Tag Archives: georgia

Gundlach: Buy Closed-End Bond Funds And Mortgage REITs

It seems that bond king Jeffrey Gundlach and I are reading from the same playbook. In the Barron’s Roundtable (registration required), he made his case for deeply-discounted closed-end bond funds and mortgage REITs. I’ve been bullish on both for over a year… and I’ve taken my lumps for it. But the values are there, and I’m collecting outsized payouts while I wait. Some of Gundlach’s comments are worth passing on: A portion of the credit market has a safety cushion large enough to absorb another 200- or 300-basis-point widening in junk-bond spreads versus Treasuries. I’m referring to closed-end bond funds, which trade on the New York Stock Exchange. Closed-ends are one of the best plays on the Fed not raising interest rates… Closed-end funds are leveraged, and investors have been afraid to own them because they fear that the Fed has launched a tightening cycle. Also, based on daily data going back 20 years, they have traded at a 2% discount, on average, to net asset value. Recently, however, the sector traded at a 10% to 12% discount to NAV. It has traded at such a steep discount only 5% of the time. In the past 20 years, the discount has been wider than that only during the financial crisis in 2008-’09… If history is any guide, discounts would widen further only in a 2008-type scenario, which is possible, although doubtful so soon after the prior crisis. Under current circumstances, you have about two percentage points of downside, and 10 points of upside to return to the historical discount. That makes a basket of closed-ends attractive. If you bought a junk-bond-oriented closed-end trading at a 12% discount to NAV, some of the bonds would be trading at a 15% discount. This isn’t a bad idea, but I prefer Brookfield Total Return (HTR). It is trading just as poorly as some other closed-ends, but is vastly safer. Gundlach’s firm, DoubleLine, is far too big to buy closed-end funds in any meaningful size. He’d end up single-handedly moving the market. But for individual investors, these may be the best option available these days. As Gundlach puts it, “If the S&P rises 10%, closed-ends could return 20%. If the stock market falls 30%, a decline is already priced into these funds. I look at closed-end funds as a good place to put your risk money.” I agree. Given the yawning discounts among closed-end bond funds, we have that all-important margin of safety in this space. Moving on, Gundlach had some interesting things to say about mortgage REITs: Fears that the Fed will raise rates significantly are overblown. This brings me to Annaly Capital Management (NYSE: NLY ), one of the largest mortgage REITs [real-estate investment trust]. It has an $8 billion market cap and has been trading at a 25% discount to book value for some time… It is selling for $9.41. A few years back, it sold for $18. These sorts of stocks have step-function moves. They don’t move by a few percent; they go from $18 to $12 and from $12 to $9, and if the yield curve is inverted, and they have to cut their dividends, things get really bad. But a discount of 30% to book value is the widest ever for Annaly, and historically very wide for a mortgage REIT. Annaly is paying a dividend of 30 cents per quarter. It yields 12.75%. The environment for Annaly has improved… At today’s discount, a lot of bad things are priced in. If the Fed doesn’t raise interest rates much, the stock should go higher. I’m not currently long Annaly. Rather than bet on a single mortgage REIT, I opted to buy a broader basket via an ETF. But my rationale was much the same. Across the sector, you have quality names trading at enormous discounts to their underlying portfolio values. The sector is worth more dead than alive. The rationale move here would be for mortgage REITs to plow the proceeds from maturing and prepaid mortgage securities into buying back their own stock. An m-REIT yielding 10% and trading at 80 cents on the dollar is going to deliver a better return than the mortgage securities they’re currently buying. Annaly, for one, has done exactly that, announcing over the summer that they intended to buy back about $1 billion in shares . At today’s prices, that amounts to about 12% of Annaly’s market cap. Expect more of their peers to follow suit. Disclaimer : This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

WisdomTree Makes Early Splash In 2016

Despite market volatility, 2016 looks to be a big year for WisdomTree (NASDAQ: WETF ). The New Year’s confetti had hardly been cleared when the firm announced it had completed its acquisition of GreenHaven Commodity Funds, the managing owner of the GreenHaven Continuous Commodity Index Fund (NYSEARCA: GCC ) and GreenHaven Coal Services. The news came on January 4, the first business day of 2016, and it was quickly followed up by another big announcement: the firm’s launch of a four-fund suite of dynamic currency-hedged ETFs: WisdomTree Dynamic Currency Hedged Europe Equity Fund (BATS: DDEZ ) WisdomTree Dynamic Currency Hedged Japan Equity Fund (BATS: DDJP ) WisdomTree Dynamic Currency Hedged International Equity Fund (BATS: DDWM ) WisdomTree Dynamic Currency Hedged International SmallCap Equity Fund (BATS: DDLS ) “WisdomTree’s dynamic currency hedged strategy limits the need to make a call on currency by utilizing a data-driven, rules-based approach that assesses the picture of developed market currencies relative to the U.S. dollar on a monthly basis,” said WisdomTree Director of Research Jeremy Schwartz, in a statement. “This offers the potential for an attractive strategic and baseline exposure for long-term portfolios.” Move Into Commodities The GreenHaven acquisition also involves alternative investment funds. In addition to the GCC ETF, WisdomTree’s acquisition of GreenHaven Coal Services also includes the GreenHaven Coal Fund (NYSEARCA: TONS ), which GreenHaven Coal Services sponsors. GreenHaven has been retained by WisdomTree as the sub-advisor to both funds. “The acquisition of these ETFs represents WisdomTree’s first foray into the commodities space and exemplifies our commitment to growing an innovative, differentiated and diversified product platform,” said WisdomTree CEO Jonathan Steinberg. “Today in the U.S. alone we offer 88 ETFs across traditional equities and currency-hedged equities, domestic and international fixed income, currencies, and alternatives strategies including commodities.” GCC returned -18.99% in 2015, a very tough year for commodities, ranking in the top 12% of its Morningstar category. TONS launched in February 2015 and returned -20.90% in the final six months of 2015, but that was good enough for it to rank in the top 1% of its category. The two funds have respective net-expense ratios of 0.85% and 1.23%. Three of the new currency hedged equity ETFs – DDEZ, DDJP, and DDLS – have net-expense ratios of 0.43%. DDWM has a net-expense ratio of 0.35%. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.

How Tactical Asset Allocation Can Handle Market Corrections

By Matthew Tuttle , Tuttle Tactical Management First published to the Harvest Exchange on January 7th, 2016 I have been writing a lot lately about the new market environment and its implications for Tactical Asset Allocation. Now that it looks like we are back in a market correction this article will go into more detail about how to handle these types of moves. In the past any type of tactical methodology could successfully navigate a market correction. Corrections gave plenty of warning before the majority of the decline and before the majority of the recovery. In this new market environment, corrections give little, if any warning, making navigating them much harder than ever before. If practitioners implement the following steps then market corrections can be an opportunity rather than something to be dreaded: 1. Use multiple tactical methodologies. No one methodology works well in every market environment. Instead of trying to find the one “best” methodology, multiple, uncorrelated, methodologies should be combined. 2. Use some sort of optimization and/or regime switching approach to be able to move to the methodologies that are particularly suited to the present market environment. 3. The approach should take volatility into account so that you can increase risk when market volatility is decreasing and reduce risk when it is rising. 4. Emphasize counter trend models over trend following and fundamental. Counter trend models which seek to buy into short term weakness and sell into short term strength can offer better risk adjusted returns than other types of models. They also typically do this with much less time in the market than other methodologies. 5. Ladder your counter trend methodologies. During a correction markets can get very oversold and very overbought. Counter trend methodologies should be laddered just like a bond portfolio might be laddered so that they scale into and out of markets. 6. Use conditional filters. Looked at over a large period of time it may seem as if the performance of different methodologies is fairly uniform. However, when time frames are reduced you may find that a model has much better success with long trades when the underlying security is above a certain moving average, or corporate earnings are increasing, etc. These types of things can be used to filter trades and reduce risk. 7. Use a short side. You may not be comfortable being net short the market but using models that have the ability to short can offset the risk of models that may be long during a correction. 8. Incorporate extremely short term momentum models. Over long periods of time, extremely short term momentum models will not work well. However, they can navigate a correction very well, getting out near the top and back in near the bottom. If you apply an optimization or regime switching approach you can be allocated to these models when the environment is conducive and out of them when it is not. 9. Eliminate as much of the rebalance date risk you can. Because corrections are so sharp and come so quickly rebalancing a portfolio on one fixed date could bring a lot of extra risk. Instead of rebalancing portfolios on one fixed date they can be tranched. For example, a strategy that rebalances weekly on Mondays could be changed where 20% of the portfolio is rebalanced on a daily basis. Incorporating these steps will help tactical strategies successfully navigate corrections in this new market environment.