Instead I'd rather be in something like iShares Investment Grade Bond (LQD) which is yielding in the mid 5% range, while holding a lot of higher quality debt. Typical holdings include Johnson & Johnson (JNJ), Walmart (WMT), Berkshire (BKRa), and IBM (IBM) debt - safest of the safest. Looking over the past half decade this normally always traded in a 0 to 1% premium to NAV but spiked to 2% this year. However in the past month its cratered (on a relative basis) from a +1 premium to -2% discount to NAV. That is a very rare occurance for this sort of holding - and just reverting to the mean on that gap would be a 2-3% gain. So in theory you could get mid 5% yield plus a 2-3% appreciation in the underlying instrument as we move from a rare discount to a more normal small premium to NAV. So 7.5% to 8.5% potential for instruments that should be "relatively" risk free - the biggest and best US companies debt.
LQD is high on my list and I may yet buy it, but as I was researching the corporate bond alternatives I came upon an interesting fund that I am going to choose today instead - it is PIMCO Strategy Global Government Fund (RCS) - website here.
Primary objective is to seek to generate, over time, a level of income higher than that generated by high-quality, intermediate-term U.S. debt securities.
- Invests primarily in a diversified portfolio of U.S. and foreign government securities.
- Seeks to generate greater income than high-quality intermediate-term U.S. debt securities, while maintaining a comparably stable net asset value.
- Also seeks to maintain volatility in the net asset value of the shares comparable to that of high-quality, intermediate-term U.S. debt securities.
- Leverages PIMCO's core analytical and risk-management capabilities.
On a 1 year basis RCS has traded in a $9.25 to $11.75 range other than in the panic lows earlier this month where it traded in the $7s! $8s for 2 days. Outside of that, $8.75 has been the panic floor. So we're buying it today in the $9.20s and $9.30s. So obviously if it just sits here we get an 8.5% yield which in this market is like 50% in a bull market. And if it makes a move into the $10s or even better $11s - we throw some nice capital appreciation on top of it. The last positive is this is a PIMCO based which is the most stable (and largest) bond shop in America so we should not run some risk of some unknown event that other money market or bond funds might run into (have to think of every contingency nowadays)
I'm working on about a 5.5% position in that range that we'll be buying and hopefully be done by end of the day. It's relatively low volume and by Marketocracy.com rules I only get 10% of every real world trade counted towards our purchase i.e. 1000 shares in the real world translate to 100 shares in the account. RCS trades about 115K shares a day, and already we are through 35K so we might not complete this today. Since this whole bond business is new to me I'll consider adding more once I watch this for a few weeks/months and see how it behaves in real time. It won't be something we trade very often at all, but a place to stash long exposure in a market that has no rhyme or reason and where stocks act like pinballs.
Any reader who happens to own these type of instruments on a normal basis, feel free to comment or email and give me your thoughts and pros/cons you see to my analysis.
From a contrarion point of view I want to bet against myself and go 100% long because when someone like me is buying bonds it must mean the bottom is in ;) Next.... as you watch me turn to Certificates of Deposit as a risk aversion tactic it's time to 2nd mortgage your house (errr, ummm.... ) and go on margin on the long side.
Long PIMCO Strategic Global Government Fund in fund; no personal position
5 comments:
Mark, Why RCS and not MGF? They hold pretty much the same stuff, but MGF has lower fees and trades at a slight discount compared to RCS's 17% premium.
Mark,
Very interesting that you are looking at high quality debt now! Have you considered TIPS? Their yield over inflation is at an all time high now.
Too early for TIPS - they are based on lousy US governments CPI measures which are a farce.
As for MGF, well there are like 5000 of these darn closed end funds/ETFs and I only had time to get through about 2000.
That one looks very similar but 1%+ less yield and while it trades at a discount to NAV it really is no different than RCSs spread. It is now trading at around -12 and over the past year has been in the -2 to -10 range. RCS is +10 for something that is typically in +5 to +20 range. So either could improve 10 points - and no one knows which will do it. Plus I get the extra 1%+ of yield, but its a very similar vehicle and certainly yours could outperform the one I chose. Do you own it? THis is new stuff for me after 20 years - never touch this sort of stuff normally but 8.5% with potential for more isn't bad even in a normal year.
Interesting choice.. Although there is a lot of talk lately about moving to dividend paying stocks, funds and ETFs.
One thing I've noticed lately is that **everything** I look at either seems to parallel or move inverse to the dollar. When the dollar goes up, oil and the markets seem to drop and vice-versa. (As a result, I've been running scans looking for low Beta stocks in hopes of finding something moving up irrespective of this function).
For a laugh, I pulled up Yahoo Finance/charts and plugged in RCS and overlaid UDN (Inverse dollar). Aside from spikes around the monthly dividend, it seems to be a parallel over the last year.
So, aside from the dividend gain, I presume you expect the dollar to reverse?
jegan
Yes, on MGF and RCS, I see your point that mean reversion for ETFs should be measured against their historical premium/discount rather than against zero discount to NAV - zero can be viewed as just an arbitrary line. I did buy some MGF at the beginning of October, when everything was starting to go nuclear. 7%+ for govt AAA bonds seemed like a good place to stash some cash. RCS seems like a good play on that too. One could probably rotate between the two of them as they fluctuate up and down relative to each other.
On TIPs, I agree with you that the government cheats on CPI, but isn't inflation just as relevant to regualar bonds as to TIPs? So when TIPs are so cheap compared to Treasuries they seem like a good idea. Forsyth's column in Barron's this week has some additional analyis on TIPs.
-nam
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