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THE BLUE MONEY REPORT.
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The Blue Money Report
"Money clarifies onešs speech greatly, while no one listens to the poor."
~ Chinese proverb.
Welcome to the Blue Money Report
Today's Commentary: 10.04.02 Some folks say it is all about positioning. Perhaps over the last two to three years you have found yourself under your desk in the fetal position as the market has taken much of your gains away, leaving you with your entry fee and a small charge for the education of buying at the top. If you are young, it would be wise to use that education moving forward. If you are older, and I am talking at the mid term of your investment life, there is still plenty of time. If you happen to be on the downside of your career and you found yourself suffering because of your overexposure to equities, then your lesson, my friend, has been very costly.
But that is something we should all know as investors. I, and my of my fellow writers and authors have made a decent living warning about risk and the relationship it has to reward, and to disaster.
There is another opportunity presenting itself for just such a risk coupled with just such a disaster. This is the kind of event that causes us to turn a deaf ear to those who purport to be experts in the field because we like to buy at the top. I am referring of course to the incredible run that bonds have had over the last six months or so.
The turn of the quarter is always cause for optimism. For some folks it is a reevaluation of holdings as we look for what could have done better for us, we tend to look backward. All of the fund companies are sending out performance reports and before they arrive in your mailbox, you should be warned. Actively managed funds, with the exception of those who use bear markets for profit, and index funds did not do so well. Bond funds did and I still would like to impart a word of warning about them.
Volatility, a code word for risky, is what gets you to the top. If you want to be among the top ten in rank on anything, you need to be capable of sticking your neck out. Mutual funds are no different. We all react in a similar fashion when we see these top ten ranked performers. We look for something we might own, or worse still, something we think that we should own. Those funds at the top of their categories, and this time around they are bonds, have extended themselves in the way of risk to get there.
Long thought of as the conservative investment, some of these long term top performers have seen their investments take on a life of their own in an environment custom made for such a run. Interest rates have cooperated and are at historic lows, and look to be staying that way for the near term. But there is always that chance, and I believe that if Greenspan and his posse perceive that the economy turns even a little in the fourth quarter, they will raise rates. I realize that the popular contention is for additonal lowering of rates, but this may not be in everyone's best nterest. Mr. Greenspan may bow to the pressures of the banks whose concern for profitability will turn many potential borrowers away from their doorstep. Believe it or not, lending costs money and if the margins are razor thin, many of the folks who need the money will not get it. This will spill over into the housing market, which is being talked about in the same bubble terms.
Suppose he decides that interest rates are too low? Suppose he decides that a gradual increase of a percentage point is what the economy needs while keeping the money supply pumped? Bonds, especially those bond funds with a long term outlook would be devastated. This is all due to duration.
In a bond fund, duration is the measure of risk. The greater the maturity, the greater the chances for interest rate sensitivity, the greater the chances that fund's bottom will fall out with a rate move. For instance, should the duration of a fund be 5%, and increases in the interest rate of a percentage point exposes the fund to a 5% reduction in returns.
I'll admit that it isn't quite that simple. Coupons can offset those losses in price. But some of those top performers are their due to exposure to government debt and high grade corporate bonds, many of which carry a zero-coupon. This provides greater upside, but a percentage point for percentage point reduction in price if rates move. In other words, a 20% gainer could lose 20% if rates were to climb a 100 basis points.
Can it happen in the near term? Only if investors are listening to all of this talk of bond bubbles. If they do heed the warnings that bonds have run their course and equities, beaten down steadily over the last three years are now attractively valued, the exodus could mean problems ahead.
Most folks are saying that near term looks okay for bonds. The low inflation, low interest rate scenario will play itself out for some time. The warning lies in those who look to the top. The best rarely remain there for long.
Today's Commentary: 10.01.02 I recently donated my car. My 1990 Lincoln Continental looked great, often confusing folks about the model year, but had begun to take on the aspects of Stephen King's possessive machine in "Christine". It unfortunately became the proverbial hole in the driveway where we threw money.
The car itself was a lemon. It had taken my wife and I for one major repair bill after another in recent years, each fix became necessary in order to rid ourselves of the car. We had only the one and it seemed to know this. At the most inopportune times, it would demand that we donate to $400 to 500 to the local repair shop, causing major inconveniences to the household.
When the accelerator stuck, causing the car to race it's engine, we knew that this was another repair that would have probably been a turn of the screw on a lesser car of the same age. On my car it would be a hook-up to a diagnostic which would cost me $150 alone. The only bright side was that it happened on a vacation where we had planned to just hang out around the house. Now we needed to find another car.
My wife called the kidney foundation, only because she had a scare with her kidneys recently, and the transfer of the title was completed. It was parked on the street, outside the protective confines of my gated driveway, and left for the tow truck to haul.
Before it was taken, I cleaned out the seven years worth of remnants and doodads that cars seem to collect. Oh I kept the car clean, but not empty of every personal effect. I sat in the well worn leather seat, whose conformity to my large frame drove my wife crazy on the rare occasion she needed the car for errands, and marveled at the way it seemed to wrap me. I forgot how much money I had lost in repairs that both seemed unnecessary and unwarranted. I would see folks driving cars that qualified for junk status that seemed to purr right along without wallet draining expenses. Here was my car, looking sharp and worth only $400 in value as a trade in. The alternator/battery repair that took place three weeks prior to the last and final breakdown cost more than that!
I had completely lost track of the value of the car using only what I had invested as the criteria for worth.
I am like that with my Janus Twenty fund.
Many years ago, I bought into the fund, which at the time seemed like a good idea. This was before those astronomical returns of the late 90's turned it into the aggressive fund pick for the go-go type investor. The idea was that impeccable research could lead to aggressive stock picking in a small grouped portfolio. In a bull market, this works great. In a bubble market, even dart board investing was working. But the concentration of twenty companies would spell disaster for this particular fund starting in about March of 2000.
Many folks bailed on the notion as certain companies held by the fund started warning of rough times ahead. Nokia was a train wreck that caused the fund it's first failed attempt at this unusual experiment. With a concentrated group of holdings, sudden moves by large holdings limited the ability for the fund to react quickly. This illiquidity proved to be a back breaker.
Couple that with redemptions and price depreciations, and the fund was no longer the golden ring in so many optimistic investor's portfolios.
The fund under new management from an old hand with Janus, Scott Schoelzel, who delivered stellar results with the much smaller Janus Adviser Capital Appreciation, and has performed well against its peer group.
I am disappointed with those folks that decided the fund was not to their speculative liking. A good deal of them bought at the top and were frustrated when those astronomical results did not hold for the long run. The fund still has a problem that is not getting any better. It currently holds about ten billion dollars in investable cash with little or no where to go. The fund with its current construction will perform with predictability over the next couple of years. If the market continues to bottom, and regular readers of this column have heard me say the worst isn't here yet, the fund will bounce along in the doldrums even with Schoelzel buying more diversified financial services and energy stocks. If mid-caps and small-caps stage any sort of a rally, this fund will be hard pressed to beat them from a numbers standpoint. But if you can not find fast growing companies, cash is where you should be and Schoelzel has exhibited a great deal of patience in doing just this. Another upside is the parent company's wrangling with Janus has settled down and business can move forward. Bringing the Berger Fund family under the Janus wing might be good for Berger shareholders but unless you are looking for some value diversification, this will mean little to those growth hungry Janus investors. Unlike my Lincoln, my Janus holdings are not my only investment. In fact, the allocation has gotten to the 10% mark and will probably stay there for some time forward. But the comfort that it provides is knowing that the fund has been repaired and will ride into the sunset again, the bad news is past and the current price reflects those facts. Lastly, I am at break even for the fund. Comparing my old car with a mutual fund is admittedly a stretch. But the point is rationalizing possession. The fund is too cheap to sell. I have been buying at bottom levels for quite some time now. Couple that with dollar cost averaging and a little optimism, and who knows. We are at the quarter's end and without much in the way of farewell, most of us are moving forward. With any good fortune, our investments will follow.
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