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Columbia Threadneedle Rolls Out Unconstrained Fixed Income Fund

By DailyAlts Staff Fixed-income yield curves and credit spreads are expected to be dramatically impacted by the Federal Reserve’s interest-rate decisions later this year, and that has put a lot of bond-market investors in a quandary: Should I dump my debt holdings and take on equity risk? Liquid alternatives give even modest investors new options, including “unconstrained” fixed-income funds like the newly launched Columbia Global Unconstrained Bond Fund (MUTF: CLUAX ), which invests across the full spectrum of debt and currency markets in pursuit of absolute returns with low sensitivity to interest rates, credit spreads, and general market volatility. Designed for the New Normal “The fixed income world has undergone structural change and the characteristics that once defined fixed-income asset classes are becoming obsolete – witness the near-zero yields in some high-quality bonds,” said Jim Cielinski, Global Head of Fixed Income at Columbia Threadneedle Investments and one of the funds three portfolio managers, in a June 30 press release . “The Columbia Global Unconstrained Bond Fund is designed to exploit these new investment conditions by having the flexibility to invest successfully across a broad risk spectrum.” In addition to Mr. Cielinski, the fund’s managers include Martin Harvey and Gene Tannuzzo. Mr. Harvey has been with Threadneedle since 2003 and is also the lead manager of the firm’s Euro Aggregate Bond portfolios. Mr. Tannuzzo also joined Threadneedle in 2003 and is a senior portfolio manager for the company’s strategic income and multi-sector fixed income funds. Strategy Already Available in Europe and Asia The Columbia Global Unconstrained Bond Fund’s portfolio managers employ a fundamental, research-driven investment process. They’re also able to leverage Columbia Threadneedle’s team of over 180 professionals managing more than $200 billion in assets. The fund’s managers’ views may be expressed through long or short exposures to interest rate, credit, and currency markets, with the ample flexibility to navigate across various market environments and capitalize on current trends. Its objective is to complement other total return and yield-oriented strategies, and its benchmark is the Citi 1-month U.S. Treasury Bill Index. Although the fund just launched on June 30 in the U.S., the strategy has been available to investors in Europe and Asia for some time now. “I am excited to bring this capability to the U.S. market, which adds to the Columbia Threadneedle Investments suite of absolute return capabilities,” said Mr. Cielinski. For more information, visit columbiathreadneedleus.com . Share this article with a colleague

Seeking Beta: The World’s #1 Passive Fund

Summary I own Vanguard’s Total Stock Market Portfolio in their 529. Here is why I own it and why everyone should consider it. You can make a tax-advantaged contribution at a significant scale. #1 Passive Fund in the World I have always mixed active investing ideas with some amount of passive market exposure. Passive exposure is cheap, simple, and tax-efficient. It also provides me with a little insurance against the results of my active ideas. My #1 favorite place to get market exposure with these benefits is Vanguard’s Total Stock Market Portfolio (MUTF: VTSMX ) within Vanguard’s 529. It has done well since inception: It is up over 50% since I discussed it as a long idea: Management Vanguard claims that, We hire top investment professionals with the experience and expertise you’d expect from Vanguard. But this is an unmanaged fund, so as long as they can keep the books straight, they could also, hire psychotic crack fiends with the experience and expertise I’d expect from San Quentin. for all that I would care. Service Their service is fine. You get 25 free trades per year if you keep over $1 million and you get 500 free trades per year if you keep over $10 million at Vanguard. They are quite generous about this status as they count the entire family’s balance towards the requisite total. In addition to the free trades, they also give you the name and phone number of a competent representative who typically can solve problems associated with such accounts. 529s A 529 savings plan is an investment account intended for college and other higher-education costs. They are sponsored by individual states and offer various tax benefits. Earnings are deferred from federal taxes. Withdrawals for qualified higher-education expenses are also tax-free. You can make up to five years’ worth of contributions at one time without triggering gift tax. The uses are pretty generous – you can use the money for tuition, room and board, books, and other expenses. Why Nevada? Nevada is one of the few remaining states without any income tax. If you have flexibility as to where you live, these are probably states worth considering. Of the bunch, Wyoming is my favorite. If one lives in Wyoming close enough to Montana to shop there, you can pay Wyoming’s zero percent income tax and Montana’s zero percent sales tax. As for Nevada, since they lack a state income tax, they cannot lure Nevadans to their 529 with promises of avoiding state income tax. Instead, they have offered every other type of inducement. Their contribution limit of $370,000 is high. Funds are removed from your estate and are exempt from creditors’ claims. They are lenient about any requirement to withdraw funds. Why Vanguard? Compared to the alternative in Nevada, Vanguard’s 529 allows you to invest in Vanguard funds. The alternative fund costs from 0.29-0.89%, while the expense ratio on my favorite Vanguard fund is 0.21%. Vanguard’s minimum initial contribution is $3,000 instead of $250, but the whole idea with this investment is to make a large investment and to hold it for a very long time. There are no enrollment fees for either Vanguard or the one alternative to Vanguard in Nevada. Why the Total Stock Market Portfolio? While this fund is highly correlated with the S&P 500 (NYSEARCA: SPY ), it is somewhat more diversified. It includes smaller capitalization companies. In doing so, it avoids some of the turnover associated with companies entering and exiting the S&P 500. That reconstitution generates trading fees and taxes. Companies included in the S&P 500 trade at a premium, which one has to pay every time one buys an S&P 500 index fund or ETF. Owning a broader based fund avoids such expenses. But whether or not you agree with my rationale, the difference is trivial: Scale This is a tax-advantaged fund 67x your IRA contribution limit. For 2015, the IRA contribution limit is $5,500 ($6,500 for people 50 or older). One might as well fund it, but the scale is small. The 529 limit is $370,000. If you are married, you can each invest $370,000 with oneself as the owner and beneficiary. At that scale, this investment has already been worth over $1.1 million since inception and over $391,000 since I last discussed it. This is an ideal vehicle for long-term tax-free compounding. Withdrawals This investment idea works well regardless of your intention for the proceeds. It works best when invested for at least a generation or longer. However, regardless of your time-horizon, it is more flexible than it first appears. There are at least five great ways to use the proceeds. 1) College for your kids and grandkids First, one can use it for its intended purpose: college, presumably for your kids or grandkids. It is easy to transfer money from one beneficiary to another. You can transfer assets in increments of $70,000 once every five years without any gift tax. Higher education is expensive and getting more expensive. It should be no surprise that we suffer under the highest inflation where there are the most third party payers. The government enters the bid side of a market with no price-sensitivity and it… increases prices: Is the expense more worrisome or is the fact that politicians fail to see the connection between their behavior and prices? In any event, it is likely that you will have higher education bills in your future. 2) College for yourself Secondly, you can spend the money on yourself. Whether or not you have kids or grandkids (or have any inclination to subsidize said kids/grandkids), you can still save the money in a 529 and spend it on… your own bad self. Courses in wine tasting and golf in an idyllic college town would not be terrible. 3) College as philanthropy Thirdly, you can give the money away. Even if you do not want to spend it on either your progeny or yourself, this would make a perfect foundation for your philanthropic educational efforts. Whether or not you will have college bills to pay, someone certainly will. You will be able to help them. 4) Future expanded usage Fourth, it is reasonably likely that the hodgepodge of tax-advantaged accounts will be simplified and consolidated in the future. If this one is consolidated with others intended for retirement or healthcare, then the limitations on usage will have effectively disappeared. Over the next fifty years, this is highly likely. 5) Just pay the penalty… you will still come out ahead Fifth and finally, you can simply pay the penalty. But here is where this idea gets really interesting, in fact dominant as a strategy: the penalty is too small . Federal law imposes a 10% penalty on earnings for non-qualified distributions. While I never plan to pay this penalty, the value of 10% of the earnings on the back end will probably be far less than the value of compounding tax-free in the interim decades. Even if you intend to spend the money on wine, women, and song (and fail to find an anthropology course “Wine, Women & Song 101”), then you can compound tax-free, pay the penalty, and still end up ahead. Scholarship Encouragement If your kids fully expect that you will pay for college, it can be harder to encourage them to find scholarships. There are piles of scholarship dollars everywhere for almost every type of kid. The key is for them to be motivated to find it and get it. If they receive a scholarship, then the penalty for withdrawing money from a 529 is waived. My hope is that my kids attend military academies (also that my daughter elopes). If the plan succeeds, then there are decades ahead of tax-free compounding without any restriction on some withdrawals. In order to interest them, I am offering each kid half of whatever they earn in scholarship money. Conclusion If you max out your 529 contribution and then wait for a long time, you will benefit from tax-free compounding at a significant scale. At the same time, the cost of the limitations on withdrawals is manageable. With that base of passive market exposure, one can turn to active ideas. My best ones are here . Disclosure: I am/we are long VTSMX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

Raining On The All Seasons Portfolio

Investors are hungry for success stories, especially tales that include high returns with low risk. And the investment industry is always happy to stoke that appetite. One of the most popular stories today is the so-called All Seasons portfolio, whose virtues are trumpeted in the massive bestseller Money: Master the Game , by motivational speaker Tony Robbins. The book has been out since last November, and I thought the hype would blow over quickly, but I’m still getting inquiries about it, so I thought I’d take a closer look. The All Seasons portfolio was created by Ray Dalio of Bridgewater Associates , one of the largest hedge fund managers in the world. It’s based on Dalio’s similarly named All Weather fund , which reportedly has more than $80 billion USD in assets. The portfolio has the following asset mix: 30% Stocks 40% Long-term bonds 15% Intermediate bonds 7.5% Gold 7.5% Commodities In a backtest covering the 30 years from 1984 through 2013, the All Seasons portfolio had an annualized return of 9.7% (net of fees) and only four years with a loss. Its worst year was a modest -4% in 2008. With a risk-return profile like that, it’s no wonder so many investors have been attracted to the All Seasons portfolio. In fact, a service run by Robbins’ own advisor has been swamped with requests from investors who want a piece of this seemingly miraculous strategy. So, is the All Seasons portfolio really a recipe for stellar returns with minimal risk? Or is it just another example of investors chasing hypothetical past performance? The reasons for the seasons The All Seasons portfolio is based on the idea that asset prices move in response to four forces: rising economic growth, declining economic growth, inflation and deflation. In each of these economic “seasons,” some asset classes thrive and others suffer. For example, when growth is strong and inflation is low, stocks are likely to perform well, whereas commodities and gold benefit from rising growth and rising inflation. Bonds do well when economic growth and inflation are both falling. By including all of these asset classes in your portfolio, you’ll do well under all conditions. It’s like travelling with sunscreen, an umbrella, a swimsuit and a parka. There’s nothing wrong with this general idea: most investors understand that a portfolio should include asset classes with low (or even negative) correlation . Nor is it an original thesis: it’s very similar to what Harry Browne wrote in the early 1980s. Browne’s Permanent Portfolio was also based on the principle that you should hold asset classes that would thrive during four economic scenarios: stocks for prosperity, cash for recessions, gold for inflation protection, and long-term bonds for deflation. (If you’re interested in learning more, read Part 1 and Part 2 of my 2011 interview with Craig Rowland, co-author of The Permanent Portfolio .) Was the performance really remarkable? But while the premise of the All Seasons portfolio is reasonable, there’s nothing astonishing about its performance during the last 30 years. Moreover, anyone expecting it to deliver 9.7% with low risk in the future is likely to be disappointed. The returns were unremarkable. A 9.7% annualized return doesn’t mean much unless you compare it to the alternatives. The truth is that all diversified portfolios performed well during the last three decades. Despite the carnage of the dot-com bust at the turn of the millennium and the financial crisis of 2008-09, most of those 30 years were extremely kind to stocks. Late 1987 to the spring of 2000 saw the longest bull market in history, and the one we’re enjoying now ranks third all-time. From 1984 through 2013, the S&P 500 returned a whopping 11.1%. And what about bonds, which make up 55% of the All Seasons portfolio? In the US, long-term government bonds returned 9.4% during the period. In Canada, they did even better: the FTSE TMX Canada Long-Term Bond Index returned 10.3% over those 30 years. Once you consider the context, a 9.7% annualized return since 1984 isn’t remarkable at all. Anyone who stayed invested in a diversified portfolio would have seen similar results. The risk was not “extremely low.” OK, maybe the returns of the All Seasons portfolio were in line with a traditional balanced portfolio, but risk was much lower, right? In an article for Yahoo Finance , Robbins reports that the standard deviation of the portfolio during the 30-year period was 7.63%, which he declares is “extremely low risk and low volatility.” I’m not sure investors would agree with that assessment. If a portfolio has an average expected return of 9.7% and a standard deviation of 7.6%, that means in 19 years out of 20, its annual return can be expected to range between -6% and 25%. That’s not “extremely low volatility”: it’s about the same as that of a traditional balanced portfolio. In our white paper Great Expectations , my colleague Raymond Kerzhéro and I found that a portfolio of 40% bonds and 60% global stocks had a standard deviation of about 7.8% over a similar period (1988 to 2013). What about the fact that the All Seasons had only four negative years, all with only modest losses? Robbins and Dalio frequently compare the All Seasons portfolio to the S&P 500, which certainly saw much larger and more frequent drawdowns. But this is a totally inappropriate benchmark, as the All Seasons portfolio includes just 30% stocks. Dalio’s portfolio holds 55% bonds, which are far less volatile than stocks. More important, bonds only lose value when interest rates rise, and from 1984 to 2013, the yield on 30-year Treasuries fell from over 11% to about 3.5%. Any bond-heavy portfolio would have seen rare and modest drawdowns during that period. There were many disappointing periods. The long-term returns of almost any diversified portfolio look impressive, but unfortunately you can’t buy 30 years of performance in advance: you have to earn those returns by doggedly sticking to your plan even when it disappoints. And let’s be clear: the All Seasons portfolio would have tried your patience many times. While the portfolio never suffered huge losses, it would have significantly lagged a traditional balanced portfolio during the many periods when stocks delivered double-digit returns. That’s why this strategy – and the Permanent Portfolio, for that matter – had few followers during the 1980s and 1990s. A portfolio with just 30% stocks would have been met with derision during that long, giddy bull market. Gold would have been even harder to hold. Sure, it glittered during the most recent financial crisis, but during the 21 years from 1984 through 2004, the real return on gold in Canadian dollars was -2.3% annually. Would you have had the guts to hold it through two money-losing decades? Don’t make the mistake of thinking it’s easy to stick with a strategy when it underperforms during strong bull markets, as the All Seasons portfolio is almost certain to do. Bridgewater’s own All Weather fund returned -3.9% in 2013 , one of the best years for stocks in recent history (the MSCI World Index was up almost 34% in Canadian dollars). My guess is that Dalio’s clients took little comfort in the fact that strategy performed well in historical backtesting. Couldn’t stand the weather My goal here is not to beat up on the All Seasons portfolio specifically: on the contrary, I wanted to show that in many ways it’s not fundamentally different from other balanced portfolios. My concern is that the All Seasons portfolio is presented as a magic formula that will dramatically outperform a traditional stock-and-bond portfolio with far less risk. The very name implies that it will perform well during all market conditions. But that wasn’t true over the last 30-plus years, and it’s even less likely to be the case during a period of low interest rates. (No one knows where rates are headed, but it’s absurd to expect 9% or 10% returns on bonds when yields are 1% to 3%.) A well-diversified, low-cost portfolio executed with discipline offers your best chance of enjoying market returns with moderate volatility. But there’s no secret recipe, no optimal asset allocation, and no reward without risk. Be skeptical of anyone who suggests otherwise.