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  • Equity CEFs: Have CEF Discounts Really Dropped To 2008 Levels? [View article]
    Another possible reason for the increase in discounts-- CEFs might be a dying breed. They have been losing market share for years. One of the few benefits of CEFs, when compared to open end funds, is the ability to trade at a fixed price intraday. Now ETFs have that same ability with generally much lower expenses and much better tax efficiency. CEFs seem to have only two remaining draws--use of leverage and ability to time the market and buy the discount. How long can that sustain them as a investment class? Is it time to bail?
    Oct 5, 2015. 11:00 AM | Likes Like |Link to Comment
  • The ABCs Of Bond ETF Distributions [View article]
    Matt: Here's my take on distributions. Under the 40 Act, mutual funds, ETFs and closed end funds are required to distribute 95% of realized capital gains, after reducing that amount by expenses and transactions costs. But they can only distribute those once a year, and as you say they generally, but not always, occur near year end. They are required to distribute only 90% of the bond income, also reduced by the fund expenses and transactions costs but they can distribute those as often as they want so that is typically monthly or quarterly. This allows closed end funds to retain some earned income and it is referred to as UNII (Undistributed Net Investment Income). Allows those closed end funds to smooth out the distributions by holding that income for years when the distribution exceeds income. What many investors don't realize is that those UNII are already built into the NAV so when you buy a closed end fund with UNII you are buying a tax liability. Never been clear to me if ETFs and open end funds have UNII. Be a good topic for an article.
    Oct 2, 2015. 07:14 PM | 2 Likes Like |Link to Comment
  • How Survivorship Bias Distorts Reality [View article]
    Boris: Those pesky assumptions again. I guess we define "trading decisions" differently. Take a medium size open end fund like Fidelity Overseas (FOSKX). They have $4 billion in assets. They currently have 163 stocks in their portfolio and an annual turnover rate that has ranged from 41% to 111% over the last 5 years. Let's say 70% average per year. Now I am guessing that a turnover rate doesn't double count for the buy/sell, so say 110 new stocks each year and the same number of sales (excessive in my opinion but they you have it). Now my definition of an investment decision. For each stock in their portfolio they have at least a quarterly review based on their research analysts work to decide to sell, hold, or add. That is about 4X163 or 650 reviews with three options for each so 1950 decisions. After they sell 110 stocks they probably review at least 5 choices for each stock being replaced, so 5X110 or 550 decisions. Add to that all the hundreds of quick decisions they need to make when the market moves--like the last few days--do they buy biotech on the deep dip or head for the hills. Then there are all the one of a kind/macro decisions. Do we raise cash, say like a Bob Rodriquez, to 20% or 40% thinking a bear market is coming? Do we close the fund to new investors? Is the Fed going to raise interest rates so maybe we should unload our dividend stocks.

    Even with my puny portfolio I must make 200 decisions a year (and I'm not a day trader) so how can a $4 billion fund make less than 5,000?
    Sep 29, 2015. 02:39 PM | 1 Like Like |Link to Comment
  • How Survivorship Bias Distorts Reality [View article]
    All analytical studies start with a set of assumptions. Someone has to select those assumptions and most of us have agendas and biases that impact those assumptions. If a liberal democrat and conservative republican do a study on the rate of poverty they will use different assumptions and arrive at different conclusions but that won't keep the reader of those studies from nodding their head and saying "aha!"--never even thinking about the assumptions.

    Same is true of this article--so we are told that Mr. Wald's conclusion "that's where the bombers that didn't make it back were hit". Now how does he know that? They could have been hit in exactly the same places as the returning planes but maybe the pilot was less skilled or maybe a shot hit the pilot and co pilot or a million other reasons. So unless there was some verification study (check those assumptions) we are just guessing.

    And the statement that this decision "ended up saving the lives of thousands"--now think of the assumptions that would have been made to come up with that number. Maybe the surviving pilots learned as they survived. Maybe the planes improved. Maybe the best antiaircraft personnel were killed. Maybe the brass decided they couldn't keep losing pilots so adjusted the bombing process.

    The author adds to the fun by his statement (one of scores that could be questioned in this article) that "some are bound by pure luck, even over long periods of time, to produce superior performance". That must be based on that old canard about monkeys flipping a coin--as if managing money over a year is equivalent to a coin flip when it is more likely to involve thousands of decisions to buy/sell/pass.

    Never accept any financial or political analysis unless you know the assumptions and the agenda of the author.
    Sep 29, 2015. 12:16 PM | 2 Likes Like |Link to Comment
  • Investing In Biotech: Tekla CEFs Or IBB? [View article]
    Left Banker: One last try and then I will concede defeat. You say "IBB is simply not getting 3% more a year in a portfolio's bottom line". And you are correct if you look at price. Over the last 10 years HQL has under performed by 2.18% a year based on price. I think we agree that NAV best measures the performance of the fund managers. In an open end fund that is about the only measure of performance. By that measure, comparing IBB and HQL over 10 years we have a difference of 3.06% a year. Over the last five years IBB outperformed by 2.8% a year and over the last 3 years the out performance of IBB was 4.7% a year. Sounds like a pretty consistent under performance. Some of that is higher expenses, some might be higher transaction costs but most of it is poor stock selection.

    So what causes the mixed numbers you mention--the jumping around on your graphs. IN 2007-9 the discount expanded. In early 2010 it hit 19% and today it is 2%. i don't have the historical numbers but think that 2% is closer to the long term norm. That 17% drop in discount, of course, shows up in the price--and I agree that is real money. So that offsets some of that 3% manager under performance. But what does that mean for the investor thinking about buying today? What does it say about the wisdom of holding? That drop in discount was a one time thing that benefited a small group of investors who didn't hold the fund in 2007 but bought at the bottom. It does nothing for the new investor. What the new investor will likely get is that continuing 3% under performance by the managers.

    I will admit I don't understand the "psychological barrier to selling". In one case the fund is selling and sending you the money and the other you are doing it yourself. But logic doesn't always rule the investment world no matter how efficient some think the markets are.

    Thanks for the debate!
    Sep 28, 2015. 07:29 AM | 1 Like Like |Link to Comment
  • Investing In Biotech: Tekla CEFs Or IBB? [View article]
    Qniform: I could be missing something but here is what I see. In 2008 HQH lost 22% of their NAV. In addition to that performance loss I am assuming they had a distribution of 8-9%--and Morningstar doesn't seem to go back that far so I am only guessing. They had no income to distribute in 2008 so unless they are sitting on a chunk of cash going into 2008, where does the 8-9% distribution come from if not from selling at the bottom? I guess they could have borrowed money to do that distribution but I don't see any other way. Of course you are right about ETFs and open end funds needing to sell to meet customer withdrawals and CEFs don't have that problem but what I thought we were debating was if the distribution of a CEF could cause selling at the bottom in a down year.
    Sep 27, 2015. 03:54 PM | Likes Like |Link to Comment
  • Investing In Biotech: Tekla CEFs Or IBB? [View article]
    Qniform. I understand your need for income in retirement, but I am thinking the CEF has the same timing issue as we do. When the market is down, such as in 2007 and 2008, and they were making distributions not covered by income, they were forced to raise cash by selling at the bottom. How is that any better than you selling after a market drop? In fact it seems worse--you can control when you sell. If they are forced to make a distribution every quarter in a down market they are forced to sell at the bottom. I still have a few years until RMDs are required but when that happens I will make sure that my conventional IRA has either enough bond and REIT income to cover the RMD or sufficient cash to make it through a bear market without having to sell at the bottom. What I won't do is give up total return in my funds for what I see as the artificial income of CEF distributions.
    Sep 27, 2015. 12:47 PM | Likes Like |Link to Comment
  • Investing In Biotech: Tekla CEFs Or IBB? [View article]
    Left Banker: Thanks for the quick response. Two points: You say that CEFs are about income. If we change the word "income" to "distribution" then we have a good starting point. IBB also has "income" but because of the tax benefits of ETFs they can avoid the need to pass on most income (thus we avoid taxes). You notice the high market price of a share of IBB--that is because most of that income is being retained by the fund--even though the turnover rates of the three funds seems similar The customer, as you mention, can turn that unrealized capital gain into "income" by a simple selling of X % of his IBB. So I continue to miss your point about the value of that CEF "income". In the old days when commissions were huge there might have been some value in distributions in place of selling shares but I can't understand the value today with $7 commissions. I know many small investors love those distributions but my question to you is, should they? And more importantly should they give up total return for the convenience of a monthly or quarterly distribution that they can very easily perform themselves. Your second point about IRAs--the same conversion of unrealized capital gains to needed income is available in an IRA--so again why give up 3% a year in returns for something the investor can do themselves. We do seem to have a disconnect on returns over the last 3, 5 and 10 years so I can only assume you are using return on price and I am using return on NAV
    Sep 27, 2015. 12:33 PM | Likes Like |Link to Comment
  • Investing In Biotech: Tekla CEFs Or IBB? [View article]
    This is a great article for highlighting the differences in how investors analyze their investment options. I always start by looking at the long term performance. Looking at the 10 year return of these three funds it's not even close. On a NAV basis, IBB had an annual return of 15.23%. HQH, 12.62% and HQL, 12.17%. Three and five year returns show a similar out performance by IBB. All numbers from Morningstar. Add to that the large tax efficiency difference of the ETF format and the after tax difference is just short of astronomical in favor of IBB.

    Of course you can look at the returns based on price instead of NAV and that helps the CEFs in some cases--but almost no change at the 10 year time frame.

    So looking at the numbers I am trying to see how an investor would come to believe that of these three options it makes sense to buy anything but IBB? Here is the best I could come up with.

    1. You believe that the 10 year numbers aren't representative of the future. That the two actively managed CEFs will improve their performance versus IBB going forward.
    2. Taxes don't matter to you, either because the funds are held in an IRA or if held in a taxable account you are in the 15% bracket and don't have to pay taxes on your capital gains and maybe live in a state with no income tax.
    3. The larger distribution of the CEFs is so important to you that you are willing to give up 3% a year in returns and pay the extra taxes. This would also seem to mean that you don't reinvest those distributions and are unwilling to just sell shares each year to obtain the same distribution.
    4. You are a trader and believe by timing the market and buying when the CEFs go to discount you can offset the reduced return, higher expenses and extra taxes.
    Sep 27, 2015. 10:40 AM | Likes Like |Link to Comment
  • The S&P 500 Death Cross - Time To Panic? [View article]
    Rich: You make some good points but gloss over what seems to be the big shortcoming in Yellen's resume (and most of the other members of the current Fed). She doesn't seem to have ever worked in the real world. She has a career in academia and government. I am thinking she was appointed and selected to every job you list. Has she ever worried about making a payroll, dealing with competition, struggling with government regulation,etc? I'm not sure it makes sense for those impacting the economy at the Federal level not to have a very good working knowledge of it, as opposed to a knowledge based on theory and models. I would agree with many that electing members of the Fed would be ludicrous. Look how good we do electing members of congress who get a 20% approval rating year after year.

    It would be interesting to see a study of the Federal Reserve members going back to 1913 and see if we have always been academia heavy and real world experience light.
    Sep 26, 2015. 11:36 AM | 14 Likes Like |Link to Comment
  • Don't Worry About Public Bond Market Illiquidity [View article]
    David: Maybe you could expand on one of your important statements that "dealers work in this way because they want the buyers to be long term holders". Why do the dealers care how long the buyers hold the bonds? I can see that they don't want the IPO process to be impacted by short term flipping but beyond the IPO period I can't see why it would matter to either the dealer or the issuing corp.
    Sep 23, 2015. 10:33 AM | 1 Like Like |Link to Comment
  • What The Failure Of Shiller's CAPE Shows About Stock Picking [View article]
    I think there are many problems with CAPE. As you mentioned Jeremy Siegel talks about accounting changes (things like how management options are accounted for and how that impacts reported earnings). A much easier change to understand, which I think is beyond debate, are changes to the stocks that make up the S&P 500. In 2000 and prior there were no REITS in the S&P 500--then in 2001 they were slowly added--I think there are 20 REITS included now. As we all know REITs have very high (and artificial) PEs. Because depreciation reduces reported income, it is normal to see REIT PEs in the 35-50- range. What does adding 20 REITs, with those high PEs, do to the average PE of the S&P 500? What Shiller should do is identify and quantify all the changes that have taken place (during the years he is using as a baseline) both to accounting standards and stock inclusion and then he might have information of value.
    Sep 22, 2015. 01:01 PM | 1 Like Like |Link to Comment
  • Greece, The Epilogue [View article]
    Herve: Great article until the conclusion. "Mr Tsipras realized he had no choice but to live within it's means". Approving a plan of action isn't "living within it's means". Plans are easy--actually taking action is difficult. In the years to come I think you will see very little change in Greece and further bailouts will be coming. Tsipras realized he can get the Germans to continue funding his country if he smiles and says the right things.
    Sep 22, 2015. 09:01 AM | 3 Likes Like |Link to Comment
  • Despite Continuing Low Interest Rates, Wells Fargo's Best Days Lie Ahead [View article]
    I am thinking Gayle is just having a little fun with you boys. She wants to see if she can get you up on your hind legs baying at the moon and so far she is easily winning the contest. Chill out and pay attention to what is important in the investment world.
    Sep 19, 2015. 07:11 PM | 5 Likes Like |Link to Comment
  • Learning From Target Date Funds Without Actually Using Them [View article]
    Well Roger it doesn't seem like context to me--it seems like substance--in fact I would say it is the major point of the article. Reread the first sentence in your article. And sure readers (and every day there are new ones on SA who don't know you from any of the million other authors) can go back and read your past articles or follow your links but I'm suggesting that isn't a reasonable expectation. Providing context in links makes all the sense in the world but the substance of the article should stand on its own. And the "not enough room" argument is ludicrous.
    Sep 17, 2015. 08:27 AM | 1 Like Like |Link to Comment