Stable Value Funds: 8th Wonder Of The World Or Smoke And Mirrors?

How Stable Value Funds Work And How Best To Use Them

 

Get it?  A stable.

Many 401k and 403b plans have a stable value fund (AKA interest income fund) as one of the investment options.  These funds don't have a ticker symbol, have sometimes rather vague and opaque disclosure documents available on them, and it is hard to get any research or informed opinion on them. Stable value funds are only offered in "qualified" retirement plans such as 401ks and 403bs.  All most plan participants know about them is that they are "stable" and sometimes what the current interest rate offered by the fund has been recently.  In this post I will discuss how these funds are constructed and the best way to use them in your 401k or 403b.

The Not So Tender Offer: What To Do When Your Bond Is Called Early

And Why You Should Almost Always Accept The Offer

As I mentioned in a recent post about the high yield bond market (http://lifeinvestmentseverything.blogspot.com/2014/01/high-yield-market-looking-overvalued.html), junk bond issuers have been taking advantage of the lower rates and easy terms available to them in the new issue market.  When existing junk bonds are refinanced, sometimes the issuer will simply exercise the call option embedded in the bonds (usually at a fixed price that starts at par plus 6 months of coupons and declining as the bond nears maturity).  However, often junk issuers wish to refinance their bonds before the call date has arrived or their lawyers are worried about the possibility of a technicality in the existing bond covenants that may prevent them from issuing new bonds to refinance the old ones.  When this happens junk issuers will initiate what is known as a "tender offer" to get the owners of the existing bonds to go along with their intended refinancing.  Unfortunately, there appears to be some confusion on the part of retail bond owners about the best course of action when confronted by a tender offer.  This post is about what to do if you own a bond that is the subject of such an offer.

High Yield Market Looking Overvalued And Underprotected

The high yield (AKA junk) bond market is a funny thing.  Everyone who invests in this asset class knows they are buying IOUs from higher risk issuers who offer extra interest and extra restrictions on what the issuer can do in order to compensate the investors for the higher risk.  Sometimes investors are more concerned with the extra risk involved and sometimes they are more interested in the extra interest offered.  But relatively few junk investors seem to look beyond the rating and the yield, and almost all seem to have very short memories.  The junk market appears to me to be approaching an extreme and I would caution anyone tempted to chase yield in this market to be very careful.

WIW: Another Dollar Selling For 90 Cents

Finding Fixed Income Value In A Closed End Fund

In recent months, it has become increasingly difficult to find reasonably priced buying opportunities, especially in the realm of fixed income.  Even the closed end fund (CEF) world has been bid up as there are very few funds that meet my investing criteria (market cap of at least $500MM, no excessive leverage or management fee, and at least a 10% discount to net asset value).  In fact, more often than not when I screen CEFs there are no funds that meet my hurdles.  However, there appears to be one very attractive bargain still available in fixed income CEFs, the Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (WIW).

Safe Money Rate Alert!

Pentagon Federal Credit Union Offering An Attractive Set OF CD Rates

In the present low rate environment, it helps to keep an eye wide open for good deals to offset the generally lousy returns available on safe instruments.  Previous posts have identified the most reasonable places to put "safe" money these days, and one of them is certificates of deposit (CDs).  There is a big range in rates and terms between different depository institutions so it pays to shop around.  At the moment, the institution that appears to be offering the best terms is Pentagon Federal Credit Union (Pen Fed), available at www.penfed.org.  Pen Fed has a long history of offering above market yields on CDs and is one of the 5 largest credit unions in the US (and anyone can join by purchasing a 1 year membership to the National Military Family Association).  Pen Fed is currently offering CDs with APYs ranging from 1.25% for a 1 year term to 2% for a 7 year term.  These rates are far above what treasuries offer (less than 1% yield for 5 year money) and the 3 year rate is about the same as a 10 year treasuy.  Better yet, if rates spike Pen Fed offers fixed early surrender penalties of 6 months' worth of interest for terms up to 4 years and 12 months of interest for 5 and 7 year terms.  The math says that a 4 year CD yielding 1.85% APY would have an early surrender penalty of less than 1%, effectively granting the buyer of this CD a very cheap put option in the event of a rate spike.

To be clear, 2% and under yields will not blow the doors off for anyone.  However, in a very low rate environment where competing CDs and treasuries offer a fraction of the interest Pen Fed is generously dispensing, this looks like rates worth grabbing.  Be sure to stay below the deposit insurance maximums, or course.

Disclaimer: As always, due your own due diligence.  Although it seems unlikely, you can probably lose money even buying a CD.  Read the fine print and be careful.  I have no affiliation with Pen Fed other than being a customer for a number of years.

Trade Recap: JQC Has Followed The Script

I Love It When A Plan Comes Together

Back at the beginning of February, I highlighted what appeared to be an attractive medium risk trading opportunity stemming from the repositioning of a closed end fund with ticker JQC (see http://lifeinvestmentseverything.blogspot.com/2012/02/jqc-profiting-from-metamorphosis.html).  Aided by a scramble for yield all over the globe, my expectations for the trade have largely panned out over the past 6 months.  This post will detail what has happened with JQC and try to answer the eternal question that stems from successful trades: now what?

How To Chase Yield

Managing Risk & Being Careful While Doing Something Fundamentally Foolish

As old CDs, treasuries and similar very low risk investments continue to mature, one can hear the groans from investors and savers everywhere at the prospect of extremely low rates being offered on new bonds and CDs.  In many cases, investors and savers are finding that the rates offered are so low that they cannot accept such low rates and still meet their minimum return required.  This problem does not appear to be going away any time soon as central banks all over the world continue to do their utmost to keep rates on safe instruments very, very low.  Those who refuse to accept current rates offered on low risk bonds and CDs will continue to have the same quandary for the foreseeable future: what do you do with the money?  Many will choose to throw caution to the wind and adopt a strategy that has been the source of untold sums of lost money, chasing yield.  This is a dangerous environment in which to do so because lots of people are doing the same thing.  As a handy indicator, junk bond funds have been attracting enormous amounts of cash even as yields stay low and Vanguard recently decided to close its junk bond mutual fund to new money after being flooded with cash.  Yet many people will chase yield anyway since some are effectively forced to do so due to needing higher returns than they can get from safe instruments.  If you choose to chase yield, how can one manage the risk that inevitably arises from this strategy?  How does a sensible person add some yield in a judicious fashion?

The Importance of Intestinal Fortitude

Making Money Requires A Strong Stomach

One of the hardest things to do as an investor is to stick your hand out and buy when the market is falling.  Most likely, whatever you buy will be offered to you at a lower price within minutes to days making you feel foolish for buying and filling you with regret.  Yet you will likely still have to make decisions and keep putting funds to work.  There are bags of behavioral finance research pieces showing that we feel the pain of losing money far more than we feel the pleasure of making money and anyone who did not just fall off the proverbial turnip truck knows that emotionally-charged decisions are often poorly made decisions.  There is also ample evidence that most retail investors are very good at underperforming the market.  For example, the most recent DALBAR study indicates as follows:

"The average equity-fund investor saw annual returns of only 3.49% in the 20 years through 2011, according to the latest analysis from Dalbar. Compare that with the average 7.81% annual return of the S&P 500."

- Source: http://online.wsj.com/article/SB10001424052702303816504577307912829243848.html

So what should an investor do to avoid sabotaging themselves?

Safe Money Yield Alert!

TIAA Direct Offering a 1.25% APY Online Savings Account

Many investors keep a chunk of their funds in "safe" investments, generally defined as things that have little or no prospect of losing you part of your principal.  This might be an emergency fund, a dedicated portion of one's portfolio, or merely a parking place for funds that you hope to profitably invest in the future.  Whatever the reason, such funds have become a bit of a problem because the very low interest rate environment makes it tough to even break even against the ravages of inflation.  Among a number of options is a savings or checking account, although at most banks you will receive an annual yield well under 1%.  However, savings and checking accounts have a certain appeal for at least a portion of your safe money as they are backed by the FDIC and generally offer pretty much instant liquidity with no penalties for doing so.

TIAA Direct, a banking subsidiary of TIAA-CREF, is currently offering a 1.25% APR yield on savings accounts with as little as $25 on deposit: http://tiaadirect.com/banking/bank/savings/index.html  Although this rate can change at any time, it is one of the highest (if not the highest) on offer at the moment.  As long as this rate lasts, it appears to be an attractive option for investors wanting a highly liquid spot to park funds.  Of course, if the bank lowers their rate you can always go elsewhere.

Disclosure: I have no interest whatsoever in TIAA Direct and do not receive referral fees.

Numbers Are In - You Can Get 2.7% Risk Free For 1 Year Money

Buy I Bonds Before The End Of April To Lock In More Than Double Equivalent CD Yields

As I detailed in an earlier post (http://www.lifeinvestmentseverything.blogspot.com/2012/03/if-you-want-to-earn-3-risk-free-on-your.html), I bonds offered through www.treasurydirect.gov offer a tax deferred yield that beats the pants off why you can earn on a 1 year CD.  With the release of the March consumer price index (CPI) data this morning (http://www.bloomberg.com/news/2012-04-13/consumer-prices-in-u-s-increased-at-a-slower-pace-in-march.html), we now know that the CPI rose 2.7% over the last twelve months.  Newsflash: inflation is way above currently available CD rates (about1%), even before taxes.  Because I bonds pay interest currently equal to the CPI, you can buy up to $10,000 per person (husband, wife, kids, etc.) in these bonds annually and shift low yielding savings to more generous I bond rates.  In addition to keeping up with inflation automatically, I bonds are tax deferred until you cash them in.  For more details, read my earlier post linked above.  But if you want to grab a 2.7% yield over the next year, don't procrastinate.  You only have until the end of April to lock in this yield.  If you wait until May you will get a bit over 2% for the first six months and an as yet undetermined rate (possibly as low as zero) the next 6 months.

As always, do your own due diligence, consult your advisor, and be careful.  Please do not consider the above as investment advice.  Note that I bonds cannot be surrendered before 1 year and carry a penalty of 3 months' interest if you surrender them before 5 years have passed.

Picking Up Nickels In Front Of A Steamroller

How Merger Arbitrage Funds Work

For many investors, finding new ways to diversify their portfolio and reduce risk while still making an adequate return is a constant struggle.  As trading costs and barriers to capital flows have come down, markets have become more integrated over time reducing the benefits of diversification.  Worse, in times of market stress in the past several years correlations between different types of assets have approached totality (with the exception of now very low return treasury bonds).  So the hunt is always on for assets with low correlation and positive return.  One of the options available to retail investors are merger arbitrage funds, such as the Merger Fund (MERFX) and the Arbitrage Fund (ARBFX).  These specialized funds offer positive (if modest) returns, very low correlations to most other asset classes, and very low volatility (its like watching paint dry).  But before running out and clicking "buy" investors should understand how these funds work and what the risks are.

If You Want To Earn 3% Risk Free On Your Cash, Hurry Up

A Reminder To Jump On I Bonds Before It Is Too Late

As I mentioned in a prior post (http://lifeinvestmentseverything.blogspot.com/2012/03/where-to-invest-safe-money.html), one of the places to put some of your "safe" money is I bonds issued by the US Treasury.  Bonds bought by the end of April will earn 3.06% for the first six months, with rates subsequent to that based on the consumer price index (CPI rate).  Based on the CPI thus far, I would expect the following six month rate to be over 1%.  An all-in 12 month rate would be approximately 2 to 3% depending on what the second half of the year's rate turns out to be (very attractive compared to a 1 year CD at 1% if you can even find a rate that high).  However, if you wish to jump on this opportunity you will need to move soon.

Where Do Junk Bonds Go To Die?

Sketching Out The Range Of Outcomes

Some bond investors buy bonds with the intention or at least strong possibility of selling them prior to maturity.  Other bond investors tend to buy bonds, put them away, and forget about them until they mature or default.  With investment grade bonds, the outcomes are fairly straight forward.  Most investment grade bonds are not callable and the overwhelming majority of them do not default.  In contrast, junk bonds have a wider range of outcomes which can materially affect an investor's returns.  In this post I will outline the more common cases and describe the implications for returns.

A Treasure Hunt In Reverse

How to track down ALL the leverage on a balance sheet

When investing in either the stock of a leveraged company or a junk bond, it is important to understand how much leverage that company has.  Some leverage is very easy to find: you look on the balance sheet and there is a number labelled "long term debt."  Unfortunately, there are other forms of leverage that are not as clearly labelled, although it is disclosed by SEC filers if you know where to look.  As part of your reular due diligence, you should always tally up all the forms of leverage and ensure that the issuer in which you are about to invest has as solid a balance sheet as first appearances suggest.  As an aid to my readers, I will walk through a specific example and illustrate how to find all of an issuer's leverage.

Attractive Yield Opportunity In Stonemor Partners Bonds

At an 11% YTM, I am Dying To Get In

As the junk market has rallied, pickings have been getting slim in the 10+% YTM category.  Of the non-Caa/CCC rated names that regularly show up in my searches there are precious few I would want to own.  However, Stonemor Partners (STON) 10.25% bonds due 2017 (CUSIP 86184BAB8) recently offered at 95 cents on the dollar in retail sized lots appear to be one of the rare attractive yield opportunities currently available.  These bonds yield a bit over 11% if held to maturity and as much as 16% if they are called at the issuer's earliest opportunity.  While STON bonds do not offer a material capital gain potential, I believe they are a solid value for yield oriented investors.

Where to Invest "Safe" Money?

There Ain't No Such Thing As A Free Lunch (TANSTAAFL)

We are in a persistent low interest rate environment and this shows no obvious signs of changing in the near future.  Many people who have been accustomed to receiving 5% and higher yields on CDs, treasury bonds and other "safe money" instruments are now faced with increasing maturities and have to decide what to do with the funds.  What should risk averse investors (or investors who keep some of their portfolio "safe") do with these funds?

The Dangers Of Chasing Yield: Always Read The Fine Print

Walking Away From RadioShack Bonds Due To Inadequate Covenant Protection

One of the hazards of digging around in the discard bin of the junk bond market is that an investor is constantly looking through what other people have run the heck away from.  Sometimes they have run away with good reason, sometimes they have panicked unnecessarily.  The only way to have a reasonable idea of whether a given bond is an opportunity or a trap is to very carefully do your own due diligence, including reading all the fine print.

JQC: Profiting From A Metamorphosis

Hitting a Single With A Fund Under Transition

In a prior post (http://lifeinvestmentseverything.blogspot.com/2012/01/how-to-buy-dollar-for-90-cents.html), I explained how I scan the world of closed end funds (CEFs) for bargains.  Usually the realization of excess value requires patience, and the time you must wait can extend well over a year.  However, from time to time an opportunity presents itself in the CEF world which offers a far more timely excess return.  The Nuveen Multi-Strategy Income & Growth 2 fund (ticker JQC) offers just such an opportunity for excess potential returns which are likely to emerge within a relatively short period of time.

Rolling Your Own

How To Create Your Own Indexed CD or Equity Indexed Annuity On the Cheap

Banks, brokers and (especially) insurance agents love to sell a product that has a very mouth-watering top line pitch: equity market upside without the risk of losing money. Unfortunately, the reason they love to sell these products is that the commissions to the salesperson are typically fairly generous and the economics of the product are attractive to the bank or insurance company underwriting the paper. These products go by various names, most commonly appearing in the form of an equity indexed CD, equity indexed annuity, or fixed indexed annuity. Due to the very simple construction of these products, they are actually quite easy and cheap to reproduce in under 30 minutes a year in your very own brokerage account, giving you much better returns and offering a lot more flexibility.

How to Buy a Dollar For 90 Cents

Arbitraging Market Inefficiencies In Closed End Funds

In a world of universally low yields and high volatility, it’s a tough time to be an investor.  Many people are nervous and prone to shoot first and ask questions later.  Since “safe” options like treasury notes and CDs are now offering yields less than inflation (a TIPS auction was recently concluded at a negative real yield), there really is no obvious place to hide.  Despite this difficult climate, there are still ways to generate returns that are in excess of current bond yields.  One option is to take advantage of other people’s panicky sales and buy dollars for 90 cents by picking through the market for closed end funds.