Diversification versus Tactical Allocation

February 18, 2010

It’s no secret that we prefer tactical asset allocation as a way to deal with the vagaries of financial markets. A very nice piece from Doug Short, entitled “Diversification Works…Until It Doesn’t” illustrates why we are leery of sit-and-take-it investing.

Markets are always changing. Sometimes taking risk is rewarded and sometimes it is punished. During the last bear cycle, bonds were the “safe” assets. Given the large buildup of public indebtedness, can anyone assume that bonds will be the safe asset the next time around? I’m not willing to make that leap of faith. That’s one of the nice things about tactical asset allocation: you don’t have to make assumptions; you can just roll with the changes. Let supply and demand determine what is strong and what is weak.

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Posted by Mike Moody

Municipal Bonds: Still Low Risk?

February 18, 2010

As discussed in today’s WSJ, it appears that municipal bond holders are going to become increasingly familiar with the term “Chapter 9.”

The seldom-used part of U.S. bankruptcy law gives municipalities protection from creditors while developing a plan to pay off debts. Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders.

The economic slump, however, is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities traditionally considered low risk.

Past assumptions about municipal debt need to be reevaluated:

“People believe that municipal debt is safe based on assumptions that are no longer true,” says Kenneth Buckfire, managing director and chief executive of Miller Buckfire & Co., an investment bank that has worked with corporations on restructurings and now is advising municipalities.

Once again, we can see the merit of allocating among assets based on intermediate-term relative strength as opposed to long-held assumptions.

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Posted by Andy Hyer

Fund Flows

February 18, 2010

The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.82 trillion and serve nearly 90 million shareholders. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.

Net fund flows are shown in the table below:

There were big inflows for taxable bonds and big outflows for U.S. equities for the week ending February 10.

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Posted by Andy Hyer