You probably heard about the investment fund in Florida that had to suspend withdrawals due to having too much allocated into SIVs. You might have heard about a public fund in Montana going through a similar ordeal. You may not have heard about the Norwegian brokerage that shut down for putting money from four different townships in to similar vehicles.
One by-product from the tech wreck is that some people learned a lesson and now know more about not allocating too much, like 50%, into one sector. Maybe this can be thought of as a back to basics for equities.
The current meltdown of complex fixed income products having to do with mortgages and CDOs levered up and "stress tested" could very likely lead to a simplification of fixed income investing even if just for individuals.
A few months ago I mentioned Nassim Nicholas Taleb's suggestion of putting 90% of a portfolio in t-bills from various countries and then letting it ride with the other 10%.
To take that idea in a different direction there is no simpler strategy in fixed income investing than t-bills. This is also true of foreign t-bills (and notes). Accessing them can be more difficult but the strategy is simple.
The ETF industry is starting to create funds that provide access foreign fixed income products. I believe that that over the next couple of years there will be a lot more funds as investor demand for this segment increases.
I have small positions for some clients in two year (now 18 month) sovereign debt from Norway, the UK or both. Foreign debt, individual issues as opposed to funds, are difficult for individuals to access because orders need to be at least $100,000--so says Schwab.
Where I think this is headed is easier access to sovereign debt from a lot of countries either with funds or brokerage firms making it just as easy to buy foreign bills as it is US bills.
I could see people allocating 5% each to ten different countries and 50% to US debt for example. By sticking with sovereigns investors would avoid having to manage all sorts of different risk issues such as quality and changes in spreads between different qualities and segments.
An obvious concern would be how to analyze and understand countries well enough to feel comfortable buying their debt. Well I believe in learning and then following any country you invest in, developed countries are not a realistic risk to default. Neither are emerging markets--very often.
We all know Russia famously defaulted in 1998, Ecuador seriously threatened to default earlier this year and Venezuela seems to threaten default every couple of weeks (intentional hyperbole). For anyone not liking those odds for emerging debt a blend of individual issues for developed countries and a fund or two for emerging debt seems like it would be a good mix.
By allocating just 5% to a country the risk is mitigated somewhat.
What about currency risk? One thing to remember is that the dollar has been a one way trade against everything of late. That is unlikely to last forever even if the dollar does generally weaken. One way to address currency risk is to take in countries with different economic characteristics. Offset a deficit country with a surplus country or maybe a carry funding country and a carry trade destination or maybe a commodity based country with a service based country and lastly an in-its-own-world country and a very cyclical country.
The bigger macro here is portfolio evolution, a favorite topic of mine. The way I view this, the goal is not to go for the most yield possible; in that case 50% Turkey, 50% Iceland and be done with it. I think some extra yield is available but going with all high yielders would be a lopsided bet.
I actually think managing a bunch of different t-bills is easier than managing a portfolio consisting different types of investment grade corporates, converts, high yield and so on. Anyone investing in individual countries from the top down has already done the legwork. The decision to buy a short term debt instrument is not a reach at all compared to the decision to buy a stock or country fund.
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26 comments:
I hope the etfs that allow access to foreign debt will get here soon, and in a suitable array of indivdual countries!!
Well, you can get started with:
BWX: SPDR Lehman International Treasury Bond ETF
PCY: Powershares emerging market debt
PHB: Powershares high yield bond ETF
I think PHB hold some debt from outside the U.S.
I own BWX for a couple of smaller accounts. No position in PCY for now. PHB, after a quick scan, looks like it has two foriegn holdings but the fund owns corporate issues.
I have no expectation of a REAL problem ever for PHB but I do think it is a different fixed income segment.
The idea of locking in a specific rate from an individual issue is appealing to me.
I have begun buying some closed-end fund muni's. There are various AAA insureds yeilding over 5.25% and trading at >10% discount to NAV. Staying away from the the single states like -Fla but the whole sector is being dragged down.
I have no objection to buying any GO bond issued by ANY state. The day any state, whether it be Kansas or Florida, or what ever, defaults on its GO bonds, we will much more to worry about than creditworthiness of any governmental entity.
what about Orange country in 1994?
I believe they defaulted without much long term impoact, ditto NYC in the 1970s
jimidean, "insured" is a useless benefit of Muni's at this point. the insurers are close to becomming insolvent therefore your muni bonds better be able to stand on their own merits.
good article on muni bond insurance
http://www.criterioneconomics.com/docs/20071106%20Market%20Commentary.pdf
Roger.
What are the current t-bill rates for Turkey and Iceland?
not sure about the the t-bill rates but the central bank overnight rates are in the high teens for turkey and for Iceland i believe 13.75% up from 13.30% lately.
The t-bills are fairly close, you can check the central bank websites if you care.
hate to be aggressive, but if what you say is true, and i doubt it is, you added 1+1 and got 11 and you entirely missed the point of everything this site is about.
actually you got 111
Now come on Heckler, we all know you don't follow Rogers portfolio. And besides, he doesn't give "recommendations" here.
And besides, this November is the worst November for the market in the last five years. How could you have gone wrong? Did you go short Tuesday morning?
JackS
anon 3:09:
I'd be interested to know what exactly you shorted and when, or failing that, the general makeup of your portfolio.
i added to my small position on 11/20 not last week, if you took that to mean I advised to go short then I stand by my comment at 3:03.
Of course you are full of it and I'm going to delete anymore asinine comments from you in this regard.
JackS and amateurInvestor, sorry i did not realize that was Skidmark. I would have deleted sooner.
Many years ago, Dow Chemical had bonds that were denominated in Eurodollars. Roger, do you know of any solid companies that have issued bonds in foreign currencies? These would be for a self directed IRA, so taxes are not an issue. I'm looking for reasonable yield, secure, with a built in hedge on dollar devaluation. I haven't decided on time horizon to maturity, but five to ten ears would work.
Thanks,
Sam
Excellent post on fixed income investing.
There is nothing sinister about allocating speculative funds to lower rated bonds and/or international currency bonds. Do your homework and be prepared for risk - risk that should be mitigated with the large majority of your other security investments.
companies issuing bonds in other countries is very common in the world. accessing them through a discount broker could be tough as opposed to a wirehouse.
I believe more of it goes on elsewhere in the world than in the US but still. I don't know of any issues, though. I have never looked into it.
thank you T
You are correct. It helps to have a little gnome in Switzerland that can help. I recommend Bank Julius Baar.
Having another outlet to purchase otherwise unobtainable securities might be a good topic for a future post.
Congratulations, Roger! You’ve been mentioned in one of the most obscure, esoteric sites on mutual fund investing, on the web. The paradox here, is that this site specializes in small, unknown, newly formed, open ended mutual funds. You, of coarse, don’t follow such funds, and prefer closed ends, or avoid these vehicles, altogether.
The site is Fund Alarm, and here is what David Snowball (yes, that’s his name, how seasonal.) had to say.
“Nakoma Absolute Return got a nice review from TheStreet.com. Roger Nusbaum appears to have had an extended interview with Nakoma’s Mark Fedenia and Greg Schroeder in which they covered many of the same topics that they spoke with me about (e.g., the possibility of using Nakoma as a bond substitute in your portfolio) as well as some technical stuff (a flexible threshold for stop orders on their positions) that I’d hadn’t heard. Nusbaum reproduces a striking graphic that shows the returns of NARFX against those of the S&P 500…
“…He concludes that "Integrating a fund like this into a diversified equity portfolio should reduce volatility and increase risk-adjusted return. This is an important concept if the market is going to be more volatile for the time being, especially if we are late in the stock-market cycle." I agree. A link to his article is posted at the "news and information" page of Nakomafunds.com.”
The link to Fund Alarm is here:
http://www.fundalarm.com/hilights.htm
Go to the December, 2007 entry of “Highlights and Commentary”
http://tinyurl.com/2xw4qg
Would you consider this fund
being in the same ballpark?
FNMIX
Thanks from a loyal reader:-)
in general terms, of course that fido fund is part of the genre. looking at the top holdings they are going for a lot of yield.
their mix may work one year and not the next. I would prefer narrower to create the effect my self but to the extent that is not preferable know that FNMIX is swinging for a lot of yield.
Roger,
Another avenue for global sovereign investment is CEFs. I've got GIM (Templeton Global Income), precisely for the reasons you've mentioned in this post. Its been around since 94, and has a good track record.
Jan
Jan, i hear you but what i am interested in is narrow products to create very specific exposure. I use one CEF in this way but most are very broad, great track records notwithstanding.
you are right of course the CEFs do provide a general access to the space.
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