No Mean Sum

"Many shall be restored who are now fallen, and many shall fall who are now in honor." -Horace

Jul 30, 2015

What’s Conservative Got To Do With It?

(0)

Below is a section from the most recent WhiteTree quarterly client letter.

Excerpt:

 

What’s Conservative Got To Do With It?

Echoing the famous poll in which 80 percent of people rated themselves above average drivers, most investors consider themselves more conservative than their peers. Unfortunately the term “conservative” has little descriptive power in context of portfolio construction, except as short-hand for the investor’s desire for low volatility and consequently more bonds. This common psychological orientation, combined with the obliging nature of investment professionals, the desire for yield, and demographic trends, has resulted in an increasing number of investors with portfolios heavily if not totally allocated to the bond market. Recent market events indicate that such portfolios may exhibit surprising and undesirable characteristics.

As food for thought, consider the performance of a hypothetical U.S. bond portfolio in the second quarter of 2015. The table below includes the returns of various bond market ETF’s, their prospective yields and a hypothetical portfolio allocation.

 

HypotableV2

The value of this portfolio declined by 4.08% in the second quarter. This is of course, not likely a ruinous outcome for the owner. However, consider these losses in the context of the portfolios weighted average yield of 3.18%. If the portfolio owner is a pensioner, he or she has seen the entire year’s earnings and more wiped out in a single quarter – probably not an outcome that was deemed likely if the portfolio was constructed using historical simulation. Indeed, when a substantially similar portfolio is backtested over the period of 1972 – 2014, the worst drawdown over the entire 40+ year period was 4.62%. Students of history may note that the retrospective period includes the 1973 oil crisis and its resulting inflation.

Equal to or perhaps more important than the exact magnitude of the quarter’s decline is the economic environment in which it transpired. That is, that the drawdown occurred without a meaningful increase in US inflation, or hike in interest rates by the Federal Reserve.  And while no rigorous conclusions can be deduced from a single quarters data, I do think the events portend an increased sensitivity in what is popularly assumed to be among the most robust asset classes.

To be clear, none of this is meant to be a predication about the future of the bond market or inflation. What I am attempting to convey by way of anecdote is that investors should be aware that what common-knowledge regards as conservative, may be revealed to be otherwise. Intelligent investing requires a more nuanced communication than is commonly employed, with the consequence that many investors get the portfolio they ask for but not what they were expecting.

Disclosures / Disclaimer

All WhiteTree Investment Management Strategies are subject to market risk, including the risk of permanent losses. Before investing, clients should carefully evaluate their financial situation and their ability to tolerate volatility.

This  information  should  not  be  used  as  a  general  guide  to  investing  or  as  a  source  of  any  specific  investment  recommendations,  and  makes  no  implied  or  expressed  recommendations  concerning  the manner  in  which  an  account  should  or  would  be  handled,  as  appropriate  investment  strategies  depend  upon specific investment guidelines and objectives. This is not an offer to sell or a solicitation to invest.

This information is intended solely to report on investment strategies implemented by WhiteTree Investment Management, LLC and its investment managers. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market  conditions.  Under  no  circumstances  does  the  information  contained  within  represent  a  recommendation  to  buy,  hold  or  sell  any  security,  and  it  should  not  be  assumed  that  the  securities transactions  or  holdings  discussed  were  or  will  prove  to  be  profitable.   There  are  risks  associated  with  purchasing and selling securities and options thereon, including the risk that you could lose money.

FULL POST
Jul 21, 2015

Carl Ichan – Telling (his) Truth to Power

(0)

You don’t often get to see titans of industry wriggle in their chairs like this. Carl Icahn has a gift for both investing and making people in high places squirm.

FULL POST
Jul 10, 2015

On the Necessity of Naming

(0)

From Antifragile: Things That Gain From Disorder: We know more than we think we do, a lot more than we can articulate. If our formal systems of thought denigrate the natural, and in fact we don’t have a name for antifragility, and fight the concept whenever we use our brains, it does not mean that […]

FULL POST
Jun 22, 2015

Down The Bond Market Liquidity ETF Rabbit Hole – A Link-Fest

(0)

*Many of the articles linked to are from The Financial Times Alphaville column. You do not need to subscribe to the Financial Times to read them but you do need to be registered for a free account with the FT for access.  Regular consumers of financial media will be aware; there has been much gnashing of the teeth over bond market liquidity […]

FULL POST
Apr 23, 2015

Bring Up The Bodies – Spinning the Flash Crash

(0)

Regulators don’t like being embarrassed and the Flash Crash was an embarrassing episode for the people who are in charge of supervising financial markets. From a regulatory perspective, the problem with financial markets is that they are by their very nature distributed amongst many participants, and therefore it is very difficult to assign blame when something goes […]

FULL POST
Apr 5, 2015

Howard Marks – Links

(0)

Howard Marks is one of my favorite investment luminaries. I’ve read his book, “The Most Important Thing” twice and listened to the audio-book version more than once as well. Below you’ll find links to his talk at Google and his most recent memo on liquidity. The memo on liquidity is especially interesting because it is […]

FULL POST
Jan 8, 2015

Energy Recovery – $ERII – Insider Buying and The Fear of Missing Out

(0)

Energy Recovery Energy Recovery (ERII) was incorporated 1992 and went public in 2008. The company produces energy saving solutions for desalination plants. Over the past few years, it has been developing a number of products to address the needs of other fluid intensive industrial processes, mainly related to the oil and gas industry. Legacy Business […]

FULL POST
Dec 29, 2014

Elliot Management – Paul Singer Interview

(0)

Also from the NYT Deal-book Conference, an interview with Elliot Managements founder Paul Singer. I think there is a lot of truth to what he says about governments implicitly or explicitly allowing central bankers to do the heavy lifting in terms of economic policy.

FULL POST
Dec 26, 2014

Holiday Readings

(0)

Some holiday reading links and video materials: Ray Dalio at the NYT deal book conference: Aswath Damodran writes a good note on the Oil price drop and its implications <LINK> Tim Ferris Podcast with Dr. Peter Attia <LINK> More interesting Dr. Peter Attia Articles: Is Sugar Toxic <LINK>  Success Versus Failure – (His thoughts on […]

FULL POST
Dec 24, 2014

ALJ Regional – A Mini BRK In The Making?

(0)

Background ALJ Regional holdings is a micro-cap holding company. The company’s largest shareholder, Jess M. Ravich owns 47% of the outstanding shares and is also the Chairman. Mr. Ravich has had a long career as an investment banker, and thus far it seems he is putting that experience to good use in assembling the holdings […]

FULL POST
to-top