Liquid Alternative Monthly Investment Spotlight: Pioneer Dynamic Credit Fund (RCRAX)

(Click above for full size image)
(Click above for full size image)

As part of our monthly series of spotlighting one of our Liquid Alternatives preferred holdings, I would like to provide some color on the Pioneer Dynamic Credit Fund (symbol: RCRAX).

On the surface, RCRAX may look like any other bond fund and one may ask what it’s doing in our alternative model line-up. Well, it’s anything like a traditional bond fund once you take a look under the hood. RCRAX is a non-traditional fund utilizing fixed income securities in alternative ways such as shorting or using derivatives, default swaps, event linked bonds, etc. As such, it’s basically an absolute return fund using fixed income vehicles.

Let’s review a little about the credit markets. Income is now a scarce commodity. As a result, investors are forced to take on more risk in order to achieve the same levels of income that they have experienced in the past. Unfortunately, fixed income investors face a more volatile and uncertain investment environment than the last few decades. However, volatility can create opportunities, and a flexible investment approach may be able to capitalize upon these opportunities.

Credit can provide strong returns, but one must tread carefully as downturns in the credit cycle can cause large a drawdown, the peak-to-trough decline during a specific record period of an investment. The traditional response to a credit downturn is to increase credit quality and/or add Government Bonds. The former can hurt the portfolio due to transaction costs as market liquidity deteriorates. The later may be less effective in the future given how compressed the yield curve is. We think a more effective risk management strategy for an all-credit portfolio lies in what Pioneer calls their multi-layered hedging approach. This multi-layered hedging strategy seeks to buffer volatility and provide a measure of protection from extreme market dislocations. And as our clients know, protection is one of our number one goals at DWM.

Put it all together and you have a multi-sector credit portfolio designed to adjust allocations in order to take advantage of opportunities based on valuations, volatility, dislocations and market timing across credit markets. Portfolio construction, allocation, and security selection are driven by an integrated quantitative and fundamental research framework. We get excited about this fund because it can and does short different parts of the bond market, which means it can take advantage of rising rates! It also plays in areas that the standard traditional bond funds don’t, like convertible securities, floating rate securities, and currencies.

This approach has landed RCRAX in the top quartile of the non-traditional bond category as determined by Morningstar since its inception in 2011. And of course this approach has given us reason to give it a seat in our Liquid Alternative model.

Again, alternatives provide an additional asset class that can produce new sources of returns with lower correlation and reduced volatility. We expect volatility and returns for the alternative portion of one’s portfolio to be somewhere between what you would expect of stocks and bonds, with an extra bonus emphasis on downside protection. We continue to watch this exciting area of investment management for continued opportunities and use this forum as an educational tool.

Please don’t hesitate to reach out to the DWM team if you have a particular question on liquid alternatives and/or just want to say ‘Hi’!

Target Security Breach Puts Spotlight on Identity Theft Prevention

identitygrinch
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Across the country, 110 million Target customers are now dealing with the fallout from the security breach in December. Hackers obtained e-mails, name, addresses, phone numbers and PIN numbers for the debit and credit cards. Target has just agreed to provide all of its customers with a year of free credit monitoring. Worse yet, the Department of Homeland Security reported last week that the attack on Target was likely a part of a broader and highly sophisticated scam that potentially affected a large number of retailers, including Neiman Marcus. Apparently, Target’s systems were amazingly primed for hacking- lacking the virtual walls and motion detectors found in secure networks like most banks. Identity theft continues to be on the rise. The good news is that there are actions you can take to protect your identity. We thought it would be a good time to review some of the suggestions we have provided in the past, as well as some new ones:

Digital Security:

  • CHOOSE GOOD PASSWORDS. Make them difficult to decipher. Vary them by account. Don’t store your passwords on your computer.
  • COMPUTER SECURITY: Use anti-malware/spyware and anti-virus programs and keep them up to date.
  • PREVENT PHISHING SCAMS. This is when a thief sends a legitimate-looking email from a company you have an account with and asks you to reply with information or click on a link in the email. Instead, contact the company directly through the website or phone number you would usually use.
  • RESTORE YOUR COMPUTER TO THE FACTORY SETTINGS. When you sell or get rid of your computer, make sure that you have wiped out all information first.
  • SHOPPING ONLINE is safe as long as you are on a secure website. The internet address should start with “https” and have a padlock icon in the lower right hand corner.

At Home:

  • SHRED everything with sensitive information. (This means anything you wouldn’t hand to a total stranger).
  • PROTECT SNAIL MAIL. Consider using e-delivery as much as possible. Consider getting a P.O. box for delivery of mail with sensitive information.
  • TELEPHONE SCAMS: Never give out information to someone who calls you claiming to be from your credit card company, bank, etc. If they are legitimate, they already have that information. Call the company yourself using a phone number from the back of your credit card or bank statement.
  • USE A SAFE for all your important documents including your social security card. Keep your birth certificate, passport and other identifying documents in a bolted-down safe at home and use the hotel safe when you’re travelling. Also consider scanning and moving these documents to a “safe vault” in the cloud, such DWM/Orion.

When Out and About:

  • AVOID “SHOULDER SURFERS”. The person behind you at the ATM or supermarket may be just another shopper or maybe not. Be cautious.
  • WATCH WHAT YOU CARRY. Take only what you need. Change your credit cards to a PIN option only, if possible.
  • CARRY YOUR WALLET in your front pocket or your purse in front of you to reduce the likely-hood of pick-pocketing.

Other:

  • CREDIT FILES can be protected by placing a security freeze on your credit reports. When a freeze is set at all three credit bureaus, a thief cannot open a new account because the potential creditor will not be able to check the credit file. When you need to apply for credit, you can lift the freeze temporarily. See: www.equifax.com, www.experian.com, and www.transunion.com.
  • Order a free credit report through www.AnnualCreditReport.com from one of the three agencies every four months. You are entitled to one free copy a year from each agency, so you can rotate your requests.
  • MONITOR YOUR CREDIT CARD AND BANK ACCOUNT ACTIVITY. Most credit card companies and banks have a smart app that allows you to monitor your activity. It’s a good idea to check it every few days. If there is a fraudulent purchase, you’ll catch it quickly.
  • PAY FOR AN OUTSIDE MONITORING SERVICE. Both Target and the State of SC (when tax files were breached 15 months ago) provided a year free service with Protectmyid.com (now part of Experian). The service typically costs $16 per month. It monitors your credit and notifies you of new accounts or applications for credit. It includes $1million identity theft insurance- however, this is limited in scope and primarily pays for incidental expenses, not monetary loss. The only loss covered is if funds are electronically transferred from your account.

These days, risk management includes much more than simply sufficient life insurance or auto insurance. It needs to include a program to safeguard your most important asset- your identity. Please give us a call at DWM, if we can help in any way.

New Year’s Financial Resolutions

new years resolutions list

It’s still early in 2014- time to make financial resolutions for the New Year. Here are 11 you can make and keep:

  1. Establish/update your goal-based plan. It starts with goals- financial independence, college education, travel, etc. You add in resources, liabilities and expected time lines. You need a plan that has an excellent chance of success and that has been stress tested for potential “surprises” in the future. Our clients know that we accomplish this with our MoneyGuidePro software, which uses Monte Carlo simulations to calculate expected success and use the “play zone” and the “what am I afraid of?” screens to stress test.
  2. Review your Risk Profile. Your risk profile includes your risk capacity, your risk tolerance and your risk perception. The world and the investment landscape changes regularly. In addition, personal circumstances change over time. Hence, it is important to review your risk profile and make sure that your asset allocation conforms to it.
  3. Invest in a diversified asset allocation portfolio. Consider all three major asset classes; stocks, bond and alternatives. Within each asset class there should be sufficient diversification including, for example, small, mid and large cap U.S. stocks, international and emerging stocks, corporate bonds, international bonds, floating-rate bonds, high yield bonds, and various complementary alternatives. With the end of the 30 yr. bond bull market, allocations should be reviewed. Historical rules of thumb, such as “the percentage of bonds in your portfolio should equal your age,” very likely are not appropriate in today’s investment environment.
  4. Use a robust investment management platform. The old “set it and forget it” doesn’t work. You need regular rebalancing. Furthermore, research has shown that for equities and fixed holdings, passive management outperforms active management by roughly 1% a year, just about equal to the higher operating expenses for actively managed funds. Alternative investments, on the other hand, often are actively managed and can still provide an excellent net benefit to your portfolio.
  5. Max out your deferred accounts. Income you invest before taxes starts out with about a 40% advantage. And, often you receive employer contributions. You should max out your IRA-$5,500 for those under 50 and $6,500 for those over 50-even if the amount is not deductible. If not deductible, you might consider a “backdoor Roth.”
  6. Review your insurance. You need to review your coverages and what you are paying for them. Do you have too much life insurance or not enough? How about long-term disability, long-term care, home, auto, umbrella Have you “shopped” the policies recently to compare prices? We don’t sell insurance, but we know insurance. We regularly help our clients with this review.
  7. Review/refinance your debt. Interest rates have gone up significantly in the last year and will likely climb more in the next few years. It’s a good time to review your home mortgage and other debt.
  8. Save for college. Set up or add to a 529 plan or college account. College isn’t cheap. Also, you may want to review the investment allocation within your college funds. Typically, they should be less aggressive as the student nears college age.
  9. Plan your estate. At a minimum you need a will, health care power of attorney and property power of attorney. You may need trusts and you may need planning to minimize federal and/or state estate and inheritance taxes. A visit to an estate attorney may be a good suggestion for 2014.
  10. Simplify, organize and store records electronically. Move your banking online. Consolidate various investment accounts. Check with your CPA and shred as many tax returns and supporting documents as you can. Make PDF copies of important documents, including estate planning, business papers, tax records, real estate records, titles, personal papers (such as birth certificates) and list of key advisors and important contacts. Then, save these electronic records in at least two safe places.
  11. Get help (if you need it), to accomplish these resolutions. We’re all busy and we all have different talents and priorities. Sometimes we need an expert and/or coach. In financial matters, DWM is both. We help our clients with all of these items and more as part of our Total Wealth Management Program. If you need help, give us a call.

DWM 4Q13 & 2013 Market Commentary

Brett M. Detterbeck, CFA, CFP®Happy New Year! The story of 2013 was how US stocks blew away market expert predictions by registering its best year since 1995. It has now been over 825 days without a 10% or greater drop for the S&P500, the 5th longest stretch in the last fifty years. Fueled by easy money policy from the Fed and improving signs in the economy, it was basically “off to the races” for most stocks in both 4q13 and all of 2013. Unfortunately, for the diversified investor, most other investments lagged far behind the big figures posted by US stocks, yet still helped produce what overall will be considered by most to be a very good year for their portfolio.

Let’s celebrate the honorable return achievements of 2013 before looking ahead to 2014.

US Stocks finished the year up 30%+ as evidenced by the S&P500’s 32.4%. Domestic markets trumped overseas ones as the MSCI World Index (ex-US) was only up 21.0% and the MSCI Emerging Markets Index was actually negative 2.6%. This really showcases what’s going on in the world right now: the US recovery is making strides while the rest of the world is still trying to find its legs.

Unlike the fun times in equity-land, bonds had a bleak turnout in 2013, with the Barclays US Aggregate Bond Index down 2.0%, its first losing year since 1999. Per our recent seminars, we have been “pounding the table” on bonds urging others to follow our lead and change up or decrease their bond exposure given the new rising interest rate environment we’re in. The 10-Yr Treasury Note is now hovering around 3.00%, its highest level since July 2011, having climbed 1.61% since the start of May, which is a pretty monstrous move in bond land. Given the inverse relationship between rates and bond prices, this made for a tough year. Fortunately, there were places within fixed income to find some modest returns including high yields (up 7.4% per the Barclays US Corp High Yield Index) and floating rate funds (up over 4% as exhibited by the ETF many of our investors hold, PowerShares Senior Loan Portfolio (symbol: BKLN)).

Most alternatives did not come close to faring as well as equities. There are not many benchmarks in this category but we like to look at the DJ Credit Suisse Core Hedge Fund Net Index which posted a 2.92% return for 2013 and the CPI which was up 1.5%. Many of the liquid alternatives securities we follow posted modest, albeit positive single-digit returns. The fact is: if all alternatives were up 30% like equities, they wouldn’t be doing their primary job at being a diversifier and protector for the overall portfolio. With five straight years of positive stock market returns with no meaningful correction and an unattractive bond market, we think this asset category is of utmost importance.

We’re cautiously optimistic looking forward to 2014, however we’d be surprised to see equities continue their recent trajectory. Furthermore, we would not be surprised for fixed income to post much-lower-than-historical-average-like returns. And we would expect alternatives to remain that diversifier and protector with results in the mid- to high- single digits.

Of course, a lot depends on how the economy fares and how market participants react to it. The key factors to look for are the following:

1) Housing recovery snap – home prices are back to pre-Financial Crisis peaks in many areas. However, with interest/mortgage rates much higher than just several months ago and expected to go higher, affordability is not what is was and buyers may get spooked.

2) CAPEX anyone? – will businesses continue to be wary about spending, either by hiring, adding new equipment, or other measures?

3) Washington gridlock – with the Federal borrowing limit set to be hit soon and many other political wrestling issues ahead, we’re sure to get more fireworks here which could cause some negative ramifications.

4) Fiscal Stimuli no more – the Fed has laid out a timetable to slow and ultimately end its current humongous bond buying program. What happens if there’s a sharp economic downturn along the way and how might that affect markets?

5) ex-US – we didn’t get the confidence-shaking headline international news stories in 2013 that were overkill in 2009-2012, but severe vulnerabilities still exist across the pond. It’s important to investors everywhere, including us here, that this global economic recovery continues.

In conclusion, on the investment management side, DWM looks forward in 2014 in continuing to do what we do best: preserving and growing our clients’ capital. We do that by controlling what we can control within a low-cost, properly diversified investment portfolio, consistent with clients’ long-term goals, and regularly rebalancing it. On the financial planning side, DWM looks forward in 2014 to working with clients to firm up their financial plans using our state-of-the-art dynamic financial planning software.

For those of you currently not using a wealth manager, we urge you to make 2014 the year you help yourself by getting one. Here’s to a wonderful and prosperous 2014!