Aug 01, 2011
As June ended, the story was the end of QE2. The conventional wisdom at the time was that there would be no incremental buyer of Treasuries as the Fed ended its purchases on June 30th. The story of the day was that stocks were cheap relative to bonds. By the end of the month, the story was about the debt ceiling vote by Congress. This will come and go and we will be on to the next employment numbers and european debt and whatever else comes along. However, having a valid investment process that assesses conditions and adapts to them will serve to keep us on the right side of any intermediate or extended trends that appear.
Put yourself in the role of someone who stands in front of an investment committee – or a consultant that must travel around and tell the strategy of the firm. It is very hard to come out with an argument that can defend a large overweight in treasuries these days. Indeed, trying to find the reasons to buy a low single-digit yield can get you laughed out of the room.
So what happened during July? Intermediate treasuries (IEF) rallied +3.2% and outperformed the S&P by 520 basis points (S&P 500 was -2.0% for month).
We think this is where professional investment advisors tend to really excel: in finding credit securities that are reasonable return for relatively low risk. Intermediate corporate bonds as measured by the plain vanilla Vanguard Intermediate bond fund (VCIT is the ETF version of VFICX) rallied +2.3% in the month, the 7th best return in a calendar month since 12/31/02 ( 103 months). Here is the range for this index over that time period lined up from low to high:
There were of course other interesting things happening --- the Swiss Franc ETF (FXF) and all longer-term bonds had strong months. There were some tradeable longs in the Australian dollar (FXA) and elsewhere across the ETF landscape.
We believe that altering allocations --- even when using plain-vanilla index funds (which by the way are ultra low-cost and highly liquid) -- is a more powerful strategy than trying to understand business fundamentals of a few companies better than others. To the extent you can find unique products that beat indexes, all the better. But it is the basic big picture allocation that is the important part. Do you think a $50 billion pension fund manager can nimbly move assets around on a monthly basis? No. Do you think that sub-second high-frequency hedge-fund trading signals affect calendar-month returns? No.
As we’ve highlighted before, you can now trade index baskets for no commission and a penny bid-ask spread. We live in a time that has never been so investor-friendly.
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