[Need help to review alternative investment portfolio]

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WildCat48
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[Need help to review alternative investment portfolio]

Post by WildCat48 » Sun Jul 16, 2017 8:50 pm

[Split into a new post from: My Favorite Alternative Funds --admin LadyGeek]

First time posting but long time lurker! I self-manage my portfolio with vanguard funds.

Recently, a friend came into a substantial windfall. He's been interviewing investment firms about handling my accounts. I have referred him to the forum but he does not seem interested in self managing his assets.

He asked me to review a model portfolio that one of the firms put together. The firm is heavy into alternative, perhaps, too heavy? They have his portfolio model with SRRIX (5% of total portfolio), LENDX (10% of total portfolio), and AVRPX (5% of total portfolio) in it's holdings. LENDX is categorized in the bond section of the portfolio. I'd never heard of these funds until this weekend, it all sounds too good to be true to me....

PFInterest
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Re: [Need help to review alternative investment portfolio]

Post by PFInterest » Sun Jul 16, 2017 9:03 pm

Sounds like they will slowly drain his fortune.

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nedsaid
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Re: [Need help to review alternative investment portfolio]

Post by nedsaid » Sun Jul 16, 2017 11:04 pm

These recommendations sound very close to what Larry Swedroe and his firm Buckingham Asset Management would recommend. I suspect that Stoneridge All Asset Variance Risk Premium fund has been substituted for AQR Style Premia fund QSPIX. A 20% allocation to alternatives sounds about right, that would be enough to make a meaningful difference in portfolio performance.

Pretty much, it boils down to whether one believes in Alternative Investments or not.
A fool and his money are good for business.

Avo
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Re: [Need help to review alternative investment portfolio]

Post by Avo » Mon Jul 17, 2017 12:59 am

I agree with nedsaid. It would be interesting to know the rest of the portfolio to see if it has more BAM fingerprints on it ... but this is not the usual actively-managed high-fee crap one gets from a run-of-the-mill firm.

WildCat48
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Re: [Need help to review alternative investment portfolio]

Post by WildCat48 » Mon Jul 17, 2017 3:04 pm

Avo wrote:I agree with nedsaid. It would be interesting to know the rest of the portfolio to see if it has more BAM fingerprints on it ... but this is not the usual actively-managed high-fee crap one gets from a run-of-the-mill firm.
Thanks, he might not be getting fleeced as I originally assumed. It looks like the entire equity portion of his portfolio will also be in funds that are from the same group that runs LENDX, SRRIX, AVRPX. About 75% of the equity portion of the portfolio will be in ELUSX, no clue if this is passive or active, but the expense ratio is .45.

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Lieutenant.Columbo
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Re: [Need help to review alternative investment portfolio]

Post by Lieutenant.Columbo » Mon Jul 17, 2017 3:16 pm

WildCat48 wrote:...SRRIX (5% of total portfolio), LENDX (10% of total portfolio)...
this 2:1 is the LENDX:SRRIX ratio Larry Swedroe recommends
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

Biffer
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Re: [Need help to review alternative investment portfolio]

Post by Biffer » Mon Jul 17, 2017 8:28 pm

I found it surprisingly difficult to find expense ratio information on Stone Ridge alternative funds. The expense ratios seem pretty high. Bloomberg has:

AVRPX (SR All Asset Variance Risk Premium Fund): 2.68 % expense ratio

SRRIX (SR Reinsurance Risk Premium Interval Fund): 2.29 % expense ratio

I wasn’t able to find the expense ratio for LENDX (SR Alternative Lending Risk Premium Fund), even at SR’s web site. Anybody know what the expense ratio is?
Last edited by Biffer on Mon Jul 17, 2017 9:15 pm, edited 1 time in total.

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Taylor Larimore
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Re: [Need help to review alternative investment portfolio]

Post by Taylor Larimore » Mon Jul 17, 2017 8:35 pm

Biffer wrote:I found it surprising difficult to find expense ratio information on Stone Ridge alternative funds. The expense ratios seem pretty high. Bloomberg has:

AVRPX (SR All Asset Variance Risk Premium Fund): 2.68 % expense ratio

SRRIX (SR Reinsurance Risk Premium Interval Fund): 2.29 % expense ratio

I wasn’t able to find the expense ratio for LENDX (SR Alternative Lending Risk Premium Fund), even at SR’s web site. Anybody know what the expense ratio is?
Wildcat48:

If the 2.68% and 2.29% expense ratios are correct, I see little chance of these two funds outperforming the market over a long term -- especially with an advisor fee (and possibly a sales charge).
Morningstar: "If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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grap0013
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Re: [Need help to review alternative investment portfolio]

Post by grap0013 » Mon Jul 17, 2017 9:36 pm

Lieutenant.Columbo wrote:
WildCat48 wrote:...SRRIX (5% of total portfolio), LENDX (10% of total portfolio)...
this 2:1 is the LENDX:SRRIX ratio Larry Swedroe recommends
Privately he has stated since that comment that he's moving towards something like this:

8% LENDX
8% SRRIX
8% AVRPX
8% QSPRX
2% QMHRX

Alts 1/3 of portfolio, equal weighting them with the exception of QMHRX.
There are no guarantees, only probabilities.

Avo
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Re: [Need help to review alternative investment portfolio]

Post by Avo » Tue Jul 18, 2017 4:11 pm

WildCat48 wrote:About 75% of the equity portion of the portfolio will be in ELUSX, no clue if this is passive or active, but the expense ratio is .45.
Appears to be another Stone Ridge fund (though no mention of it on the Stone Ridge web site!).

I'd be pretty leery of going so all-in on Stone Ridge. They're new, they may be geniuses, but I'd want a lot more of my money in plain-vanilla index funds.

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nisiprius
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Re: [Need help to review alternative investment portfolio]

Post by nisiprius » Tue Jul 18, 2017 4:36 pm

It seems faddish to me.

Furthermore, all the Stone Ridge funds I've peeked at come packed with what I'll call "kids, don't do this at home" warnings. Notice that these are not the open-ended funds ordinary Bogleheads are familiar with, and don't promise daily liquidity and easy redemption the way open-ended funds do.

Now, if your friend is perfectly familiar with and comfortable with interval funds and closed-end funds, fine, and understands the risks, fine.

Personally, I'm not. I wouldn't touch these myself due to lack of personal understanding of interval funds and closed-end funds.

Ask your friend to explain to you what an interval fund is, how it works, and what extra risks it poses compared to a normal open-ended mutual fund. These funds are supposed to be sold through advisors who educate their clients properly, so he should be able to explain it. If he can't, then it suggests that he wasn't paying attention or his advisor wasn't doing his job.

LENDX--interval fund
SRRIX--closed-end fund
AVRPX--closed-end fund

They all come with notices like this:
Stone Ridge Funds are generally sold only to (i) institutional investors, including registered investment advisers ("RIAs"), that meet certain qualifications and have completed an educational program provided by Stone Ridge Asset Management LLC; (ii) clients of such institutional investors; and (iii) certain other eligible investors.... Investing in the Funds involves a high degree of risk.
A sane person could certainly accept a "high degree of risk." But does your friend know that there is a "high degree of risk," can he explain to you what the nature of the risk is, and why he personally accepts it?

LENDX notes:
The Fund’s Shares are not listed and the Fund does not currently intend to list its Shares for trading on any national securities exchange. There is currently no secondary market for its Shares and the Fund does not expect a secondary market in its Shares to develop.
‰ An investment in the Fund is not suitable for investors who need certainty about their ability to access all of the money they invest in the short term.... Even though the Fund makes quarterly repurchase offers for a minimum of 5%, and currently expects to offer to repurchase 5%, of its outstanding Shares, investors should consider Shares of the Fund to be an illiquid investment.
Notice, they are not talking about short-term fluctuations, they are talking about "ability to access" the money. In a normal mutual fund, the value may fluctuation, perhaps a lot, short-term, but you are able to cash in that value--whatever it is--on a day's notice, any day you like.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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nisiprius
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Re: [Need help to review alternative investment portfolio]

Post by nisiprius » Tue Jul 18, 2017 4:49 pm

Help me decode this... gobbledegook. From the LENDX Annual Report, 2/28/2017
The second line on the table below provides information about hypothetical account values and hypothetical expenses based on the actual expense ratios of the Fund and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other fund. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relevant total cost of owning different funds.
Image
Please confirm my impression that the annual report might be saying:
  • The expense ratio was 4.42%.
  • If the return had, hypothetically, been 5% per year, then during the reporting period the fund managers would have taken $21.95 for expenses and given fund shareholders $2.88.
  • But fortunately, the return during that six-month period was much, much higher, and as a result the fund managers took $22.26 and gave fund shareholders $31.50. That is, they only took 41% of the fund's return.


Note that this does not include "sales charges (loads), redemption fees, or exchange fees."

It's quite possible that I just don't understand what the annual report is saying here.

Ask your friend what the expense ratio of LENDX is and see if his advisor has explained it to him.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Taylor Larimore
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Re: [Need help to review alternative investment portfolio]

Post by Taylor Larimore » Tue Jul 18, 2017 6:09 pm

nisiprius:

Great investigative post, above.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

getco
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Re: [Need help to review alternative investment portfolio]

Post by getco » Tue Jul 18, 2017 8:13 pm

nisiprius:

Larry Swedroe answers some questions re: LENDX expenses in this thread: viewtopic.php?t=215898

May answer some questions concerning the ER breakdown.

-g

WildCat48
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Re: [Need help to review alternative investment portfolio]

Post by WildCat48 » Tue Jul 18, 2017 8:41 pm

nisiprius wrote:It seems faddish to me.
This is exactly my concern. I don't think he knows how to explain an interval fund. I don't think he wants my help anymore he sent me a text today that he is going with the advisor with access to the stone ridge funds.

WildCat48
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Re: [Need help to review alternative investment portfolio]

Post by WildCat48 » Tue Jul 18, 2017 8:44 pm

nisiprius wrote:Help me decode this... gobbledegook. From the LENDX Annual Report, 2/28/2017

Please confirm my impression that the annual report might be saying:
  • The expense ratio was 4.42%.
  • If the return had, hypothetically, been 5% per year, then during the reporting period the fund managers would have taken $21.95 for expenses and given fund shareholders $2.88.
  • But fortunately, the return during that six-month period was much, much higher, and as a result the fund managers took $22.26 and gave fund shareholders $31.50. That is, they only took 41% of the fund's return.


Note that this does not include "sales charges (loads), redemption fees, or exchange fees."

It's quite possible that I just don't understand what the annual report is saying here.

Ask your friend what the expense ratio of LENDX is and see if his advisor has explained it to him.
THat's really interesting and shocking, especially in the 5% situation.

getco
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Re: [Need help to review alternative investment portfolio]

Post by getco » Tue Jul 18, 2017 9:40 pm

WildCat48:

Larry Swedroe also gives a bit of context to the expense numbers, and gives some detail about regulations on interval funds in this topic: viewtopic.php?t=204480#p3136133

Further down specifically re: the expense (thread is from Dec 2016, so not most recent numbers):
larryswedroe wrote: First, as I have already explained it makes no sense whatsover to consider the servicing fee of about 1% kept by the originator. That's just a dumb SEC rule. As I said if you bought the same exact loan in a security the expense would not be required to be shown. You are simply buying a NET interest payment. So that should not be there. Nor should the borrowing costs associated with the leverage. Yes it's a cost of the fund (but it's offset by the income earned with the invested leverage), but it's not the MANAGEMENT fee. There are only two fees that should be considered expenses truly borne by investors. The first part is the 1.5% management fee, along with the other 44bp. Then custodians, not Stone Ridge, charge 10bp to hold the funds as Stone Ridge doesn't pay for custodians fees. You often see this in mutual fund fees. So since this is a true cost to the investor it should be counted. So you get around 2%. And as I noted, that should be dropping over the course of the next year to about 1.85 total, 1.75 plus the .1. Now that isn't cheap, but as I noted you aren't investing in an index fund here. You are paying for basically someone to run a bank for you, without the branch infrastructure.
Cheers,
-g

Biffer
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Re: [Need help to review alternative investment portfolio]

Post by Biffer » Tue Jul 18, 2017 10:35 pm

WildCat48:
One other thing your friend may want to consider is tax efficiency. Some of the discussion in previous threads about LENDX and these other alternative funds suggest that there could be a lot of tax drag on returns if they are held in taxable accounts. (The LENDX prospectus states a portfolio turnover rate of 54%!) How big a factor this is for your friend depends, of course, on how much tax-advantaged space (if any) your friend has for the windfall.

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Re: [Need help to review alternative investment portfolio]

Post by not4me » Wed Jul 19, 2017 3:09 pm

nisiprius wrote:Help me decode this... gobbledegook. From the LENDX Annual Report, 2/28/2017
I'm trying to be sure I didn't miss your point...isn't this "standard gobbledegook"? I may be staring right at the difference, but I'm missing it

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