Investors Taking On Junk Bonds Could Be In For A Nasty Surprise
Sarah Bush from Morningstar warns that there has been an investing shift toward non-traditional bonds and bank loan categories. While high-yield categories are becoming more popular, she says this approach will expose investors to more risks.
"The fastest-growing categories are also those with the most credit risk and the highest correlations to equities. Investors relying on the likes of non-traditional-bond and high-yield funds to provide ballast in turbulent equity markets could be in for a nasty surprise; junk-bond funds lost more than 25% on average in 2008 as did bank-loan offerings, and, while most non-traditional-bond funds haven't been around that long, most suffered losses in 2011’s third-quarter equity sell-off," Bush writes
"What’s the take-away for investors? Those entranced by the yield offered in some of the racier bond categories should expect--and plan for--these funds to add equity sensitivity to their portfolios. And, as always, it’s important to know what you own."
In his latest quarterly letter to GMO clients, Jeremy Grantham writes that M&A activity will reach record levels, leading to the next market bubble. Grantham said the explosion in M&A is indicated by cheap debt, high profit margins, and young-looking recovery. "[M]y recent forecast of a fully-fledged bubble, our definition of which requires at least 2250 on the S&P, remains in effect," he writes.
"If I were a potential deal maker I would be licking my lips at an economy that seems to have enough slack to keep going for a few years," Grantham said. "I think it is likely (better than 50/50) that all previous deal records will be broken in the next year or two," he writes. "This of course will help push the market up to true bubble levels, where it will once again become very dangerous indeed."
UBS Wealth Management Is Raising Their Annual Client Fees (InvestmentNews)
UBS is trying to raise fees for some clients of financial advisors, to make up for lost revenue on annual 12b-1 fees. The increase will not be mandatory, but one UBS advisor tells Mason Braswell at InvestmentNews that, "Even though they're trying not to say it that way, it's because of the 12b-1 fees that they're doing it. They're not telling us to raise fees, but it kind of feels like they want us to."
"The move comes as the firm faces a potential loss in revenue from moving clients out of Class A and Class C mutual fund shares into institutional and advisory share classes. The firm is making the conversion this summer in order to compete with its wirehouse rivals and other firms who already offer the products, which are cheaper for clients because they do not charge annual 12b-1 fees," Braswell writes.
"The fee increases are not mandatory, and advisers have the opportunity to decline or lower fees starting August 2. Clients would be notified of any changes, which would go into effect later in the year," according to Braswell. "While advisers do not have to raise fees, the discount sharing floor, the lowest amount an adviser can charge without being penalized, is increasing by the same amount as the lost 12b-1 fee in accounts under $1 million."
Financial Advisors Can't Beat The Market By Picking Stocks (Wall Street Journal)
In a WSJ article, Mitch Tuchman from Rebalance IRA writes that active stock picking does not give investors an advantage in the market. He says, while active managers may have exceptional quarters, these returns are unsustainable in the long-run.
"The trouble with every argument that you read about active versus passive management is that they're one dimensional. You cannot add potential returns as an active manager without taking on active risk," Tuchman says. "When you try to time the market, like some people are suggesting advisers do right now, you get in and out of it at the wrong time. Regardless of what people think about the economy or insight they claim to have about the market, switching tactically between active and passive management does little besides add cost and risk to your client portfolios."
Laddered Portfolios Won't Help Protect You Against Rising Rates (AllianceBernstein)
While some investors are using laddered portfolios to prepare for rising rates, Terrance Hults argued that this isn't a good idea for several reasons. On the AllianceBernstein blog, Hults explained that actively managed portfolios would be a better solution to changing markets.
"Laddered portfolios are built with bonds spaced evenly across maturities so that bonds mature and their proceeds are reinvested at regular intervals. These portfolios are assumed to be simple, provide return certainty and capture higher yields as interest rates rise," Hults said.
"They’re definitely simple, and they do provide a relatively certain return. But in today’s low-yield environment, that return is likely to be locked in at below-inflation yields for the next few years. A portfolio laddered from one to 10 years yields only about 1.5% before accounting for the costs of trading and other annual fees. At that low yield, there’s little chance to beat even a modest rate of inflation."