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Kipley Lytel, CFA  

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  • A Once In A Generation Change For Stocks [View article]
    There is a lot of read between the lines here. Fed is not mandated with policies to solve inequality. Regardless, the Fed mechanisms are blunt instruments and not scalpels to elevate the standard of living for the so-called underserved 95%.

    All boats rise in a rising tide, or fall in a receding tide - in other words, policies tend to impact the whole. The Committee currently anticipates that, "even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." That does not indicate a change. Everything has remained rather transparent with Yellen, including the phasing out of economic stimulus.
    Oct 30, 2014. 10:45 AM | 2 Likes Like |Link to Comment
  • Defensive Income Strategies For Rising Rates And Bond Outflow Rotation [View article]
    The bigger point is that in 2014 YTD, the strategies recommended are still paying off: REITS, High Yield, MLPs, Covered Call funds, Preferred Stocks, Convertible Bonds, etc.

    TLT is the 20 yr, we focus on the 10 yr, which also drives mortgage rates. Yes, the Fed has not raised rates yet.

    Now, let's step back to 2013 when the article was written. The perception and expectation of rising rates was in play in 2013. Even though the Fed did not move rates, the 10-year Treasury yield rose to a high of 3+% (the highest level in years). For the first time in nearly a decade investors had taken more money out bond funds than they've put in -- and it topped the previous record from 1994. The bond outflow in 2013 was driven by interest rate increase fears, which were exacerbated by higher trending rates on longer treasuries, which were in fact in play and the strategies discussed applied to that environment. It is noteworthy we did not suggest shorting the treasury or cutting your yield potential by going very short duration - popular advice at that time. In fact, we discussed alternate income options that are still relevant in late April 2014 and, by the way, largely working for investors.
    Apr 30, 2014. 01:39 PM | Likes Like |Link to Comment
  • Defensive Income Strategies For Rising Rates And Bond Outflow Rotation [View article]
    You are a bit late to the party, as this article was written in 2013. Rates indeed were rising on the 10 year treasury for 2013 and bonds took losses in 2013.
    Apr 28, 2014. 02:05 PM | Likes Like |Link to Comment
  • The Pain Has Only Just Begun [View article]
    Gutsy call. Personally, I subscribe to diverse asset classes and remain cautious. Even with the recent market weakness, the S&P 500 is still near an all-time high level but it’s also below its all-time high valuation. At 19 times trailing earnings, the U.S. market today is more expensive than average but it’s not extremely expensive. In fact, the market’s valuation is still running below the average of prior peaks, both on a trailing and on a forward basis (around 17). When you are in a low-to-moderate interest-rate environment, the average price-earnings ratio for stocks is 18 to 19.
    At this juncture, we are closely monitoring earnings growth and quality, along with forward guidance by companies. We haven’t had a normal 10%+ correction since 2011, which isn’t really normal for a cyclical bull market. "Most corrections (over 80% of them historically) end in some kind of capitulation or supply exhaustion." That means supply tends to get stronger toward the end of a correction.
    We are also monitoring the relationship between credit spreads and the behavior of other risk markets. Credit spreads measure the “collective opinion of untold well-informed, financially incentivized participants in an ongoing conversation about risk.” Domestic credit spreads have remained low and stable. This suggests risk-on is still very much in place for long-term investors. Yield spreads between a widely followed junk bond index and the 10-year U.S. Treasury, the median spread over this 17-year time period was 5.34%, while three-quarters of all observations reflect a spread below 7.25%. Credit spreads also rose immediately before and during the two recessions.
    Feb 6, 2014. 11:30 AM | 1 Like Like |Link to Comment
  • Why Buy Convertible Bonds? [View article]
    I am not the author, but a zero coupon convertible bond (optional convertible note) is sold at a discount and matures at par - it accretes in value for yield and these securities tend to have lower yields than vanilla convertibles given they are viewed as having greater upside in optionality to convert into stock (greater potential gain).
    Jan 8, 2014. 10:37 AM | Likes Like |Link to Comment
  • Why Buy Convertible Bonds? [View article]
    I think you need to consider valuation metrics for converts, optionality and be cognizant that many convertible bond funds lost 30-47% in 2008 (more than balanced funds). My personal take is we are taking profits on about half of our convertible bond positions for 2014 (mainly on the lower grade issues that have had a great run.


    Jan 2, 2014. 11:45 AM | Likes Like |Link to Comment
  • Portfolio Diversification: Traditional-Alternative Core With Satellite Tactical Allocations [View article]
    We agree then that asset allocation is the overwhelming determinant of portfolio returns. That is a big building block of agreement.

    However, it is our view the stale expectations (static) limit investors to implementing a portfolio over only one efficient frontier. We believe a dynamic allocation program that encompasses the most recent expectations is superior to a 'set it & forget it' approach to asset allocation. The dynamic approach enables an investor to move the efficient frontier in line with new information. For example, 5% change in equity expectation return can materially change the optimal asset allocation mix. Also, changes to macro expectations like valuation, market risk, GDP, inflation, rates etc. can also sharply change allocations.

    Thanks for your input.
    Dec 9, 2013. 10:55 AM | Likes Like |Link to Comment
  • Portfolio Diversification: Traditional-Alternative Core With Satellite Tactical Allocations [View article]
    Good question. The article only touched on it some, as allocation weightings must firstly be determined by our internal forecasts and expectations driven by macro factors: market risk (premium), inflation, rates, volatility, GDP growth, etc. We forecast asset class returns over the next 6-months and 12-months.

    Then we turn to momentum weightings, such as Gaussian transform to the cross sectional momentum across horizons. The process uses a Gaussian transform to standardize relative momentum scores at each horizon period, such that the final momentum score for each asset is the average of the Gaussian score at each period. Ultimately, you get a vector of positive momentum weights which we can use as weights in the portfolio at each rebalance.

    Other considerations to allocation weightings deals with risk-parity and Value at Risk. The volatility weighting framework looks at how the assets allocations at each rebalance period contributes to the amount of risk to the portfolio rather than a set proportion of capital.
    Dec 9, 2013. 10:39 AM | Likes Like |Link to Comment
  • Portfolio Diversification: Traditional-Alternative Core With Satellite Tactical Allocations [View article]
    I believe it was 1970-2006 period, but he has ongoing updated studies. Also, his withdrawal rate was pretty low, in 2-3% range.
    Dec 5, 2013. 06:52 PM | Likes Like |Link to Comment
  • Portfolio Diversification: Traditional-Alternative Core With Satellite Tactical Allocations [View article]
    Not sure how it would be good for the advisor? Sorry for delay, as I thought this was already answered. Fees for our individual stocks, bonds and ETFs are marginal. We are not a commission practice, so no commissions. About 80% of our mutual fund trades have no transaction fees and we only use no-load or load-waived mutual funds. We also have access to many institutional lower fee funds, etc.

    Of course if you subscribe to random walk and markets perfectly efficient, while managers add no value, then 'ETF Do-It-Yourself' is your bias. We are not in that camp and nor are our clients. Probably just a different philosophy here.
    Dec 5, 2013. 05:40 PM | Likes Like |Link to Comment
  • Portfolio Diversification: Traditional-Alternative Core With Satellite Tactical Allocations [View article]
    Not with the many ETFs. We also accept no commission structure. About 85% of trades are Schwab One with no transaction fee (if not sold in 30-60 days), we don't invest in load funds, we get institutional fee rates on many funds, etc. However, if you believe no manager adds value and investing is a random walk, just do it yourself with ETFs. We are not in that camp and neither are our clients. Best of luck.
    Dec 5, 2013. 03:23 PM | Likes Like |Link to Comment
  • Portfolio Diversification: Traditional-Alternative Core With Satellite Tactical Allocations [View article]
    Good question.

    The turnover of the portfolio has ranged between 10%-60%. To keep it simple, I will work with round numbers. In 2008, turnover was about 60% (asset correlations & forecasts were breaking down in the market crash and we found treasuries, gold, etc. to still be holding up), then in 2009 it was about 30% (shifting back to equities and other assets), then 2010 was about 20-25% (still shifting to more risk-on), 2011-2012 was only about 10%, then in 2013 we are way back up to about 50% turnover (style drift, rising rate shifts, etc.).

    First, statistics work with normalized bell curve events (about 95-98% of the time), so I acknowledge that negative gamma fat tailed events change everything. Our turnover is often just rationale value-added, which is taking profits, style drift, new market paradigms in which we have to adapt to, etc., all which typically add alpha on annual risk-adjusted return on a long-term basis. However, optimization looks at the expected risk and return of each asset class along with the correlation among asset classes, and determines which mix of asset classes will provide the highest expected return for any risk level. You conduct resampling and sensitivity analyses to ensure the stability of the asset allocation recommendations under a variety of market scenarios.
    Dec 5, 2013. 10:58 AM | Likes Like |Link to Comment
  • Portfolio Diversification: Traditional-Alternative Core With Satellite Tactical Allocations [View article]
    I will send you a private message on this - I don't want to overload everyone else with our advanced quantitative conversation that has since gone way beyond the concepts of the article. Good topic though for maybe a financial journal discussion.
    Dec 4, 2013. 01:10 PM | Likes Like |Link to Comment
  • Portfolio Diversification: Traditional-Alternative Core With Satellite Tactical Allocations [View article]
    Incorrect, your applied formula is way off. There are a series of formulas that can't be added in this edit box given it doesn't have square root, etc. Yes, not a perfect science, but it is a combined DDC and GARCH, and as I illustrated, along with other factors, it is applied for estimating correlation. First Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) model is a common tool used to model correlation between two or more data series with GARCH volatility estimations to estimate correlation. There is also the AG-DCC model and ARCH models used to model time-varying volatility for time series data. The correlations evolve over time in response to new information regarding the returns, and as returns on both assets move in the same direction, the correlations will rise above their average level and remain at that elevated level for a brief
    period. The key step in forecasting analysis is to derive the DCC conditional correlations out-of-sample based on in-sample DCC-GARCH parameters. Once you have DCC conditional correlation estimate then this will serve as the first estimate, and then you also have the naïve unconditional in-sample covariance, which will serve as the second estimate. You then utilize mean-squared-error analysis to determine the difference between the realized covariance and the estimated covariances from the two models.
    Dec 4, 2013. 10:43 AM | Likes Like |Link to Comment
  • Portfolio Diversification: Traditional-Alternative Core With Satellite Tactical Allocations [View article]
    I disagree - that is why it was selected as an editor's pick. You can't backtest a dynamic portfolio that adapts allocation weightings to new circumstances anyway. Our portfolio three months ago is very different than today. Only our models track all changes throughout the year. You are trying to fit a triangle into a cube of many moving parts.

    However, the philosophy over the past 10 years has been largely the same.

    Seeking Alpha is a global syndicated blog and we don't advise in any other market than California, so my views are not designed to garner business via this forum - that would be naive. I suggest you read other articles submitted, which clearly counters that contention.
    Dec 3, 2013. 06:52 PM | Likes Like |Link to Comment
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