thomas ford library investment discussion group · changing portfolio design and management...
TRANSCRIPT
10/15/2014
1
Thomas Ford Library Investment Discussion Group
Closed‐End Funds
October 14, 2014
Kirk A. Kreikemeier, CFP®, CFA, FSA4365 Lawn Avenue, Suite 5Western Springs, IL 60558
708‐246‐2366 | [email protected]
Topics Covered
Importance of Asset Allocation
Closed‐End‐Funds
Market Update
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
2
Changing Portfolio Design and Management Importance of Asset Allocation
Traditional Current
Portfolio Mix 60% equity / 40% bonds Refined sectors plus alternatives
Holdings Individual stocks / bonds ETF / Mutual Fund / CEF / Individual
Regions US‐based Global
Return Yield focus and price return Total return
Risk Measures Standard deviation or none Std Dev, Sharpe, Capture Ratio, Drawdown
Accounts Manage each account as stand‐alone Combine all accounts by goal funding
Tax Management Tax‐loss harvest at year‐end ‘Asset Location’, harvest throughout year
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
Changing Portfolio Design and Management Importance of Asset Allocation
Traditional Current
Portfolio Mix 60% equity / 40% bonds Refined sectors plus alternatives
Holdings Individual stocks / bonds Individual / Mutual Fund / ETF / CEF
Regions US‐based Global
Return Yield focus and price return Total return
Risk Measures Standard deviation or none Std Dev, Sharpe, Capture Ratio, Drawdown
Accounts Manage each account as stand‐alone Combine all accounts by goal funding
Tax Management Tax‐loss harvest at year‐end ‘Asset Location’, harvest throughout year
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
3
Capital Structure Exposure of Investment Importance of Asset Allocation
Debt
Equity
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
Refined Asset Classes and Allocation Weight Importance of Asset Allocation
Sample
Old
Weight
Sample
New
Weight
Asset ClassYTD (1)
Total
Return
3 Yr
Total
Return
10 Yr
Total
Return
15 Yr
Total
Return
10 Yr
Std
Dev
10 Yr
Sharpe
Ratio
2008
Annual
Return
60% 23% Equity‐US Large Cap 8.08 23.01 8.46 5.19 14.7 0.52 ‐37.067% Equity‐US Small Cap ‐1.16 23.34 10.12 9.31 19.9 0.51 ‐37.7610% Equity‐Int'l Developed ‐1.38 13.65 6.32 3.87 18.3 0.35 ‐43.38
5% Equity‐Int'l Emerging 2.43 7.19 10.68 9.01 23.8 0.49 ‐53.3340% 22% Bonds‐US Aggregate Bond 4.10 2.43 4.62 5.57 3.2 0.92 5.24
5% Bonds‐US High Yield Credit 3.49 11.09 8.33 7.67 10.4 0.67 ‐26.168% Bonds‐Int'l Bond (Curr Hdg) 6.04 4.78 4.61 4.98 2.4 1.20 5.75
5% Commodity ‐5.59 ‐5.34 ‐1.04 3.69 18.0 ‐0.05 ‐35.655% Real Estate‐US 14.69 16.19 8.21 11.70 26.4 0.38 ‐39.20
10% Cash & Equivalents 0.03 0.06 1.52 2.01 0.7 ‐0.08 1.77
Inflation (2) 1.21 1.64 2.30 2.37 1.2 0.57 ‐0.02Note: (1) Returns are not annualized; (2) as of 8/31/2014 Source: Morningstar Office, PVWM Research
Sharpe Ratio = (Return over Risk‐Free) / (Std Dev of Return over Risk‐Free); risk‐adjusted reward per unit risk
Asset Class Annualized Total Returns as of 9/30/2014
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
4
Annualized Total Returns Vary by Starting Point Importance of Asset Allocation
Sample
Old
Weight
Sample
New
Weight
Asset ClassYTD (1)
Total
Return
3 Yr
Total
Return
10 Yr
Total
Return
15 Yr
Total
Return
10 Yr
Std
Dev
10 Yr
Sharpe
Ratio
2008
Annual
Return
60% 23% Equity‐US Large Cap 8.08 23.01 8.46 5.19 14.7 0.52 ‐37.067% Equity‐US Small Cap ‐1.16 23.34 10.12 9.31 19.9 0.51 ‐37.7610% Equity‐Int'l Developed ‐1.38 13.65 6.32 3.87 18.3 0.35 ‐43.38
5% Equity‐Int'l Emerging 2.43 7.19 10.68 9.01 23.8 0.49 ‐53.3340% 22% Bonds‐US Aggregate Bond 4.10 2.43 4.62 5.57 3.2 0.92 5.24
5% Bonds‐US High Yield Credit 3.49 11.09 8.33 7.67 10.4 0.67 ‐26.168% Bonds‐Int'l Bond (Curr Hdg) 6.04 4.78 4.61 4.98 2.4 1.20 5.75
5% Commodity ‐5.59 ‐5.34 ‐1.04 3.69 18.0 ‐0.05 ‐35.655% Real Estate‐US 14.69 16.19 8.21 11.70 26.4 0.38 ‐39.20
10% Cash & Equivalents 0.03 0.06 1.52 2.01 0.7 ‐0.08 1.77
Inflation (2) 1.21 1.64 2.30 2.37 1.2 0.57 ‐0.02Note: (1) Returns are not annualized; (2) as of 8/31/2014 Source: Morningstar Office, PVWM Research
Sharpe Ratio = (Return over Risk‐Free) / (Std Dev of Return over Risk‐Free); risk‐adjusted reward per unit risk
Asset Class Annualized Total Returns as of 9/30/2014
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
Risk Measures – No Free Lunch Importance of Asset Allocation
Sample
Old
Weight
Sample
New
Weight
Asset ClassYTD (1)
Total
Return
3 Yr
Total
Return
10 Yr
Total
Return
15 Yr
Total
Return
10 Yr
Std
Dev
10 Yr
Sharpe
Ratio
2008
Annual
Return
60% 23% Equity‐US Large Cap 8.08 23.01 8.46 5.19 14.7 0.52 ‐37.06
7% Equity‐US Small Cap ‐1.16 23.34 10.12 9.31 19.9 0.51 ‐37.7610% Equity‐Int'l Developed ‐1.38 13.65 6.32 3.87 18.3 0.35 ‐43.385% Equity‐Int'l Emerging 2.43 7.19 10.68 9.01 23.8 0.49 ‐53.33
40% 22% Bonds‐US Aggregate Bond 4.10 2.43 4.62 5.57 3.2 0.92 5.24
5% Bonds‐US High Yield Credit 3.49 11.09 8.33 7.67 10.4 0.67 ‐26.168% Bonds‐Int'l Bond (Curr Hdg) 6.04 4.78 4.61 4.98 2.4 1.20 5.755% Commodity ‐5.59 ‐5.34 ‐1.04 3.69 18.0 ‐0.05 ‐35.655% Real Estate‐US 14.69 16.19 8.21 11.70 26.4 0.38 ‐39.20
10% Cash & Equivalents 0.03 0.06 1.52 2.01 0.7 ‐0.08 1.77
Inflation (2) 1.21 1.64 2.30 2.37 1.2 0.57 ‐0.02Note: (1) Returns are not annualized; (2) as of 8/31/2014 Source: Morningstar Office, PVWM Research
Sharpe Ratio = (Return over Risk‐Free) / (Std Dev of Return over Risk‐Free); risk‐adjusted reward per unit risk
Asset Class Annualized Total Returns as of 9/30/2014
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
5
Calendar Year Total Returns – 9/30/2014 Importance of Asset Allocation
Source: Morningstar OfficeKirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
Topics Covered
Importance of Asset Allocation
Closed‐End‐Funds
Market Update
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
6
Investment Vehicle Comparison Closed End Funds
Individual Stock/Bond Mutual Fund Exchange‐Traded Fund Closed‐End Fund
Asset Class Available Mostly equity, bonds All All; focused; index Mostly equity, bonds
Buying/Selling Throughout day End of day only Throughout day Throughout day
Expense Ratio None Higher if active Lower Higher + borrow costs
Transaction Costs Commission + bid/ask‐ Bonds embed in yield
None if fund company‐ Loads for some
Commission + bid/ask‐Wide b/a for focused
Commission + bid/ask‐Wide b/a for some
Premium Discount None None Yes, generally small Yes, can be substantial
Leverage If use margin, options None Margin, options, 2x, 3x Yes, part of structure
Tax Efficiency Investor controls No control, annual‐ Sell as redeem
Investor mostly control‐ Trade units, create
Investor mostly controls, tax leverage
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
Premium / Discount for Closed‐End Fund (HPF) Closed End Funds
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
7
Leverage Closed End Funds
House #1 House #2 House #3 House #4
Purchase Price (Exposure) 100,000$ 100,000$ 100,000$ 100,000$
Down Payment (Equity) 100,000$ 72,000$ 20,000$ 5,000$
Mortgage (Borrow) ‐$ 28,000$ 80,000$ 95,000$
Leverage 100% 139% 500% 2000%
$ Gain/Loss if 10% Move 10,000$ 10,000$ 10,000$ 10,000$
% Gain/Loss if 10% Move 10% 14% 50% 200%
Equivalent Investment Mutual Fund Closed End Fund New Home Spec Home
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
Closed‐End Fund Key Metrics – Illustration Only Closed End Funds
Morningstar Category
Name Ticker Prem / Disc
Lvg Distn Rate
Net Exp (excl Int)
Total Ret YTD
3 Yr TRR Annlzd
Std Dev 3 Yr
Worst 3 Mo Ret
Preferred Stock iShares US Preferred Stock PFF 0.00 5.66 0.47 11.31 9.51 6.71 -29.22JH Preferred Income II Common HPF -7.79 36.2 8.45 1.28 16.32 7.77 10.73 -33.75JH Preferred Income III Common HPS -8.81 35.2 8.46 1.26 16.65 9.39 11.90 -37.15Nuveen Quality Preferred Inc 3 Common JHP -12.66 27.9 7.43 1.33 13.17 12.52 10.27 -45.74
Real Estate iShares US Real Estate IYR 0.01 3.74 0.45 14.88 14.92 14.05 -47.35LMP Real Estate Income Common RIT -12.87 19.4 6.35 1.30 18.28 16.84 17.32 -61.35
Municipals iShares National AMT-Free Muni Bond MUB -0.05 2.88 0.25 8.54 4.47 5.33AllianceBernstein Nat Muni Inc Common AFB -8.89 37.2 6.47 1.02 13.93 6.52 11.79 -18.05PIMCO Municipal Income II Common PML -4.26 36.0 6.67 1.16 15.91 9.28 13.98 -35.57
Source: Morningstar Office; CEF Connect; PVWM Research
25.0% 33.0% 39.6% <= marginal federate rate
3.8% 3.8% <= Medicare Surtax on Unearned Income
AllianceBernstein Nat Muni Inc Common 8.63% 10.24% 11.43% <= pre‐tax equivalent for comparison
PIMCO Municipal Income II Common 8.89% 10.55% 11.78% <= pre‐tax equivalent for comparison
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
8
Closed‐End Fund Analytics – cefconnect.com Closed End Funds
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
cefconnect.com – Key Functionality Closed End Funds
Enter Ticker in Quick Search
Overview – distribution rate, premium/discount graph
Fund Basics – leverage, expenses, sponsor website (Fact Sheet)
Distributions – ex‐div date, changes, income/gain/return of capital
Pricing Information ‐ premium/discount graph, different time periods
Performance ‐ total returns, NAV and price
Portfolio Characteristics – bond type, quality, sector, region (also Fact Sheet)
Fund Screener
Filter by asset class (called Investment Strategy) then sort by key metric; beware of Managed DistributionKirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 |
pvwealthmgt.com
10/15/2014
9
Topics Covered
Importance of Asset Allocation
Closed‐End‐Funds
Market Update
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
Asset Class Returns Heat Map – 10/10/2014Source: Morningstar Office
Market Update
Name Total Ret MTD - Oct 10
Total Ret YTD - Oct 10
Annual Ret 2013 USD
Annual Ret 2012 USD
Annual Ret 2011 USD
Annual Ret 2010 USD
Annual Ret 2009 USD
Annual Ret 2008 USD
Annual Ret 2007 USD
DJ US TSM Large Cap TR USD -3.43 4.37 32.65 16.12 1.71 16.07 26.98 -37.06 6.40DJ US TSM Small Cap TR USD -4.71 -5.82 39.63 18.30 -2.91 28.61 41.93 -37.76 1.90MSCI EAFE NR USD -5.25 -6.56 22.78 17.32 -12.14 7.75 31.78 -43.38 11.17MSCI EM NR USD -1.50 0.89 -2.60 18.22 -18.42 18.88 78.51 -53.33 39.42Barclays US Trsy Bellwethers 5 Yr TR USD 1.10 2.85 -2.47 2.29 9.36 7.02 -1.35 13.97 10.28Barclays US Trsy Bellwethers 30Y TR USD 3.48 21.65 -15.03 2.34 35.60 8.72 -25.88 41.25 10.14Barclays US Treasury US TIPS TR USD 1.47 5.19 -8.61 6.98 13.56 6.31 11.41 -2.35 11.64Barclays US Corp IG TR USD 1.35 7.03 -1.53 9.82 8.15 9.00 18.68 -4.94 4.56Barclays US Corporate High Yield TR USD -0.23 3.25 7.44 15.81 4.98 15.12 58.21 -26.16 1.87Barclays Gbl Agg Ex USD TR Hdg USD 0.39 6.45 1.18 6.46 3.94 3.28 4.43 5.75 4.27Bloomberg Commodity TR USD -0.41 -5.98 -9.52 -1.06 -13.32 16.83 18.91 -35.65 16.23DJ US Select REIT TR USD 2.46 17.51 1.22 17.12 9.37 28.07 28.46 -39.20 -17.56
CurrencyShares® Euro ETF -0.07 -8.65 4.10 1.20 -3.03 -6.70 3.25 -1.67 14.29CurrencyShares® Japanese Yen ETF 1.64 -2.91 -18.06 -11.37 4.99 14.32 -3.01 22.98
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
10
Treasury Rates – Different Maturities Market Update
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
Corporate Spreads – Different Qualities Market Update
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
11
S&P 500 versus Volatility Index (VIX) Market Update
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
Unemployment Rate Falling; So is Participation Market Update
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
12
Inflation versus Treasury Bills Market Update
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
Social Security 2015 COLA Estimate * (Oct 22nd) Market Update
CPI ‐ W Year Inflation2013-07-01 230.084 2001 3.50%2013-08-01 230.359 average 2002 2.60%2013-09-01 230.537 230.327 2003 1.40%2013-10-01 229.735 2004 2.10%2013-11-01 229.133 2005 2.70%2013-12-01 229.174 2006 4.10%2014-01-01 230.040 2007 3.30%2014-02-01 230.871 2008 2.30%2014-03-01 232.560 2009 5.80%2014-04-01 233.443 2010 0.00%2014-05-01 234.216 2011 0.00%2014-06-01 234.702 2012 3.60%2014-07-01 234.525 2013 1.70%2014-08-01 234.030 average 2014 1.50%9/1/2014 * 234.030 234.195 2015* 1.70%
0.016794987
{ (234.195 / 230.327) ‐ 1} x 100 = 1.68
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015*
Social Security Inflation Adjustment
Source: ssa.gov, PVWMResearch
Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com
10/15/2014
13
Contact Information
Kirk A. Kreikemeier, CFP®, CFA, FSA
4365 Lawn Avenue, Suite 5Western Springs, IL 60558
pvwealthmgt.com
708‐246‐[email protected]