Wednesday, October 08, 2014
Tuesday, October 07, 2014
Posted by Bud Fox at 9:55 AM
A lot has been made of the track records of Bill Gross and Dan Ivascyn managed funds since the sudden departure of Gross from PIMCO. Mainstream media has covered the aftermath in great detail, but explanations of the performance have gone relatively untouched. Was the performance of Bill Gross really that awful? Was it entirely attributable to a poor call on US Treasuries? Is the Ivascyn magic touch now about to change all of PIMCO’s bond funds? Let’s sort through the facts and establish some pragmatic views on the subjects.
1. Ivascyn knocked it out of the park
Make no mistake about it, the management of Dan Ivascyn’s funds the since the crisis has been nothing short of superb. The PIMCO Income Fund (PIMIX) is up an average of 12.8% over 5 years versus the category average of 7.2%, ranking it better than 99% of peers according to Morningstar. Fund assets grew from $300mil in 2008 to $6.5bil at the end of 2011, and now $38.6bil at the end of September 2014.
Ivascyn and co-PM Alfred Murata targeted beat up credit assets that would benefit from a reflating of the financial markets. As central banks moved interest rates to zero and removed government bonds from the system, investors were forced to incrementally move out the credit curve.
An example of something that PIMIX has owned and done extremely well on is Spanish Covered Bonds. This is one the larger holdings in PIMIX. As shown, in three years, the price has risen from ~50 cents on the dollar to ~120 as the Euro debt crisis calmed.
Arguably the largest source of returns for the PIMCO Income Fund has been from non-agency MBS. There’s been arguably no better place for outsized returns in fixed income than non-agency MBS since 2009. Ivascyn and team made shrewd bets that these assets would recover and they did.
All in all, Ivascyn’s bets have been credit related and have centered around risk premium compression in the junkiest areas of credit. He has not been without misses - as his PIMCO funds held large amounts of Brazilian entrepreneur Eike Batista’s bankrupt OGX, as well Mexican homebuilder Homex. The point is not that he got a few wrong, but that he bet big on a recovery in the weakest areas of the credit markets and has largely been correct. Gross himself recognized & apparently liked this opportunity set as he is the largest owner of the Ivascyn managed PIMCO Dynamic Income fund (I consider it a leveraged version of PIMIX) with over 1.6mil shares held.
2. Gross’ Total Return Fund was not comparable to Ivascyn’s Income Fund
The objective of the PIMCO Total Return Fund is to "maximize total return, consistent with preservation of capital and prudent investment management. The fund invests at least 65% of its assets in investment grade fixed income".
The objective of the PIMCO Income Fund is to "maximize current income and to seek for long-term capital appreciation…"
These objectives are not anything similar to each other. The Gross managed Total Return Fund by mandate must seek preservation capital and may only hold a maximum of 35% in non investment grade bonds. In contrast, the Income fund is seeking to maximize current income and long term capital appreciation. Gross was forced to hold a substantially larger amount of government bonds and lower yielding IG credit.
3. Even if he wanted to, the Total Return Fund was too large to buy the bonds that Ivascyn bought
Peaking at $293billion, the Total Return Fund is an absolute behemoth. Bottom line is that the types of bonds which had the most outsized returns (such as non-agency MBS) were not able to be purchased in great enough size to move the needle.
The size of the entire non-agency universe has fallen to under $750billion. After accounting for legacy holders, hedge funds, and banks, the universe to buy is very small. As an example, the large Maiden Lane auctions where the Government sold off amounts of non-agency MBS were only around $7bil if I recall correctly. If the Total Return Fund bought that whole thing it still would’ve been a very small allocation to the fund.
4. The performance of the Total Return Fund was largely based on duration calls
With a fund so large as Gross managed, the relatively performance of it came down to his call on duration. It’s been well documented that he was wrong about US rates a few years ago and that lack of duration hurt his relative performance. Regardless of QE or “the new normal”, his views on how much duration to take was the big determinant. He bet that rates would rise and inflation would as well (Gross funds were heavily long TIPS).
Yes, Gross and team made some mistakes but comparison to Ivascyn’s funds are misleading. They were playing in very different areas of the bond market and the size of Gross’ Total Return Fund were a big headwind. Astute readers will note that Ivascyn isn’t on the PM team for the Total Return fund & that’s probably a smart choice. Ironically, as Gundlach mentioned yesterday, the biggest mistake that Gross made might have been letting his flagship fund get too large.
Posted by Bud Fox at 6:19 AM
Sunday, October 05, 2014
Posted by Bud Fox at 7:40 AM
With the month of September and the third quarter now in the books, below is a look at the performance of various asset classes using key ETFs traded on US exchanges. It was a rough month for stocks, especially for smallcaps. The Russell 2,000 (IWM) finished the month down 6.19% and the quarter down 7.96%.
Six sectors finished the quarter lower, while four traded higher. Health Care and Technology were the winners of Q3, while Energy was the big loser.
Foreign markets didn't fare well in September either. The Brazil ETF (EWZ) was by far the worst with a decline of 19.09% for the month. Australia (EWA) fell the second most at -11.86%.
Commodities and fixed income fell as well in September. For the quarter, commodities took it on the chin, with declines of more than 10%.
About the only thing that did well in September was the US dollar index.
Posted by Bud Fox at 7:26 AM
Posted by Bud Fox at 7:21 AM
Short sellers have to pay a pretty hefty premium these days to bet against camera maker GoPro Inc.
GoPro’s stock has more than tripled from its trading debut in June and is the best-performing U.S.-listed initial public offering this year, according to Dealogic. The rally has made GoPro a ripe target for short sellers to bet on a drop from such elevated levels.
But to do that, the shorts need to pay a hefty price tag.
“GoPro is currently one of the most expensive stocks to borrow among all U.S. equities,” Andrew Laird, analyst at securities-financing tracker Markit, said in an email to MoneyBeat. Nearly all of the shares available for lending have been borrowed, he said, and the cost to borrow the stock has surged to among the highest levels since GoPro’s IPO in June.
“Currently investors are willing to pay close to 100% (annually) of the value in order to borrow shares,” Mr. Laird said. “This is extremely high by any standard and is a factor of both strong demand to short from the buyside and limited supply.”
Short sellers borrow shares to sell them in hopes of buying them back cheaper at a later date, aiming to profit from a price decline.
While the demand for shares to short is pushing against the available supply, the percentage of GoPro shares on loan — a proxy for short-selling activity — isn’t wildly outside the norm. As of Wednesday, it stood at about 2.5% of shares outstanding, according to Markit. That’s above the average short interest for the S&P 500 at about 2.2%.
GoPro makes wearable high-definition videorecorders that first appealed to surfers and cyclists seeking ways to record cool tricks before surging in popularity among the general public.
Shares are up about 250% from GoPro’s $24 IPO price. But trading in the stock also has been erratic. The stock fell as much as 14% on Thursday after the company said its founder, Chief Executive Nicholas Woodman, and his wife, Jill Woodman, gave 5.8 million Class A shares worth about $500 million to a charitable foundation. The couple had been restricted from selling the shares until six months after the June IPO, but sidestepped a so-called lockup agreement and transferred the stock.
Shares rose about 11% on Sept. 29 after the company unveiled a slew of new cameras. The stock also fell 15% on Aug. 1 after the company reported earnings.
GoPro shares rose 3.1% to $88.14 Friday afternoon.
Posted by Bud Fox at 7:11 AM
Thursday, September 18, 2014
Monday, September 08, 2014
Saturday, September 06, 2014
In investing, as in life, timing can be everything. The cycles of the capital markets are as immutable as are the seasons of the year. Those who commit risk capital while the cycle is enjoying its risk-on spring will prosper; those who avoid risk-taking during the spring would be well advised not to do so as the autumn chill approaches.
Shockingly, as critically important as it is to take the measure of financial and economic cycles, there is precious little insight offered in terms of understanding what drives them. The ability of our institutions to forecast, much less control, cycles has been exceedingly poor. Need proof? Inspect the pronouncements of our high priests and priestesses of finance at the Federal Reserve. In June 2008 — three months before the failure of Lehman Brothers and the takeover of Fannie Mae and Freddie Mac — the Fed expressed its concern over rising inflation and reiterated its expectation that growth would continue.
My point isn’t to lambaste the Fed, which — like the U.S. government, Wall Street and the media — failed to perceive the severity of the financial fragility that had developed during the housing bubble. Rather, my purpose is to remind that the customary ways of understanding and measuring cycles are nearly useless and investorsneed to examine them in a new, or at least different, way.
Traditionally, two basic narratives have been used to explain cycles: Recessions happen because businesses become infused with an excess of animal spirits. Overexpansion begets an unwanted build in inventory, forcing the shuttering of production until inventory is worked down to a manageable level, at which point normal growth is restored. Now, does that sound like any business cycle you’ve seen in the past 30 years?
Alternatively, some claim that the imbalance comes not from business but from consumers. They get exuberant, go on a shopping spree and spur inflation, compelling the Fed to pull the punch bowl. Once it is removed, consumer spirits dampen, and the cycle concludes. Well, does this sound like 2008? Was inflation such a menace that the Fed raised rates to flatten growth?
So if the usual suspects have little to do with the demise of the cycle, then investors ought to look elsewhere to more properly gauge its longevity. A study of the deleveragings of the past quarter century provides the necessary guidance: Simply put, we have lived for some time in an integrated global economy mirrored by a globalized financial system. This means that the credit cycle and the business cycle have become almost one and the same.
Provided that the capital markets are willing and able to extend the frontiers of credit that one extra step, so long as one more marginal loan can go to that one more marginal borrower, we maintain growth. But once the high-water mark in credit is reached, a deleveraging inexorably builds momentum (either over several quarters or within the context of a market crisis, when it happens over days or weeks), and an economic downturn is under way.
The implications for investors are clear. Main Street economic indicators — car sales, purchasing manager surveys, employment data, housing market activity, asset prices — are highly dependent upon the willingness of the capital markets to engage in the lending activity that fuels a releveraging economy. The notion that high asset prices and a low level of unemployment inoculate the economy from downturns is belied by history. Did such a peak in stock and real estate prices prevent the cataclysm of 2008? Did the sub-5 percent unemployment of early 2008 mean that the virtuous jobs-income-jobs cycle had firmly and forever established itself? Obviously not.
If you want to understand how old the current cycle is — that is, how risky a commitment to risk-based assets might be — then it is critical that you judge the quality and durability of underwriting standards in the capital markets. A recovery that is predicated on the continued production of loans, too many of which will ultimately go bad, is no recovery at all. Rather, it is a condition that supports current economic activity at the expense of a future write-down in loan and asset valuations.
Yes, conditions appear better, but the house of recovery is increasingly being built out of credit straw rather than brick and, consequently, will not withstand the gales of the tighter credit to come. Whether these tighter conditions come naturally, via a capital markets self-realization of the excesses, or by the Fed’s need to raise rates in response to the risk or reality of higher inflation, the result will be the same: a deleveraging and possibly recession. For this reason, we at TCW have steadily reduced our exposure to rates and to risk-taking in credit with the expectation that an inevitable winter of higher rates, wider risk premiums and higher volatility lies ahead.• •
Tad Rivelle is CIO for fixed income at TCW, which manages over $140 billion in assets globally.
Posted by Bud Fox at 6:34 PM
Thursday, September 04, 2014
YOUR APPARENT OPTIONS: DEAD, DYING OR LIVING DEAD
THE PARALLEL EXPERIENCE OF THE LIBERAL ARTS COLLEGE
“THE FAULT, DEAR BRUTUS, IS NOT IN OUR STARS, BUT IN OURSELVES, THAT WE ARE UNDERLINGS.”
SEVEN THINGS THAT MATTER.
TWO THINGS THAT DON’T.
THE ONE THING THAT MIGHT MATTER?
SMALL WINS FOR INVESTORS
CLOSINGS (AND RELATED INCONVENIENCES)
OLD WINE, NEW BOTTLES
OFF TO THE DUSTBIN OF HISTORY
Posted by Bud Fox at 5:03 AM