Tag Archives: management

Value Seen In Muni Bond Closed-End Funds

Guest Paul Mazzilli, Independent Fund Consultant and Senior Advisor for S-Network Global Indexes, shares his thoughts on the current attractiveness of municipal bond closed-end funds: Their ability to use leverage very effectively. Wide discounts: share price dislocation versus net asset values. The potential impact of the Puerto Rico debt crisis. TOM BUTCHER: I’m here with Paul Mazzilli, Senior Advisor to S-Network Global Indexes. ETF providers often seek to partner with innovative third-party index developers like S-Network. Using his extensive knowledge of the closed-end fund market, Paul was instrumental in the development of the S-Network Municipal Bond Closed-End Fund Index. Paul, why may municipal bond closed-end funds be attractive for investors right now? PAUL MAZZILLI: There are three attractive aspects of municipal closed-end funds, all of which are working together right now. The first, as a closed-end fund, they have a set investment, they’re run by professional managers, and since they don’t have assets coming in and out like an open-end mutual fund, they can buy less-liquid, higher-yielding securities like private placements, non-rated bonds, and they’re not forced to sell bonds when people are seeking out liquidity. The next is a unique aspect of municipal closed-end funds. They have the ability to leverage. When a closed-end fund leverages, it will borrow against its own assets and buy more bonds. Here is a simple example: For a $100 million closed-end fund, the most it’s allowed to borrow is one-third leverage. It can borrow $50 million and buy another $50 million of bonds. The $100 million in assets becomes $150 million invested. If the underlying bonds are yielding 4%, the leveraged fund would yield 6%, approximately, before any incremental costs. You get almost a 50% increase given this ability to leverage one third. The final thing is that after closed-end funds are issued, they trade as stocks in the marketplace. Based on demand and supply, they can trade rich to their value [at a premium], or they can trade cheap to their value [at a discount]. Right now, they’re selling historically cheap at about a 10% average discount. The 25-year average discount is approximately 2%. So when you’re selling at a 10% discount, if you’re buying a dollar of assets for $0.90, if you had an asset yielding 10%, you’re actually getting an 11.1% yield on the money you’re putting up. This fact that they’re trading at a discount is happening right now because investors are fearful of the Fed raising rates. They are fearful of the equity markets, they’ve been raising cash since they’ve traded stocks, they’re selling them, they’re not looking at the underlying value, and it’s created a real buying opportunity. The discount has one other final advantage: If bonds were to sell off, but you’re buying at a 10% discount and it goes to a 5% discount, you actually could have a capital gain, even though the underlying bonds sell off. BUTCHER: Is the prospect of debt restructuring in Puerto Rico going to have any impact on municipal bond closed-end funds? MAZZILLI: Very good question. I think there are two different aspects. First, what does Puerto Rico do to the general municipal bond market? It is a significant issuer. It could have some impact in terms of how bonds trade. I personally believe a lot of that is already reflected in the market. Second is, what does it do to our index of municipal closed-end funds [S-Network Municipal Bond Closed-End Fund Index, CEFMX]? Our index currently has a very low exposure of about 0.43% to Puerto Rico. And that comes from two reasons. One: municipal closed-end funds tend to buy higher-quality funds, which would exclude Puerto Rico right now, or in the past. Two, we buy only national municipal closed-end funds, or our index represents only national municipal closed-end funds. And the national funds buy very little Puerto Rico exposure because they have a lot of other ways to diversify. BUTCHER: Paul, thank you very much for joining me today. MAZZILLI: Thank you. Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested. S-Network Municipal Bond Closed-End Fund Index is a rules based index intended to serve as a benchmark for closed-end funds listed in the US that are principally engaged in asset management processes designed to produce federally tax-exempt annual yield.

Is The Recovery Of GLD Underway?

Summary Shares of GLD have bounced back in the past couple of weeks. The recent depreciation of the U.S. dollar has helped pull up the price of GLD. Will the recent rally of GLD continue? Shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ) have rallied in the past couple of weeks, following the disappointing non-farm payroll market and a weaker U.S. dollar. The gold market isn’t out of the woods just yet – even though some analysts already suggest the recovery of gold is underway – as the Fed is still on course to raise rates in the coming months, and the U.S. dollar may start to climb back up if future U.S. economic reports such as JOLTS and consumer sentiment show better-than-expected results. But for now, the gold market benefits from the current market conditions. The U.S. dollar isn’t picking up, for now The appreciation of the U.S. dollar during the first few months of 2015 came to halt. Although the gold market saw short-term gains during the first half of the year, it dropped between April and July. Since then, however, gold has remained relatively flat, as the U.S. dollar also remained relatively (compared to the beginning of the year) stable. (click to enlarge) (Source: FRED ) The hesitation of the FOMC in raising rates, and the lower-than-expected growth in non-farm payroll report helped pull up the price of GLD. The minutes of the last FOMC meeting also didn’t offer much input as to when the Fed plans to raise rates, or any new insight behind the Fed’s deliberations. But the main issue will remain the progress of the U.S. economy, including when it comes to inflation and labor. As for labor, the JOLTS report will be released this week, and may boost the U.S. dollar if it shows better-than-expected results. It may offset the adverse impact the NFP report had on the U.S. dollar. Nonetheless, the market isn’t convinced that the Fed is ready to raise rates. As of the end of the week, the implied probabilities of an October rate hike are below 10%, while in December, the odds are still nearly unchanged at 37%. And these odds suggest the market isn’t convinced that the Fed will raise rates. And in a recent interview, Federal Reserve Vice Chairman Stanley Fischer opened the door for a scenario in which the Fed may opt out from raising rates this year, as opposed to repeated claims that the Fed, including Chair Yellen , aims to raise rates this year. He stated that a rate hike is expected, but isn’t a commitment. As long as the Fed isn’t raising rates, the U.S. dollar may remain flat or even decline against other currencies, which will keep fueling the rally of GLD. But GLD isn’t the only way people invest in the yellow metal – some also consider buying coins. And the demand for coins seems to have gone up in previous months. Higher demand for coins? The U.S. mint experienced a rise in gold coin sales back in July-September. Since then, however, sales have gone down and are at among the lowest levels for this year, as presented in the following chart. (Data Source: U.S. Mint ) This is only a signal as to the changes in the physical demand for gold for investment purposes in the U.S. So far, the slow fall in gold prices in the past few months may have fueled a rise in demand for gold during the summer. I have pointed out in a previous article that total demand for gold declined in the second quarter. So even though this recent finding may signal (albeit it should be taken with a grain of salt, considering it’s not a complete account of the changes in the demand for gold coins on a global level – less than 10%) a modest gain in demand for coins during the third quarter, it’s still too early to determine if this means the gold market is tightening, and how this could affect the price of gold in general and GLD in particular. Final note The recent rally in GLD may not last long, especially if the U.S. reports including JOLTS and consumer sentiment show promising results. If not, the recent rally of GLD is likely to continue until other central banks boost their QE programs (ECB or BOJ), which will drive up the U.S. dollar, or until the Fed starts to drop stronger hints as to timing of the historic rate hike, which seems less likely to occur this year. As long as the Fed keeps pushing the rate hike to a later date, the price of GLD will keep seeing modest relief. For more please see: ” Gold and Inflation ”

Fidelity Select Funds Portfolio Optimized For Low Volatility Performed Well In 2015

Summary LOW volatility portfolio: FIBIX, FSBIX, FSPHX, FSELX, FSCHX, FBMPX. MID volatility portfolio: FLBIX, FSBIX, FSPHX, FSELX, FSCHX, FBMPX. HIGH volatility portfolio: FLBIX, FIBIX, FSPHX, FSELX, FSCHX, FBMPX. The LOW volatility portfolio had a positive return so far in 2015 despite the interest rate uncertainty. In a previous article we presented the performance of a portfolio made up of five Fidelity select mutual funds. That portfolio had a stellar performance over the whole 27 year period starting in 1987. Back in July we decided to replace the GNMA fund (MUTF: FGMNX ) with two high quality government bonds. The performance of the two portfolios was discussed in the July article, the conclusion being that the new portfolio performed slightly better than the old one. In the first article I used a Relative Strength (RS) strategy based on a three-month look back evaluation period. In the second article I used a Mean-Variance Optimization (MVO) algorithm with 65-day look back evaluation period. While the MVO algorithm may approximate the RS algorithm if one selects the proper volatility target, the MVO strategy is very flexible, and it allows the investor to adapt it to the variable market environment. It turns out that during the first nine months of 2015 the RS strategy, as well as the Dual Momentum (DM) one, has performed poorly with a return of -15.22% for a 3-month look back, or -10.15% for a 12-month look back. The interested reader may verify the performance of Dual Momentum and Relative Strength on the portfoliovisualizer.com site. In this article we shall use only the MVO strategy and we want to emphasize the performance of the new portfolio during the first three quarters of 2015. We shall present three versions of this new portfolio for three levels of volatility: low, mid and high. The three versions are meant for investors with different risk tolerance. They also are meant for investors who may want to vary their risk level based on their evaluation of the markets. The portfolios are made up of the following funds: Fidelity Select Multimedia Portfolio (MUTF: FBMPX ) Fidelity Select Chemicals Portfolio (MUTF: FSCHX ) Fidelity Select Electronics Portfolio (MUTF: FSELX ) Fidelity Select Health Care Portfolio (MUTF: FSPHX ) Fidelity Spartan Long Term Treasuries Fund (MUTF: FLBIX ) Fidelity Spartan Intermediate Term Treasuries Fund (MUTF: FIBIX ) Fidelity Spartan Short Term Treasuries Fund (MUTF: FSBIX ) With the seven funds above, we created three portfolios to be used at three volatility levels: low, mid and high. All portfolios include the same four equity funds, but each one includes only two of the three treasury funds. The high risk uses FLBIX and FIBIX, the mid risk includes FLBIX and FSBIX, while the low risk has FIBIX and FSBIX. The data for the study were downloaded from Yahoo Finance on the Historical Prices menu for FBMPX, FSCHX, FSELX, FSPHX, FLBIX, FIBIX and FSBIX. We use the daily price data adjusted for dividend payments. The portfolio is managed as dictated by a variance-return optimization algorithm developed on the Modern Portfolio Theory ( Markowitz ). The allocation is rebalanced monthly at market closing of the first trading day of the month. In table 1 we present the performance of the portfolio for three levels of risk. Table 1. Portfolio performance from January 2007 to October 2015 TotRet% CAGR% VOL% maxDD% Sharpe Sortino 2015 return LOW risk 109.22 8.80 5.49 -7.50 1.60 2.10 1.75 MID risk 287.58 16.75 13.37 -16.97 1.25 1.69 -0.49 HIGH risk 569.16 24.26 20.22 -16.97 1.20 1.70 -2.45 The realized volatilities of the portfolios are in agreement with their names; the LOW risk had 5.49% annualized volatility, the MID had 13.37%, while the HIGH had 20.22%. Also, please notice the strong correlation between the returns CAGR and volatility of the portfolios. On the other hand, during 2015 the LOW volatility portfolio produced a positive return of 1.75%, while the MID and HIGH risk portfolio suffered negative returns. In figure 1 we show the graphs of the portfolio equities for the period from January 2007 to October 2015. (click to enlarge) Figure 1. Equity curves for three portfolios adaptively optimized for low, medium and high risk targets. Source: All charts in this article are based on EXCEL calculations using the adjusted daily closing share prices of securities. In figure 2, 3 and 4 we show the time variation of the percentage allocation of the funds for the period since January 2014 to October 2015. We opted for this shorter time period to get graphs that are easily readable. We are mostly interested in the allocations during 2015. (click to enlarge) Figure 2. Percentage allocation of the funds for low risk portfolio January 2014 to October 2015. One can see in figure 2 that most of the time the portfolio was invested about 50% in the short term treasury fund FSBIX. In figure 3 we show the time variation of the percentage allocation of the funds for mid risk. (click to enlarge) Figure 3. Percentage allocation of the funds for MID risk portfolio January 2014 to October 2015. (click to enlarge) Figure 4. Asset allocations for the portfolio adaptively optimized for the HIGH risk target January 2014 to October 2015.. Since July 2015 the high risk portfolio was invested 100% in treasuries; in FSLBX in July and August, and in FIBIX in September and October. The current fund allocations are shown in table 3. Table 3. Asset allocations for October 2015 FSELX FBMPX FSPHX FSCHX FLBIX FIBIX FSBIX LOW risk 0% 0% 0% 0% 0% 0% 100% MID risk 0% 0% 0% 0% 88% 0% 12% HIGH risk 0% 0% 0% 0% 0% 100% 0% Conclusion The low risk Fidelity select portfolio performed better than the mid and high risk portfolios. While the return of 1.75% is relatively modest, it is better than many other choices. The losses of the mid risk portfolio are very small at -0.49%, while the high risk portfolio lost the most at -2.45%. In hindsight, investing in a low risk portfolio was the better choice due to the fact that the market environment was very difficult since the beginning of 2015.