I have been an investor for 30 years. I have been a CFA charter holder for 20 of those years. For most of my career, I have focused on individual investments. I have bought and recommended mostly individual stocks, REITs, MLPs, and bonds.
My attitude has changed over the past couple of years. I have bought more fund investments than I have individual stocks. I find the fund approach particularly attractive when investing in contrarian sectors. The historical fund return frequently belt-loop holds the return of the individual stock I was considering. Better yet, It holds the loop with less risk. After all, we are spreading the money around.
For example, I recently invested in the beleaguered pipeline sector with the Alerian MLP ETF (AMLP). The sector is composed mostly of master-limted partnerships (MLPs), of which the Alerian fund owns 20. The top-five MLPs -- Enterprise Products Partners, MPLX LP, Magellan Midstream Partners, Energy Transfer LP, and Plains All-American Pipeline -- account for 50% of the portfolio value. These top-five the steer the Alerian fund.
I have owned the Alerian fund for a year. Over the my holding period, fund has outperformed Enterprise Products Partners and Energy Transfer. It has been outperformed by Magellan Midstream Partners and Plains All-American Pipeline. It has performed on par with MPLX LP. You could say it's all a wash, but, again, with less risk.
Besides, in the instances of out performance and under performance, I'm looking at only a few percentage points. The difference in performance of one MLP compared to the Alerian fund has been too insignificant to accept the risk of investing in only one MLP. Convenience is another factor for favoring Alerian fund. It distributes form 1099-DIV for tax reporting. MLPs distribute schedule K-1, which, as every MLP investor knows, can be a tax-reporting nightmare.
Because I'm in my mid-50s, income has ratcheted higher on my list of investing objectives. For that reason, I have added more investments that offer high-yield income as opposed to growth potential. I have added a few closed-end funds (CEFs) to my portfolio.
CEFs share characteristics of mutual funds and exchange-traded funds (ETFs). They are, after all, all fund investments. Each owns many securities. CEFs share characteristics of individual stocks. Their shares are bought and sold through a broker during the trading day like any share of common stock.
Unlike mutual funds and ETFs, the CEFs share price can differ from the net asset value (NAV), or the market value, of the investments the CEF holds. The divergence occurs because the market price of a CEF is influenced by factors that influence all traded securities, namely investor sentiment (which can be rational, irrational, fund illiquidity, lack of institutional ownership, euphoria, and depressing). The key is to buy the CEF shares at an above-average discount to their historical discount.
I own CEFs that invest in utility stocks, international large-cap growth stocks, private real estate, preferred stocks, collateralized loan obligations (CLOs), special purpose acquisition companies (SPACs) and other CEFs, and convertible securities. These investments are frequently more difficult for nonaccredited investors to incorporate in their portfolio. Yields range between 7% and 15%. Most pay income (distributions) monthly.
Most also use leverage. A CEF can issue debt up to 50% of its NAV. By employing cheap leverage (at least cheap today), a CEF can deliver far greater immediate income than an unleveraged mutual fund or ETF or most individually traded stocks.
But lunches have never been free. Leverage imbues the CEF with additional risk. More income, to be sure, but also more risk. For now, I'm willing to accept the additional risk for the additional income.
Funds are worthy options for value and income investors. What's a growth investor to do?
That depends.
Experienced growth investors might consider eschewing funds for individual stocks. The Vanguard Information Technology ETF (VIG) garners a four-star rating from Morningstar. The ETF owns 334 securities, but it is dominated by two securities: Apple and Microsoft account for 36% of portfolio value.
The Vanguard ETF shares have appreciated 412% over the past 10 years. Microsoft shares have appreciated 661%, Apple shares have appreciated 863%. The Vanguard ETF's other 332 have been a drag on performance when compared to Microsoft and Apple. Concentrating on Microsoft and Apple would have been the more remunerative bet.
Of course,we view Microsoft, Apple, and the Vanguard ETF through the rear-view mirror. Ten years in arrears, you would have needed to anticipate Microsoft would replace the effete Steve Ballmer with the dynamic Satya Nadella and that Tim Cook would sustain the growth trajectory at Apple established by Steve Jobs. The bets were hardly sure.
The Vanguard ETF would still have been a smart bet. A more risk-averse investor bullish on large-cap technology would still have reason to boast: he realized, after all, a 413% gain on his Vanguard ETF investment. His gain would have been two-and-a-half times that of the S&P 500 over his holding period.
I have grown more risk-averse in recent years. I expect my aversion to risk to rise with my age. I expect my allocation to fund investments to rise as well.
My attitude has changed over the past couple of years. I have bought more fund investments than I have individual stocks. I find the fund approach particularly attractive when investing in contrarian sectors. The historical fund return frequently belt-loop holds the return of the individual stock I was considering. Better yet, It holds the loop with less risk. After all, we are spreading the money around.
For example, I recently invested in the beleaguered pipeline sector with the Alerian MLP ETF (AMLP). The sector is composed mostly of master-limted partnerships (MLPs), of which the Alerian fund owns 20. The top-five MLPs -- Enterprise Products Partners, MPLX LP, Magellan Midstream Partners, Energy Transfer LP, and Plains All-American Pipeline -- account for 50% of the portfolio value. These top-five the steer the Alerian fund.
I have owned the Alerian fund for a year. Over the my holding period, fund has outperformed Enterprise Products Partners and Energy Transfer. It has been outperformed by Magellan Midstream Partners and Plains All-American Pipeline. It has performed on par with MPLX LP. You could say it's all a wash, but, again, with less risk.
Besides, in the instances of out performance and under performance, I'm looking at only a few percentage points. The difference in performance of one MLP compared to the Alerian fund has been too insignificant to accept the risk of investing in only one MLP. Convenience is another factor for favoring Alerian fund. It distributes form 1099-DIV for tax reporting. MLPs distribute schedule K-1, which, as every MLP investor knows, can be a tax-reporting nightmare.
Because I'm in my mid-50s, income has ratcheted higher on my list of investing objectives. For that reason, I have added more investments that offer high-yield income as opposed to growth potential. I have added a few closed-end funds (CEFs) to my portfolio.
CEFs share characteristics of mutual funds and exchange-traded funds (ETFs). They are, after all, all fund investments. Each owns many securities. CEFs share characteristics of individual stocks. Their shares are bought and sold through a broker during the trading day like any share of common stock.
Unlike mutual funds and ETFs, the CEFs share price can differ from the net asset value (NAV), or the market value, of the investments the CEF holds. The divergence occurs because the market price of a CEF is influenced by factors that influence all traded securities, namely investor sentiment (which can be rational, irrational, fund illiquidity, lack of institutional ownership, euphoria, and depressing). The key is to buy the CEF shares at an above-average discount to their historical discount.
I own CEFs that invest in utility stocks, international large-cap growth stocks, private real estate, preferred stocks, collateralized loan obligations (CLOs), special purpose acquisition companies (SPACs) and other CEFs, and convertible securities. These investments are frequently more difficult for nonaccredited investors to incorporate in their portfolio. Yields range between 7% and 15%. Most pay income (distributions) monthly.
Most also use leverage. A CEF can issue debt up to 50% of its NAV. By employing cheap leverage (at least cheap today), a CEF can deliver far greater immediate income than an unleveraged mutual fund or ETF or most individually traded stocks.
But lunches have never been free. Leverage imbues the CEF with additional risk. More income, to be sure, but also more risk. For now, I'm willing to accept the additional risk for the additional income.
Funds are worthy options for value and income investors. What's a growth investor to do?
That depends.
Experienced growth investors might consider eschewing funds for individual stocks. The Vanguard Information Technology ETF (VIG) garners a four-star rating from Morningstar. The ETF owns 334 securities, but it is dominated by two securities: Apple and Microsoft account for 36% of portfolio value.
The Vanguard ETF shares have appreciated 412% over the past 10 years. Microsoft shares have appreciated 661%, Apple shares have appreciated 863%. The Vanguard ETF's other 332 have been a drag on performance when compared to Microsoft and Apple. Concentrating on Microsoft and Apple would have been the more remunerative bet.
Of course,we view Microsoft, Apple, and the Vanguard ETF through the rear-view mirror. Ten years in arrears, you would have needed to anticipate Microsoft would replace the effete Steve Ballmer with the dynamic Satya Nadella and that Tim Cook would sustain the growth trajectory at Apple established by Steve Jobs. The bets were hardly sure.
The Vanguard ETF would still have been a smart bet. A more risk-averse investor bullish on large-cap technology would still have reason to boast: he realized, after all, a 413% gain on his Vanguard ETF investment. His gain would have been two-and-a-half times that of the S&P 500 over his holding period.
I have grown more risk-averse in recent years. I expect my aversion to risk to rise with my age. I expect my allocation to fund investments to rise as well.
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