Roger Nusbaum submits: A question came in about the Alpine funds. The reader is considering buying Alpine Global Dynamic Dividend Fund (AGD). Apparently they have a new fund coming called Alpine Total Dynamic Dividend Fund (AOD). I am favorably disposed to the concept. I wrote about AGD for TheStreet.com when it first listed.
As best as I can tell the difference between the two is that AGD will manage for qualified dividends were AOD will not. That could be an important distinction.
Not sure if I need to disclose that I own an open end version of this for what I think is four very small accounts -- Alpine Dynamic Dividend Fund [ADVDX].
The reader says he may add AGD or the new AOD as a fixed income proxy. He notes that the time is not right high yield bonds.
There are only a few months to look at but AGD may not quack like a bond fund. I don't think the reader is taking crazy risk but he is not buying a bond fund and I am not sure if AGD could be called a bond proxy either.
Also in this question was whether these CEFs might be like the WisdomTree funds. I think that is a possibility. The two seem to have similar characteristics, but that is all the more reason not think of AGD as a bond proxy. If there was a stock market crash I would expect AGD to capture most of it. One positive aspect about this as a bond proxy could be that AGD would probably not be as interest rate sensitive the next time rates spike up.
Please note: I am not knocking the merits of the fund, just questioning whether it could be a fixed income substitute.
Another reader asked for clarification on what I mean by 'low correlation' and what I look for when I say low correlation.
I'm not sure I can make it crystal clear but I can describe how I integrate this into client accounts. First, at certain points in the stock market cycle it makes sense to have a portfolio look a lot like the benchmark -- for me, that's the S&P 500. At other times it makes sense to move away from the S&P 500.
Moving toward SPX would mean owning a lot of big US companies in the index such that the point-for-point movement is pretty close. This would entail the sector weighting being about the same as the index with the names held being the largest with in each sector.
Moving away from the index could entail several things including changing cap size, going foreign, making sector bets and raising cash.
Turning the entire portfolio upside down in pursuit of this is not practical. So this is where adding in things with a low or negative correlation to SPX comes in handy. An inverse fund will obviously have an inverse correlation and can be an efficient way to reduce the correlation of the portfolio. Gold seems to drift from a slightly negative to slightly positive but it is never high. So 5% in a gold something or other and 10% in an inverse fund goes a long way to reducing the correlation of the entire portfolio, even if every other holding is a mega cap.
I have written numerous times about the various things I use to reduce correlation of the portfolio - from foreign stocks to high yielding to commodity to foreign currencies. If this is something you really want to be able to quantify, you will probably need to pay for the information from some sort of data service.