On August 1, Fidelity took direct aim at index fund competitors Vanguard, Blackrock’s iShares ...
It’s High Time for This Income ETF
09/30/2011 9:51 am EST
There’s a conundrum in the financial markets that’s making it a tough climate for income investors, Doug Fabian of High Monthly Income.
As an income investor, I don’t have to tell you how hard things have been of late. If you had your money in dividend-paying equities, you’ve been subject to some stomach-churning volatility.
That volatility has resulted in a decline of more than 10% off of the May highs for dividend stocks in the iShares Dow Jones Select Dividend Index (DVY).
Meanwhile, Treasury bond yields have plummeted to near crisis levels, as the yield on the ten-year Treasury note is just 1.9%. If you take inflation into account, you’re essentially getting a negative rate of return.
Then there’s what the bank gives you on cash, which thanks to the Federal Reserve’s commitment to near zero interest rates well into 2013, gives you a pitiful return that costs you money over time.
So, as investors look to generate a solid yield from our capital, what do we do?
I think the first step to navigate the current income waters is the step that we’ve already taken to move our assets out of high-risk equities and into the safety of cash, and some targeted bond funds.
Now as we mentioned, cash isn’t paying much these days. But the good thing about cash is it allows us to preserve our income-generating principal while dividend stocks gyrate wildly, and while many equity sectors continue to languish in official bear-market territory.
It’s All about Timing
You’ve probably been told your whole life that investing for income is different than investing for growth.
You’ve probably also been told that trying to time the market is no way to invest in an income portfolio. In fact, the conventional wisdom is that you should never try and time the market, because that’s a fool’s game.
Well, I couldn’t disagree more.
You see, during periods where dividend stocks are most vulnerable to a sharp correction, you need to get your money out of harm’s way before those declines wipe out your principal. Sure, you still may get a dividend by holding onto steep decliners, but that dividend is meaningless if your account value has fallen substantially.
I talk to income investors everyday who are really worried about the future, and usually it’s because they’ve bought a high-yield investment that’s down significantly during the past several months.
We can see that over the past three months, and year to date, many of what we consider to be the best high-yield investments have fallen on decidedly hard times.
The poster child for the big decliners here is Penn West Petroleum Ltd. (PWE), which is down more than 26% in 2011 alone. And while the decline in this energy fund is a bit atypical for the sector, there’s also been a big decline in another high-yield energy play on the list, namely Enerplus Corp. (ERF), which has come down more than 14% this year.
Under these circumstances, the savvy income investor must time the market by making a timely exit, and parking capital in cash and targeted bonds. Here is where patience is the virtue that will pay the biggest dividends, because rather than chasing equities down toward the bottom; we can wait things out until we get the next attractive buying opportunity.
Jeffrey Gundlach, the highly lauded manager of the DoubleLine Total Return Bond (DLTNX), is a winner in the investment game. Gundlach successfully has managed DLTNX higher this year. Since our purchase, we have an unrealized gain of nearly 5% in the fund.
Gundlach also is a winner in court, as he recently received a $66.7 million jury award against his former employer for unpaid wages.
Back in 2009, Gundlach was fired from TCW Group Inc. His firing enabled him to start the DoubleLine Funds, which is great for us, but that’s not the end of the story.
In January 2010, TCW sued Gundlach after more than half of its fixed-income professionals joined DoubleLine. TCW sought as much as $566 million in damages from Gundlach for breach of fiduciary duty and misappropriating trade secrets.
Gundlach was found to have breached his fiduciary duty to TCW by misappropriating trade secrets, but the jury found that Gundlach and DoubleLine didn’t act willfully and maliciously in misappropriating those trade secrets.
Although both sides in the case are claiming a victory of sorts, I think Gundlach is the real winner here. That’s because the publicity of the trial has made him an even bigger star in the fixed-income business. It also has cemented his status as, what some have dubbed him, “The New Bond King.”
More importantly, now that this trial is over, Gundlach can get back to the business of making his clients big money—and that makes those of us who own his DoubleLine Funds the real winners.
Related Articles on FUNDS
Investors often ask me how to build a portfolio that holds its own in down times but hands them soli...
Real estate investment trusts (REITs) have been in a trading range the last couple of months, but th...
What a great few days at MoneyShow San Francisco! The show was larger than it had been in several ye...