Seeking Alpha

Daniel Moser

View as an RSS Feed
View Daniel Moser's Comments BY TICKER:
Latest  |  Highest rated
  • Is Everything We Know About Stock/Bond Allocations Wrong? [View article]
    I accept.

    P.S. I am flattered that you found my article interesting/influential enough that you 1.) read it more than once and 2.) found it compelling enough to invest the time required to write an entire blog post devoted to raising questions and posing critiques to several of the arguments in my article.
    Sep 12 02:41 PM | 3 Likes Like |Link to Comment
  • Will The Real 60/40 Please Stand Up? [View article]
    Haha. That is good. I wonder if someone were to write about the impact of divorce on retirement outcomes if SA would publish it.

    Hayekvonfriedman - that is actually a complicated set of questions and a thorough/complete answer will require a substantial amount of work. My process actually assumes monthly re-balancing for better or worse. I don't know if this is the best re-balancing period or even if changing re-balancing periods has a material impact on this analysis. Intuitively, it may impact the performance data shown at the bottom but that historical performance is just that anyways: historical. On a high level, optimal re-balancing is essentially analogous to picking winners - just on a much smaller scale. The important thing is that you are maintaining the approximate risk exposures you desire overtime and the specifics of how large a deviation it takes to warrant a re-balancing is just one opinion vs. another. I am sure there are tons of research papers that explore optimal re-balancing and what impact it has on various strategies.

    With respect to transaction costs, I totally ignore them - which I would argue they are immaterial anyways for a strategy like this given the ultra low cost of ETF transaction fees at various low cost brokers.

    Your questions regarding secular or cyclical trends are relevant but unfortunately equivalent to asking which asset classes will outperform on a risk adjusted basis in the future...e.g. how do demographic factors impact financial flows into various asset classes (i.e. equity valuations, performance, volatility, etc.)? That question has tons of merit, but it is a market call and in effect the outcome would likely involve skewing a portfolio's risk allocation marginally in favor of which ever asset class you expect to perform best (on a risk adjusted basis) due to the secular trends vs. other asset classes. I am sure there are countless research papers evaluating the role of strategic asset allocation (long term secular trends) vs. tactical asset allocation (cyclical trends) and maybe they could be of some value.

    The most interesting part of your comment, in my opinion, is the question regarding contingency plans for the extremely low interest rate environment and how to best re-allocate as interest rates normalize to more historic levels. That is an awesome question and the truth is I don't know. My initial thought is that when the facts change, you re-balance which is to say when the "fixed weights" no longer provide the desired risk balance between equities and fixed income, you adjust the weights. The more important issue that I don't know how to resolve is this: as interest rates rise the diversifying properties of bonds will increase. This is due to the fact that at the point long term interest rates are higher vs. current levels there will be room for them to return to low levels again in the event of a market downturn - effectively leading to price appreciation and potentially strong relative out-performance of bond funds vs. equities. Additionally, there are other fixed income funds such as 1-3 year, 4-7 year duration funds that may become the superior fixed income instruments, from a statistical characteristics perspective, to include in the asset mix during a period of rising interest rates. This may actually turnout to be the best interest rates begin to actually rise, an investor should re-allocate more heavily to the front end of the yield curve and take on more credit risk as opposed to duration and interest rate risk for their fixed income allocation.

    There are probably people on here much more capable than me to actually explain the mathematics, as well as the relative importance of risk factors such as credit, duration, interest rate etc., and demonstrate how these varying factors can play out in varying scenarios and perhaps provide some good guidance for the future.

    Studies of risk parity strategies (which is what my analysis is effectively based on) have shown robust performance over long investment horizons. It's during periods of significant one way equity out-performance vs. other assets that this approach to asset allocation looks less than desirable - but that becomes a question of timing capabilities.
    Sep 9 04:12 PM | 1 Like Like |Link to Comment
  • Will The Real 60/40 Please Stand Up? [View article]
    68osb28 - congrats on the good performance doing it yourself. Having said that just remember that any asset allocation mix that incorporates multiple asset classes will likely under perform a portfolio 100% allocated to the strongest performing asset class during a set time period using only return driven metrics - it's when that cycle turns that you get crushed. If you happen to be continuously blessed with fortuitous timing skills and can successfully re-allocate your asset mix prior to a severe correction than you will no doubt fare very well.

    I have noticed TONS of investment firms, mutual funds, etc use very bastardized versions of MPT and from what I can tell, a large portion of them are essentially mediocre versions of the S&P 500 - literally by design and perverse incentive structures.
    Sep 9 02:02 PM | Likes Like |Link to Comment
  • Will The Real 60/40 Please Stand Up? [View article]
    Old Trader - My absolute two favorite investing books are Steven Drobny's "Inside the House of Money" and "The Invisible Hands". At 27 years old, they have been immensely influential on my way of thinking. There are so many thought provoking points made by the fund managers interviewed in his books. I can't tell you how many times I have re-read chapters only to gain new perspectives and potential ideas that I never considered in my 2nd or 3rd reading of those same chapters. And yes, the concepts underlying my article are pretty much exactly what "the pensioner" discussed in that book.
    Sep 9 01:47 PM | 1 Like Like |Link to Comment
  • Will The Real 60/40 Please Stand Up? [View article]
    Smarty_Pants: You make a valid point. The time period under consideration is limited and potentially skewed in such a way that the performance chart at the bottom of the article is not necessarily indicative of what the next 5 years will look like. That does not in any way invalidate the approach or conceptual premises underlying this article. It simply introduces additional information that needs to be carefully thought through when making any investment decisions.

    Toledoinvestor: my time frame was constrained by data availability on the specific funds I incorporated into the analysis.

    You raise some important issues in your first comment. When I discuss risk in this article I am referring to volatility. And when I discuss risk exposure I am referring to the overall portfolio volatility that can be attributed to each asset class (in retrospect, I should have called this "risk contribution" to help prevent any confusion). I don't explicitly discuss risk factors (i.e. credit, duration, liquidity, etc).

    With respect to the relative correlation of each fund vs. the S&P 500, that all depends on the time frame you are using to measure the correlation. Over the entire time period in question I am showing a correlation to SPY of -.10 for AGG and 0.168 for LQD (using daily returns from Jan 1 - Sept 6). The higher level point that I would argue you are raising is that over the time period in question, AGG has not exhibited enough volatility within its available risk factors (credit, duration, liquidity, etc.) to meaningfully contribute to the portfolio's volatility vs. the volatility exhibited by stocks over the same time frame. This is exactly why the risk exposure calculation using only SPY and AGG yields a risk exposure of 95% to equities and 5% to fixed income.

    Moreover, only after increasing the various risk factors you highlight i.e. credit, duration, etc., did the fixed income allocation exhibit sufficient volatility to actually contribute to the volatility of the overall portfolio - which is to say it actually reflected a true 60/40 asset allocation.

    And with respect to showing my calculations: only because I don't actually run a fund : )

    I want to provide the calculation, but it is pretty difficult to type it in the comment box without looking pretty confusing. So in lieu of an typed out formula, I just found this slide show put out by Panagora that explains the calculation. Incidentally if you look on slide 6 (pg 7) they show the same thing I have shown with the 95% and 5% risk exposure/contribution breakdown between stocks and bonds. They go into a lot more stuff in this slide show but hopefully this will help you out as far as calculations go. Let me know if this is insufficient for providing the calculation I used, and I will figure out how to type it out without confusing everybody involved.

    Thanks again for reading and all the comments. Good discussion.
    Sep 9 01:37 PM | 1 Like Like |Link to Comment
  • Will The Real 60/40 Please Stand Up? [View article]
    Good comments from everyone. Let me start from the bottom and move towards the top:

    1.) Mgordon10 - On what basis are you arguing that the classic 60/40 portfolio is far superior to the alternatives I purpose? I would argue fixed income investments should provide far more than a simple anchor to a risky (read: volatile) equity portfolio. The implication of your argument, if I have understood it correctly, is that investing is 100% about stock picking - as fixed income is included to simply work as an anchor against the excessive volatility of stocks vs. including fixed income as a means of introducing incremental returns/diversification properties to the overall portfolio. Which, if I have understood your argument correctly, I can't agree. Depending on the mathematics, you can pick a majority of "winning" stocks and still end up worse off than had you invested in a diversified portfolio of different asset classes.

    2.) Geneh - I am not entirely sure I understand your question. If you wanted to go over the top and really do this the right way you would include every asset and associated cash flow/return stream ranging from SS, equities, real-estate, etc. Having said that, I did not specifically include SS or annuities into the "fixed income" allocations.

    3.) Crankyguy - Let me ask you do your investors react to modestly under performing the market during up swings? I have full confidence that this strategy works over a long investment horizon but during periods when equities go up 15-25%, this strategy would likely under-perform an all-equity portfolio and I just wonder how quick a client is to fire you as they tend to focus only on upside that they feel they are missing out on effectively forgetting what happens during bear markets?

    4.) Jonathan - I read the Bridgewater whitepaper a while back...and that paper as well as a few others completely changed my life. In fact, I have incorporated risk parity concepts into many of my SA contributions.

    5.) I will make a specific comment for Toledoinvestor.

    6.) Varan - I don't know anything about the Morning Star fund selector tool but I do agree that many people got crushed because they did not have a thorough enough understanding of the risks inherent in their portfolios.

    Thanks again for reading and all of the comments.
    Sep 9 12:37 PM | Likes Like |Link to Comment
  • Will The Real 60/40 Please Stand Up? [View article]
    I appreciate all of the comments and praise. Let me answer the question regarding relevancy with another question: does diversification matter?

    If diversification does not matter, then this is not relevant to anyone regardless of their age. If diversification does matter, then the concepts underlying this discussion are not only relevant, they are somewhat crucial to success.

    While I chose to focus on asset allocation between fixed income and equities in order to extend on another SA contributor's article, this same analysis can readily be applied to any asset mix under review-including 100% equity portfolios.

    Thanks again for reading.
    Sep 8 11:31 PM | 1 Like Like |Link to Comment
  • Metals & Mining: Buying Opportunities Are On The Way [View article]
    Thanks for your comments on both articles. As time permits, I will definitely look into the BHP presentation you mentioned as well as look into what I can find on iron ore production costs (which intuitively I would think are similar).

    Just for the contrasting view, I would suggest looking into Hugh Hendry's market views on China. After watching a few video clips or reading a few interviews with him, you may disagree with his view...but it is definitely worth considering with respect to China and the medium/long term impacts of their policies on engineering growth.

    Thanks again for reading.
    Jul 24 08:43 AM | Likes Like |Link to Comment
  • Don't Expect North American Prices For LNG Exports: Shell Chief [View article]
    "Investors, however, have grown increasingly concerned that buyers such as China will refuse to accept an oil-linked price and instead demand pricing on North American terms. If that happens, LNG exports suddenly become a much more tenuous proposition."

    Whats your source for this argument? When you say "North American Terms", are you referring to a an index on natural gas prices such as Henry Hub (plus some variation of differentials)? Foreign buyers of LNG who have historically purchased LNG based on long term contracts priced to oil indexes got the short end of the stick within energy markets - shale production has driven North American natural gas prices to levels that would have been completely unbelievable 5-7 years ago meanwhile Brent crude oil (the global price marker) has been and remains relatively strong. Granted, at the time the foreign buyers entered into the long term LNG purchase contracts, it seemed like a good idea to enter into such agreements for their own energy security...the natural gas/crude oil markets were relatively well correlated commodities. As it turns out, it didn't work out so well for the buyer. One might be hesitant to conclude that global LNG contracts will become primarily priced off of Henry Hub prices, however, the idea that LNG becomes priced to various indexes linked natural gas prices of the producer supplying the product or at the nearest "liquid" market strikes me as a very logical idea for the buyers and the sellers.

    May 30 10:02 PM | Likes Like |Link to Comment
  • Annaly Capital: A Great Buy For Strong Income In 2012 [View article]
    So the largest short coming of this analysis is that it doesn't address the fact that Annaly relies on leverage to earn returns - the cost of which is tied to short term interest rates. Operation twist has the potential to derail or at least hamper Annaly's ability to earn the same level of income (let alone grow income)...which is to say the cost of their leverage could rise while the yields on mortgages fall when the Fed begins purchasing longer term assets. This issue needs to be addressed in order to make a bull case for NLY.
    Dec 22 10:27 PM | 2 Likes Like |Link to Comment
  • MLPs Continue To Be A Great Investment Opportunity [View article]
    Na...I didn't take that much time with it when I wrote that comment. I simply clicked on Google finance, put in the ticker, checked the box to overlay S&P 500 and then proceeded to click through from left to right the time frames I said in my comment and found what I found...that SRV doesn't perform better than the S&P 500. Ok, so now I am curious about whether Google incorporates dividends into their return calculation. So, I just pulled holding period returns including dividend payments and here is what I am seeing...

    In the past 12 months ended Nov'11
    SRV = (8%)
    SPY = (1.44%)
    AMLP = 4.59%
    My MLP Portfolio = 11.7%

    However if you extend the time period to 15 months which is what is shown in the chart above...

    SRV = 16.78%
    SPY = 8.78%
    AMLP = 10.08%
    My MLP Portfolio = 20%

    So, I guess there are specific time periods possible in which SRV did outperform the S&P 500. Just in case you are curious over the entire time period 12'07 through 11'11...

    SRV = (16.668%)
    SPY = (10.31%)
    My MLP Portfolio = 43%

    But there are those dreadful K-1 forms to mess with!

    Thanks everyone.
    Dec 15 07:50 PM | 1 Like Like |Link to Comment
  • MLPs Continue To Be A Great Investment Opportunity [View article]
    Thank you for the comments. Every time frame (5d, 1m, 3m, 6m, ytd, 1yr) I looked at, SRV underperformed vs. the S&P 500. Like I said in my article messing around with K-1's is some extra work but if you like being down over 16% while the S&P 500 is only down 3.3% and my MLP Portfolio is actually all means have at it.

    The problem with countless funds out there are that they are DESIGNED to track an index and if they get lucky and slightly outperform their index that is seen as a huge accomplishment. Funny thing, when I took a quick gander at their top 10 holdings on Swank's website...the fund factsheet indicated their largest single holding is a 6.6% short position in the JPMorgan Alerian MLP Index ETN. Hopefully this is not the case...but one could argue that they are not even bullish of MLP's as an asset class so they are holding this short position in the index fund so they can marginally outperform their benchmark if a bearish scenario on MLP's plays out. Again, that is probably a bit harsh...but the point being how a fund is constructed determines the outcome of the is not enough to simply hold some of the same securities.
    Dec 15 05:29 PM | 1 Like Like |Link to Comment
  • Why MLPs Are Extremely Overvalued As An Asset Class (Part 1) [View article]
    So why are MLP's priced wrong if your case is a relative valuation case? it seems inconsistent to suggest MLP's are not necessarily overvalued on an absolute basis but simultaneously say that they are overvalued on a relative basis. That would seem to suggest that the case being made is that equities are undervalued. In my opinion most MLP's should trade at a premium to stocks as they have more stable cash flow streams than most companies in the S&P 500. Unless you are particularly bearish on
    the earnings stream of MLP's, I don't follow how this supposed overvaluation can be corrected. After all if their share prices fall without a corresponding decline in profits, their yields will be awfully high relative to bonds even after adjusting for risk - at which point they will likely perform remarkably well over a medium term time horizon. So, this leads me to ask, are you hyper bearish on MLP earnings? Please recall during the worst of this on going recession, energy demand marginally declined relative to other industries and or on an absolute basis. Since a lot of MLP's earn their livings off of storage, transportation, throughput, will take a very bold call to suggest these earnings streams are just going to collapse thereby correcting the overvaluation that you assert exists.
    Sep 1 11:59 AM | 2 Likes Like |Link to Comment
  • Why MLPs Are Extremely Overvalued As An Asset Class (Part 1) [View article]
    After reading most of the comments, I saw very few that mention a discounted cash flow analysis. Some people did mention that MLP's compete with fixed income why not use the same technique to value them? After all, lots of MLP's operate extremely stable businesses which lends itself to a discounted cash flow analysis. It would be tedious but I think it would completely change the results of your conclusions in many cases - while I am
    sure there are actually overvalued MLP's out there. I guess I just want to know what makes the metrics you highlight relevant? And if they are relevant, why is it superior to use them to make an investment decision vs a discounted cash flow valuation?

    Disclosure: I have long positions in 11 different MLP's. Most of which can be seen in this article I posted on MLP's a little while back.
    Sep 1 10:26 AM | 1 Like Like |Link to Comment
  • How to Invest After the Roller Coaster Last Week [View article]
    Thanks for the comment. The only reason it is compared to the S&P 500 is that the S&P 500 (or in reality the Dow Jones Industrial Average) is the most publicly accepted measure of how the market is doing. As such, I would argue most people are always intuitively comparing the returns they are earning with that of the S&P 500 or DJIA. As I recall, I did state that the risk exposures are much more diversified (i.e. different) than the factors inherent in the S&P 500 in the article where I covered my process of how I created this portfolio (linked above).

    My primary interest is the creation of a portfolio that exhibits less than or equal to the volatility of the S&P 500. The general point or theme being that you can still earn decent returns by holding risk exposures that are distinct from one another as well as the risk exposures inherent in the S&P 500.

    What is it about these funds that you consider particularly risky? The fact that they utilize leverage? So long as the risk factors inherent in the funds maintain some level of independence from one another, the leverage isn't necessarily a bad thing. Furthermore, the second primary question of this article was dedicated to my view on short term interest rates and the implications they will have on investing. Debt funds can be much less volatile than equity funds, and to the extent that they utilize leverage (which in my view will remain relatively cheap for quite a while into the future) they should perform well on a risk adjusted basis compared to stocks which will likely remain uncomfortably volatile for a lot of investors.

    My final question is in regard to the NAV of the fund PTY. I definitely appreciate that concern. It is at least mildly uncomfortable seeing such a large discrepancy but I do wonder whether it is some sort of accounting short coming with how PIMCO is required to report NAV or more generally what is the driving force behind such a large discrepancy. How can the market so blatantly allow such a wide variation between market prices and value to occur? Unless of course there is some shortcoming in how you are analyzing the values vs. price. I guess I take some solace in the fact that PTY has been performing essentially as expected...and the allocation is smallest to it in the overall portfolio. It probably still deserves some extra scrutiny by individuals.

    Thanks again for reading and for the comment.
    Aug 15 05:39 PM | Likes Like |Link to Comment