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| Sharon Daniels, President Weiss Capital Management |
If your goal is to aim for good, steady income while lowering your risk, then you’re facing great challenges today.
For one thing, interest rates on bank CDs, money market funds, and even short-term Treasury securities are locked at abnormally low yields.
One-year jumbo CD rates, for instance, are just 1.6% today … while many money market funds pay less than 1% … making life quite difficult for fixed-income investors right now.
Other potential threats lurk too … including soaring federal budget deficits, not to mention the chronically weak U.S. dollar.
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The once almighty buck continues to lose value against global currencies … DOWN another -14% in the nine months ended September … and if the slide continues at this pace, it could easily lead to higher inflation down the road and potential lost value in EVERY dollar-denominated asset you own.
On October 14, 2009, I joined my colleagues Steve Chapman, Vice President and Portfolio Manager for the Weiss Diversified Income Builder program, and Mike Burnick, our Director of Research and Client Communications, for a very special Webinar:
Earning Higher Income in a Low Yield Market
The purpose: To discuss what options are available for fixed-income investors to deal with these challenges. In this online-only event, we covered a wide range of topics, including:
- Why ultra-low interest rates have persisted for so long now … and why yields may stay low even longer …
- How we follow global interest-rate trends and yields in other markets and adjust our fixed-income strategies accordingly …
- Where to access higher interest rates globally in countries that may offer higher yields than the U.S. today …
- How to potentially boost your current yield by diversifying your fixed-income holdings more broadly and internationally …
- And much more.
If you missed this special Webinar or just want to view it again to absorb all the details … you can access a special, on-demand replay of the video, just go here.
But, if you prefer to read the insights and analysis in detail, here’s an edited transcript from the event:
Earning Higher Income in a Low Yield Market: Edited Transcript
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Sharon Daniels, President
Steve Chapman, Vice President and Portfolio Manager
Mike Burnick, Director of Research and Client Communications
Weiss Capital Management, Inc.†
Sherri Daniels: Mike, as Director of Research and Client Communications at Weiss Capital Management, you’re constantly reviewing economic data and keeping an eye on financial markets. Let’s start by recapping for us: How did we get to today’s extreme ultra-low yields?
Mike Burnick: The Federal Reserve, desperate to prevent a total meltdown in financial markets a year ago, slashed short-term interest rates to the lowest point in history.
Sherri: That was supposed to be an emergency measure!
Mike: It was. But today … one-year later … short-term rates are STILL stuck near ZERO.
Sherri: Unfortunately for fixed income investors, yields on short-term savings vehicles, like CDs and money markets, have plunged along with the Fed Funds rate. Do you see any relief in sight for income investors? Can we expect short-term rates to move higher anytime soon?
Mike: Long-term interest rates may drift higher due to worries about Washington’s rapidly growing deficits … and the potential for inflation down the road. But for money markets, short-term CDs and Treasury bills, the answer is no, we don’t see rates heading higher anytime soon.
In fact, according to the Fed’s most recent policy statement, they fully intend to keep rates “at exceptionally low levels … for an extended period.”1 Translation: Investors should be prepared for this low-yield market climate to continue.
Sherri: That’s so important and it bears repeating: Prepare for a continuation of low interest rates. Steve, what does this mean for retired investors focused on income or for those who depend on the income from their investments?
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Steve Chapman: It’s the great dilemma of my generation … and the generations that come after me. I want to work past my retirement age because I’m loving every minute of it. Still, I don’t want to HAVE to work to pay bills. But imagine the situation for those who are unable or unwilling to work in their retirement! Look how difficult it is to cope with the triple-whammy of meager Social Security payments … AND low yields … PLUS a falling dollar.
Sherri: So, tell me, how are investors coping with this dilemma … how can you earn higher current income in a climate of near zero yields?
Editor’s Note: To View the Webinar in its Entirety, Go Here Now!
Steve: I speak to investors every day, and many don’t know what to do. I’m finding that many are taking on significantly more risk to make up for low yields — they’re investing in higher risk stocks and other growth investments hoping to improve their cash flow.
Sherri: While it’s understandable that you may have to take more risk to earn a higher yield, taking on significant new risks today may NOT be a good idea.
Steve: That’s the real problem, but many people feel they have no other choice. Instead, if you’re a retiree, or quickly approaching retirement, then I strongly suggest you shift, to some degree at least, from a wealth creation strategy to an income-producing strategy.
Your priorities must change from growing your wealth to, taking advantage of your wealth. In other words, all the money that you worked hard for will now have to work hard for you.
Mike: Even if your primary focus is still on stocks for long-term capital growth, you still need to keep some portion of your portfolio in a relatively safer place … that’s more important than ever after the turbulent markets we’ve seen over the past few years. Even if you don’t need regular monthly income, your fixed income holdings can still act as a very important stabilizer for your overall portfolio.
Sherri: In other words, strike a balance between income and growth.
Mike: As an example, during 2008, large-cap stocks plunged -37% in value. But an equal mix of different types of bonds, including Treasuries, municipal bonds, and corporate bonds (both investment grade and high yield) only fell -4.3% over the same time period.
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They were still down overall, but a portfolio that had this mix of bonds AND stocks would have held up much better.2
In spite of the headline-grabbing rally in stocks over the past year … government and corporate bonds have actually performed BETTER than stocks over the past 12-months through the end of September.3
Steve: The trouble is, most investors don’t own enough bonds to help stabilize their investment mix. In fact, U.S. investors own FOUR TIMES as much in equities as in fixed-income securities today.4
Sherri: But that’s beginning to change.
Mike: It is. Year-to-date though August, bond mutual funds have attracted about $220 billion in net cash inflows from investors, while equity funds added just $15 billion in new cash over the same period.5 That’s a sign some investors are beginning to wake up to rising risks and are prudently diversifying into bonds. I think that’s a smart move.
Editor’s Note: To View the Webinar in its Entirety, Go Here Now!
Steve: And it’s NOT just retirees who can benefit from this approach …
Sherri: That’s an important point, Steve. We manage money for individuals and institutions, and that’s exactly what we’ve seen with our clients — which is why we developed a special income strategy several years ago focused on providing regular cash flows. Can you tell us more about it?
Steve: It’s our Weiss Diversified Income Builder strategy. This program is designed to generate a higher level of income than you’re likely to receive from any bank CD, money market fund, or even from long-term government bonds … to help meet your cash flow needs now AND during retirement or to reinvest the cash generated right back into your investment principal. Granted, the strategy is not FDIC insured, which means it does carry a higher level of risk, but risk is relative to your situation. This particular strategy is deemed appropriate at the moderate risk level.
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Sherri: Tell us how often it pays income.
Steve: Both monthly and quarterly. You can choose to receive your income directly — by check, have it deposited right into your bank account, or it can accumulate and be reinvested right back into the Diversified Income Builder program until you need to use it. The choice is yours.
Sherri: Can you explain the strategy in detail and give us some ideas you’re using to possibly increase cash flows today?
Steve: Sure. The Weiss Diversified Income Builder program is designed to focus on the current cash flow yield provided by the fixed income securities we invest in for the program. Our minimum goal, our benchmark, is to produce 1.5% to 2% above the average yield on a 5-year U.S. Treasury note.
Sherri: Can you give us an example, using current yields?
Steve: Sure. For instance, the average yield on the 5-year U.S. Treasury note today is about 2.5%, so our goal would be to produce a 4% to 4.5% yield in the Weiss Diversified Income Builder program.6 Keep in mind, this is not a fixed interest rate like a CD. Interest rates can and will fluctuate up and down. But with a diversified mix of fixed income mutual funds, which represent many different types of bonds and varied maturities, we have been able to provide investors with consistently positive current income levels in the past and hope to continue doing so, even in today’s very low interest-rate environment.
Mike: How are you actually doing today, Steve?
Steve: I’m proud to say we’re doing even better than our income goal.
Steve: The average 12-month yield on the investments held in Weiss Diversified Income Builder at the end of September is about 6.5% … that number is based on a forward-looking estimation.7
Mike: That’s more than TWICE as much as the 5-year Treasury yields today. In fact, it’s even higher than the yield on 30-year Treasury bonds.
Editor’s Note: To View the Webinar in its Entirety, Go Here Now!
Steve: That’s right, but it’s important to point out that a 6.5% yield is a moving target — it’s not fixed at this rate like the coupon of an individual bond. The 6.5% indicated yield in this program is a reflection of the specific bond-fund holdings held in Diversified Income Builder at the end of last quarter and this invariably changes over time.
Sherri: I think this is a critical distinction for investors to understand: Bond yields fluctuate with bond prices. When yields go up, prices go down, and vice a versa.
Steve: The bottom line is that you need to pay your bills AND keep up with the rising cost of living. So, while bond prices may fluctuate, it’s also important to focus on the cash flow — or income stream — that you’re receiving.
Sherri: True, but I also want to stress that retirees can’t afford to lose their investment principal either. There’s a risk and reward element to every investment that is important to consider. Steve, what amount of risk are we talking about here … to increase income to that level?
Steve: For this program, protection of principal is a very high priority, even more important than a higher level of income. If we have to err on the side of less income for the sake of less risk to principal, we do. Of course, losses can still happen; all investing involves some level of risk, just as you said Sherri.
Sherri: But that’s one of the reasons why we recommend diversifying your fixed-income investments broadly and strategically to minimize risk as much as possible. Can you give an example of different kinds of risk in bonds that investors need to be aware of?
Steve: The 5-year Treasury note, for instance, is considered a relatively risk-free investment because your principal is backed by the full faith and credit of Uncle Sam. There’s virtually no credit risk. The likelihood of the issuer — in this case the U.S. government — going belly-up is remote.
When it comes to government-issued debt, we all know it’s backed by a printing press. But to get this assurance, you have to sacrifice yield in the process. The 5-year Treasury yields just 2.5% today … which is not very much. But there’s another risk involved here too, it’s called interest rate risk or the risk of future inflation.
Editor’s Note: To View the Webinar in its Entirety, Go Here Now!
While inflation may not be a problem right now, if in five years, inflation is higher than 2.5% … and that’s a very good bet, in my view … then you may still lose money in this supposedly risk-free Treasury, because you’ve lost purchasing power to the rising cost of living.
Mike: That’s a great point Steve, and the chart (above) illustrates the impact of different rates of inflation on the purchasing power of $100,000 over time — it really erodes your money — quickly. It’s NOT easy to get lost purchasing power back, not in a climate of rising inflation. How do you deal with these risks?
Steve: We diversify. We buy bond mutual funds that can hold hundreds of bonds from different issuers — reducing credit risk. Plus, we buy bond funds with various maturities — from short term, 2-3 years maturity, to longer-term maturities. This helps reduce inflation or interest rate risk. In a nutshell, taking this approach also gives us more flexibility to shift when market conditions warrant.
Sherri: Steve, let’s drill down to specific strategies. With money market rates, CDs and short-term Treasuries yielding practically ZERO today, what moves are you making in Diversified Income Builder right now to help boost yields?
Steve: The first step is to start from a global perspective. Some of the best opportunities around are in foreign countries. Look beyond our borders, and you’ll find many countries that are healthier than ours economically, with stronger currencies than our own U.S. dollar, and that have naturally higher interest-rate environments.
Sherri: What’s the next step?
Steve: Once I have my short-list of countries and regions of the world that offer the best income opportunities, then I want to invest alongside the best bond fund managers in the business. I look for experienced managers backed by great global research capabilities. That’s when I select mutual funds that will diversify our holdings across different parts of the fixed-income universe and the globe to help reduce overall risk.
Mike: Many of our viewers make their own investment decisions rather than use an advisor. I’m sure they’re wondering how to differentiate among the many bond funds in all the different areas of the fixed-income universe. After all, there are thousands of bond funds and millions of bonds the world over to choose from today.
Steve: Yes, but not all bonds or bond funds are created equal. Different types of bonds have different sensitivities to changes in interest rates and credit conditions. So, for do-it-yourself investors, diversifying into multiple types of bond funds is a smart idea. Diversification can help stabilize the performance of your overall portfolio, yet still offer the chance to earn better overall yields.
Editor’s Note: To View the Webinar in its Entirety, Go Here Now!
One caveat though: It’s a tricky environment right now, so you can’t just “set it and forget it” when it comes to your bond-fund holdings. I’m managing our portfolios more actively these days.
Sherri: During the worst of the credit crisis, many investors flocked to safer U.S. Treasury securities, what do you see now?
Steve: Well … now that the economic outlook is improving somewhat, this may be the BEST time to get a professional check-up on your investments … see if you should restructure your portfolio to earn higher income and reduce risk. This is part of the portfolio review service we offer to you at no charge when you contact us at Weiss Capital Management. We’ll review your stocks and your bonds.
Sherri: Most have rallied nicely in recent months.
Steve: Which is all the more reason you should ask us for a complete portfolio check-up. To make sure you’re not overextended, and you’re not overexposed to sharp corrections.
Sherri: What else do you recommend?
Steve: Well, I recommend diversifying over several fixed income sectors. At the end of the third quarter (9/30/2009), Diversified Income Builders holdings included funds invested in …
- Emerging market bonds
- Domestic and global high-yield bonds
- Global sovereign bonds
- Treasury inflation protected securities (TIPS)
- High-quality U.S. corporate bonds
Editor’s Note: To View the Webinar in its Entirety, Go Here Now!
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Collectively, the maturities are in the shorter to intermediate range — RIGHT NOW in the 2-10 year range. Of course, these holdings are subject to change, especially when our inflation/deflation indicators signal a change, or when sentiment regarding investor risk appetites shift.
Mike: That’s a very broad mix …
Steve: There are at least two reasons for this: The more diversified your fixed-income portfolio, the better it can help offset price volatility and the more it spreads credit risk across a vast number of holdings.
Mike: Very true … many categories of fixed-income funds have very LOW or even NEGATIVE correlation with stocks, as the chart (right) indicates. This means that when one zigs, the other zags. So, proper diversification should give you a smoother ride for your overall portfolio.
Sherri: Okay, here’s a question that our financial advisors at Weiss Capital field daily from callers: Why do you buy bond mutual funds instead of individual bonds in the Weiss Diversified Income Builder program?
Editor’s Note: To View the Webinar in its Entirety, Go Here Now!
Steve: That’s because of credit risk. When YOU buy an individual bond, you’re basically underwriting the bond’s risk. We call this “concentration risk,” meaning that if something were to happen to that one single bond issuer, YOU would bear all the direct risk of that bond either declining in value or outright defaulting on your interest payments AND the payback of your principal. It happens too … Lehman Brothers is an example.
Sherri: But if Lehman bonds had been in a bond fund, they’d most likely only represent a fraction of that fund’s overall holdings …
Steve: Exactly, so a diversified mutual fund is in a much better position to spread risk out over potentially HUNDREDS OF HOLDINGS — especially in this market, where corporations are going belly up every day.
Sherri: So, the failure of one issuer to pay interest or principal has only a slight affect on your total principal.
Steve: Yes. Plus, there’s another reason mutual funds are important: Most investors don’t have the capital to diversify broadly across many different, individual bonds. Fund structures spread out risk in ways that individuals could not achieve on their own. Even better, you can invest in most bond funds with a relatively small amount of money. As a manager, that gives me plenty of latitude.
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Sherri: Many investors today ask us about the falling dollar, Steve. Earlier you mentioned foreign bonds and foreign bond funds, which can provide natural protection against the falling dollar. Can you elaborate on this please?
Steve: That’s precisely what makes our program unique. While many other income programs ignore the risk of a falling dollar, the Weiss Diversified Income Builder program is DESIGNED to help protect you … and perhaps even benefit from … the falling dollar.
The foreign income funds we invest in not only give us better potential yields than those available in the U.S. — they are also denominated in local currencies that typically rise when the dollar falls.
Sherri: Since the dollar decline is such a key aspect of everything happening in the world today, can you tell us specifically which countries and which bonds you favor?
Steve: Each country has the equivalent of our “Treasury Department.” They each sell their own country bonds; the governments of Canada, Switzerland, Australia, Brazil, Japan, etc. These are referred to as SOVEREIGN BONDS. Also, each country also has corporate bonds from companies domiciled in their country — companies like Nestle, BP, Toyota and Daimler Chrysler.
The key is that many countries and global companies pay HIGHER interest rates than those available in the U.S. today. PLUS, the credit quality for many is just as good, and in some cases, even better. So, in many instances, there is little to no tradeoff in terms of credit risk. In my opinion, it can be the best of BOTH worlds.
Sherri: So, are you buying bonds in Brazil, Japan, Canada and Australia?
Editor’s Note: To View the Webinar in its Entirety, Go Here Now!
Steve: No. We are buying select bond funds that have holdings in those countries’ government debts … as well as corporate debts.
Sherri: But that adds another level of risk, called “currency risk.” Tell me, do you hedge against the possibility that foreign currencies might go down in value?
Steve: No. We generally do NOT choose to hedge against currency risk. Most of the time, we want to have local currency exposure to hedge against a drop in the U.S. dollar, which we believe — from a fundamental viewpoint — will continue to suffer weakness over time. However, if we believed a particular currency was weakening, we could eliminate or reduce our exposure, just as we’ve done with the U.S. dollar.
Sherri: What other risks might “do-it-yourself” investors face with international bonds?
Steve: There are differences in accounting standards, political risks, and less corporate transparency in some countries outside the U.S. that you need to be aware of, but we aim to minimize those risks as much as we can through broad diversification.
There are a number of other good reasons to invest abroad. First, we DON’T want our clients to have all their investment money denominated in the U.S. dollar. That’s why we have exposure to NON-DOLLAR securities in countries that we believe will have stronger currencies than ours.
Second, we find value in certain countries that have a trade or budget surplus.
Third, we like countries with natural resource- or commodity-based economies, such as Canada, Australia and New Zealand.
And finally, we enjoy exposure in emerging markets like Brazil, which offer future strong hedge potential against our greenback.
Sherri: Gentlemen, this has been a great discussion and in this limited time, we have only scratched the surface. But, I trust our viewers will appreciate the efforts we put into our income strategies at Weiss and realize there ARE several alternatives to ZERO yields.
Thanks, Mike. Thanks, Steve.
Editor’s Note: If you have questions about investing for income or for growth, we will be glad to discuss them with you in a way that’s tailored to meet your personal financial needs. Just contact a Weiss Financial Advisor today at: 800.814.3045. We understand the dilemma many investors face searching for alternatives to low-yielding money market funds and bank CDs, which may be coming due now.
The Weiss Diversified Income Builder program is an alternative you may want to consider for your portfolio. The primary goal of this professionally managed account strategy is to provide you with a diversified mix of both domestic and international income-producing securities that we feel offer the greatest value today. Please keep in mind, however, that unlike bank CDs, this strategy is not FDIC insured, and you can lose money in this program, as with any investment program.
But in today’s low-yield environment, we believe you can benefit by exploring other options, like the Weiss Diversified Income Builder to learn how you can possibly increase your income to meet your needs. Indeed, many of our clients faced similar challenges before coming to us for advice and management and we know there are many others who may find our programs suitable.
Through the end of this year, we want to make it more beneficial for you to join our other clients in this program. We’ve lowered our standard NEW client household minimum from $250,000 to $100,000. BUT, it’s only until the end of the year, and ONLY if you join the Weiss Diversified Income Builder program.*
Remember, this window closes on December 31, 2009. In the meanwhile, for even more income investing details, you can download a copy of our new special report:
Four Ways to Seek Higher Current Income in a Low Yield Market
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Go HERE NOW to Download your FREE
Diversified Income Builder Kit
For more details about this exclusive Weiss Capital Management strategy, your Income Builder Kit provides you with everything you need to get started in the Weiss Diversified Income Builder Program.
PLUS, You’ll receive a complimentary copy of our
special report: Four Ways to Seek Higher Current Income in a Low Yield Market
Best wishes,
Sharon A. Daniels
President
Weiss Capital Management, Inc
P.S. Due to the timely nature of the investment insights we provide, our Webinar: Earning Higher Income in a Low Yield Market will ONLY be available online for a LIMITED time. Don’t miss it: Go HERE now.
†Weiss Capital Management (an SEC-Registered Investment Adviser) is a separate but affiliated entity of Weiss Research, the publisher of Money and Markets. Both entities are owned by Weiss Group, LLC.
1 Federal Reserve press release: FOMC statement, 9/23/09
2 Ibbotson, FMRCo (MARE) as of 12/31/08
3 Bloomberg data: 10/6/09
4 Gluskin Sheff Economic Commentary, 7/31/09
5 Investment Company Inst., Trends in Mutual Fund Investing, 9/29/09
6 U.S. Treasury, Daily Treasury Yield Curve, 9/9/09
7 Weiss Capital Management, Investment Meeting Agenda, 9/28/09
This edited transcript contains forward-looking statements regarding intent and belief with regard to the Weiss Diversified Income Builder program and the market in general. Viewers are cautioned that such statements are not a guarantee of future performance and actual results may differ materially from those statements. The Weiss Diversified Income Builder program is suitable for investors with a MODERATE risk tolerance. Any comparison to money market funds and CDs is made only in reference to yields and not level of safety.
INTERNATIONAL INVESTING presents certain risks not associated with investing solely in the United States. These include, for instance, risks related to fluctuations in the value of the US dollar relative to the values of other currencies, custody arrangements made for foreign securities, political risks, differences in accounting procedures and the lesser degree of public information required to be provided by non-US companies.
PAST PERFORMANCE is not indicative of future returns and as with any investment program, it is possible to lose money by investing in the Diversified Income Builder program. There are no guarantees that the program will be able to achieve its stated objectives. Before investing, please read the Firm’s ADV Part II and all program materials for important disclosure information.
RETURNS — Returns are based on a composite of actual client accounts. Individual client returns may vary. See program materials for details. Net returns cited include actual management fees, commissions and other similar fees charged on transactions and reinvestment of dividends, income and capital gains. Gross returns cited exclude management fees are net of actual commissions and other similar fees charged on transactions and include dividends, income and capital gains.
BENCHMARK — The Barclays Capital Bond Index (formerly Lehman Aggregate Bond Index) is a market-value weighted index of taxable investment-grade, fixed-rate debt issues, including government, corporate, asset-backed and mortgage-backed securities. It assumes reinvestment of dividends and capital gains and excludes management fees, transaction costs and expenses. It is not possible to invest in an index. Index return data source: Bloomberg
The Weiss Diversified Income Builder program may invest in securities that are not included in the benchmark index including inverse-index funds. See program materials for more details.
Mention of specific securities is for illustration purposes only and should not be construed by readers as a specific recommendation to buy or sell any security. Information given regarding these securities was based on information available at the time of the Webinar’s initial broadcast and actual results may differ materially from those statements.
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