Fixed Timing

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Jun 6, 2007 1:57 pm

Anyone have an opinion on the timing right now of moving cash (overall fixed portion of portfolio) over to convertible security mutual funds - convertible bonds and preferred stocks. I'm doing some TIPS funds, and I like strategic income funds, any other fixed diversification ideas.


Please, I already know about individual securities and annuities.

Jun 6, 2007 2:44 pm
razeurgame:

Anyone have an opinion on the timing right now of
moving cash (overall fixed portion of portfolio) over to convertible
security mutual funds - convertible bonds and preferred stocks. I'm
doing some TIPS funds, and I like strategic income funds, any other
fixed diversification ideas.


Please, I already know about individual securities and annuities.





"strategic income funds" == Code talk for Junk bond fund.




Jun 6, 2007 2:53 pm

In part, I see it as active exposure to junk, high quality corporate, international, government of varying types. Active with me not managaing  is the key. Okay, Bondguy sees it as lame, and another advisor just keeps half in cash and half in equities. Three ways to skin Bunny's cat.


What do you think of convertibles?

Jun 6, 2007 3:12 pm

I like the new Mustang convertible but really prefer a 1949 Buick Roadmaster.


http://www.buickstreet.com/49buickstreet.html


Jun 6, 2007 3:13 pm

I can drag a topic of thread with the best of them.

Jun 6, 2007 3:16 pm
razeurgame:

What do you think of convertibles?





They are nice. The value comes from the embedded options, so that a
fair amount of the total return on converts comes from the stock market.



In general sound companies do not issue convertable bonds. So a pure convertable portfolio has skewed market exposure.



Given the heavy interest of hedgefunds doing convertable arbitrage, the market for converts is probably very effecient.




Jun 6, 2007 3:49 pm
AllREIT:

  In general sound companies do not issue convertable bonds.


Huh? I've had entire convertible SMA accounts with investment grade credit quality .  Sometimes you really make me wonder about you ALLREIT.


Jun 6, 2007 4:22 pm
mikebutler222:

Huh? I've had entire convertible SMA accounts with
investment grade credit quality .  Sometimes you really make me
wonder about you ALLREIT.





What percentage of the entire investment grade corporate bond market is convertable? Not much.



If we look at the Jeffries Active Convertables Index; Risk profile sheet.



http://www.jefferies.ch/cms.cfm/s_page/58060/mItem/200505



We find that in the US sub-index of 147 issues, only 36.3% are investment grade.



What I said before still stands, most IG companies don't issue
convertable bonds, and of the convertable bonds out there most of them
are not investment grade.




Jun 6, 2007 4:37 pm

AllREIT:
mikebutler222:

Huh? I've had entire convertible SMA accounts with investment grade credit quality .  Sometimes you really make me wonder about you ALLREIT.



What percentage of the entire investment grade corporate bond market is convertable? Not much.

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You do realize that's not what you originally said, right? 


Just because;


1)     MOST convertibles are not investment grade


2)     most investment grade bonds are not converts


 


 it doesn’t automatically follow that “In general sound companies do not issue convertable bonds.” (the line you removed from the quote of the post).


. The fact is MANY sound companies issue converts.

Jun 6, 2007 4:42 pm

It seems to me that there are many ways you could define "sound", too.

This is starting to sound like the intro philosophy/logic class that I hated so much in college.

If Socrates is a man, and Socrates is Greek.....blah blah blah....

Jun 6, 2007 4:46 pm

Would you say, guys, that convertibles offer some non correlated diversification to a portfolio in a TIPS sense, and at what point in the economic cycle or what scenario could convertibles take a bath? Sorry, it has been a while since I cracked my textbook, and there is always the experience factor you could pontificate upon to add perspective here.

Jun 6, 2007 5:06 pm
mikebutler222:

 it doesn’t automatically follow that “In general sound companies do not issue convertable bonds.” (the line you removed from the quote of the post).


. The fact is MANY sound companies issue converts.





I'm too old for this,



My statement is consistent, In general (i.e the typical case) sound
companies (those with IG ratings) do not issue convertable bonds.



And it shows, given the ratio of non-convertable to convertable
investment grade debt. Although I don't know the number off the top of
my head, I'll guess that less than 8.34% of outstanding IG debt is
convertable.



Further the converse holds true as well. Of those companies which do issue convertable debt, most of them are not IG.



-----

Just because you found a few IG converts does not invalidate what I said, since I was talking about typical cases. Your typical IG company doesn't issue converts, and your typical convert wasn't issued by an IG company



In general sound companies do not issue convertable bonds


Jun 6, 2007 5:15 pm
razeurgame:

Would you say, guys, that convertibles offer some non
correlated diversification to a portfolio in a TIPS sense, and at what
point in the economic cycle or what scenario could convertibles take a
bath? Sorry, it has been a while since I cracked my textbook, and there
is always the experience factor you could pontificate upon to add
perspective here.





Convertable returns are correlated to both equity and bond markets,
since they span those two markets. Converts are very sensitive to
stagflation, and periods of falling stock markets combined with rising interest rates.



TIPS are sensitive to three things.



1) Real rates

2) Inflation expecations

3) Realised inflation.



These are big macro variables that are weakly linked to the general bond market and even weaker to the stock market.

Jun 6, 2007 6:27 pm
AllREIT:


In general sound companies do not issue convertable bonds



Simply untrue, which continues a streak on your part.

Jun 6, 2007 6:42 pm

Convertable returns are correlated to both equity and bond markets, since they span those two markets. Converts are very sensitive to stagflation, and periods of falling stock markets combined with rising interest rates.

TIPS are sensitive to three things.

1) Real rates
2) Inflation expecations
3) Realised inflation.


Yep, I suspected stagflation. But given the U.S. debt level, I wonder if falling stock markets combined with rising interest rates ( and slow economic growth) will be the same as stagflation, at least, one possible outcome not too long from now. TIPS sound "easier", for the generalist advisor.


What do you think about commodity linked notes in a fund that does TIPS, REITS, floating rate, and CLNs - I think I already know how you feel about floating rate?

Jun 6, 2007 7:17 pm
razeurgame:

Yep, I suspected stagflation.
[QUOTE]

Converts are just a muted way of acessing the underlying bonds/equities.


Compared to straight debt and straight equity they have advantages.
But when you understand how they are basicly a blend of bonds and call
options, the smoke lifts.


[quote]What do you think about commodity linked notes in a fund that
does TIPS, REITS, floating rate, and CLNs - I think I already know how
you feel about floating rate?





You're talking about the Fidelity Real Return fund, which just a bag of
gimmicks. It seems like a nice fund. Although the commodities fad seems
to have faded, and it was always questionable.



If your going to use this fund for diversification, then you need a big hunk of it.








Jun 7, 2007 10:24 am

In Dan Fuss and Kathleen Gaffney at Loomis Sayles we trust.... Look at the risk adjusted returns on Strategic Income and Investment Grade- stellar...


Both of those funds are a great complement to more plain vanilla offerings like PIMCO Total Return and Calvert Income, along with a muni fund or two for diversification and some tax free income....

Jun 7, 2007 12:39 pm

I'm with you, blarm.


Allreit, you got the fund right. Don't understand why a bigger hunk is better than a smaller hunk of it, alongside a blarm - like strategy.


I think bonds (strategic income) are an example of at least the potential for added value through active management, when you consider that the only really big idea that can be added to asset allocation is the idea of pushing the allocations a little, based on what we expect of the market.


Not even saying that management will beat the index, but, its " fun " and provides a broad field for client service and education.


Usually we say active management can add value more in international and small cap ( no question about the potential to add value through security selection), and I would add bonds  to that list right now, given where we are in the economic cycle, and specifically, total return type bond funds.


Just my opinion, can't prove it, frankly don't want to, as I enjoy talking to my clients about the strategy, which is likely no worse than alternatives, regarding the fixed portion of the portfolio.


Jun 7, 2007 1:43 pm
razeurgame:

I'm with you, blarm.

Allreit, you got the fund right. Don't understand why a bigger hunk
is better than a smaller hunk of it, alongside a blarm - like strategy.


Because if you want diversification you need a big portion of it to
offset larger equity postions, since that fund isn't very volatile.



I think bonds (strategic income) are an example of at least the
potential for added value through active management, when you consider
that the only really big idea that can be added to asset allocation is
the idea of pushing the allocations a little, based on what we expect
of the market.


Which assumes that people have any hope of doing that. On the whole
active management has a bad record picking stocks, which suggests an
equally bad record picking and shifting asset classes.


You're basicly assuming that Fidelity can time the market for you.

[quote]Not even saying that management will beat the index, but, its
" fun " and provides a broad field for client service and education.[/quote]


You want fun and gambling? go to vegas. They give you free drinks. The most fidelity will give you are glossy anual reports.

[quote]Usually we say active management can add value more in
international and small cap ( no question about the potential to add
value through security selection), and I would add bonds  to that
list right now, given where we are in the economic cycle, and
specifically, total return type bond funds.[/quote]


The evidence for active management adding value, (at the retail fund
level) is very poor. Both international and small cap markets are
probably more effecient than in the past owing to greater interest in
those sectors.


[quote]Just my opinion, can't prove it, frankly don't want to,
as I enjoy talking to my clients about the strategy, which is likely no
worse than alternatives, regarding the fixed portion of the portfolio.

[/quote]


A recession combined with tighter credit conditions is going to hammer that fund.


1. Meltdown in the junk loan market.

2. Drop in commodities prices due to lower aggregate demand.

3. Tighter credit conditions reduce the profits /impair assets of the mortgage reits.


If you want the diversification of real returns then buy the Fidelity Inflation protected securities fund.


The other moving parts of the Real Return fund are just flash and noise.


BTW I'm very impressed that you are honest enough to admit that you
make investment decisions for subjective reasons include percived fun
of ownership. Most people won't admit that.

Jun 7, 2007 2:01 pm
AllREIT:
razeurgame:

I'm with you, blarm.


Allreit, you got the fund right. Don't understand why a bigger hunk is better than a smaller hunk of it, alongside a blarm - like strategy.


Because if you want diversification you need a big portion of it to offset larger equity postions, since that fund isn't very volatile.

[quote]I think bonds (strategic income) are an example of at least the potential for added value through active management, when you consider that the only really big idea that can be added to asset allocation is the idea of pushing the allocations a little, based on what we expect of the market.[/quote]


Which assumes that people have any hope of doing that. On the whole active management has a bad record picking stocks, which suggests an equally bad record picking and shifting asset classes.


You're basicly assuming that Fidelity can time the market for you.


[quote]Not even saying that management will beat the index, but, its " fun " and provides a broad field for client service and education.[/quote]


You want fun and gambling? go to vegas. They give you free drinks. The most fidelity will give you are glossy anual reports.


[quote]Usually we say active management can add value more in international and small cap ( no question about the potential to add value through security selection), and I would add bonds  to that list right now, given where we are in the economic cycle, and specifically, total return type bond funds.[/quote]


The evidence for active management adding value, (at the retail fund level) is very poor. Both international and small cap markets are probably more effecient than in the past owing to greater interest in those sectors.


[quote]Just my opinion, can't prove it, frankly don't want to, as I enjoy talking to my clients about the strategy, which is likely no worse than alternatives, regarding the fixed portion of the portfolio.
[/quote]


A recession combined with tighter credit conditions is going to hammer that fund.


1. Meltdown in the junk loan market.
2. Drop in commodities prices due to lower aggregate demand.
3. Tighter credit conditions reduce the profits /impair assets of the mortgage reits.


If you want the diversification of real returns then buy the Fidelity Inflation protected securities fund.


The other moving parts of the Real Return fund are just flash and noise.


BTW I'm very impressed that you are honest enough to admit that you make investment decisions for subjective reasons include percived fun of ownership. Most people won't admit that.



Stupid.