So Why Do I Still Hold These Stocks?

[cinghiale]

Here's a year-end "what would you do if this was you?" question. For years, I have held the following four stocks in a retirement account.

Brookfield Infrastructure Partners (BIP)
Procter & Gamble (PG)
Royal Dutch Petroleum (RDS.A)
Williams Company (WMB)

This foursome does not constitute a large percentage of our overall portfolio. We have modest allocations in each, and they represent about 10% of our stock holdings and about 4% of our total holdings (in a 40-60 equities/fixed portfolio). And, as already mentioned, they are held in a tax-deferred account, so each or all could be sold today with no tax consequences.

But, there they sit. I suspect that the reasons they endure touches on a number of assumptions that, in theory, I do not necessarily believe. A quick tour reveals the following:

1) Royal Dutch was/is one of the first stocks I ever purchased back in 1987. It has more than doubled in share price in that time, and so it can be said that I am earning double its current yield of 4.7%, as I have double the number of shares of the original purchase. I suppose there's a combination of nostalgia and mental accounting that estimates a 9.4% yield at work here.
2) Procter and Gamble is on everyone's recommended list, right? I has an attractive yield (3.3%) and is one of those "dividend giants." And, its Procter and Gamble...
3) Brookfield Infrastructure was the last indiviual stock I bought before finding this forum, doing the reading, and finding out I was deluding myself about being able to pick stocks, sectors, funds, or managers who/that would beat the benchmarks. This one has international appeal, with a strong Australia play (doesn't everyone love the Aussie Dollar these days?), and diversified holdings in all sorts of strategic areas (mining, ports, timber, utilites) that warm the hearts of the Jeremy Granthams of this world. It's an all-in-one "hard asset" play and sports a 4.3% dividend.
4) Williams... domestic energy, gas pipelines, infrastructure, all that. A long-term play on the energy we will be forever needing. And, once again, a respectable 4% dividend.

So, given the information and variables stated here, would you sell or hold or something else? Is it time to better align Boglehead convictions with reality, or is this too small a percentage of the portfolio to worry about? I know that I have fallen prey to some nostalgia (RDS.A), some pride (BIP has done awfully well), and some persistent "I know better-ism" (good dividend plays are going to beat the benchmarks), and some inertia (so far, so good...).

Please don't take this too seriously. The cognitive dissonance here is quite low. I have some extra time over the holiday break and finally have time to consider this corner of the retirement portfolio. But, I would value the input of the forum. Thanks.

[livesoft]

I own a couple of stocks from way back, but in a taxable account. I am slowly giving appreciated shares away to charity and to my children. But I am having my children sell the shares immediately. This way I do not have to pay any cap gains taxes as I get rid of these shares.

If I had shares in a tax-advantaged account, I would keep them as long as they performed better than the Total Stock Market Index fund. In the year they underperformed, I would sell them. Simple enough?

[Aptenodytes]

I like Livesoft's advice.

I'll also point out that objectively it is hard to call 10% of your stock holdings "small." My small cap growth allocation is less than that (not by much, but you get the point).

[Grt2bOutdoors]

I like Royal Dutch's yield. Williams is a play on increasing natural gas production and future demand (increasing) - I know they are investing significant moola increasing compression capabilities up here in the NYC area. I imagine you also own some WXP shares as well?
Don't know much about office buildings which I imagine that is what Brookfield is all about. P&G - you get sentimental when you see the Mr. Clean commercial or you prefer Tide over All

[grok87]

Here's a year-end "what would you do if this was you?" question. For years, I have held the following four stocks in a retirement account.

Brookfield Infrastructure Partners (BIP)
Procter & Gamble (PG)
Royal Dutch Petroleum (RDS.A)
Williams Company (WMB)

This foursome does not constitute a large percentage of our overall portfolio. We have modest allocations in each, and they represent about 10% of our stock holdings and about 4% of our total holdings (in a 40-60 equities/fixed portfolio). And, as already mentioned, they are held in a tax-deferred account, so each or all could be sold today with no tax consequences.

But, there they sit. I suspect that the reasons they endure touches on a number of assumptions that, in theory, I do not necessarily believe. A quick tour reveals the following:

1) Royal Dutch was/is one of the first stocks I ever purchased back in 1987. It has more than doubled in share price in that time, and so it can be said that I am earning double its current yield of 4.7%, as I have double the number of shares of the original purchase. I suppose there's a combination of nostalgia and mental accounting that estimates a 9.4% yield at work here.
2) Procter and Gamble is on everyone's recommended list, right? I has an attractive yield (3.3%) and is one of those "dividend giants." And, its Procter and Gamble...
3) Brookfield Infrastructure was the last indiviual stock I bought before finding this forum, doing the reading, and finding out I was deluding myself about being able to pick stocks, sectors, funds, or managers who/that would beat the benchmarks. This one has international appeal, with a strong Australia play (doesn't everyone love the Aussie Dollar these days?), and diversified holdings in all sorts of strategic areas (mining, ports, timber, utilites) that warm the hearts of the Jeremy Granthams of this world. It's an all-in-one "hard asset" play and sports a 4.3% dividend.
4) Williams... domestic energy, gas pipelines, infrastructure, all that. A long-term play on the energy we will be forever needing. And, once again, a respectable 4% dividend.

So, given the information and variables stated here, would you sell or hold or something else? Is it time to better align Boglehead convictions with reality, or is this too small a percentage of the portfolio to worry about? I know that I have fallen prey to some nostalgia (RDS.A), some pride (BIP has done awfully well), and some persistent "I know better-ism" (good dividend plays are going to beat the benchmarks), and some inertia (so far, so good...).

Please don't take this too seriously. The cognitive dissonance here is quite low. I have some extra time over the holiday break and finally have time to consider this corner of the retirement portfolio. But, I would value the input of the forum. Thanks.

I guess the one I am most skeptical about is Brookfield Infrastructure Partners. I get the concept- it sounds attractive on the face of it. But what worries me are the fees. I guess I would think of this like a REIT or a mutual fund- i.e. they own a bunch of assets and pass through the results. Yet unlike a mutual fund its really tough to figure out what the "expense" ratio is. Here's my shot at it:

http://www.brookfieldinfrastructure.com ... s/5124.pdf

If you look at this report (page 8), you will see that Brookfield's General and Admin Expense is $67 M for the latest 9 months and that the "net income" was $111 M. Adding back the $67 M to the $111 M gives $178 M before Brookfield's General and Admin Expense. So they siphoned off $67 out of $178 = 38%. THis seems rather high to me. For a S&P 500 index fund the expense ratio might be 0.10% and the dividend yield say 2%, so that is only about a 5% ratio.
So it seems to me Brookfield has a good thing going here. They siphon off 40% of the income and take no risk on the assets, but have found a bunch of, um, patsies (oops I mean partners) to take all the risk of the assets.
I would sell this puppy as quickly as possible.
cheers,

[Valuethinker]

Here's a year-end "what would you do if this was you?" question. For years, I have held the following four stocks in a retirement account.

Brookfield Infrastructure Partners (BIP)
Procter & Gamble (PG)
Royal Dutch Petroleum (RDS.A)
Williams Company (WMB)

This foursome does not constitute a large percentage of our overall portfolio. We have modest allocations in each, and they represent about 10% of our stock holdings and about 4% of our total holdings (in a 40-60 equities/fixed portfolio). And, as already mentioned, they are held in a tax-deferred account, so each or all could be sold today with no tax consequences.

But, there they sit. I suspect that the reasons they endure touches on a number of assumptions that, in theory, I do not necessarily believe. A quick tour reveals the following:

1) Royal Dutch was/is one of the first stocks I ever purchased back in 1987. It has more than doubled in share price in that time, and so it can be said that I am earning double its current yield of 4.7%, as I have double the number of shares of the original purchase. I suppose there's a combination of nostalgia and mental accounting that estimates a 9.4% yield at work here.
2) Procter and Gamble is on everyone's recommended list, right? I has an attractive yield (3.3%) and is one of those "dividend giants." And, its Procter and Gamble...
3) Brookfield Infrastructure was the last indiviual stock I bought before finding this forum, doing the reading, and finding out I was deluding myself about being able to pick stocks, sectors, funds, or managers who/that would beat the benchmarks. This one has international appeal, with a strong Australia play (doesn't everyone love the Aussie Dollar these days?), and diversified holdings in all sorts of strategic areas (mining, ports, timber, utilites) that warm the hearts of the Jeremy Granthams of this world. It's an all-in-one "hard asset" play and sports a 4.3% dividend.
4) Williams... domestic energy, gas pipelines, infrastructure, all that. A long-term play on the energy we will be forever needing. And, once again, a respectable 4% dividend.

So, given the information and variables stated here, would you sell or hold or something else? Is it time to better align Boglehead convictions with reality, or is this too small a percentage of the portfolio to worry about? I know that I have fallen prey to some nostalgia (RDS.A), some pride (BIP has done awfully well), and some persistent "I know better-ism" (good dividend plays are going to beat the benchmarks), and some inertia (so far, so good...).

Please don't take this too seriously. The cognitive dissonance here is quite low. I have some extra time over the holiday break and finally have time to consider this corner of the retirement portfolio. But, I would value the input of the forum. Thanks.

When in doubt in finance 'halve the difference' aka 'minimize regret'.

Sell some, but not all.

For complex reasons, I do have an account which is actively managed. I try to buy roughly equal amounts of each of the 10-12 stocks I own, as a percentage of the total portfolio as and when I buy them. I then 'let it ride' (aka 'allow portfolio drift') to minimize dealing costs. I deliberately don't benchmark myself against an index, because, probably this would depress me.

But if you are careful which Dow stocks you own, for example, you probably can track S&P500 pretty well.

On Brookfield I concluded I wanted to own the topco (Brookfld Asset Management) rather than the funds. Like Macquarrie, the funds seemed rigged to make more money for the managers than for the investors-- if you took their management fees as a per cent. of net assets, you'd get something over 3%?

[Valuethinker]

I guess the one I am most skeptical about is Brookfield Infrastructure Partners. I get the concept- it sounds attractive on the face of it. But what worries me are the fees. I guess I would think of this like a REIT or a mutual fund- i.e. they own a bunch of assets and pass through the results. Yet unlike a mutual fund its really tough to figure out what the "expense" ratio is. Here's my shot at it:

http://www.brookfieldinfrastructure.com ... s/5124.pdf

If you look at this report (page 8), you will see that Brookfield's General and Admin Expense is $67 M for the latest 9 months and that the "net income" was $111 M. Adding back the $67 M to the $111 M gives $178 M before Brookfield's General and Admin Expense. So they siphoned off $67 out of $178 = 38%. THis seems rather high to me. For a S&P 500 index fund the expense ratio might be 0.10% and the dividend yield say 2%, so that is only about a 5% ratio.
So it seems to me Brookfield has a good thing going here. They siphon off 40% of the income and take no risk on the assets, but have found a bunch of, um, patsies (oops I mean partners) to take all the risk of the assets.
I would sell this puppy as quickly as possible.
cheers,

I would take it $67/ 0.75 (to annualize) and then divide by 'partnership capital' ($4,606 m). That gives me about 1.9%?

So my management charge (annualized) would appear to be about 1.9% of Assets Under Management. Not high for an alternative assets fund-- probably about average.

However infrastructure returns 8-12% pa, generally, so you are giving up 1/4-1/6th of the performance of the asset class.

And there is likely to be a performance fee 'kicker' (typically 20% above a benchmark pa NAV return) which will be paid, presumably, in the Q4 results, so the MER could be a lot higher.

[EmergDoc]

Give me a break. Sell the stocks. Seems like there's a lot more fun things to do with a fun money portion of the portfolio. You already agree you can't pick stocks. Just sell them and move the proceeds into the rest of your asset allocation.

[grok87]

I guess the one I am most skeptical about is Brookfield Infrastructure Partners. I get the concept- it sounds attractive on the face of it. But what worries me are the fees. I guess I would think of this like a REIT or a mutual fund- i.e. they own a bunch of assets and pass through the results. Yet unlike a mutual fund its really tough to figure out what the "expense" ratio is. Here's my shot at it:

http://www.brookfieldinfrastructure.com ... s/5124.pdf

If you look at this report (page 8), you will see that Brookfield's General and Admin Expense is $67 M for the latest 9 months and that the "net income" was $111 M. Adding back the $67 M to the $111 M gives $178 M before Brookfield's General and Admin Expense. So they siphoned off $67 out of $178 = 38%. THis seems rather high to me. For a S&P 500 index fund the expense ratio might be 0.10% and the dividend yield say 2%, so that is only about a 5% ratio.
So it seems to me Brookfield has a good thing going here. They siphon off 40% of the income and take no risk on the assets, but have found a bunch of, um, patsies (oops I mean partners) to take all the risk of the assets.
I would sell this puppy as quickly as possible.
cheers,

I would take it $67/ 0.75 (to annualize) and then divide by 'partnership capital' ($4,606 m). That gives me about 1.9%?

So my management charge (annualized) would appear to be about 1.9% of Assets Under Management. Not high for an alternative assets fund-- probably about average.

However infrastructure returns 8-12% pa, generally, so you are giving up 1/4-1/6th of the performance of the asset class.

And there is likely to be a performance fee 'kicker' (typically 20% above a benchmark pa NAV return) which will be paid, presumably, in the Q4 results, so the MER could be a lot higher.

Thanks- that's helpful.

[Valuethinker]

I guess the one I am most skeptical about is Brookfield Infrastructure Partners. I get the concept- it sounds attractive on the face of it. But what worries me are the fees. I guess I would think of this like a REIT or a mutual fund- i.e. they own a bunch of assets and pass through the results. Yet unlike a mutual fund its really tough to figure out what the "expense" ratio is. Here's my shot at it:

http://www.brookfieldinfrastructure.com ... s/5124.pdf

If you look at this report (page 8), you will see that Brookfield's General and Admin Expense is $67 M for the latest 9 months and that the "net income" was $111 M. Adding back the $67 M to the $111 M gives $178 M before Brookfield's General and Admin Expense. So they siphoned off $67 out of $178 = 38%. THis seems rather high to me. For a S&P 500 index fund the expense ratio might be 0.10% and the dividend yield say 2%, so that is only about a 5% ratio.
So it seems to me Brookfield has a good thing going here. They siphon off 40% of the income and take no risk on the assets, but have found a bunch of, um, patsies (oops I mean partners) to take all the risk of the assets.
I would sell this puppy as quickly as possible.
cheers,

I would take it $67/ 0.75 (to annualize) and then divide by 'partnership capital' ($4,606 m). That gives me about 1.9%?

So my management charge (annualized) would appear to be about 1.9% of Assets Under Management. Not high for an alternative assets fund-- probably about average.

However infrastructure returns 8-12% pa, generally, so you are giving up 1/4-1/6th of the performance of the asset class.

And there is likely to be a performance fee 'kicker' (typically 20% above a benchmark pa NAV return) which will be paid, presumably, in the Q4 results, so the MER could be a lot higher.

Thanks- that's helpful.

Closed End Funds like Private Equity (there are a few listed in the US now like Apollo, also KKR? There is even an ETF of PE stocks-- see also UK 'Private Equity Investment Trusts (ie CEFs)' listed (there are also 'Venture Capital Trusts' (VCTs) which have special tax arrangements and much higher fees). I think you will see MERs average round 2%. Total ERs could be higher (you have to dig to work them out).

Quoted UK Inv Trusts generally (investing in listed stocks) typically have MERs around 1%.

Infrastructure Funds are structured similarly (3i has one, Henderson I think, HSBC, Macquarrie). Some of the Macquarrie fees are outrageous (that woman of Enron fame the journalist Bethany Maclean, did a deconstruction in Fortune a few years back): 3%+-- not for nothing is working there known as 'the millionaire factory' in Oz.

Again 2% is probably around the level of fees charged. However PE funds, top quartile, run 15%+ pa Internal Rates of Return (ie NAV increases). Infrastructure players are typically aiming 8-12% I think-- so the impact of fees is correspondingly higher. Also the asset class was undervalued and there was an absence of liquid entry vehicles, so prices on individual assets 'popped'. That process is presumably over.

Infra still remains an interesting asset class: long term, inflation linked returns. People like the Ontario Teachers' Pension Fund ($100bn fund) love 'em. They are strongly similar to some of the more aggressive forms of Commercial Real Estate investing. Governments desperate to raise money by spinning off critical infrastructure.

(I don't know what the tax issues are though: REITs are tax transparent, I don't know if infra CEFs pay corporation taxes on dividends received and capital gains?).

The old problem-- hard as an individual investor to get access to those returns and risk-return without excessive fees.

Note the impact of the 'carried interest' or carry, typically 20% performance fee (over a benchmark like 6 or 8% pa) is huge on net returns. And the funds tend to quote gross returns. I don't know if infra funds pay the same carry as PE funds to the managers, but I suspect they have similar arrangements.

I read an article in the FT I think (but stupidly did not write it down) about CLO funds and some of the names. I think the fees are probably outrageous, and you could argue that train has left the station, but the striking feature of the credit crunch was that corporate LBO loans (which go into CLOs) did NOT blow up the way they did in 2000 or 1990.

[pennstater2005]

I still hold some Bank of America, Ford, and Fannie Mae stock. I can't bring myself to sell it. I have not purchased any additional shares and have no plan to. I have only funded my index fund since joining the Bogleheads. They're still fun to watch. I can't help myself

[dyangu]

I think putting 10% of your stock allocation on random individual stocks is ok if it makes you happier. (but do think about how you would feel if one of them tanked while the rest of the market went up)

[grok87]

Infrastructure Funds are structured similarly (3i has one, Henderson I think, HSBC, Macquarrie). Some of the Macquarrie fees are outrageous (that woman of Enron fame the journalist Bethany Maclean, did a deconstruction in Fortune a few years back): 3%+-- not for nothing is working there known as 'the millionaire factory' in Oz.

Here's the article
http://money.cnn.com/2007/09/17/news/in ... /index.htm

Chanos captured the audience's attention by opening with a quote from the Sydney Morning Herald: "The Macquarie model is justly famous around the world. It is quite possibly the most efficient method of legally relieving investors of their money ever conceived." That Macquarie Bank is currently a highly profitable company is not a matter of dispute. Only a week before Chanos's talk, Macquarie had posted its results for its fiscal year ended in March 2007. The firm's profits were almost A$1.5 billion, up 60% from the year before and up from just A$250 million in 2002. (One Australian dollar is currently worth about 84 cents.) The base management fees from its funds amounted to A$785 million. Through mid-July, Macquarie's stock, which was listed on the Australian Stock Exchange in 1996, had returned over 2,000%. At home Macquarie had become known as the "millionaires factory." In the past two years the top five Macquarie bankers earned A$216 million, with Moss and Nicholas Moore, the investment-banking head, making more than A$30 million each last year. But Chanos is a contrarian, and on that sunny spring day he explained to the audience what he saw under Macquarie's glittering surface. The firm, he said, had a "perverse incentive to serially overpay for assets." That's because the assets are owned not by the bank itself but by the shareholders in its funds. The shareholders pay Macquarie management fees that are based on the size of the fund, meaning that Macquarie has an incentive to add to its collection. (The funds also pay fees based on their performance, but as Macquarie gets bigger, those are dwarfed by the base fees.) The shareholders pay Macquarie investment-banking fees too - any deal that a fund does, from the acquisition of an asset to a refinancing to its ultimate disposition - results in fees to Macquarie. In the past two years Macquarie Infrastructure Group (MIG) - the oldest and largest fund - has paid Macquarie a total of almost A$150 million in banking fees and another A$273 million in management fees. That the funds are fee factories for Macquarie wouldn't be so much an issue - sure, it's more rapacious than your average private equity firm, but only a little - if it weren't for another part of the picture. That's debt. Macquarie uses debt of as much as 85% to purchase an asset and pay for the necessary capital expenditures. This debt is hard to see, because it doesn't reside on Macquarie's books. You won't even see it by looking at the financial statements for the funds. Instead, it is held at the asset level. For instance, if you glanced at the financial statements for MIG, you would see debt of A$2.6 billion. But the assets themselves carry another A$8.7 billion of net debt. In part because there is less disclosure on some of Macquarie's other funds, it is impossible to independently calculate how much debt there is across the entire empire.

Yikes!

[cinghiale]

Thanks to all for the input. I appreciate both the evaluative (grok87, Grt2bOutdoors, and VT) and the more broad perspective (livesoft, EmergDoc, pennstater, dyanju) views that have been offered. As mentioned before, I wrote this as much to play with the inconsistences of thought and conviction as to look at the four stocks being held. It's easy, in the abstract, to confidently state that "I can't consistently pick stocks, sectors, or funds that will beat the avarages." It is tougher to look an old stock holding square in the eye and hit the sell button. It's my stock... I picked it, it has done well, and I'm attached to it. (See the cognitive experiments by Ariely, Kahneman, Mlodinow, and others in this regard.) Would I buy any of the four stocks today? Nope. But now, years later, they are my stocks. I value them differently, because I perceive that they have done well for me. Ownership creates attachment; success evokes loyalty.

That said, I suspect that tipping one domino will make it easy for all four to fall. It sounds like BIP could have some Enron-like elements to its management, fees, and profit incentives. And, at this point, why take the chance that could easily end up ?

[umfundi]

I own a couple of stocks from way back, but in a taxable account. I am slowly giving appreciated shares away to charity and to my children. But I am having my children sell the shares immediately. This way I do not have to pay any cap gains taxes as I get rid of these shares.

If I had shares in a tax-advantaged account, I would keep them as long as they performed better than the Total Stock Market Index fund. In the year they underperformed, I would sell them. Simple enough?

Be careful with that!

If you give the shares to your children you give them your original basis also! If you mean you give the shares away and your children sell the shares and pay the capital gains on the original basis, that's OK.

The original price is important for capital gains.

The value on the day of transfer is important for the gift tax.

Keith

[RyeWhiskey]

Thanks to all for the input. I appreciate both the evaluative (grok87, Grt2bOutdoors, and VT) and the more broad perspective (livesoft, EmergDoc, pennstater, dyanju) views that have been offered. As mentioned before, I wrote this as much to play with the inconsistences of thought and conviction as to look at the four stocks being held. It's easy, in the abstract, to confidently state that "I can't consistently pick stocks, sectors, or funds that will beat the avarages." It is tougher to look an old stock holding square in the eye and hit the sell button. It's my stock... I picked it, it has done well, and I'm attached to it. (See the cognitive experiments by Ariely, Kahneman, Mlodinow, and others in this regard.) Would I buy any of the four stocks today? Nope. But now, years later, they are my stocks. I value them differently, because I perceive that they have done well for me. Ownership creates attachment; success evokes loyalty.

That said, I suspect that tipping one domino will make it easy for all four to fall. It sounds like BIP could have some Enron-like elements to its management, fees, and profit incentives. And, at this point, why take the chance that could easily end up ?

Simplest solution is to sell them all. That said, I think it's good to keep one in order to satisfy the need (a need which some may not have) to bet on an individual company rather than the entire market. I vote you keep Royal Dutch as you seem the most attached to it. Sell the rest, put that money back into your allocation and enjoy life. Best solution I can see for having your cake and eating it too.

[Valuethinker]

Thanks to all for the input. I appreciate both the evaluative (grok87, Grt2bOutdoors, and VT) and the more broad perspective (livesoft, EmergDoc, pennstater, dyanju) views that have been offered. As mentioned before, I wrote this as much to play with the inconsistences of thought and conviction as to look at the four stocks being held. It's easy, in the abstract, to confidently state that "I can't consistently pick stocks, sectors, or funds that will beat the avarages." It is tougher to look an old stock holding square in the eye and hit the sell button. It's my stock... I picked it, it has done well, and I'm attached to it. (See the cognitive experiments by Ariely, Kahneman, Mlodinow, and others in this regard.) Would I buy any of the four stocks today? Nope. But now, years later, they are my stocks. I value them differently, because I perceive that they have done well for me. Ownership creates attachment; success evokes loyalty.

That said, I suspect that tipping one domino will make it easy for all four to fall. It sounds like BIP could have some Enron-like elements to its management, fees, and profit incentives. And, at this point, why take the chance that could easily end up ?

Actually i would not go that far on Brookfield. They are simply shrewd operators. Their fees don't sound outlandish for the asset class, and carried interest (performance fees) is normal in Private Equity, Infrastructure and Real Estate funds. Whether your returns will justify the risk, I do not know.

As I think I said, I do own the parent company (Brookfield Asset Management). More out of distaste for figuring out the corporate structure, than a certainty that that is the best Brookfield asset to own.