George W. Karpus, BridgeTower Media Newswires
How has your investment portfolio performed net of fees and expenses? Are you comparing performance against other similarly invested portfolios or against all others? At the top of this second longest bull market which ended in September, were you over allocated to stocks? How about bonds? How about positive return alternatives?
What I am seeing is that endowments and charities are employing manager/consultants that are doing a horrible job with respect to their clients' asset allocation decisions.
Although it is widely debated exactly how much of an impact asset allocation decisions have on returns, it is widely accepted that asset allocation is critically important in the investment process. Most of the people at the consulting firms are well educated but have minimal real experience in managing investments from the bottom up. They tend to talk to their clients about low fees and then they will select the managers or use low-cost mutual funds or indexing.
The time-tested asset allocation mix for most endowments, pensions and charities is 40 percent bonds and 60 percent stocks. How much have you deviated from that mix? Did your consultant advise you that stocks were indeed overvalued by all metrics and that weightings should be reduced? Did they increase exposure to safer investments? Did they significantly increase durations of the bond portion of your portfolio prior to the peak in long-term interest rates in September?
I am seeing endowment portfolios that are 25 percent bonds, 10 percent in commodity related alternatives, and 65 percent stocks. And the risk of the stock portion is above the overall market.
Any above-average performance over the last several years may have been lost during the fourth quarter of 2018. Commodities, led by the 40 percent decline in oil, are down 20 percent for the quarter and stocks are down over 13 percent for the quarter. Meanwhile, bonds are up slightly with longer maturities experiencing the biggest gains.
This is a reality check on your asset allocation because equity markets could see further volatile periods in 2019. Were you over allocated to stocks and commodities at the peak and under allocated to longer-term bonds?
As a firm, we have been advising our clients to reduce their allocations to stocks. As of the end of November 2018 our overall firm was allocated 55 percent bonds, 5 percent cash and 40 percent equities. Additionally, our bond portfolios were barbelled at 20 percent long-term bonds and 80% percent short-term bonds at the beginning of the year and are now about 70 percent long-term and 30 percent short-term bonds.
Additionally, our research has uncovered an under-researched type of preferred with maturity dates that produces a safe 6 ½ percent return for a 6-year average life. We also have a very safe strategy that our research indicates produces 3 ½ percent for one to two years. These securities are known as special purpose acquisition companies (company shells) that only own short-term U.S. Govt. securities until a potential deal is found and then shareholders can ask to receive the value of their investment plus the yield on the short-term treasury note the monies were placed in.
If you are not well experienced at managing money from the bottom up, you will not find or will likely experience difficulties understanding these investments. Positive returns from these bottom up investment ideas cushioned portfolios from the severe drop in equity values worldwide.
Building portfolios from the bottom up with good investment ideas led us to buy auction rate preferred securities that we began buying in early 2008. For the 10 years ending 6/30/2018, on average they produced a 9.7 percent annualized return.
In today's volatile marketplace, the reality check is how well you do on your portfolio over a longer time period. In my opinion, a successful investor will pick and stay with an appropriate strategic long-term asset mix and measure their consultants/managers, net of fees and expenses over at least two cycles. Finally, successful investors don't let their consultants/managers keep changing benchmarks.
Since inception, my firm's motto has always been: "Smart Advice Solid Performance." Any good manager should welcome the opportunity to compare the results of their average balanced account net of all fees and expenses over a 10-20 year period of time. By comparing results net of fees and expenses, an investor can truly find out who the best manager/consultant is over the long run.
-----
George W. Karpus is chief investment strategist and chairman of the board of Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully's Trail, Pittsford, NY 14534 (585-586-4680).
Published: Mon, Jan 07, 2019
