The Real Charlie

Who Gets To Allocate Whose Assets

I've been thinking about asset allocation funds recently. For those unfamiliar, these are mutual funds (or separately managed accounts) that let the manager move with full discretion or within some range between equities, fixed income securities, cash and sometimes other assets.

I use one of these funds in a retirement account and, all things being equal, it has done well over a few tough up and down years. It has outperformed one account where I set the allocation among four managers (one bonds, one domestic equities, one international equities and global equities). Another account that I manage myself as well among a selection of funds performed much better than the asset allocation manager.

I'm at a point where I can allocate some capital again in a few different places and keep wondering whether I should pick a set of funds and allocate myself, or pick one (or more) asset allocation funds and let someone else do the driving. There is a strong temptation to do the latter, and rely on the manager to be nimble, to use tools not so accessible to me (shorting, currency trading) to gain some alpha, etc.

And yet with an actively managed asset allocation fund I really need to make sure that the manager and I see pretty eye to eye. I'm pretty bearish right now, interested in buying if (big if) I can find value, but frustrated by the ultra-low returns on my cash. Not a lot of managers are willing to sit on 25-35% cash waiting for another buying opportunity. On the other hand, my buy discipline is lousy, mostly because I get nervous and under buy, but also because I get busy with my real job.

I don't pretend to have a solution to my conundrum yet but figure I'm better off posting about it and getting something up on this woebegone old blog of mine. And if anyone has any ideas, by all means comment.

A Month Without A Post?

No, I can't let that happen. So an update about my thinking in terms of investing right now. I am still holding a lot of cash and even more "near cash" in the form of 3-6 month FDIC insured CDs, spread out at a few different banks. I have maintained my exposure to the municipal bond market through a relatively short duration (5 year-ish) managed account, which gave me a scare last fall and subsequently rebounded nicely. I am concerned about a lot of state and local finance issues, so I am taking the popular advice and staying national, with only about 15% of my muni bonds in Massachusetts. So Alaska, Maine, Virginia - keep your books in order!

And I still have some equity exposure - 10% in my taxable accounts, much more in the retirement accounts. I'd add to it if I felt better about whether we are at the bottom or not. I easily could see this market testing the lows of November and then running down another 10-15% in the next few months. After that the road back will be fairly long, fairly slow and full of opportunities to make some money investing in good companies, and also to lose tons of money. And Uncle Sam's hand will rest more heavily on everyone, mostly for ill, and will eventually reach deeper into our pockets, which is always for ill, in this closet libertarian's book.

Meanwhile, we are weathering things well enough in this house, thank God, to allow us to enjoy some interesting meals out lately. I heartily recommend Rincon Limeno in East Boston for excellent Peruvian food (try the ceviche, the roast chicken and anything fried) and Jojo Taipei in Allston (Three Cups Tofu, Sour Cabbage and the Taiwanese Noodles, which Roxanne inhaled). On the beer front, both Publick House Provisions in Washington Square, Brookline and Wine Gallery on Route 9 in Brookline, near Brookline High, are worthy of your patronage. Very different vibes and selections - your domestic micro six pack needs will be met with a smile at Wine Gallery, while the very hip PHP is the only place in town that I know of to consitently carry De Koninck - the true king of beers.

In My Portfolio There Is Problem

I have avoided posting for about a week because of the Madoff situation. The main reason is because of Ground Rule #2, and my particular concern with this situation will be obvious to those of you who know where I work and what I do. For almost an entire week I primarily dealt with Madoff related issues at the office, ranging from the bizarre to the tragic to the utterly hilarious. It was exhausting and blog-worthy, but I need to choose my words carefully and with some distance.

So speaking, as always, only for myself, a few comments:

1. Diversify. Please, please diversify. I saw a foundation tax return that showed 10% of assets in an illiquid real estate venture, 40% in a Madoff feeder fund, 30% in another Madoff feeder fund, and the rest in a wonderfully diversified and well chosen portfolio of mutual funds and ETFs. So they were 20% of the way there. Here's a hint: if you have to over-concentrate your portfolio to get exposure to a really great manager or fund, you don't have enough money to invest in that fund. The charities supported by this foundation, and the state in which this charity operates as a public trust, should be asking the trustees some hard questions.
2. Demand almost total transparency almost all of the time. A black box investment that seems to work and be interesting and that you just don't get is OK for a few percent of your portfolio if you can't help yourself. It's gambling, and realistically think of it like that. Don't bet, say, your endowment, or your grandchildren's trusts, or a foundation on it. If you making a significant investment demand near total transparency, force yourself to understand the strategy, get third part advice and insist on independent custody of assets.
3. A shanda fer der goyim. That translates from Yiddish roughly as "an embarrassment in front of the gentiles." As in, don't do it. It is an old Jewish rule - don't make us as a people look evil, or reckless, or stupid, or cruel in front of the many, many non-Jews with whom we live as neighbors in either peace and harmony or tension and conflict. A short and sickening trip to google will quickly turn your stomach as you see what the Jew haters in the world make of Madoff. Many of their darkest hallucinations and fantasies about how Jews treat each other and the world, and what our values are, have been brought to life in vivid Technicolor.

I may have more to say on this as time goes by and the story continues to develop. For now, I repeat the words of our great president Ronald Reagan, which I have seen so much the past week or so: trust, but verify.

Let's Not Go There

I haven't posted about investing in some time, mainly because I've been up to my pupik in investing stuff at work and eager to leave it behind at the end of the day. And also, of course, because it is not such a fun topic right now. I actually have acquaintances with whom I can not talk right now, because our primary topics of conversation are investing and the Red Sox, and both are sort of not worth discussing these days. One of them will be back on the table in February, though.

I made one major move in October, pulling some money from managed tax-exempt fixed income and putting it into FDIC insured short term CDs, spread over a bunch of different banks, all maturing over the next few quarters. As the CDs come due, I will be forced to make some decisions: stay in these CDs as a form of super short term fixed income, or put the money back into the muni market, or look for some equities, or something else? If one came due tomorrow, I'd roll it over for another quarter or two, or just hold it as cash.

I sold a few positions to realize some losses (I had gains from earlier in the year to offset) and bought some equities to round out some odd lot positions I've picked over the years (so I owned, for example, 150 shares of Diageo, and bought another 50 to make it 200, which is an easier position to sell or write options against). I will rebalance a few things just after year end, once everyone is done with the tax loss selling typical of this season, especially in bad years. And one thing we know, this is a bad year.

Overall I feel OK about my results to date. I am down, but not too much, and glad to have my munis and my cash positions, and to have gotten out of my "cash equivalent" auction rate securities with the help of my friendly state government. This will turn around, but not for a little while yet, and meantime there are some buying opportunities, but also some major opportunities to get crushed.

Risk Tolerance

I feel like I should have something profound and reassuring to say about our current financial situation in the world, and I do and I don't. I have nothing profound to say, but do have a useful story. I have nothing especially reassuring to say either, except that I am worried, but usually not panicked, glad to be mostly liquid and overweight in cash and general obligation municipal bonds, angst ridden about my illiquid auction rate securities (liquidating in seventeen days, they tell me) and reminding myself and others, constantly, about time horizons.

My story is about an acquaintance who asked me, in great panic, about the situation. She told me that she had some CDs coming due and didn't know what to do with the money. I asked her what bank, and she named two banks, one a fairly solvent major international bank and the other a regional bank well known in town for tougher than average lending policies and a sound balance sheet. I asked her how much she had in each bank, and she named a number well under the FDIC insured level. I asked her when she thought she needed the money and she told me five years. I suggested she roll over the CDs to the same maturity (one year) and not worry about the money until next September.

After the conversation I applied the same technique, in my head, to a bunch of my own investments. I need to make a few changes, some of which I've done, some of which I need to wait on for a while. Mostly they involve sticking to my long terms plans and being true to my own values in the companies and entities that I choose to share my capital with: conservative with risk, conservative with leverage and committed to the long term.

Recent events are a good reminder to everyone about risk tolerance, about not listening to the loudest voices on the TV in good times or bad and about staying liquid and under leveraged. Also, Barney Frank is almost as sarcastic as my wife. Almost. She is much better looking, though.

On a mostly unrelated note I wish all to whom it is applicable a happy, healthy, prosperous, sweet and wonderful New Year.

The Parrots and the Sheep

Those of us who work downtown are, by and large, a fairly drab lot. Brighter and more varied in dress (and, it seems to me, ethnicity) than when I worked downtown in the late 90s, but there are still a lot of dark suits, blue shirts, ties, sensible shoes, etc. That's why I love it when I come across a little knot of bike messengers. I saw a group this morning on High Street. Bright shirts, tattoos on display, much hardware pierced into the face, hair in many colors, etc. The Financial District is the home of a flock of crows, and the bike messengers are the parrots who fly with us.

And I'm trying to stay out of the flock and not sell securities in a panic. I have a lot of stocks and ishares that are getting hit hard - none catastrophically, yet - and other securities that I just feel anxious about. I feel like the market is going through a cathartic self-cleaning that would actually get done sooner and neater if the government would just back away a little bit. I blame our quadrennial presidential foolishness for about 50% of the hype and hysteria. I keep trying to keep myself out of the panic, but it is hard, and to prepare for some bargains for sale very soon. Big, very successful investors that I know and work with are out buying distressed debt and properties and having a ball. Glad someone is.

Staying the Course

Unless you live in a dark and damp hole in the woods, you are aware that the securities markets have been a bad place the past few weeks. Like many, if not most, investors, I am not doing well year to date. My biggest problem is my exposure to some auction rate securities, which I can't sell for love or money. Otherwise I'd be happier, actually, because I'd be looking to use some of that capital to buy some of the bargains and near bargains out there on the market, especially among some of the big European companies in the financial, consumer staples and industrial areas, and among some of the US mega caps in industry, technology and, yes, a few financial stocks. But until I can get at my (famous last words) "cash equivalents," I am on the sidelines.

Except that I sold my last holdings in Bank of America last week, after several decades of owning Connecticut National Bank, Shawmut, Fleet and then Bank of America. I've been whittling the holding down for about eight years, and said goodbye to the last little bit after a terrible year or two. Incidentally, I was also a lifelong (literally, as my parents opened a Hartford National Bank account for me as an infant) retail customer of BoA and its antecedents, and "fired" them two years ago. Not a quality outfit in many, many ways. Good riddance.

I did finally invest my IRA rollover. I ended up with more money than I expected, so I went from X all in Blackrock Global  Allocation to 6.5 as follows:

2.5X in Blackrock Global Allocation
2.5X in iShares Lehman TIPS
1.5X in cash

I am still looking to get that cash down as I am getting a 0.10% yield annually on it. I am looking at some other "asset allocation" managers, particularly the Bob Arnott advised funds at PIMCO, All Asset and All Asset All Authority. They are both funds of PIMCO funds, and the later can hold short-biased sub-funds. Not a bad idea, in this market. As always, I'll keep you posted and, also as always, my financial advice and ideas are worth what you just paid for them.

And sorry for the hiatus, as Typepad fixed some annoying bugs and I finished a massive SLEP (Service Life Extension Program) on my iMac G4. More memory, new OS, new backup drive -  its practically modern! And I even own an iPod now! 21st century, here I come!

Success!

The mystery of my 403(b) rollover has been solved. My former employer's HR department sent the paperwork directly to the investment manager, who then sent the check directly to my financial adviser, where it showed up, without notice, today.

So now I am back to my asset allocation decision again. Right now my IRA is 10% in cash and 90% in the Blackrock Global Allocation Fund (MDLOX, for you ticker checkers). The IRA has X dollars in it (X being a relatively small fraction of my total portfolio), and the new additions will bring it to 6X. My plan, for tonight at least, is to allocate the IRA as follows:

2.5X in Blackrock Global Allocation
3X in the iShares TIPS ETF, for some tax sheltered exposure to a real return asset class
0.5X  in cash

How might I change it? I am concerned that the TIPS are really overvalued right now, as are most real return assets. So I might go 5.5X into the Blackrock Global Allocation, or add some Diamond Hill Long-Short into the mix. But I have learned that the Diamond Hill is actually fairly tax efficient, so I might wait and save that for the taxable account instead. Another option would be a global (ex-US) bond fund, or a fixed income asset allocation fund that can do for FI what Global Allocation does for everything that's not tied down. I'm going to mull it over for the weekend, and I'll let you know what I decide.

End of May?

It is hard to believe that May is almost over. The month didn't even fly by, it just vanished, in a flash. So, a few late spring updates and thoughts:

1) No, I still haven't gotten my 403(b) money emancipated yet. Yes, it has been two months. And yes, the nasty letter is coming. Should I start it out "Dear Thief" or "Dear Loser?"

2) Today I was walking home from the train, about 3/4 of the way home, and I heard some familiar squeaking from up ahead of me. My girls, all three of them were coming down the street. I waved, and the two little ones broke into a run (more of a gallop, actually) and caught up with me, and gave me a hug. My boss, whose daughters are 11 and 14, keeps telling me to enjoy this stuff, as the little girls get big fast.  With a welcome home like that after along (but fun, and productive) day, how can I not enjoy it?

3) This morning, my train got in fifteen minutes late. Yesterday, my line was disrupted by a lightning strike. This afternoon, two trains on another line collided. One of my favorite conductors retired and another switched lines. Why do I have the funny feeling that my mass transit honeymoon is over?

Let My 403b Go!

So I left my previous job at the end of February. In April, like a good boy, I asked for the papers to get my 403b account rolled over into the IRA that I manage for myself. I picked out the investments (some TIPS, some Blackrock Global Allocation), signed and filled out and saw the notary. Then I mailed it all to my former employer for verification of my having left their employ.

And I have heard nothing. For a month. I know they got the papers, because I sent them return receipt. They are either lost, or sitting on someone's desk, or someone is being an ass about it. I just want my money. So I called today, and did not hear back. I'll give them tomorrow and Wednesday, and then the next letter goes to the CEO.

Let this be a lesson to you all: it is all well and good to save for retirement, and to intend to keep one's assets properly stewarded after one leaves. But it is another thing altogether to claw one's money loose from the grips of incompetent bureaucracy!