What’s The Fund’s Objective?

On this week’s show, Karl explains how mutual funds aren’t all created equal.  Karl also gives an example how two funds with different objectives behaved over the past 25 years.

Hey everybody, welcome to the show. My name is Karl Eggerss, and I am the host of this podcast. If you would like to get a hold of us, (210) 526-0057.

And as I’ve been mentioning in the last few weeks, we have some changes coming up in the next probably a couple of weeks, you’re going to see some changes to the podcast. These are going to be improvements along the way that are really going to improve, I think, what you get out of the podcast. And many of you tell me you love the podcast right now, and that’s great, and we’re going to continue doing the same things. We’re just going to expand on it. So bringing on more guests with more areas of expertise to try to help you become a better investor and really live the life that you’ve wanted to in terms of not only financial, but just in the big picture.

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It’s been a pretty quiet few weeks here. We had some volatility in May and June, but it’s been pretty quiet since the 4th of July holiday. We’ll get into the why. Let’s go over what the markets did this past week. It finished the week on an upbeat note. And really all the major indices were up somewhere between 0.75% and 1.5%, and another solid week, as we’re still pushing towards and having new highs for the markets.

If you look at things like the Dow Jones, the Standard and Poor’s 500, we had this fearful technical pattern called a triple top that everybody was worried about, what we saw in January of ’18, the market pulled back from that high, it ran up in late ’17, early ’18. Then of course it made a second run at it. That was in the late third quarter of ’18. We had the nasty sell-off in the fourth quarter, and then we kind of paused here in the last couple of months, and now we seem to be breaking out to the upside.

So was that sideways pattern that lasted almost a year and a half, is it over? And the question is, is it over? And of course nobody really knows the answer, but what we can say is the market loves low interest rates. We know that is the case, and we know that this group of people, of investors, Wall Street loves low interest rates and is addicted to them, and nothing has really changed from the financial crisis.

We did raise rates a little bit, but here we are with an economy, it’s been doing pretty well, we’re definitely continuing to see some signs of a slowdown, and the Fed is telegraphing that they’re going to cut rates later this month. And so markets continue to like that and continue to move up.

Now before we get into that, let’s go through some of the biggest winners and losers of the week. We had oil up almost 5% this week, a real strong week for a lot of commodities. As we started, got some movement from the dollar, there was talks of President Trump talking to people about how do we get the dollar lower. Remember, this is something I’ve said for years, that all these politicians want their currencies to drop, but they have to publicly come out and say they want it strong. I don’t know if it was leaked intentionally or not, but President Trump apparently wants a weaker dollar, and he’s talked about that in the past when he first took office.

So that weaker dollar can lead to, obviously a rise in commodities, which are priced in dollars, most commodities are. And so we saw the dollar weaken late in the week. But look, the things that were up this week were a lot of commodities across the spectrum and generally. So most commodities as a basket were up over 3% this week. So a strong week.

And we saw a reversal in interest rates. We saw the 10-year go back up above 2.1%. Still very low, but remember it was sitting down there below 2% just a week ago or so, underneath 2%. I think it closed the week two weeks ago underneath 2% for a 10-year treasury. So we still have very low rates. They spiked a little this week, but still very, very low rates.

So commodities really stuck out this week as far as what really made the most money. And on the downside, volatility continues to fall. We’re sitting here now with volatility at a 12-handle, after being up around 24 in early May. So that’s been cut in half. We saw biotech get hit this week, and pharmaceuticals in general got hit, down anywhere from 1% to 3.5% across the board. It’s pretty wide range. But you saw the IBB, which is the Nasdaq Biotech Index ETF, down almost 3.5%, and XBI was down 1.62%, which was another biotech ETF. So you say, “What’s the difference? Why would one be down twice as much?”

Remember, a lot of these ETFs, how they are constructed is really important. Some are very concentrated in specific stocks, and if they get hit, then they’re going to go down quite a bit. And that was the case with IBB. Whereas XBI is a little more diversified. So again, sometimes you may want concentration, sometimes you may not, but always know what you own as far as ETFs are concerned.

So those were some of the biggest losers of the week. And as far as some of the news, it was kind of a quiet news day, especially on Monday. Markets kind of had a negative tone all day, and we didn’t have a lot of internal strength during this past week. The markets were waiting for Powell’s testimony, the head of the Fed, and we had a slow news day again on Tuesday.

And then Wednesday, we did get that testimony from Jerome Powell, and the markets spiked up, because he basically telegraphed his intention to lower rates this month. He pretty much came out and said it. And he used the risks of a trade war with China, and he’s saying, “Look, we have a healthy labor market,” which is true, but we also have a trade risk here. So it’s almost like they’re doing it as an insurance policy. So we’ll see about that.

But we are still seeing … and by the way, this week we saw the Dow go up over 27,000, we saw the S&P go over 3,000. Those were first time for both of those. So the big round numbers of 3,000 for the S&P 500. I can’t imagine on Christmas Eve many people thought that we would see 3,000 this quickly.

But look, again, you have a Fed that’s saying we are being cautionary here, so we’re going to cut interest rates. And again, markets have always loved low interest rates. Investors have always loved that. But right now, you have an economy that still is pretty good. We don’t see a recession. But you are seeing slowing, and we’ve been talking about that for weeks now, maybe months now, about that.

And in fact, one indicator this week came out, and this is really interesting, there’s a New York Fed recession probability indicator, and basically every time it’s spiked to these levels, we’ve had a recession. I shouldn’t say every time, but most times. What’s interesting about it is if you look at the chart, it’s pretty scary. You think, man, every time it spikes to these levels, we get a recession later on.

Well, there is data that suggests that that’s fine, but that doesn’t necessarily mean the stock market goes down. In fact, if you look out a year after the signal has jumped up as quickly as it has recently, a year out, the stock market has generally been higher. And this comes from sentiment traders. There was about seven previous periods that this has happened, 1966, ’69, ’73, ’78, ’89, 2000, 2006, and now. And of course, sometimes it’s fallen, sometimes it’s risen. But the point is, this is the doom and gloom chart that was circulated this week around Wall Street trading desks. And while it’s true that it has led to some recessions, it doesn’t always lead to a down stock market.

So this is one of those pieces of data you need to be very careful about. And so again, wherever you’re getting your reporting, take a balanced approach here, because sometimes, even though something looks scary, it doesn’t mean it’s the end of the cycle for your stock portfolio.

In fact, speaking of things that were scary, do you remember back in 2015, when it looked like Greece was going to fall off face of the earth, and we were having all these issues with Greece, and they were going to default, and there was all this bad, bad stuff with Greece. Their 10-year bonds … remember, our 10-year bond, right now, pays you 2% a year if you buy it right now and hold it to maturity, a little over 2% per year, our 10-year government bond. In 2015, Greek 10-year bonds were paying about 19%, which means the price of those bonds had dropped dramatically. If it’s paying 19% on a government bond, there’s some risk of default.

Guess what that rate is today. It is almost identical to the United States of America at around 2% on a 10-year bond. So had you bought into the fear at that time, those bonds have gone up dramatically during that time. Those bonds are trading very similar to what a United States treasury bond has paid. And again, you go back to 2015, nobody would have thought that in 2015. But here we are in 2019, and that is the case. And that looked like doom and gloom.

So again, there are perma bears out there who only report the negative and find and data mine for the most negative things, just like there are perma bulls who refuse to acknowledge the negative things going on, and maybe they want to sell you mutual funds or who knows what, and they’re like, oh, it only goes up. Neither one of those is true. There are cycles. We are in a bull market right now. We have been consistent in saying we’re in a bull market. We still think we’re in a bull market.

We said we are in a bull market around Christmas time as well, if you go back and and recall. But we haven’t always said we’re in a bull market, and there’s been times we have maneuvered quite a bit. But we are in a bull market right now. And I can’t tell you what it’s going to be next week or next year. I can tell you, based on all the data we look at, there’s no signs of it turning into a bear market, but as we said, there’s always correction risks.

Look, if Powell would have said we don’t think we need to lower interest rates this month, the market would have gone down this week. But he said what the market wants, which is they want their cake and eat it too. They want a strong economy with low interest rates. That’s what president Trump says. Our economy’s the best thing ever and we need lower interest rates. Those two things generally don’t jive. If the economy’s so great, interest rates should be rising slightly.

And I tell you, what’s interesting right now is you really do have a lot of pessimism out there. If you look at the fund flows right now, there is a lot of money pouring out of funds. In fact, there’s a lot of data to suggest that some of the money coming out of equity funds right now is some of the worst it’s been in the last 10 years. There’s only been maybe three other times it’s been this week. And that is a contrarian sign. That is a good sign if you still think this market’s going higher. What that’s saying is there are people pulling money out of the market. And they don’t do this in advance, this is usually a reactionary.

And so what happens is when the market goes to new highs, you may see those fund flows reverse and money start coming back in. What you need to be concerned about is people piling into the stock market, not piling out. Piling out is usually a contrarian indicator. Do you think people were buying hand over fist in the fall of ’08 or the spring of ’09? No, they were piling out, and that’s when there’s nobody left to sell. And then what happens is a little bit of buying power comes in and it turns everything around.

And so what we have seen these past couple of weeks is a lot of money pouring out, and yet the market’s still at a high. So that’s ammunition. See, that’s money that can go back into the market, and those people will capitulate and start buying. So what we’re looking for is more euphoria as opposed to what we’re seeing right now. This is actually healthy. This is really the quintessential wall of worry. People are saying, “I don’t trust it, I can’t believe it’s going up. Why is it going up? I don’t have all my money in. I’m still cautious.”

That is what I wall of worry is. And you’ve heard the old saying, the markets climb a wall of worry. This is it. We are in that right now.

And it’s been very quiet on the trade front, if you’ve noticed. We haven’t heard really heard a lot about that this past week. This week was more about the Fed, and it was about the fact that the Fed confirmed … because remember, we got that strong jobs report two weeks ago. You remember that? And that took the half a percent cut off the table, and the markets got disappointed a little bit. And now Jerome Powell reiterated, “Don’t worry. We’re going to cut rates,” and markets go back up.

But the facts remain that look, we still do have an expensive stock market in the US, especially relative to the rest of the world. That is a fact. We also have growth that significantly outperformed value. So there are still good deals in the value realm, while growth is getting expensive. And we do have what I believe are bubbles in certain areas. Those things are there, and we don’t want to ignore them.

And so again, as we much go into this mature bull market, you have to continue to know what you own. And that is something that may be hard for some people, especially if they own mutual funds. In fact, I was having a conversation a few days ago, and this is kind of transitioning into this topic. I had a conversation with somebody about mutual funds, and it was a general conversation about, “Hey, I noticed my blue chip growth fund has performed significantly better than,” I’m not going to name the fund, but this other fund.

And I said, “Well, what are the two funds’ objectives?”

“Well, I don’t know.”

“Okay, well let’s go look.”

The Blue Chip Growth Fund is pretty easy to understand. That manager’s mandate is to buy blue chip growth stocks. What if that manager looks across the spectrum and thinks every blue chip growth stock as a whole is too expensive? He can’t go to cash. He can’t go buy value. He can’t go buy small cap. He can’t go buy emerging market, small cap value stocks or whatever the case. He has to buy blue chip growth stocks. So he doesn’t have that flexibility. That’s his mandate or her mandate that manages the fund.

Now you go to the other fund. This fund’s particular objective was to own earn equity-like returns with a lot less volatility. That fund has the option, if they want, to buy bonds, to hold cash. It’s a more tactical and flexible fund. So guess what happens. In a period where the stock market’s going straight up like it is right now, blue chip growth is going to do pretty well. On the flip side, if we get into a down market, I’m pretty sure I know which fund is going to do okay.

And in fact, that’s what I did. I grabbed three different timeframes and showed it to this individual, and said, “Let’s look at the body of work here. Over the last 25 years, they’ve performed pretty similarly, but the blue chip growth fund that you love right now has actually underperformed that one a little bit. But let’s take it from different timeframes, for good and bad.”

So from the peak of the dotcom bubble, March of 2000 until now, the blue chip growth one had significantly underperformed, because it got hammered in the dotcom bubble, and it got hammered in ’08, whereas this tactical one actually did pretty well during the dotcom bubble fall from 2000 to 2002.

Now on the flip side, if you run it from ’09 until now, guess which one did better? The Blue Chip Growth Fund. So I said, “You tell me where we are in the cycle. I’ll tell you which funds going to do better.”

This individual owns both of the funds, and that’s the answer. It’s okay to own both. That’s called diversification 101. So these things are very different. You can’t say, “Hey, this Tesla’s faster than this pickup truck.” You don’t take the Tesla to the ranch, right? And you don’t take the truck to the drag strip. They’re for different purposes. They’re apples and oranges.

And that’s how ETFs are, that’s how mutual funds are, that’s how stocks are. That’s the key and the secret to building a portfolio, is these funds and these ETFs and these stocks and any financial instrument, they have to belong in a portfolio together. They’re puzzle pieces is what they are, and you put the puzzle pieces together, and you come up with a portfolio that matches what you’re trying to do along with your financial plan. That is the key.

So you can’t cherry pick and say, well this one’s good. Well it is right now. But guess what? When the markets are falling, I already pretty much know this one’s going to get hit harder because it’s not tactical, that’s not what it’s meant to do. It’s job is to buy blue chip growth stocks, and blue chip growth stocks tend to get hit when the market goes down. So be very careful when you’re comparing.

And this goes across the spectrum. I see this a lot where people want higher returns without the risks that comes along with it, and it just doesn’t exist. You have to pick a path, and you have to stick with it. Now there are adjustments along the way. There’s adjustments, but you have to pick a path. You can’t say, “I want every penny of the upside,” and not expect that you’re going to go down with the market.

Now there’s people that will sell trading CDs and trading classes and all this stuff on the weekends, and free steak dinners at night and all of that. They make most of their money from those courses. Let’s be clear about that. They’re not sitting on a tropical island with a laptop, trading till their hearts content. They’re not just being the guy or gal and teaching you how to do it and giving away the secrets. Most of the money they make is from these courses they teach.

So there’s been very few people that have just been complete, 100% traders. Are there people that make it a living, have done very well? Absolutely. Most of those people started hedge funds, and you already know their names. And they’re few. They’re just few and far between.

For you, it’s about picking what you’re trying to accomplish, having a portfolio matches it, and then yes, inside the portfolio there’s things you are going to be doing for good and bad, tweaking things, buying and selling occasionally, reallocating, all those things, of course that’s the case. But you can’t want to be up 20% one year without knowing that probably that same portfolio would have been down 20% sometime during the fourth quarter of 2018. That’s just the way it goes. So you have to decide where you want to be.

Now in a big, big bear market, that’s where major allocations can take place. Changes, I mean. Where you have a march of ’09, yes, even if you were not risky, that’s the time to take on more risk more than likely, because of the fact that a lot of the risk was taken out of the market.

So again, those are decisions that have to be made, and sometimes it’s hard to make it with your own money. That’s why having an advisor is, that’s what we help people do, we don’t have that emotion involved in it. We know what should be done and we do it.

So when looking at these funds, look at the objectives, look at what they’re meant to do. It’s no different than looking at when somebody is deciding to take a rollover or a pension. If you told me exactly how long you’re going to live, I can tell you which one’s probably better. So we have to make certain assumptions and we have to live with that. You tell me what part of the cycle we’re in, and I’ll tell you how your portfolio should be allocated pretty easily.

If we’re at the very beginning of the cycle, I can tell you what you should own and what you shouldn’t own. If you think we’re at the very end of the cycle, I can tell you what you should own and what you shouldn’t own. But you know what? Most of us don’t know where we are in the cycle. But we do know that we’re not in a new bull market, and what we can do is assess and look at the situation we’re in in terms of the economy, earnings, which sectors are expensive or cheap, all those various things.

So again, this all goes back to really putting a plan together and putting an allocation together, and then tweaking that allocation over time.

Alright. Hey guys, have a wonderful weekend, and don’t forget you can always call us at (210) 526-0057, and stay tuned for some exciting changes in the next few weeks. Take care everybody. Have a great weekend.

This show is for entertainment only, and information provided by the hosts, guests and this station should not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment or get yourself a trusted advisor.


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