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There are a few simple rules to remaining compliant:
- You cannot purchase a stock so that it will increase your position to over 25% of your portfolio‘s value. If you violate this rule, your fund's effective inception date will be reset to the date that you bring the find back into compliance with all compliance rules, not just the 25% rule
- If a sub-25% position rises in value above the 25% threshold (without additional purchases), your fund will be out of compliance until you sell of enough to bring it below the threshold. (However, your inception date will not be reset.)
- You may only hold up to 35% if your portfolio‘s value in cash. The other 65% (or more) must be invested in stocks. Real fund managers are paid to invest, not hold cash, and so the SEC requires that they meet this cash rule — hence we also require you to follow this rule a majority (51% or more) of the time.
- Half of your long portfolio may be in positions that may not exceed 25% of the value your total portfolio value. That means that you can have two 25% positions taking up that entire half of the portfolio, or, you can have five 10% positions (since none exceed 25%).
Rule #3 really gets me because this is the excuse for real world mutual fund managers to be invested 98%+ all the time (2% cash in most mutual funds is a sin) - I thought the goal of "real fund managers" is to make money or at least avoid losing it - not just to be "paid to invest".
Before August 2008 I was just holding cash as "cash" and it earned us no interest - so we did that for a year; losing some income along the way. Then in August we decided to let our cash earn at least a little return and chose the shortest duration bond fund we could find to avoid risks - basically we wanted to find a "money market" ETF idea - so we went with iShares Short Treasury Bond (SHV). But going to compliance rule one I cannot stash any more than 25% in any 1 position and we are now around 24%.
So right now I have more than 35% cash, and already am "full" on my cash equivalent, SHV as I cannot buy more. Hence due to the rules I have to follow to remain in compliance I had to find another place to stash cash; I found this article on Seeking Alpha discussing short bond ETFs and embedded was this graph
The closest thing to SHV is BIL - which is the SPDR Lehman 1-3 Month T-Bill ETF (BIL) - that's a mouthful. I charted 4 of the 5 over 3 month, 6 month, 1 year durations (BSV had some wild swings for some reason) and while SHY (which we considered in August) had the best performance (higher yield) we don't even want to deal with a 1.7 year duration- because again this is essentially our cash hoard. The 2.5%ish yield is just an extra topping. Obviously in a real setting I'd just be buying more SHV.So we will be adding BIL today as a secondary way to hold cash so we stay in compliance. The way the market acts right now (violent, arbitrary) it is just a better strategy to hold high cash and then use a smaller portion of the portfolio for quick in and out trades. When we stop having 3-4-5-6% daily moves on a consistent basis we'll go back to a more normal investing methodology. But it's now been over 2 months of the current action so I am not sure when it will moderate.
Long BIL, SHV in fund; no personal position
3 comments:
Take a look at PVI, if the volume is not too low for you. My 'cash' funds are SHY and PVI. PVI is muni, but pays a good dividend. This past month it paid double the normal dividend. BSV is only about 2/3 treasury. That is part of the volatility. It was trading at a big discount to NAV a few weeks ago.
The reason institutional investors want individual money managers to be fully invested is because the investor wants to make the cash decisions at a portfolio level. If the investor wants a 10% cash position, he takes money away from his money managers.
Letting individual money managers make their own decisions as to when to not be fully invested and go to cash can result in a portfolio having a higher cash level than the investor wants.
Or, to put it another way, if you are a money manager and don't have any ideas on who to invest the money I gave you, and want to go to cash, I can take that money and find another manager who does have an idea how to fully invest that money.
I understand the concept from an institutional allocation point of view but institutions are not investing in mutual funds on a general basis.
I also think the past 3 months have shown not one asset class outside of US Treasuries has worked - granted thats a very unique period for that to happen. But put another way no manager has found a way to "fully invest" the money and preserve it with what has been happening the past quarter.
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