[quote=planrcoach] but I believe the more money you have or manage for
others, and the more experience you get, the more we work off a
modified model. What think you generally for your clients in
2007?[/quote]



60/40 is always right, all through with current market conditions 50:50 is probably better.

Good to hear 50:50 for current conditions. The trimming in and around 50:50 and 60:40 gives a lot of client contact, which is good for business. But I would not mind seeing a down market next year (please give us one more easy year without a major correction) to help with moving new money.

[quote=planrcoach]

Good to hear 50:50 for current conditions. The
trimming in and around 50:50 and 60:40 gives a lot of client contact,
which is good for business. But I would not mind seeing a down market
next year (please give us one more easy year without a major
correction) to help with moving new money.

That focus on higher quality is a nice way to backfill the many years of steady economic growth. Any number of factors could quickly lessen confidence in the business environment. Just interesting to fully feel this particular point in time: great market prospects balanced upon the invevitable correction. It feels like 50:50. I like the idea of bringing in TIPS now. Do you think a floating rate high income fund could see much downside if things fall apart, compared to its ability to add some portfolio pop, if things do well.

FYI, Fidelity Advisor Floating Rate Income fund has a 6% yield and very now NAV fluctuation from 2000 to 2006. And then there is their Strategic Real Return fund, mainly for inflation with a 3.9% yield. That fund has 30% TIPS, 25% floating rate, 25% commodity linked notes, 20% real estate. I'm using that with some strategic income funds, and/or national muni bond funds. Letting the fund managers trim the junk portion of strategic income as they see fit.

" I like the idea of bringing in TIPS now. Do you think a floating rate high income fund could see much downside if things fall apart, compared to its ability to add some portfolio pop, if things do well."

I'm a Depression Era echo and an Inflation Era bang. When I think of inflation and I think of "things fall apart" I start to twitch!

TIPS now? Are you expecting further inflation? So much further from here that the inflation that we've had up until this point...? It didn't seem to get you to load up on TIPS before, why now?

I own loads and loads of the CPI based floating rate bonds, so I'm always routing for higher inflation. But I've owned them and they are now a Tums factor in that I wonder about getting out of them if there isn't continued higher CPIage.

The good news to business (so far) is that the consumer seems to have accepted the idea that price inflation happens. Begining of 2005 the consumer wouldn't go for higher prices, then came the oil spike and price hikes seemed only fair. Meanwhile Christmas was more of a JESUS CHRIST!mas and retailers didn't get to sell as much of those price inflated goods as they had hoped. So when you ask if a high yield bond fund can hold it together if "things fall apart" it's going to depend on which things fall where.

IF as in big If, housing goes completely sewer pipe, and your junk portfolio has junk builders, junk suppliers, junk R/E plays chances are that your fund is in for a rocky road (something that fixed income people NEVER like, in my mind, junk is an equity play, never a bond play, buy junk when you think it's going to be upgraded and take the coupon to pay you while you wait or as part of your total return, never use junk to replace a fixed income position).

If the consumer has finally hit the wall, and your fund is big into Heelies bonds, you're going for a ride!

Junk is junk because the risk of the company flatlining when things go bad are greater than for investment grade companies (I know you know this, but it bears repeating!) Things can't go much badder than your costs going higher faster than your prices can.

OTOH, things can't go much better than your prices rise faster than your costs do and the dollars you're using to pay off debt are worth less than the dollars you borrowed. But how much "Pop" is that going to add from a fund? I'd prefer to selected preferreds (discount of course) Convertible if you can get them, a good yield stock (good meaning I think it's good, not good as in Con Ed) with growth potential and look for a 20% move, then move it on out and look for another. You're not cutting down the risk with a junk fund, not from these levels.

Mr. A

You’re pretty bright Mr. A. I mean that as a compliment. Well said.

Yep, good idea to think of junk as equity and not fixed. I guess you hold the preferreds as individual securities and not funds?

I'm noting the current Investment News reports analyst consensus of S&P + 7% this year. That should get everyone's attention - that would be 7%, withstanding political risk, etc. - best case.

So your preferreds would seem a risk-wise idea. And your CPIage exposure, well, now that Christ is back in Christmas, economists would say the demand should just flow somewhere else, aren't we all worried about consumers. I just can't believe that inflation is dispensed so easily. Unless we get into something wierd, like stagflation, have not really run money through that type of enviroment in a significant way.

Everyone would agree, fixed income takes on ever more importance in such an environment as today's? Consider doing your homework and portfolio adjustments now, while the going is good.

I think the old 60/40 is a simplistic and outdated notion.  A high dividend paying stock has both equity and bond characteristics. A high yield bond may act more like equity.  Where do you classify a convert? 

60/40 is black and white when there are a lot of shades of grey.

Our job should always be to get the highest rate of return with the least amount of risk.

The risk vs reward on bonds is AWFUL in the current rate environment.

[quote=planrcoach]I like the idea of bringing in TIPS now. Do you think
a floating rate high income fund could see much downside if things fall
apart, compared to its ability to add some portfolio pop, if things do
well. [/quote]



Seth Klarman had a famous saying about junk bank loans. “The Banks are senior but everybody is at risk”.



If the underlying company goes BK, you don’t want any part of the
capital stack. These funds all own the same names. and look at spread
between your bank loan funds and MMFs/USB funds,  you are going
from AAA credit to BB and worse for only 150bp more yeild. That’s a
sucker trade.



I don’t invest for portfolio “pop”. Bubbles pop. And I want no part of
that. I set people up with the most conservative investments that will
fulfill their goals, the first rule of investing is don’t lose money,
the rest is commentary.



As for TIPS, they are cheap. The spread on 10-y tips is 230bp, so if
you think inflation will be higher than that over the next ten years,
tips are the way to go. They also diversify a portfolio real well as
they are uncorrelated to bonds and stocks.

[quote=planrcoach]

FYI, Fidelity Advisor Floating Rate Income fund
has a 6% yield and very now NAV fluctuation from 2000 to 2006. And then
there is their Strategic Real Return fund, mainly for inflation with a
3.9% yield. That fund has 30% TIPS, 25% floating rate, 25% commodity
linked notes, 20% real estate. I’m using that with some strategic
income funds, and/or national muni bond funds. Letting the fund
managers trim the junk portion of strategic income as they see fit.

Some great points. Especially about conserving principal and keeping it simple and basic. And the economic cycle continues to repeat, we'll see what M&A, and increased global economic and political interdependcy do to credit quality and inflation. Your points are well taken and appreciated.

What is the context of your Klarman quote?

(I mean your footer Klarman quote.)

[quote=mranonymous2u]Something that fixed income people
NEVER like, in my mind, junk is an equity play, never a bond play, buy
junk when you think it’s going to be upgraded and take the coupon to
pay you while you wait or as part of your total return, never use junk
to replace a fixed income position

Junk is junk because the risk of the company flatlining when things go bad are greater than for investment grade companies (I know you know this, but it bears repeating!)

[quote=AllREIT][quote=planrcoach]I like the idea of bringing in TIPS now. Do you think
a floating rate high income fund could see much downside if things fall
apart, compared to its ability to add some portfolio pop, if things do
well. [/quote]



Seth Klarman had a famous saying about junk bank loans. “The Banks are senior but everybody is at risk”.



If the underlying company goes BK, you don’t want any part of the
capital stack. These funds all own the same names. and look at spread
between your bank loan funds and MMFs/USB funds,  you are going
from AAA credit to BB and worse for only 150bp more yeild. That’s a
sucker trade.



I don’t invest for portfolio “pop”. Bubbles pop. And I want no part of
that. I set people up with the most conservative investments that will
fulfill their goals, the first rule of investing is don’t lose money,
the rest is commentary.



As for TIPS, they are cheap. The spread on 10-y tips is 230bp, so if
you think inflation will be higher than that over the next ten years,
tips are the way to go. They also diversify a portfolio real well as
they are uncorrelated to bonds and stocks.





[/quote]

I like your turn of phrase that "I don’t invest portfolios for pop.  Bubbles pop."

I have almost completed selling out all of my senior bank adjustable rate loan funds based on comments that I read on this forum that I found disturbing.  Spreads are too tight, and folks are too complacent as to risk.

I would rather lose an opportunity than lose capital.

'nuf said.

[quote=joedabrkr]
I have almost completed selling out all of my
senior bank adjustable rate loan funds based on comments that I read on
this forum that I found disturbing.  Spreads are too tight, and
folks are too complacent as to risk.

I would rather lose an opportunity than lose capital.

'nuf said.[/quote]



I miss quoted Klarman, "“The Banks are senior but everyone is at risk.”



People have ignored the fact that these are junk loans, and the main point for them is

Most companies which junk bank loans also have junk bonds out, and so people who own both loans and bonds have correlated risks.



I have no problem with junk bonds, if you use them thoughtfully and
openly. But it is very dangerious when they lurk inside of a “Real
Return fund” or “floating rate income fund”.



The “Fidelity Leveraged Company Stock Fund” (FLVCX) is similarly dubious idea. Good performance so far…

Well, to advocate for the devil, it's not just a question of your bonds going bellykupt.

Most bonds don't default, most don't go completely, something happens for most bonds, somebody buys the company, they restructure, the market turns, something.

However, just the widening of spreads means lower pricing which Whacks NAV, which makes for uncomfortable talks with clients about the goodness of having a 10% yield and a 20% hickey in the portfolio.

I don't want to dissuade anyone from doing anything for their clients, the are a thousand ways to skin a cat.

Mr. A

[quote=AllREIT]

I have no problem with junk bonds, if you use them thoughtfully and
openly. But it is very dangerious when they lurk inside of a “Real
Return fund” or “floating rate income fund”.



[/quote]

That little bit sorta sums it all up for me.  I bought one of the closed ends about a year ago when it was trading at a discount to NAV and about 15% below the offering price(as a ‘broken IPO’).  It was managed by Highland, and I’d been extremely impressed with them on the roadshow.

Now, however, it’s essentially at PAR to NAV and my clients are up 10-20% on a capital gains basis.  That plus a 9% dividend yield is certainly better than a sharp stick in the eye!  Thankfully, I ate a little of my own cooking on this one too.

The fund is still paying a high single digit yield, so it’s tempting to hang on.  But when I look at spreads and the likely direction of short term rates, the outlook becomes a little less exciting.  (Remember, the dividends on these puppies will track short-term rates for the most part.)  Then, I read some of the commentary on another thread about these funds.  My takeaway-folks were jazzed up about the yields(which they couldn’t find anywhere else) and pretty complacent about the risk.  Plus-the volume in this sector has EXPLODED in the last five years, and now EVERYBODY is trading in the bank-loan game.  So, to me, that just has all the hallmarks of future problems, maybe the near future.

Much like I said before, I’m happy to leave a little on the table for the next guy to make sure I leave the party before everyone else tries to get out the door.  It’s a sickening feeling to take a round trip on a 20% profit.  I know, I’ve done it plenty.

Question is-now where do I go with the money?  This yield curve environment makes it a tough decision, at least for me.  Any thoughts are welcome.

Joe,

Is there something wrong with going to cash for now?

If you are right about the reasons for selling (which I admire) then isn't it somewhat likely that there will be a pull back into which you can redeploy?

You are up 10 to 20%, you can eat those gains for a year or two waiting for the right opening elsewhere without "invading principal". Put the principal into a 5 yr cd @ 5% and your 20% gain will turn into a 9% return for the next 5 years (4% from the gains plus the 5%)!

I like to have an idea to go into when I take a profit, but I think it is just a bad habit and I've tried to separate the two investment decisions. I've found that it changes the mindset of my clients too in that they see each move based on it's merits as opposed to this being a game of "Frogger" where we hop from one idea to the next.

Mr. A