Bob Carlson

May 5, 2015

Picking a Winning Mutual Fund

Filed under: Income Investing — Bob @ 8:20 am

This post discusses a recent research paper that identifies a unique way to select a mutual fund that is likely to outperform benchmarks and competitors. Its thesis is that mutual fund companies know more about the quality of their managers than we do. So, demotion and promotion decisions by fund firms tell us who are the really good managers.

The key to picking a stock is thus to identify positive attributes that might aren’t known to others. Similarly, the key to choosing a mutual fund is to find a measure of skill that isn’t known to others – to have a measure of skill based on private (but legal) inside information. This is where an ingenious new paper by Jonathan, together with Jules van Binsbergen (Wharton) and Binying Liu (Kellogg), entitled “Matching Capital and Labor”, comes in.
A mutual fund is part of a fund family. For example, the Fidelity South East Asia Fund and the Fidelity Low Priced Stock Fund are both part of Fidelity. One of Fidelity’s jobs as a fund family is to evaluate the performance of each fund manager, to decide whether to promote her (i.e. give her an additional fund to manage, or move her to a larger fund) or demote her (take away one of her funds). They have access to a ton of information over and above past performance figures – just like scouting out a baseball player gives you much more information than you’d get from the statistics. For example, they can engage in subjective evaluations of her performance based on on-the-job observation, or assess whether poor performance might actually be due to good long-run investments that just haven’t paid off yet.  Thus, a promotion signals positive private information, and a demotion signals negative private information.

March 19, 2015

Should You Be Scared of Bonds?

Filed under: Asset Allocation,Income Investing — Bob @ 8:20 am

Robert Shiller, the Nobel Laureate, doesn’t think so. Shiller recently went back to review a bond market analysis he did in his doctoral dissertation and first published professional paper. He updated the research and bond market forecasting formula used in the paper. His conclusion is that investors don’t have much reason to fear a bond market crash despite our very low interest rates and the Federal Reserve’s stated intention to raise interest rates.

But the explanation that we developed so long ago still fits well enough to encourage the belief that we will not see a crash in the bond market unless central banks tighten monetary policy very sharply (by hiking short-term interest rates) or there is a major spike in inflation.

Bond-market crashes have actually been relatively rare and mild. In the US, the biggest one-year drop in the Global Financial Data extension of Moody’s monthly total return index for 30-year corporate bonds (going back to 1857) was 12.5% in the 12 months ending in February 1980. Compare that to the stock market: According to the GFD monthly S&P 500 total return index, an annual loss of 67.8% occurred in the year ending in May 1932, during the Great Depression, and one-year losses have exceeded 12.5% in 23 separate episodes since 1900.

December 22, 2014

The Great Bond Market

Filed under: Asset Allocation,Income Investing,Investing — Bob @ 9:30 am

At the start of 2014, we saw a great many forecasts about how bad the market would be for bonds. Interest rates were sure to rise, and that would topple bonds. While most investors focused on stocks in 2014, bonds have been having a great year. The forecasts were completely wrong, as this post details. In January you’ll see a lot of stories about how great an investment bonds were in 2014. As usual, most forecasters were wrong, and most investors were focused on the wrong things.

But what if investors are looking for a melt-up in the wrong place? What if the real melt-up is already occuring in one the most boring asset class of all — long-term U.S. treasuries?

Long bonds have been on fire this year as they’re currently one of the best investments of any asset class. The iShares 20+ Year Treasury ETF (TLT) is up over 28%. From a historical standpoint, were that number to hold up through year end, it would be one of the best years ever for long bonds.

December 17, 2014

An Interview with Jeffrey Gundlach

Filed under: Income Investing — Bob @ 9:20 am

This interview with the DoubleLine Fund founder is better than most because it lets him talk without a letting of editing or interruption. He has very entertaining and candid thoughts on where most investors went wrong in 2014 and the effects of Bill Gross’s leaving PIMCO.

People pull their money out of bonds when they should’ve been putting money into them. The greatest example is my hedge fund. Last December, I did a call for my LP, the hedge fund. And I told the investors that we are going to make money on bonds because rates are probably going to fall and I took the duration to 9. And an investor said, “What?” And I said, “Yeah, I think we’re going to make money on bonds. Profits.” And the guy says, “I don’t want to be long the 10-year (Treasury).” I remember one guy specifically said that. And I said, “we’re not long the 10-year. we own other things but we do have a duration that’s longer than the 10-year by a little bit.” And the guy said, “Forget it, I am pulling my money out.” And I said, “I thought you wanted me to manage your money with my highest-conviction best ideas?” And the investor said, “yeah, that’s true but not when your ideas are stupid?” That fund is going to be up potentially 20% this year. It’s already up 17 and change through November. So a third of the investors nearly pulled their money out because I allow redemptions on a 45-day notice at month end. And so 30% of investors pulled their money out. and They’re like: “We’re not interested in this bond thing. we hate interest rate risk.” I said, “Well, I am not going to be second guessed on this. You can second guess me on other strategies but not in my best ideas strategies.” I’m not going to be moved by the fact that you don’t like it.

December 15, 2014

Lending Club Analyzed

Filed under: Income Investing — Bob @ 9:30 am

One option people have to invest for higher income is to make loans to individuals, and there are several web sites designed to help. The web sites seek out people who want to borrow money, and they give investors the opportunity to choose to whom they want to lend money. Here’s an analysis of this opportunity from Bill McBride of Calculated Risk blog. Take a look and see if it is for you.

Would you make an unsecured personal loan to an individual so they can pay off $14,000 in credit card debt? If so, at what interest rate (the credit card debt is at 17%). The person has a 15 year credit history, a FICO score of 699, an annual income of $73,000 and a DTI of 17% (excluding mortgage debt).

December 12, 2014

Four Strategies for Secure Retirement Income

Filed under: Annuities,Income Investing — Bob @ 6:20 pm

William Baldwin of Forbes looked for ways to generate $40,000 annually for 25 years, taking very low risk. All the strategies work, though some are harder to implement than others. Of course, the costs vary. One point to consider is that there’s no inflation protection. Another point is that the cash flow isn’t all income and capital gains. It also includes a return of some or all of your principal, so you could run out of money after 25 years. If nothing else, it’s a good thought exercise, and some of the ideas you aren’t going to hear from your average financial professional.

The purpose of this exercise is to help someone who has just turned 70 liquidate an IRA. Not long after you pass that age, you have to start pulling money out. It wouldn’t be a bad idea to use your IRA to create a guaranteed income stream, lasting to age 95, to cover basic expenses like food and rent.

“Income” is used loosely here to mean a flow of cash. It does not mean profit. Most of the annual 40K you’re hauling in is returning principal. The interest income on safe fixed-income portfolios is very meager. For that you can thank the funny-money people at the Fed.

December 4, 2014

More on the PIMCO Soap Opera

Filed under: Asset Allocation,Income Investing — Bob @ 9:30 am

Bloomberg.com has what probably is the final comprehensive story of the behind the scenes maneuvering that occurred before Bill Gross made his dramatic departure from PIMCO earlier in 2014. The story doesn’t add a lot of new information. But it does try to put events in sequence and adds a few more details. The key question, which isn’t fully answered in any of these stories, is to what extent Gross and the PIMCO leadership were negotiating to downsize Gross’s role at PIMCO and whether Gross’s offers to take a reduced role were believable to the others.

Gross spent much of the past year hunting down employees who he believed were leaking information about the internal clashes to the press, according to the interviews. Among them were money managers Andrew Balls, one of Gross’s newly appointed deputy investment chiefs, and Joshua Thimons. Gross tried to fire both but his effort was thwarted by Pimco’s new CEO Douglas Hodge, 57, and President Jay Jacobs.

On at least three occasions, Gross proposed to step back as tensions within Pimco worsened.

November 7, 2014

Interest Rates to Stay Low

Filed under: Asset Allocation,Income Investing,Investing — Bob @ 1:20 pm

Two guys who’ve been right on interest rates longer than probably anyone are Lacy Hunt and Van Hoisington of Hoisington Management. The scholarship and depth of their quarterly shareholder letters makes them worth reading. Their latest quarterly letter continues the theme of past letters. Interest rates are going to stay low and bonds will be good investments, because economic growth is slow, the velocity of money is slow, and there’s no indication these trends are likely to change.

The risk of outright deflation in Europe
with inflation at such low levels, and the danger
of similar developments in the U.S., should not
be minimized as inflation has fallen in almost
every previous U.S. and European economic
contraction. Lower inflation is, in fact, almost as
much of a hallmark of recessions as is decreasing
real GDP. From peak-to-trough the rate of CPI
inflation fell by an average of slightly more than
300 basis points in and around the mild U.S.
recessions of 1990-91 and 2000-01. Starting
from a much lower point, the CPI in Europe at
those same times dropped by an average of 150
basis points. Given that inflation is already so
minimal in both the U.S. and Europe, even the
mildest recession could put both economies in
deflation.

October 15, 2014

Avoid Outliving Your Money

Filed under: Annuities,Cash Management,Income Investing — Bob @ 5:20 pm

Here’s a short, sweet essay on the case for using some annuities in your retirement portfolio along with a couple of ideas about how to use the annuities. It’s not new to Retirement Watch readers, but it’s a good, concise briefing.

For years, many economists have recommended that workers use all their retirement savings to buy life annuities in order to avoid outliving their savings. Nevertheless, few workers want to put their whole retirement nest egg into a life annuity.

Why? In one word, optionality. Retired workers want to have substantial resources available to deal with medical emergencies or unexpected disasters during their retirement years. Alternatively, retired workers want to bequeath any remaining savings at death to their families, friends and favorite charities. However, if workers buy a life annuity, all payments typically end at death — even if it occurs shortly after retirement.

October 10, 2014

Bill Gross Still is Pessimistic

Filed under: Income Investing — Bob @ 5:20 pm

He’s moved from PIMCO to Janus, but Bill Gross still is fairly pessimistic about investment returns in coming years. In his latest investment commentary, the first at Janus, as in his previous commentaries at PIMCO, Gross says we’re in a different financial era. The credit-expanding, asset-inflating era that began in the late 1970s or early 1980s is behind us. Now, we have a hangover and are recovering. The recovery will last quite a while, he says. He also includes an introductory note briefly explaining his move from PIMCO to Janus.

Let me address the most obvious question first: Why did I leave PIMCO? Had there been a reasonable way to continue there, I would have stayed to my last breath. I was honored by the trust of the millions of clients and thousands of employees over decades. They have been the center of my life’s work. I am very proud of my record there for more than 40 years. PIMCO is a great firm with lots of great people, and Allianz was a fine owner for many years. But slowly and with great hesitation, I came to understand that it was time for me to leave. It happens sometimes to founders! But that is water under the bridge, as they say. I don’t plan to address it further. Now let’s talk about the future.

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