Tag Archives: stocks

Reaves Utility Income Fund: What To Make Of The Rights Offering

Reaves Utility Income Fund intends to do a rights offering. Forget about the minutia of the actual offering. Think – instead – about the reason for the offering. Reaves Utility Income Fund (NYSEMKT: UTG ) is one of my favorite closed-end funds, or CEFs, for those seeking utility exposure and dividend income. Its dividend history is nothing short of impressive and it has historically been a solid performer on a total return basis. That said, what should you make of the recent announcement of a rights offering? Impressive record One of the most notable aspects of UTG is its monthly distribution. Since the CEF first initiated a distribution in 2004, it has been increased eight times, most recently in December of last year. The distribution has never been cut, despite the fund living through the deep 2007 to 2009 recession. And, perhaps more impressive, the distribution has never included return of capital. Although the 6% or so distribution yield won’t excite those looking for 10% yields, it’s high enough to be meaningful and yet low enough to be sustainable. History has, so far, proven that out. Performance, meanwhile, is solid. The fund’s trailing 10-year return through September is an annualized 9% or so. That’s notably above Vanguard Utility ETF’s (NYSEARCA: VPU ) 6.6% annualized gain. Both numbers assume the reinvestment of distributions. To be fair, UTG’s mandate is broader than VPU’s, allowing it to invest in areas like oil, but the comparison provides at least a reasonable benchmark. That said, the more recent performance has been, well, not as good. UTG was down roughly 10% through September while VPU was down just 6.6% or so. It has been a bad year for utilities as well as some of the other areas in which UTG invests, so this doesn’t look like it’s an issue of management losing its way. Still, it’s not a good thing to see the value of an investment you own fall 10%. So why is UTG raising cash? Which might lead some investors to wonder why UTG recently announced a rights offering . Shareholders can get one right for every UTG share and buy a new share for every three rights they own. On the surface, this could look like a risky proposition since the fund is doing relatively poorly this year. If you are really cynical you might even suggest it’s a way to cover up a shortfall on the dividend front by spitting out the new cash as return of capital distributions. But step back and think bigger picture. Yes, UTG is doing poorly this year performance wise. Which, in turn, means its holdings aren’t doing so well, since UTG is nothing more than a pooled investment vehicle. If management believes this is an opportunity to buy good companies at depressed prices, its only option is to sell other holdings or raise more cash. But it can’t do that easily because it’s a closed-end fund. Thus, it has to go with a rights offering. In fact, the last time UTG did a rights offering was in 2012 . That was a relatively weak year for the fund, with a total return of around 5.8% compared to 2011’s over 14% gain (which was down from 2010’s 27% gain). In the CEF’s 2012 annual report it explained : “In August the Fund raised $144 million from a transferable rights offering. We view the rights transaction as a long‐term positive outcome for the Fund and its investors. The offering proceeds were invested principally in proven, current holdings of utility equities, increasing their portfolio weighting from just over 41% to 53%. The new investments enhanced the Fund’s current and potential future dividend yield. The outlook, after the offering, for Fund returns over the long term, gave us the confidence to announce in September the sixth increase in the monthly dividend rate since the Fund’s inception in 2004.” Essentially, the fund used the cash raised from the rights offering to buy more companies it knew well and believed were undervalued. It isn’t a stretch to think management is looking to do essentially the same thing this time around, too. If you are a Reaves shareholder this is probably a good deal for you. Will it be a good deal in the next six months? Maybe, maybe not. But longer term the CEF appears to be of the opinion that now is a good time to put money to work. And that should work out for you if you plan to stick around for some time.

Revisiting Asset Allocation Strategies

Summary Allocation between different classes is one of the most important decisions. 9 asset allocation strategies designed by famous investors provide a good starting point. Whilst returns are volatile, portfolio risk contributions tend to remain stable. One of the most important decisions for investors is their approach towards asset allocation. With a number of different asset classes and subclasses available, this task can easily become overwhelming. In an article published just over two years ago, I analyzed from the risk perspective 9 popular asset allocation strategies designed by famous investors. This time I would like to review the same strategies and compare how they have performed since my previous publication. Portfolio specifications come from Meb Faber’s website and they have been replicated using ETFs that most closely match the defined categories. All the statistics have been obtained from a publicly available analytical tool InvestSpy utilizing historical data for the last 2 years. 60/40 A “classical” portfolio consisting of 60% stocks and 40% bonds. Often considered as a simple benchmark for a balanced asset allocation and tends to be difficult to outperform over long time periods. (click to enlarge) Swensen Portfolio David Swensen has been the Chief Investment Officer at Yale University since 1985, where he is responsible for managing the university’s endowment fund and has a spectacular track record. This portfolio consists of 70% equities and 30% fixed income, split between several sub-classes. (click to enlarge) El-Erian Portfolio This portfolio is modelled on an allocation suggested in El-Erian’s book When Markets Collide and managed to outperform equities only portfolio over the last 40+ years. It is More aggressive than some others, this had 51 per cent in various classes of stocks, 17 per cent in bonds, and the remainder distributed between index-linked bonds, commodities and real estate. This portfolio is 60% invested in various sub-classes of equities, 29% in fixed income and 11% in commodities. (click to enlarge) Arnott Portfolio Rob Arnott is the founder and chairman of Research Affiliates and a portfolio manager at PIMCO. Bg proponent of fundamental indexing and smart beta, he has once suggested that the “ultimate” portfolio should consist of equal parts in a range of sub-asset classes. They add up to 30% equities, 60% fixed income and 10% commodities. (click to enlarge) Permanent Portfolio Created by the late Harry Browne in the 1980s, the Permanent Portfolio divides holdings into four equal pieces of stocks, long-term U.S. treasuries, cash, and gold. Simple as it looks, the Permanent Portfolio had only 3 down years over the last 30 years! (click to enlarge) Andrew Tobias Portfolio Andrew Tobias is a well-known author who proposes a “lazy” portfolio with only three equally sized holdings: US stocks, international stocks and US bonds. (click to enlarge) William Bernstein Portfolio William Bernstein is an investment advisor and best-selling author with a strong focus on efficient asset allocation. The portfolio below tries to replicate his suggestion in the book The Intelligent Asset Allocator . 75% are invested in bonds and the remainder in fixed income. (click to enlarge) Ivy Portfolio The Ivy Portfolio has been proposed by Meb Faber, who is a co-founder and the chief investment officer of Cambria Investment Management as well as a popular author. His proposed portfolio consists of equally weighted 5 components: bonds, US stocks, international stocks, real estate and commodities. This effectively equates to 60% stocks, 20% bonds and 20% commodities. (click to enlarge) Risk Parity Portfolio Risk parity is an approach to investment portfolio management which focuses on allocation of risk, usually defined as volatility, rather than allocation of capital. There are countless versions of implementation and this particular one has 20% invested in equities, 70% in fixed income and 10% in commodities. (click to enlarge) Conclusion Analysing the tables above, there are a few interesting observations: The best performer in terms of absolute returns was the simplest portfolio – 60/40, which gained 15.0% over the last two years. Swensen portfolio was second with a 10.4% return. The superior performance of these two portfolios was largely due to their substantial allocations to US equities as well as limited or non-existent exposures to commodities and emerging markets. The only two portfolios to post a negative return in the specified period were El-Erian (-2.4%) and Ivy (-0.8%). Both of these portfolios suffered badly from underperformance of commodities and turbulence in emerging markets. All 9 portfolios experienced a massive decline in annualized volatility, which in most cases more than halved. This comes as no big surprise though as the reference period covered August 2008 – August 2013 that included the peak of the financial crisis. Finally, and probably most importantly, risk contributions in portfolios remained very close to the levels seen two years ago, with the only exception being the Risk Parity portfolio. This is a great illustration that even though portfolio returns are volatile, the risk sources tend to be stable. And it is a good reason why analysis of risk metrics should always be a part of the investment decision making process.

TLT: Think Long Term

Many retail investors find it easier to access and buy bond funds or bond ETFs instead of going out andowning individual pieces of paper debt. It has been a dull few years for bond investors. As equity prices have risen higher since 2007 and 2008, bond performance has struggled. For the course of the long term, we remain very bullish on U.S. treasury bonds, and we recommend TLT – think long term. By Parke Shall Bonds can sometimes be tricky for the average retail investor. They are usually priced much higher than stocks, sometimes around $1000 if you want to buy individual bonds, sometimes higher. It’s for that reason that many retail investors find it easier to access and buy bond funds or bond ETFs instead of going out and owning individual pieces of paper debt. There are a growing number of bond ETFs that you can put your money into, but the most important thing to look at is always whether or not these ETFs are levered and what the fees are going to cost you. Bond instruments for the long term should not have leverage, and should simply track the yields of the type of bonds that you want to invest in, whether it is municipal bonds, corporate bonds, or our favorite; government bonds. Here is a list of some of the more popular treasury bond ETFs, from ETF Database , (click to enlarge) Our preference is the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ). It has been a dull few years for bond investors. As equity prices have risen higher since 2007 and 2008, bond performance has struggled. This does not discourage us, however, as our bond investment strategy is to buy long term treasury bonds where we think there is eventually going to be some pricing support and some safety. Our investing strategy is one that always has some exposure to the consistent coupon of bonds. We try to keep some cash, we definitely keep equities, but we always do try and have varying amounts of exposure to bonds as well. Treasury bond prices have fallen, and the latest bit of news from the world of treasury bonds was that China was curbing the amount of money that they were pouring into U.S. government debt. Zerohedge said : As BNP’s Mole Hau put it on Monday, “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term. ” And a reduced role for the market means a larger role for the PBoC and that, in turn, means burning through more FX reserves to steady the yuan. Translation and quantification (with the latter coming courtesy of SocGen): as part of China’s devaluation and subsequent attempts to contain said devaluation, China has sold a gargantuan $106 (or more) billion in U.S. paper just as a result of the change in the currency regime. Notably, that means China has sold as much in Treasurys in the past 2 weeks – over $100 billion – as it has sold in the entire first half of the year. Today, we got what looks like confirmation late in the session when Bloomberg, citing fixed income desks, reported “substantial selling pressure in long end Treasuries coming from Far East.” We believe this move, on China’s part, is due to China needing to access the cash that it has in order to stabilize its stock market. When we look out over a broader term, we believe that Bond prices treasury bond prices will eventually study. Another interesting fact directing the bond market is the fact that inflation is seemingly nonexistent. This makes bond investing even more attractive, we believe. Short-term yields may stay at levels that they are at now for a little while to come. When the Federal Reserve finally gets around to raising rates,Will expect find pricing to begin stick up once again. However, for the course of the long term, we remain very bullish on U.S. treasury bonds, and we recommend TLT – think long term.