climb, we may cut back on stocks and increase our bond allocations.
<b>Redemption fee information:</b>
There are no short-term redemption fees associated with this sale charged by the fund – your broker may charge a fee or commission. If you can stomach some risk with this long short fund, wait until after your broker’s short term redemption fee period to sell.
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We are making the following trade in our Conservative Portfolio. These trades should be executed before August 31st, 2007.
<b>Sales</b>
<ul>
<li>Sell entire short allocation: American Century Long-Short Equity (ALHIX) from 5% to 0% of entire portfolio.
</ul>
<b>Buys</b>
<ul>
<li>Increase global allocation: Janus Global Research (JARFX) from 5% to 10% of entire portfolio.
</ul>
<b>Why:</b>
The recent market troubles have shown the shortcomings of funds that short. In addition to dropping high yield bonds (which have since fallen), we cut back on “normal” long-only stock funds in this portfolio in our last trade at the end of June. Because the stock market was getting overvalued we went with a long short fund because in theory investors would have a little less downside than a stock fund.
Everything had been fine with American Century Long Short until the big market upset. In a bizarre five day fall – much of it in one day -this fund dropped about 13%. While this would be expected with long-only higher risk funds in the recent market swoon, a fund that is not leveraged and is equally short and long should have done just fine. It would be almost impossible throwing darts at stocks and building an equal long short portfolio to create a situation where investors could lose 13% in a few days, even during market mayhem.
We talked to the fund company and did our own research and apparently the stocks the fund was shorting were also being shorted by huge leveraged quant hedge funds. As these funds unwound positions - possibly from losses in other areas like subprime debt – these stocks moved way up, even in a down market. Basically everybody using quantitative models was shorting the same stocks.
In recent days this fund has recovered most of the losses and to the casual observer looks fine. We are getting out of this fund because any fund that can fall 13% in a few days without the S&P500 falling even more has no place in a conservative portfolio. We are keeping this fund for now in other portfolios as it may be that this strategy works 98% of the time and offers us some extra return in normal up and down markets. We are reviewing other funds as well, but there are generally slim pickings in funds that short.
We are not putting the proceeds of this sale into bonds as interest rates are now too low, but may do so if rates go back well over 5% on 10 year government bonds as when we did our last trade. As stocks are lower now than a few weeks ago, we are going to increase our stake in a Janus fund that has been working well for us. This fund has become a global fund in recent months, but is still in large cap growth stocks – about half from the U.S. If stocks run up and interest rates climb, we may cut back on stocks and increase our bond allocations.
<b>Redemption fee information:</b>
There are no short-term redemption fees associated with this sale charged by the fund – your broker may charge a fee or commission. If you can stomach some risk with this long short fund, wait until after your broker’s short term redemption fee period to sell.