Gregory Skidmore

Gregory Skidmore
Contributor since: 2008
Company: Belpointe Asset Management
I was referring to short term muni bonds. What is your duration?
Muni's have their place for sure, as do Federal Agency Securities. My concern with Muni's is that they don't provide the same protection as Treasuries and in recent history I haven't felt the risks taken supports their low yields. Federal Agency Securities provide better protection in times of distress, but I've favored pure US Treasuries.
You are correct that buying puts and bear market funds do generally protect against a declining stock market. However, I've found treasuries do it at a lower cost.
I will do my best to add some context and provide additional reasoning behind why I incorporate Treasuries even when they are yielding so little.
I manage money for a wide range of investors. Some are conservative and some are aggressive. The portfolios I manage are generally balanced portfolios. Clients who are in retirement are usually taking distributions from their portfolios.
The last time interest rates were this low were in the 1940s ( and as rates slowly rose until they peaked in the early 80's stocks outperformed their historical average and government bonds underperformed their historical average. So during this period of rising interest rates stocks made up for the underperformance in government bonds. However, during this same period there were many corrections in the equity markets and holding government securities in a portfolio during this period reduced the volatility of a portfolio and provided important liquidity.
Some people will disagree with my belief that Treasuries should continue demonstrate the tendency to rise in price when stocks fall in price. However, historically Treasuries have tended to move up in price when stocks move down in price. So they have provided insurance against falling markets. In other words they have provided an important source of liquidity to investors when they need it most. During a market correction an investor would have the option to sell Treasuries to meet their liabilities instead of selling its theoretically under priced stocks. The kinds of investors faced with this type of need would be anyone drawing income: retirees, pension funds and endowments.
I believe interest rates will slowly rise over the next 30 to 40 years as they did between the 1940s and 1980s. I expect that stocks will outperform their historical average and government bonds will underperform their historical average. Even though I feel this way, the problem with holding stocks is that they can lose up to 80% of their value in a crash as they did in crash of 1929 or commonly 50% as they did in 2008-09. Therefore holding dividend stocks in place of Treasuries requires an investor to assume a much higher probability of a capital loss. History has shown that investors who may need to access their capital to meet immediate or near term liabilities would be better served to hold a portion of their assets in treasuries.
In regards to the statement concerning Treasuries and that “they’ll be intrinsically valueless”... People may find the following helpful: Ken French, Professor of Finance at the Tuck School of Business at Dartmouth College, explains how investors can manage inflation uncertainty using Treasury Bills and Treasury Inflation Protected Securities in a video at the following link. (
In terms of investors mentioned (Buffett, Soros, Yacktman, Icahn), I would assume they all hold short term Treasuries as a form of liquidity and to meet the needs of short term liabilities such as fund redemptions or distributions. As a side note David Swenson, CIO of the Yale Endowment, recommends 30% in Treasuries (15% in TIPS and 15% in regular).
Is your question referencing ETFs or Mutual Funds? Also do you prefer buying actual bonds?
I like and agree with your suggestion of switching a portion of fixed income to high quality/defensive equities. Half way through the article I mention some of the WisdomTree Funds I've used.
I do allocate to MLPs and BDCs as well as REITs using ETFs. Depends on the risk of the portfolio. Unless a market is extremely liquid like the treasury market, I don't like buying bonds in an ETF because an ETF carries secondary market trading risks and during times of distress they can trade far away from NAV. When I allocate to bond mutual funds I tend to use Vanguard or DFA Funds which typically have expense ratios as low as ETFs.
Thanks for your question. I like FFRHX and think it is a great fund. I use EABLX for a small allocation of 2.5% in my model accounts. I have not changed my floating rate allocation since I added it a year or so ago. EABLX carries a little more credit risk and has a higher yield. You can see that in how it got beat up a little more in 2008 and 2009.
If the economy starts to slow I will probably switch to FFRHX or something similar.
Unfortunately this kind of stuff goes on too often. However, it was fun to watch David stand up and start yelling when this was announced.
To follow up on Herve's comment, there have been many companies that have produced dominant products/services throughout history. Some maintain that status longer than others and some have been monopolies but not all. The one's that come to mind are: Dutch East India Company, Wedgwood, United Aircraft and Transport Corporation, US Steel, Standard Oil, RCA, Ford, AT&T, Kodak, Sony, Nintendo, Microsoft, Netscape, and Apple. History tells us that biggest threats to Apple are the government, competitors or a drastic change in technology.
I believe it is important to watch Nokia because they are well position to benefit from any challenges that Apple might face. (Disclosure, Herve and I work together. I do not own Nokia in any of my portfolios.)
This article is meant to point out that the average retail investors is taking on duration and credit risk to get yield without fully understanding the risks that go along with chasing yield. This group has always used bonds for safety of principal and income. Bonds have served these conservative investors well since the 1970's and as Steven Bavaria points out in his comments above this is not the 1970's.
The next 30 years of bond returns will look very different from the last 30 years of returns. Investors who try and chase the returns they have previously receive from bonds by adding credit and duration risk may be burned badly. This is the wrong time for these types of investors to be adding that kind of risk. The last time interest rates were this low was some time in the 1940's and for the next 30 years the annualized returns of bonds was approximately 2%.
For investors looking to protect principal within the fixed income markets I believe a globally diversified portfolio of short term, high quality fixed income is appropriate. Investors should accept that the period of time when short to medium term investment grade bonds could produce high single digit returns is gone.
The type of risk you are bringing up, fraud risk, is one that should be considered when investing in any small emerging markets company. So I would say your point is well taken, but we have no reason to believe there is any accounting fraud with TRIT.
Alan, Looks like that one could have been included in a list of competitors. It's not a name that we're familiar with or follow, but it looks interesting.
Tony, I am not sure I have the answer to your question. We have a top level estimate for sewage that is processed within China, but we have not developed or come across a number for how much sewage TRIT is processing through existing projects or an estimate of future sewage processing. So I don't think we have the number you are looking for in your question.
Alan, I agree that it is a high risk pick. We tend to craft portfolios using low cost beta (index funds and ETFs) and seek add alpha by adding positions that we think will move significantly. The risk of course is that they don't work out the way we hope and that is factored into how we design a portfolio. For our firm this would be high conviction pick even though it carries significant risks. Your point is a valid one, for others this could be too risky or a "gamble" as you called it.
I want to give credit to David Leute, a Portfolio Manager at our firm who follows this name closely and brought it to my attention.
Great contrarian pick. Like most value guys you might be a bit early on your pick, but that is the nature of value investing.
FYI - PFP is Powershares International Listed Private Equity. May want to fix that ticker.
Addition to my above comment. I have no problem with investors being bailed out by any SIPC coverage they are due. Any amount above that I have a problem.
I don't know how you can't feel badly for investors who lost money. I personally don't like to see any honest person lose money. They may have made a mistake to invest with Madoff, but they did not deserve to loose out in a ponzi scheme.
All that being said, I don't believe any investors should be bailed out. I've heard the idea tossed around and this would only encourage people to continue to make investments without doing adequate due-diligence.
I find this idea of selling in wmt curious. I think it risks alienating Apples cult like following. I remember reading Malcolm Gladwell's book Tipping Point and he discusses when Airwalk started selling their shoes in main stream dept. stores. Killed the brand immediately. What made Airwalks cool is you had to buy them in skate or bmx shops. Is apple going to make itself uncool by selling in wmt?
It seems to be a problem with market makers. PCY has been trading below it's intraday NAV for two months now. It seems whoever makes the market is not redeeming their creation units. So it continues to trade below NAV. Usually market makers arbitrage this spread to make money. Right now NAV is $21.69 and last trade is $18.55. If you look at EMB from iShares it is actually a smaller Emerging Markets Bond ETF as well with lower volume and fewer assets under management. NAV is $86.60 and last trade is $85.21. EMB seems to have market makers doing a better job making a fair market. My firm holds PCY.
Good points. My belief is that there will always be some individual who accurately predicts a rare event. Whether this is luck or skill is another discussion. However, for the masses these are unexpected events.
ETF Investor - Thanks for the informative comment.
Also interesting is the EMB is not trading this way. The portfolio do not look that different so this seems to be a PCY issue.
It looks like PCY is trading at a discount to NAV. Can anyone confirm my logic? It's been this way for several days. I spoke to PowerShares and they seem clueless. These quotes are from yahoo.
^PCY-NV 23.26
^PCY-IV 22.95
PCY 20.20
On Sep 18 01:03 PM rayhendon wrote:
> Looking at the detail of their holdings, it looks like the death
> list of an airlines crash where there no survivors. Chilean debt
> is their largest holding, and the Chilean economy and currency has
> been besieged lately. This is also true for most of Latin America.
> Then they have Bulgaria, Hungary and Turkey--two of which (Hungary
> and Turkey) have currencies under severe attack. I don't have good
> data on Bulgaria, but it is a former vassal state of Russia, with
> little experience in modern capitalism.
> Then, they have over 4.5% invested in Russian bonds. Russia's equity
> market has been forced to close for the last two days, attributable
> to the meltdown of some of their largest banks--all are severely
> undercapitalized (like the U.S. banks, only more so), and the ruble
> has been vanquished.
> I have no time table for when any of these collapses will conclude.
> At the edges of the financial world, all these countries, indeed
> almost all emerging markets except China and India are suffering
> greatly as the world's investors try and get a grip of what's happening.
> I don't think there is going to be any fast recovery for them. But,
> when they do recover, it will be twice or three times the rate of
> developed economies. The volatility of emerging markets equities,
> currenies and debt is exceptional. You must be prepared to take some
> big lumps if you get into these investments. Personally, I have confidence
> that most of those I listed will recover. Their economies have far
> to go on the upside. But their fairy tale growth has ended for now,
> and it may be some months before all the commotion settles down.
> For now, there is an international flight to quality--can you believe
> U.S. Treasuries? They are still the prime debt instruments in the
> world.
> Best wishes,
> Ray
> Ray
Tom's a smart guy, we had him on our radio show a month or so ago.