New commodity ETF launch: actively managed, but long-only

I won’t complain about having more possible commodity investment vehicles, and I like the concept behind this new ETF, but I’m not a huge fan of the idea because it’s long-only, and I prefer a long/short approach. The new fund will track the SummerHaven Dynamic Commodity Index, which we be rebalanced monthly. The “based on observable price signals” line sounds to me like a trend following model, just like the LSC ETF I prefer, but this new fund will be long-only. Full disclosure: they don’t have a ticker for the fund yet, so I’ll update this post when they have one.

The announcement press release:

SummerHaven Index Management Announces Launch of the SummerHaven Dynamic Commodity Index

STAMFORD, Conn., Dec. 18 /PRNewswire/ — SummerHaven Index Management, LLC announces the launch of the SummerHaven Dynamic Commodity Index (“SDCI”) – an innovative approach to commodity investing that uses fundamental signals about underlying physical markets to create an active benchmark for commodity futures investors. The index builds on academic research by professors from Yale University and the University of Tokyo. The SDCI tracks the performance of a fully collateralized portfolio of 14 commodity futures, selected each month from a universe of 27 eligible commodities based on observable price signals, subject to a diversification requirement across major commodity sectors.

The SDCI is composed of commodity futures contracts for which active and liquid contracts are traded on futures exchanges in major industrialized countries. The commodities are denominated in U.S. dollars. The commodity sectors for the Index include precious metals, industrial metals, energy and agricultural products including livestock, softs, and grains.

The First Long-Only Active Benchmark for Commodity Investors

The SDCI was designed as an active commodity benchmark index with the investor in mind. The index construction embeds active re-balancing instead of passive weights because not all commodities are expected to contribute equally to the overall performance of a commodities portfolio. The SDCI focuses on a subset of the commodity universe based on a periodic evaluation of fundamental signals, while at the same time maintaining a diversified exposure to the global commodity complex. Professor K. Geert Rouwenhorst of the Yale School of Management commented “Over the past decade commodities have gained acceptance by investors as an important element of the investment universe. As the asset class has matured, investor interest has naturally shifted towards active management. The SDCI design incorporates research ideas from two academic studies, Facts and Fantasies about Commodity Futures and the Fundamentals of Commodities Futures Returns, into a practical and implementable investment benchmark for investors.”

The SDCI is the first commodity index designed by SummerHaven Index Management. SummerHaven Index Management, LLC is the owner of the Index.

About SummerHaven Index Management

Headquartered in Stamford, CT, SummerHaven Index Management is focused on creating innovative commodity indices. The firm is led by a seasoned management team with over 50 years of collective financial markets experience with commodity futures, capital markets, investment management, and exchange traded products.

———————–

The link to the announcement press release: http://www.prnewswire.com/news-releases/summerhaven-index-management-announces-launch-of-the-summerhaven-dynamic-commodity-index-79605862.html

The link to the fund’s latest prospectus filed with the SEC: http://www.sec.gov/Archives/edgar/data/1479247/000114420409066339/v169761_s1.htm#tPS

Bespoke Investment Group’s 2010 roundtable discussing asset class expectations

The 2010 Bespoke Roundtable is out, and as always, they’ve done some interesting work. I think it’s extremely insightful. the link to their full post is here: http://bespokepremium.com/roundtable/

They present the aggregated “up or down” predictions very clearly in this table:

I have a few quick comments:

-The up/down prediction for the S&P 500 is mostly “up” with only a couple “experts” disagreeing. Who knows? No one has EVER been able to successfully profit from trying to time the market over a reasonable time period. There are a zillion studies that reach that conclusion, and my summary of the Morningstar book has their conclusions based on their data that confirms the same thing. SO what do you do? Well, I think  you try to capture potential upside from equities by having some long-equity exposure, but you keep long-equity allocations to a minority of your portfolio, and instead spread your assets across multiple asset classes, with a preference for long/short strategies, and you try to generate current income (all the while trying to focus on uncorrelated investment returns).

-Long bonds: everyone polled agreed that they should have a negative return in 2010. There could be multiple reasons: rising interest rates, higher default rates, less attractive yields/valuations…the list goes on and on. This is why I prefer munis that are insured and through closed end funds that are trading at a discount: you reduce your tax liability and you reduce your default risk. The rising interest rate or rising inflation scenario is why I like floating / variable rate debt. You get income from being long debt, but the interest payments increase in size as overall interest rate levels rise.

-Junk bonds: not for me. I don’t know of any consistent and low-risk funds that have demonstrated success in the junk bond / high-yield debt space that I would consider for my portfolio at this present time. I say “at this present time” because entire asset classes can occasionally get cheap enough that you don’t really need to worry about the skill of a fund’s active asset management, but given the recent run-up in junk bonds and the uncertain default risk trend I just can’t stomach purchasing high-yield debt now when I can get similar income generation from other asset classes and can lower the tax impact by going with municipal bonds. Sure, junk bond prices can rise much more when they do rise versus munis or other higher-credit quality debt, but the reason junk bonds rally is usually because of optimism about near-to-medium term economic prospects, and I think that the best case scenario is already reflected in the massive recent appreciation of both junk bonds and equities.

-Gold & Oil: The roundtable has mixed expectations for the next year. I think that’s why I prefer a long/short commodity strategy and a long-term investment horizon. Commodities are an important asset class to have in your portfolio, so you don’t want to forget to have some exposure, even if it’s only a little. If inflation does become an issue, regardless of what macroeconomic demand is, then commodities will benefit.

-The US Dollar: The roundtable is uncertain and so am I about what the Dollar will do in the next year. Over the medium-to-long-term, however, I have very high conviction that the US Dollar will continue to lose its purchasing power and will continue to decline against other currencies, just like it has done over the last 50+ years. This is why I like an absolute-return strategy currency allocation. Currencies are a very, very tricky asset to trade profitably, and I would advise non-expert investors to let the experts handle it and go with a good mutual fund.

-China: Who knows what happens. I will probably always keep a portion of my assets in Chinese equities (I hold HAO), although I have recently trimmed my allocation after the very large run up in Chinese equity prices. Regardless, China has much more attractive prospects for equity investment returns over the long-term than the US does, so I will always hold some China and will look to buy more over time when the overall indexes decline.

Hedge fund replication: the WSJ discusses its growing popularity

In a recent article in the WSJ entitled “Hedge-Fund Clones Draw Investors,” the obvious is highlighted: interest in hedge fund replication and “hedge fund clones” is increasing. The reasons are many-fold, and the WSJ points to the obvious benefit of avoiding high fees by holding “passive” hedge fund strategies instead of paying them with “active” strategies involving direct hedge fund investments.

I’ve discussed the idea of hedge fund replication previously and why I think it’s a good idea for the average individual investor at the present time. My previous post is here: https://knowledgecapitalist.wordpress.com/2009/12/14/strategies-for-uncertain-times-uncertainty-supports-hedge-fund-replication-strategies/

The URL for the WSJ story is: http://online.wsj.com/article/SB10001424052748704718204574615980132871774.html

They state: “Wall Street is trying to lure investors with investment vehicles designed to deliver hedge-fund-like returns without hedge-fund fees or hassles. But they have their own drawbacks.

These hedge-fund clones, called replicators, typically aim to mimic returns of broad hedge-fund indexes using easily traded instruments like exchange-traded funds and futures contracts. Some are structured as mutual funds or ETFs, others as separate accounts and other vehicles.

Investors, many weary of hedge funds’ high fees and long lock-up periods, are diving into replicators. Goldman Sachs Group, which launched a clone in 2007, now has roughly $2 billion tracking its replicator. State Street Corp. entered the replication business around the same time and now has more than $400 million in these products. Even start-up money manager IndexIQ has about $200 million in replication assets.

Investors are likely to hear more about clones in the coming months. Credit Suisse Group plans to launch two new clone indexes in the next few months, while Goldman Sachs is seeking to expand distribution of its Absolute Return Tracker replication fund through 401(k) plans. And early last month, State Street in a regulatory filing sought permission to launch a hedge replication ETF.

Some pension plans, like the Swedish government’s AP7 fund, are dumping funds that own hedge funds in favor of replicators. And even some funds of hedge funds are investing in the clones.

Cost considerations and high-profile hedge fund blow-ups drove the AP7 fund to invest in a clone last year, said Richard Grottheim, chief investment officer. Through a fund of funds, AP7 invested in Amaranth Advisors, which collapsed after bad natural-gas bets. In clones, “you don’t have that risk,” Mr. Grottheim said.

The firms offering replication products say they will deliver hedge-fund-style returns and diversification in a low-fee, transparent, easily traded package. Many charge fees of 1% to 2% of assets annually. Hedge funds, by comparison, often charge a 2% management fee, 20% of any gains and other expenses.

“We view what we’re doing as what Jack Bogle did at Vanguard in the 1970s” when he popularized index mutual funds, said Andrew Lo, a finance professor at the Massachusetts Institute of Technology and manager of Natixis ASG Global Alternatives, a replicator mutual fund.

Though the hedge-fund clones have a short track record, it’s not clear that they can deliver on their promises. Since they hold easily traded instruments like stocks, they often behave a lot like the traditional investments already held by most investors. Being limited to liquid investments, clones may also lag behind real hedge funds, which get some of their returns from holding hard-to-trade assets. And though most clones have so far kept pace with hedge-fund indexes, they have done so with more volatility, according to recent academic research.

Clones’ popularity is on the rise after a tumultuous year for hedge funds. The HFRI Fund Weighted Composite Index, a broad hedge benchmark, fell 18% last year, and investors yanked a record $155 billion from the funds, according to data provider Hedge Fund Research.

Here’s how clones work: They are typically designed to deliver hedge-fund “beta,” or the part of returns attributed to market exposure, and not “alpha,” returns attributed to manager skill. One common replication approach involves examining the past several years’ worth of hedge-fund index data and essentially reverse-engineering the returns, determining what market factors were driving the performance. The clone will invest in those easily traded instruments that best explain the returns, rebalancing the portfolio each month as it incorporates new data from hedge indexes.

While most clones have so far generally kept pace with broad hedge-fund indexes, their performance has been all over the map. Between March 2008 and Sept. 30 of this year, clones studied by researchers at Haute Ecole de Gestion in Geneva and Bank Julius Baer & Co. delivered annualized returns ranging from -21% to 6%. And some clones this year have sharply underperformed broad hedge indexes. State Street’s Premia Fund was up less than 2% in the first 10 months of this year, compared with a 10% gain for the HFRI Fund of Funds Composite Index.

The underperformance is due to the fund’s built-in risk controls and the fact that it couldn’t hold some less-liquid assets like distressed credit, said Bailey Bishop, vice president at State Street Global Advisors.

Being restricted to easily traded holdings, replicators may not capture a big chunk of hedge-fund performance. Anywhere from 10% to 60% of hedge-fund returns may come from a premium earned by holding illiquid assets, said Mr. Lo, the Natixis fund manager.

Some replicators behave a lot like stocks. Goldman Sachs Absolute Return Tracker mutual fund, for example, had a roughly 80% weekly correlation with the Standard & Poor’s 500-stock index from its launch in May of last year through Oct. 31, according to Morningstar.

“The correlation to any single index like the S&P 500 is going to move around quite a bit” over time, said Glen Casey, managing director at Goldman Sachs Asset Management.”

Merger arbitrage strategy update

The Reformed Broker cites a very interesting study put out by The Boston Consulting Group (BCG) that suggests that M&A activity is expected to materially increase (they’re looking at European companies, but there are few reasons why the US won’t behave similarly, like FX rates). Bottom line: merger arb strategies need deals to invest in, and more deals means more potential investment opportunities in the merger arb space. The more opportunities, the better the prospects for solid returns, as a low-deal environment forces more crowded trades in the merger arb space which historically is negatively correlated with spreads/discounts to takeover prices. More activity is good for the merger arb funds. There are a number that I’ve discussed previously, including ARBFX, MERFX, GABCX, and GDL.

Their post: http://thereformedbroker.com/2009/12/23/a-european-buyout-frenzy/

They state: “It was only a matter of time.

The recent rally notwithstanding, corporations and their assets denominated in US dollars are lookin’ like lunch meat to the European business world and according to a recent study, a wave of mega-mergers is on the way.

The Boston Consultant Group is out with a survey that indicates 1 in 5 European companies is planning to do a deal in 2010, and that percentage jumps to 1 in 2 companies with market caps in excess of €20 billion.

68% of the companies surveyed were pondering “horizontal” deals, meaning mergers within their own industry segment for the purpose of scale and the easing of competition.

BCG broke the results down by industry group (see chart below):

While to be sure, a great many of these deals will take place on the European continent, something tells me that the Kraft/Cadbury game of footsie we’re witnessing is only the canary in the coalmine in terms of Transatlantic mergers (although in this case, it’s an American company bidding for Euro assets vs Nestle, another European company).

One bright spot for the global economy is the fact that 44% of chemical companies have the urge to merge, as the chemical industry is often seen as a harbinger of economic activity.

Research Recap has the rest of the stats as well as a link to the full report.

Sources:

1 in 5 European Companies Planning M&A Deal in 2010  (Research Recap)“

Hedge fund replication ETFs

A natural extension of the ongoing ETF creation boom, we’re starting to see full-blown “hedge fund” ETFs. After examining the funds (strategy, holdings and expenses) I come away unimpressed. I’m referring to IndexIQ’s two “hedge fund” ETFs: QAI and MCRO. They are not expensive, with total expense ratios around 1.0%, but the logic as to what they hold and why is less than obvious, nor do they appear to be in any way positioned to outperform for any smart/unusual/unique/non-consensus reason.

Here’s IndexIQ’s website: http://www.indexiq.com/etfs/etfsiqh.html

Their HF ETFs at the moment:

1) IQ Hedge Multi-Strategy Tracker ETF (Ticker QAI)

2) Q Hedge Macro Tracker ETF (Ticker MCRO)

The “multi-strat” ETF prospectus says that the ETF will try to match the underlying returns of the IQ Hedge Multi-
Strategy Index. They elaborate a bit more:

“The Index attempts to replicate the risk-adjusted return characteristics of hedge funds using multiple hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage, and emerging markets.”

So basically what you get is a hodge-podge of various hedge fund strategies, although the allocations and composition of the exact holdings is essentially unknown. I’m not a big fan of low-transparency (not that they’re trying to hide anything, you just don’t really know what they hold and what they’re changing and why). The majority of those pieces can be replicated by just separately buying funds that focus on each specific piece. For example, you can buy the emerging market ETF EEM, any number of “event driven” or “special situations” or “merger arbitrage” funds like the other ones I’ve discussed in previous posts, and you can take your pick of long/short equity funds based on YOUR evaluation of the manager and their track record (QAI doesn’t really have a track record at this point b/c it’s young and simulated returns are dangerous to rely on in the vast majority of situations as the past rarely repeats itself). Furthermore, as of their last holdings disclosure, the fund held 42% of assets in long positions in short-term treasuries (like you need them to earn a treasury yield) and 24% of assets were long the EEM ETF exactly with about 10% of assets in the Powershares G10 currency ETF. So…they’re not doing anything you can’t do for yourself (and if you do it yourself you can control things, which may or may not be what you’re looking for).

The macro fund tracks the performance of the IQ Hedge Macro Index. Looking at their top 10 holdings, the macro fund’s portfolio is slightly-more complicated than the QAI portfolio, but pretty straight forward anyway.  28% of the fund’s holdings are just EEM. There’s a tiny short treasuries position, but it’s dwarfed by the long treasuries positions. The “ultra short” real estate position is one of the few distinguishing positions (tho it’s only 3.7% of fund assets) b/c it’s both short and levered, so presumably they have reasonable conviction that there is further downside in real estate. I don’t see anything here that impresses me or suggests to me that this fund does anything beyond simplify the construction and purchase of a portfolio of emerging market stocks, various treasury and corporate bonds (both US and international), currency ETF holdings, and a small position betting against the real estate sector. All in, MCRO doesn’t do it for me, but I’m not you, and maybe you like the idea of one purchase that requires no follow-up maintenance.

TickerName Weight
EEMiShares MSCI Emerging Markets Index Fund 28.43%
SHYiShares Barclays 1-3 Year Treasury Bond Fund 15.90%
LQDiBoxx $ Investment Grade Corporate Bond Fund 13.29%
BWXSPDR Barclays Capital International Treasury Bond ETF5.63%
BSVVanguard Short-Term Bond ETF 5.23%
SHViShares Barclays Short Treasury Bond Fund 3.97%
SRSProShares UltraShort Real Estate 3.69%
DBVPowerShares DB G10 Currency Harvest Fund 3.35%
TWMProShares UltraShort Russell2000 3.29%
BILSPDR Barclays Capital 1-3 Month T-Bill ETF 1.99%

Strategies For Uncertain Times: Currencies

Overview: I prefer a strategy that employs funds with an absolute return perspective and not-exclusively a US Dollar bear strategy that only generates an positive return if the US Dollar falls. Currency and interest rate arbitrate is possible using the actual currencies and debt instruments, but that is well beyond the capabilities of the vast majority of non-professional investors (in addition to being extremely difficult for the pros as well). My personal view on the US Dollar is bearish, though my time horizon is longer than the next year. The reason is simple: inflation in the US WILL rise from current levels in the future and the large US trade deficit means that America Inc continues to purchase more foreign goods than it sells domestically, which prevents the US Dollar from serving as a reliable medium-term or long-term investment. Remember when your grandfather told you about how hot dogs used to only cost 10 cents back in the day? Well, it’s because the US Dollar has lost over 90% of its purchasing power since WWII, despite the fact that it has been a relatively stable currency over that same time period on a comparative basis. Additionally, I’d point out that the Chinese currency (Yuan / RMB) is ABSOLUTELY undervalued due to its non-free floating nature, and as the Chinese government allows the true value of the RMB to be realized at a highly uncertain-yet inevitable-point in the future, it is nearly certain to appreciate in value.

Currencies

Overview: Almost zero beta vs. S&P. Returns aren’t impressive over time but is necessary asset class addition. It’s an important hedge versus foreign/emerging market debt holdings.

• Open-end mutual funds:
  • MABFX: Merk Absolute Return
    • It’s a long/short fund, don’t care about the US Dollar, just absolute return
    • 1.3% annual fee
    • Just started in September
• CEFs:
  • GCF: Global Income & Currency Fund
    • L/S currency, does not use leverage
    • 13.5% discount, 5 year avg is 0.9% discount
    • 1.2% annual fee
    • Started in 2006
    • 4.55% std dev on 3 year basis
    • Has an annual repurchase option, can sell around NAV
• ETFs:
  • CEW: Wisdomtree emerging market currency
    • 0.55% annual fee
  • CYB: WisdomTree Chinese Yuan Fund
    • China’s RMB/Yuan WILL appreciate over time, for sure
    • 3/4 of the Chinese government’s foreign reserves in dollar-denominated assets, Beijing has been losing purchasing power due to the U.S  dollar’s declines in value

Strategies For Uncertain Times: Private Equity & Venture Capital (PE & VC)

Overview: I invest in non-public companies through funds that have direct stakes in private investments, or funds that hold positions in public companies that have direct stakes in private investments. Private equity and venture capital are entirely distinct, though. Private equity portfolios are very different than typical venture capital investments. Private equity positions are usually mature companies that are frequently in the process of a turnaround or reorganization, and typically are levered in ways that make them uniquely risky during weak macroeconomic times. Venture capital investments are typically in smaller, growing companies and industries that may not even have meaningful revenues or profits at the moment. Venture capital strategies also require acceptably vibrant IPO markets and M&A environments to serve as value-realizing exit strategies. Illiquidity of investments and a lack of transparency into holdings is a key risk for both private equity and venture capital strategies.

Private Equity or Venture Capital

Overview: Provides low-correlation returns with equities, however, PE holdings are macro sensitive and IPO/merger activity “exits” for PE & VC firms are much more likely during bull markets and strong macro periods.

• CEFs:
  • MVC: MVC Capital
    • VC in IT companies (has PLENTY of non-IT investments, though)
    • Full cap structure
    • Very diversified
    • 100% US
    • Very high expenses
    • Beta of 1.07 w/ S&P
  • TTO: Tortoise Capital Resources
    • Buy non-public stakes (mostly debt) in US energy infrastructure (mostly MLPs)
    • Beta of 1.28 w/ S&P
• ETFs:
  • PSP: PowerShares Listed Private Equity
    • Holds roughly 30 listed Private Equity firm stocks & ADRs
    • Global
    • Started in Nov, 2006
    • 1.8 beta vs. S&P over 3 years
    • 0.70% annual expense

Strategies For Uncertain Times: Long/Short Equity

L/S Equity or Market Neutral Equity

Overview: Funds are either long/short with some long exposure (not entirely hedged against market movements) or are market neutral (which TRY to be entirely hedged against market movements). This strategy has roughly a 0.60 beta vs. S&P over the last 10 years. Long/short funds either pick their positions based on fundamental analysis or employ quantitative screens for identifying investments. Additionally, not all funds short single stocks against their long positions, and might short various equity indexes or short futures to hedge against market declines. If you’re gonna be long equities at an uncertain time in the macro cycle or at uncertain overall market valuations it makes sense to be long/short as opposed to long-only. Hold in either a taxable or tax advantaged account.

• Open-end mutual funds:
  • HSGFX: Hussman Strategic Growth
    • Long single stocks, short index and buy puts
    • Almost entirely hedged exposure
    • Down 9.6% in 2008, good
    • 1% expense fee
    • No load
    • Low turnover
    • Down 10% in 2008
    • 8% std dev
  • DRCVX: Comstock Capital Value
    • Up to 50% short, solid returns
    • Global
    • UP 50% IN 2008
    • Lose money frequently, negative 5 year annualized return, down 2009 YTD
    • 22% std deviation
    • 5.75% load and 1.7% annual fee
  • COAGX: Caldwell + Orkin Market Opportunity
    • Totally unrestricted hedge fund, great manager, Michael Orkin
    • $25k minimum
  • CVSIX: Calamos Market Neutral A
    • Convert arbitrage and covered call strategies only (roughly 50/50)
    • 1.1% annual expense with 4.75% load
    • 7.7% std dev on 3 year basis
    • 5 year annualized return of 2.2%
    • 110 positions with high turnover
    • MOSTLY covered calls
    • Down 13% in 2008
  • OLA: Old Mutual Claymore Long-Short
    • Long/short equity with covered calls for ~85% of portfolio
    • 130/30, so roughly 20% short with no more than 100% long
    • Specific stock longs and shorts based on quant model
    • Stocks are mostly large cap
    • Beta of 1.07 w/ S&P
    • Down 40% in 2008, very poor performance for a “hedged” strategy
    • 18% std dev
    • 2.7% annual fee
  • BPLEX: Robeco Boston Partners Long/Short
    • No load, 2.75% annual fee
    • Fundamental analysis
    • Down 21% 2008, too much for a “hedged” strategy
    • 13% 5 year annualized return
    • 22% std dev
    • 5 star Morningstar
    • Very diversified, individual stock shorts (20% short)
  • Other poor L/S equity fund choices
    • (HSKSX: Highbridge Statisical Market Neutral: not fundamental, $1m min investment), (ALPHX: Fee too high), (MADEX: Not consistent in returns), (DIAMX: Too volatile), (MLSAX: Closed), (TFSMX: Closed), (AARFX: Too young), (FMLSX: Too volatile), (JAMNX: Weak returns), (TMNVX: The Market Neutral Fund: Just switched advisors), (NARFX: Too new/young, not enough track record)
• CEFs:
  • DHG: Dreman Value:
    • Volatile returns, does have specific stock shorts
    • Has beta of roughly 1.25 w/ S&P (very high)
• ETFs:
  • ALT: iShares Diversified Alternatives ETF. Full range HF multi-strat ETF
    • Objective:Yield/futures arb, technical trades, fundamental relative value
    • Current holdings are mostly currency, IR, and index futures
    • Just started
  • QAI: IQ Hedge Multi-Strategy Tracker ETF
    • Just started

Strategies For Uncertain Times: Emerging Market Debt

Emerging market debt (Sovereign Govt’s or Corporate)

Overview: I prefer emerging market debt to US debt (both US government treasuries and US corporate debt) because I have a cautious view regarding US interest rates and inflation (which will both rise from current lows), as well as questionable corporate default rates. Emerging market debt has roughly a 0.40 beta vs. S&P over time. Yields produce high current income but prices are volatile. Produces high current income, so probably best to hold in a tax advantaged account.

• Open-end mutual funds:
  • FNMIX: Fidelity New Markets Income Fund
    • Global, lots of LatAm, mostly sovereign
    • Mostly in USD denominated, but USD is not part of strategy
    • 0.92% annual fee, no load
    • 16% 3 year avg std deviation
    • 0.40 10 year beta vs. S&P 500
  • PREMX: T. Rowe Price Emerging Markets Bond
• CEFs:
  • MSD: MS Emerging Markets Debt
    • Sovereign debt fund
    • Pay quarterly, no managed distribution
    • 5 year avg discount is 10.9%
    • Fairly liquid trading
    • 1.23% annual expense
    • 7.9% distribution rate
    • Current discount is 8.4%
    • 9% leveraged
  • GHI: Global High Income Fund
    • 2/3 sovereign, 1/3 corporate
    • Only in USD denominated securities, so no FX risk or benefit
    • Pays monthly, DOES have managed distributions
    • 8.5% distribution rate
    • 5 year avg discount is 0.24%
    • Current discount is 6.8%
    • 16 year track record
      • 5 year annualized return of 8.62%, 10 year of 12.44%
    • 1.39% annual expense
    • 16% 3 year avg std deviation
    • More liquid than SBW
    • No leverage
  • SBW: Western Asset Worldwide Income
    • ½ sovereign, ½ corporate
    • ¼ Russia
    • Pays monthly, DOES have managed distributions
    • 7.5% distribution rate
    • 5 year avg discount is 10.8%
    • Current discount is 9.8%
    • 16 year track record
    • 1.48% annual expense
    • No leverage
• ETFs:
  • PCY: PowerShares Emerging Markets Sovereign Debt
  • WIP: SPDR International Government Inflation-Protected Bond
  • EMB: iShares JPMorgan USD Emerging Markets Bond
  • ISHG: iShares S&P/Citigroup 1-3 Year International Treasury Bond
  • IGOV: iShares S&P/Citigroup International Treasury Bond

Strategies For Uncertain Times: Global Real Estate

Overview: I buy mostly CEFs trading at a discount which can be held long-only or arbitraged by shorting various real estate indexes. The CEFs have unusual properties (pun intended) including high leverage and high current income from REIT dividends. This is also a contrarian investment on a turnaround in the real estate markets. Real estate, both in the US and internationally, falls into two main buckets: commercial and residential. Residential real estate investments are primarily made by investing in RMBS fixed income (residential mortgage backed securities) and are a very, very unusual investment given the dynamics of the US residential real estate market. Commercial real estate can be general purpose office buildings, medical facilities, shopping malls, etc. Commercial real estate companies can be purchased directly as many are listed and structured as REITs (real estate investment trusts), and there are also real estate service firms like CB Richard Ellis that are dependent on commercial real estate market trends. CMBS (commercial mortgage backed securities) are also an option on the debt-side, but the uncertainty regarding that particular sub-segment of the ABS (asset backed securities) market and I avoid it entirely given my inexperience with actual CMBS investing.

Global Real Estate

Overview: Roughly 0.3 beta vs. S&P. Contrarian play on turnaround in real estate. High dividends income. Probably best to hold in a tax advantaged account because of the high income from REIT holdings which gets taxed at ordinary tax rates (REIT dividends don’t qualify for low dividend tax rate).

• Open-end mutual funds: The open end funds are not as global as the CEFs
  • TAREX: Third Avenue Real Estate Value
    • 56% international
    • 1.1% annual fee, no load
    • 5 year annualized return of 1.5%
    • 30% std dev and 1.1 beta vs. MSCI on 3 year basis
    • Avg cap is medium although is across all caps
    • 17 positions
    • 30% annual turnover
    • About 20% Hong Kong
  • ARIIX: Alliance Bernstein Global Real Estate II
    • 64% international (more international/global than TAREX)
    • 5 year annualized return of 1.9%
    • 30% std dev and 1.1 beta vs. MSCI on 3 year basis
    • Avg cap is medium although is across all caps
    • 14% Hong Kong
    • 95 positions
    • About 60% annual turnover
• CEFs:
  • AWP: Alpine Global Premier Property
    • Estimated avg discount is 12% (only 2.5 years of history in unusual situation)
    • Current discount is 21%
    • Monthly distributions, does NOT have managed distributions
    • US is 33%, but beyond that it’s the most geographically diverse
    • Very liquid, very big fund
    • Entirely equities
    • 1.45% annual expense
    • 138 holdings
    • Does not use leverage, but can (no further discount, but have upside optionality)
    • Already cut distribution 8 months ago, more likely to get raised, not cut
    • Equity REITs have relatively stable balance sheets (debt to total capital)
    • Commercial MBS will face the most trouble, they don’t touch it.
  • DRP: DWS RREEF World Real Estate & Tactical Strategies
    • Estimated avg discount is 14% (only 2.5 years of history in unusual situation)
    • Current discount is 21%
    • Monthly distributions, does NOT have managed distributions
    • 80% equities, the rest is preferreds, debt, and covered calls
    • US is 27%, 15% Australia, 14% Hong Kong, 12% UK, then Japan
    • 1.38% annual expense
    • 119 holdings
    • $90m total NAV, much smaller than $633m for AWP
  • SLS: Riversource LaSalle International Real Estate
    • Estimated avg discount is 14% (only 2.5 years of history in unusual situation)
    • Current discount is 23%
    • Quarterly distributions, does NOT have managed distributions
    • US 16%, Australia 21%, Japan 14%, then UK, then France
    • 1.26% annual expense
    • Entirely equities
  • IGR: ING Clarion Global Real Estate
    • Monthly distributions and DOES have managed distributions
    • Current discount is 13.5%
    • Very liquid, largest of the CEF RE funds at $1.36bn
    • 1.28% annual fee
    • 53% US, 12% Australia
    • 74% equities, 25% preferreds
    • 5 year avg discount is 8.6%*** good reference for the younger RE CEFs
    • 71 holdings, extremely low turnover
• ETFs:
  • GRI: Cohen & Steers Global Realty Majors
  • RWX: SPDR Dow Jones International Real Estate
  • DRW: WisdomTree International Real Estate
  • WPS: iShares S&P Developed ex-U.S. Property

Other Notes:

• Have to get the portfolio holdings info from the fund mgmt sites themselves