1. Bought 100 of the CEF APF at $15.08 Friday (See Disclaimer)(Asia Strategy) APF is a Morgan Stanley CEF. The Morgan Stanley web site for its closed end funds is somewhat difficult to find. This link may work: Daily Prices - United States : Individual Investor - Morgan Stanley Investment Management I just checked it to see the current NAV for its Asia-Pacific fund which is not listed in the WSJ closed end fund page for World Equity. The other MS CEFs are listed at that WSJ page. As of 3/18/2010, the NAV shown for the Asia Pacific Fund was $17.41 and the closing market price for the fund that day was $15.2. The discount expanded a tad on Friday with NAV declining a penny to $17.4 but the price fell 13 cents from Thursday's close.
The net expense ratio is shown at 1.16%. It may be easier to find the fund's most recent annual report at the SEC's web site: www.sec.gov/ I decided to add this one after selling IAE recently after it rose to a premium to its NAV.
For those unfamiliar with how to find CEF information at the SEC, I have bookmarked the main search page at the SEC's site. Next-Generation EDGAR system - Better Data. Stronger Markets. Just enter the fund name, i.e., Morgan Stanley Asia, and the page with all of this funds filings will pop up. The SEC search engine is not a smart one, really dumb would be an appropriate description, so it will frequently return nothing found if the inquiry is slightly different in any respect to the SEC's labeling of the document. So when that occurs, I go back to entering the most basic information, such as "Morgan Stanley" as an example for this inquiry and then scroll. Using the search at the SEC site makes me grateful for Google.
Since this is a Asia-Pacific fund, and does not exclude Japan, the largest weighting in the fund will be to Japanese equities. A case could be made for just avoiding the Japanese market altogether given what has happened since 1989.NIKKEI 225 Index Chart Then again, as part of my Asian strategy which is forward looking, it is possible that the Japanese companies would prosper in the coming years as emerging markets in Asia lead worldwide growth in GDP with a surging middle class. The last shareholder report for APF shows a 44.4% weighting in Japan as of 12/31/2009. There is also exposure to China (13.5% ), Australia (12.2%), Hong Kong (4.6%), South Korea (8.2%), Indonesia (5.1%), and the remainder scattered in several other countries.
2. Sold BIP at $18 (See Disclaimer): I mentioned buying some shares at $15.75. Every year now, I receive several K-1s from the publicly traded partnerships that I own. When I sit down to prepare my own tax return incorporating this information, I will generally have one of two reactions. One reaction is a realization that I need to own more shares to compensate me for the time spent fooling with the entries on my return. I did that in April 2009 by buying more shares of Linn Energy (LINE) at 15.21. Added to LINE The other reaction is to just throw up my hands and say that the security is not worth the trouble. I reached that conclusion with BIP on Thursday night, and entered a limit order to sell all of my shares at $18 which was filled at the open on Friday.
3. Money as a Limited Resource in Capital Allocation Decisions: This subject came up in an email exchange with a reader last Friday.
Capital is a limited resource, and capital allocation decisions have to be made whether or not the investor has 5 billion or $500,000. In every investment decision, I have to make an allocation between competing alternatives taking into account my individual circumstances and objectives, my time horizon and risk tolerance, and most importantly the best alternatives then available when the allocation decision is made. For example, if I have $2,500 that I want to invest on Monday, is a TC priced to yield 6.8%, maturing in 2032, the best alternative for me for that capital? I am referring to DKY containing a Credit Suisse investment grade bond, which I do not own. Each individual has to answer that kind of question for themselves. I can only outline the process that I would follow in making an allocation decision.
First, before even selecting DKY, I would examine other Credit Suisse bonds that are available as exchange traded bonds with $25 par value. For this inquiry, I am comparing bonds or bond like securities from the same issuer. I faulted Richard Lehmann in 2008 in failing to perform that analysis with TCs containing the same Credit Suisse bond. Article in this Week's Forbes on Trust Certificates/Trust the Government? BOND ETFS EX-INT/ CREDIT SUISSE BOND: TCs DKY & PYE/FINRA The current yield for this security at that time (2008), noted in my post, was around 10%. There are two TCs with the same CS bond as the underlying security, PYE and DKY. This is a simple inquiry. Which one has the best yield at the time that I want to buy one? Lehmann was recommending the one with the lowest yield at the then prevailing prices. I try to avoid that kind of mistake. Then, I would compare those TCs with another CS security, CRP, that QuantumOnline.com (free site, registration required) classifies as paying qualified dividends. PYE and DKY pay interest, and that difference may come into play for some investors. This is a comparative and relational analysis that I will always undertake, since I want the best value for my money. The result of this analysis does not justify buying a CS bond compared to a bond from another issuer, or some other type of security altogether. If done properly, this analysis helps me to choose only among those bonds issued by CS. Some may also like to include those bonds that are not exchange traded in this analysis which will give the investor more options on maturity dates: Credit Suisse Bonds List at Finra
The mere fact that DKY has been falling some in price over the past few days is not a reason to buy it. It may have been overpriced on 3/8 for example, when it closed at $24.45, at least in relation to PYE which was then priced at $23.49.
As of 3/19/2010, the yield shown at Marketwatch for DKY is 6.88% at a $22.7 price and 6.78% for PYE at $23.03, so that has become rational compared to the December 2008 prices. On 11/27/2008, the date of my post criticizing the Lehmann article in Forbes, the closing prices were $20 for DKY and $16.25 for PYE. As I have said many times, it was the wild west in TC land back then. PYE has a 6.25% coupon. DKY has a 6.25% coupon. Both have a $25 par value. Both mature on 7/15/2032. Both contain the same underlying CS bond. And which did Lehmann recommend? Forbes.com
Second, or probably first for me, I would ask myself how comfortable am I in buying any bond issued by an investment bank and how much credence will I give an investment rating considering what happened to Lehman and Bear Stearns in 2008? In other words, am I comfortable with the long term credit risk of an investment bank? The answer for me to that question is "not really". The masters of disaster are not exactly the kind of people who would be storming Omaha beach on D-Day for God and Country. The last several years have shown that they will destroy their own firms, bring civilization to its knees, in furtherance of their reckless greed. What exactly is your takeaway about investment bankers having lived through the past few years as an innocent bystander? Personally, I would look for an investment grade issue from a non-financial institution, yielding the same or more, maturing at about the same time as one alternative to DKY. A few come to mind such as the Verizon TCs XFL and PJL, both maturing in 12/2030 and having a slightly higher current yield than DKY. (YTM would be closer since the Verizon TCs are trading at over par value). I have nothing against Credit Suisse, but I would be slightly more comfortable owning just Goldman Sachs bonds in this sector and there are plenty of TCs to choose from containing senior and junior bonds issued by GS. Some of the senior bonds yield about the same as DKY.
Third, what are the risks associated with the long bond besides credit risk? The most important is clearly interest rate risk, and the impact on a long bond's value when interest rates start to rise. If inflation starts to average 4% per year, will a long bond maturing in 2032 likely be priced to yield 6.8%? How likely am I to call the transition point when the long bonds cease to go up in value and start to decline due to investor's perceptions about inflation risk? So by the time I look at this question, my ardor for a 6.8% long bond issued by an investment bank is starting to cool in a big way. Then, there is a more complicated inquiry.
Fourth, do I have alternatives for that $2500 that fit my needs and would be a better overall choice? For most investors, a fund containing a bunch of investment grade issues would be a better alternative due to the credit risks associated with owning one bond. But many bond funds have their own set of problems that I have frequently discussed. (e.g. the most recent discussion is Item # 2 /Interest Rate Risks- Bonds) I have recently discussed two new closed end funds, IGI and GDO, that address some of my concerns about bond funds. Bought 100 of the CEF GDO at 18.6 Revised Closed End Fund Table/Bought 200 of the CEF GDO Bought 100 CEF IGI at $19.89 Added 100 of the CEF IGI at 19.78 Those CEFs reduce the long term interest rate risk associated with a bond fund by liquidating their positions and returning the assets to their investors in 2024. Hopefully, the manager will be taking that liquidation date into account when choosing securities, keeping most of the maturity dates close to that termination date of the fund. This makes the fund more analogous to owning an individual bond than a regular bond fund which does not have a maturity date. When the worm turns on this long term secular bull market in bonds, and it will, the investor in a regular bond fund will see the NAV decline as interest rates rise. For BND: Is it Safe is not the Right Question. Instead Ask What are the Risks & Rewards/Assume Lost of Principal PossibleAnd, it is critical to remember that the bond fund has made no promise to pay "par value" at maturity to an investor in the fund. FINRA Smart Bond Investing It would not take much of a decline to obliterate the value of a 3 or 4% annualized dividend. Rising Rates and Your Investments A term date bond fund gives the investor diversification without some of the negative attributes typical of a regular bond fund.
So I would view both GDO and IGI to be alternatives to buying an individual bond. Credit risk is certainly less acute in a bond fund with a lot of investment grade bonds. Interest rate risk is still present to some degree but less significant than in a regular bond fund. Both of those CEFs make payments monthly, more frequently than the TC DKY which pays interest every six months. And the yield on GDO is higher than DKY while IGI is slightly less.
Another alternative would be a CEF selling at a large discount to NAV that contains a lot of bonds. For example, I have discussed a CEF from Nuveen, JQC, which yields close to 8.5%, pays quarterly distributions and closed last Friday at a 12.79% discount to its net asset value. When I last purchased it, JQC was selling at a 18% discount to NAV with over a 9% yield at my purchase price of $6.97. Added to Intel and CEF JQC Prior to that, a purchase was made last July at $6.31 and at $4.3 in October 2008. The fund was then selling at close to a 28% discount to NAV. Some investors do not like CEFs since the price is set by investor demand rather than at the day's closing NAV which is the case for a mutual fund. I simply look at it for what it is, a way to make or to lose money in two ways rather than just one. The narrowing of the discount to NAV makes JQC less attractive to me now, however, and consequently renders me less likely to add to an existing position of close to 500 shares. There are other CEFs that I would consider as the alternative to purchasing DKY. This is just an example of the kind of analysis that needs to be made, looking and evaluating the pros and cons of the alternative "income" generating securities.
Lastly, I would not overlook stocks that grow their dividends. If a company like Coca Cola doubles the amount of its dividend in 7 years, and is now yielding say 3 1/2 %, I may have that 7% equivalent to DKY in just 7 years from $2500 of KO shares. The dividend would be more favorably taxed for a U.S. resident now. I also have more appreciation potential in the share price. And, after seven years, I will start to earn more than the investor in that 6.8% fixed coupon bond. In 14 years, I might be earning twice as much. I discuss this approach in more detail in other posts, including this one that deals specifically with KO's historical dividend growth rate: Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009 KO is not the only stock that would be viewed as an alternative to DKY for that $2500 investment.
4. OSM Calculation of the Penny Rate: I have determined that my calculations of the OSM penny rate will be slightly off due to my use of the 12 month divisor. SLM is using some kind of number measured in days. So their number for the April payment is $.1002 and I came up with $.09833 in a post from January. CPI One of my readers is using days in the payment period and is accurately forecasting the upcoming penny rates. This is how I would arrive at the same penny rate as shown in the WSJ dividend page this weekend:
December 2009 NSA CPI: 215.949
December 2008 NSA CPI: 210.228
Difference =5.721
Divide by 210.228=.027213
Add the Spread of .02%= .0472% annualized interest rate
Multiply by $25 par value=$1.18 penny rate on an annual basis
Multiply by 31 days in the April payment period then divide by 365 to arrive at the rate for April =$.1002.
Everything that I just did is identical to what I have been doing except for the last line which uses the number of days in the payment period and assumes a 365 day year.
Some of this is explained in the general prospectus at p. S-11, applicable to SLM's medium term notes and referenced at the top of the OSM prospectus: www.salliemae.com .pdf
No comments:
Post a Comment