Why not 100% PSLDX?

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RocketShipTech
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Re: Why not 100% PSLDX?

Post by RocketShipTech » Mon Jun 15, 2020 12:51 pm

ChrisBenn wrote:
Mon Jun 15, 2020 12:24 pm
RocketShipTech wrote:
Sun Jun 14, 2020 10:31 pm
(...)
Overall, the weighted average duration of the bond allocation is only 7 years. Along with the stocks, that bond portion is then leveraged up 2x for an effective duration of 14 years.
(...)
Are you sure that is true? That is not how I was reading the report- It looked to me like the bond maturity avg was ~14 years -- not leverage normalized. (also I don't think there was 2x leverage on the bond side)

Image
The “effective duration” of 15 years reflects the post-leverage duration.

Page 6 has the durations of the underlying holdings.

garlandwhizzer
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Re: Why not 100% PSLDX?

Post by garlandwhizzer » Mon Jun 15, 2020 1:34 pm

RocketShipTech wrote:

1. It’s not quite accurate to characterize the equity component of this fund as “large cap growth”. It offers exposure to the S&P 500. That’s large cap blend, neither growth nor value.

2. It’s even less accurate to say the balance of this fund holds long term Treasuries. Here is a report of its credit holdings as of March (page 7).
Two good points, thanks for bringing them to my attention.Sorry, I jumped into my post without digging into all the details. Whenever I see an investing approach touted to produce robust outperformance without robust risk I have a gut reaction against it.

I would add that in point 1 above, the outperformance of S&P 500 (LCB) relative to LCV or SCV in recent years has been largely driven by LCG's dominance (FAANGs). That is why I used LCG rather than LSB.

In relation to point 2, I simply assumed that the bond portion of PSLDX was likely to be LTT because LTT offer the best volatility/risk control in a portfolio which is heavily weighted to equity like PSLDX. All quality bonds and even non-quality bonds however have been in a vigorous bond bull market since 1982 and their great returns and limited risk over that period is IMO very unlikely to persist in the future. Expected real bond returns going forward are about zero real with rates where they are today.

Market cycle trends don't persist forever. PSLDX has been almost perfectly positioned for the past 13 years to take advantage of market trends. I maintain that similar results going forward are uncertain. Leverage and derivatives work in both directions. I am not aware of any technique that reliably magnifies gains but avoids the potential to magnify losses when the market wind changes. It seems to me that if a fool-proof technique existed for this level of massive outperformance without commensurate increases in risk, I wonder why massive volumes of active investing dollars aren't flowing in that direction in these hyper-competitive markets. One might expect that such a trade would get overcrowded.

If you want to put 100% of your portfolio in PSLDX that's fine with me. I wish you good luck as I do for all investors whatever their strategy. A data driven argument can be made for it. It may work out great in the future as it has in the past 13 years. Or it may not. We're all different. I choose the simpler non-leveraged approach but that's just my point of view.

Garland Whizzer

ChrisBenn
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Re: Why not 100% PSLDX?

Post by ChrisBenn » Mon Jun 15, 2020 1:49 pm

RocketShipTech wrote:
Mon Jun 15, 2020 12:51 pm
ChrisBenn wrote:
Mon Jun 15, 2020 12:24 pm
RocketShipTech wrote:
Sun Jun 14, 2020 10:31 pm
(...)
Overall, the weighted average duration of the bond allocation is only 7 years. Along with the stocks, that bond portion is then leveraged up 2x for an effective duration of 14 years.
(...)
Are you sure that is true? That is not how I was reading the report- It looked to me like the bond maturity avg was ~14 years -- not leverage normalized. (also I don't think there was 2x leverage on the bond side)

Image
The “effective duration” of 15 years reflects the post-leverage duration.

Page 6 has the durations of the underlying holdings.
Gotcha, and yeah, good read - it does appear they are using leverage to approximate an extended the duration (which I hadn't caught).

Image

I'm still not quite getting where you get the 2x leverage on the bond side though (for 7year -> 14 year) effective?

From that first table on page 6 it looks like bonds are ~1.5x leveraged (For 31 mar, closer to 1.7x for dec) (sum of the negative % market value sub-headers/singleton headers)?

Not trying to be nitpicky, want to make sure I'm not missing something else!
Last edited by ChrisBenn on Mon Jun 15, 2020 1:49 pm, edited 1 time in total.

RocketShipTech
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Re: Why not 100% PSLDX?

Post by RocketShipTech » Mon Jun 15, 2020 1:49 pm

garlandwhizzer wrote:
Mon Jun 15, 2020 1:34 pm
RocketShipTech wrote:

1. It’s not quite accurate to characterize the equity component of this fund as “large cap growth”. It offers exposure to the S&P 500. That’s large cap blend, neither growth nor value.

2. It’s even less accurate to say the balance of this fund holds long term Treasuries. Here is a report of its credit holdings as of March (page 7).
Two good points, thanks for bringing them to my attention.Sorry, I jumped into my post without digging into all the details. Whenever I see an investing approach touted to produce robust outperformance without robust risk I have a gut reaction against it.

I would add that in point 1 above, the outperformance of S&P 500 (LCB) relative to LCV or SCV in recent years has been largely driven by LCG's dominance (FAANGs). That is why I used LCG rather than LSB.

In relation to point 2, I simply assumed that the bond portion of PSLDX was likely to be LTT because LTT offer the best volatility/risk control in a portfolio which is heavily weighted to equity like PSLDX. All quality bonds and even non-quality bonds however have been in a vigorous bond bull market since 1982 and their great returns and limited risk over that period is IMO very unlikely to persist in the future. Expected real bond returns going forward are about zero real with rates where they are today.

Market cycle trends don't persist forever. PSLDX has been almost perfectly positioned for the past 13 years to take advantage of market trends. I maintain that similar results going forward are uncertain. Leverage and derivatives work in both directions. I am not aware of any technique that reliably magnifies gains but avoids the potential to magnify losses when the market wind changes. It seems to me that if a fool-proof technique existed for this level of massive outperformance without commensurate increases in risk, I wonder why massive volumes of active investing dollars aren't flowing in that direction in these hyper-competitive markets. One might expect that such a trade would get overcrowded.

If you want to put 100% of your portfolio in PSLDX that's fine with me. I wish you good luck as I do for all investors whatever their strategy. A data driven argument can be made for it. It may work out great in the future as it has in the past 13 years. Or it may not. We're all different. I choose the simpler non-leveraged approach but that's just my point of view.

Garland Whizzer
You are correct that LCG has driven the gains in the S&P 500 but if that reverses and LCV starts to outperform, PSLDX will benefit just as the S&P 500 will benefit.

And as I’ve pointed out above, the underlying bond portfolio is actually an intermediate “blend” portfolio.

So I take issue with your overall assertion that this fund relies on successfully timing “market cycles”. If that were the case then the standard Boglehead recommendation for a 2-fund portfolio also relies on timing market cycles.

What differentiates this fund is not its holdings but rather its leverage. And whether leverage is a good idea has little to do with market trends and much more to do with an individual investor’s situation.

RocketShipTech
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Re: Why not 100% PSLDX?

Post by RocketShipTech » Mon Jun 15, 2020 2:00 pm

Last point: just adding more money (i.e. leverage) to a market beta strategy does not “overcrowd” it.

Can the S&P 500 ever be overcrowded? How about Total Bond Market?

finite_difference
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Re: Why not 100% PSLDX?

Post by finite_difference » Tue Jun 16, 2020 1:35 pm

willthrill81 wrote:
Fri Jun 12, 2020 7:25 pm
finite_difference wrote:
Fri Jun 12, 2020 7:20 pm
willthrill81 wrote:
Wed Apr 08, 2020 2:51 pm
HEDGEFUNDIE wrote:
Wed Apr 01, 2020 8:17 pm
Someone needs to coin a pithy term for the fallacy that “something that goes down must eventually come back up again”

Lots of Bogleheads suffer from this unfortunate affliction, costing them lots of money in the form of expensive fixed rate mortgages and unrenumerative short term bond holdings.
I agree.

I dub this the 'balloon fallacy'.
Boomerang fallacy?
That works too.

Given the very long-term trajectory of interest rates, I won't be at all surprised if we never again see 5% yields on Treasuries in our lifetimes.
You beat my edit, but couldn’t it also be called the “Reversion to mean fallacy”?
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

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firebirdparts
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Re: Why not 100% PSLDX?

Post by firebirdparts » Tue Jun 16, 2020 3:16 pm

finite_difference wrote:
Tue Jun 16, 2020 1:35 pm
You beat my edit, but couldn’t it also be called the “Reversion to mean fallacy”?
This is where good platitudes meet with bad thinking and failure. If you don't understand what reverts to the mean, and what doesn't, then the platitude itself doesn't work for you, and you are going to get it mixed up with totally unrelated platitudes, such as (in this case) there are more airplanes in the ocean than there are submarines in the sky.

Not everything reverts to the mean. Not everything fails to revert to the mean. It's very important that you keep a concept as crazy as mean reversion in its own lane, because it is very very crazy. You can't apply it to the ripeness of bananas. It applies in an extremely narrow window.
A fool and your money are soon partners

finite_difference
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Re: Why not 100% PSLDX?

Post by finite_difference » Tue Jun 16, 2020 5:35 pm

firebirdparts wrote:
Tue Jun 16, 2020 3:16 pm
finite_difference wrote:
Tue Jun 16, 2020 1:35 pm
You beat my edit, but couldn’t it also be called the “Reversion to mean fallacy”?
This is where good platitudes meet with bad thinking and failure. If you don't understand what reverts to the mean, and what doesn't, then the platitude itself doesn't work for you, and you are going to get it mixed up with totally unrelated platitudes, such as (in this case) there are more airplanes in the ocean than there are submarines in the sky.

Not everything reverts to the mean. Not everything fails to revert to the mean. It's very important that you keep a concept as crazy as mean reversion in its own lane, because it is very very crazy. You can't apply it to the ripeness of bananas. It applies in an extremely narrow window.
Right, but wouldn’t misapplication of the concept reversion to the mean be appropriately called “reversion to the mean fallacy”?
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

AZAttorney11
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Re: Why not 100% PSLDX?

Post by AZAttorney11 » Wed Jun 24, 2020 10:13 pm

I'm in! Going to invest $25,000 inside of my Roth IRA and see what happens to PSLDX 25-30 years from now.

codoriti
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Re: Why not 100% PSLDX?

Post by codoriti » Thu Jun 25, 2020 2:14 am

There is an interesting thread regarding bonds not performing well in future years -- viewtopic.php?f=10&t=318201

What are your thoughts on possible implications for PSLDX if that were the case? I'm thinking it is highly likely that it will be a while before we see bond yields back up.

keith6014
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Re: Why not 100% PSLDX?

Post by keith6014 » Thu Jun 25, 2020 7:07 am

What ETF can replicate -CASHX position?

rascott
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Re: Why not 100% PSLDX?

Post by rascott » Thu Jun 25, 2020 7:15 am

keith6014 wrote:
Thu Jun 25, 2020 7:07 am
What ETF can replicate -CASHX position?
None.... why would such a product exist? And what purpose do you need it for?

keith6014
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Re: Why not 100% PSLDX?

Post by keith6014 » Thu Jun 25, 2020 4:43 pm

To replicate PSLDX in a taxable https://www.portfoliovisualizer.com/bac ... on4_2=-100 or attempt.

JamesDean44
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Re: Why not 100% PSLDX?

Post by JamesDean44 » Thu Jun 25, 2020 5:01 pm

keith6014 wrote:
Thu Jun 25, 2020 4:43 pm
To replicate PSLDX in a taxable https://www.portfoliovisualizer.com/bac ... on4_2=-100 or attempt.
CASHX just represents borrowing at the risk-free rate.

BullHouse_BearMarket
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Re: Why not 100% PSLDX?

Post by BullHouse_BearMarket » Tue Jun 30, 2020 8:47 am

I'm very interested in this fund and debating putting 75% of my portfolio into it. All in IRA. My questions are,

1. What has to happen for this fund to shut down and all money invested lost?

2. With such great performance, why is the price per share still at only ~$7.86?

Please excuse my ignorance if the answers are obvious.

jibantik
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Re: Why not 100% PSLDX?

Post by jibantik » Tue Jun 30, 2020 8:56 am

This forum has so many Jim Cramer lites. So many posts of speculators, market timers, people who don't care about fees, people who absurdly think past performance will predict future returns.

I'm starting to understand why so many people rely on SS in retirement.

dukeblue219
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Re: Why not 100% PSLDX?

Post by dukeblue219 » Tue Jun 30, 2020 9:06 am

BullHouse_BearMarket wrote:
Tue Jun 30, 2020 8:47 am
I'm very interested in this fund and debating putting 75% of my portfolio into it. All in IRA. My questions are,

1. What has to happen for this fund to shut down and all money invested lost?

2. With such great performance, why is the price per share still at only ~$7.86?

Please excuse my ignorance if the answers are obvious.
Mutual fund price per share is mostly irrelevant because not only do you have dividend distributions, you also have capital gains distributions. You need to look at a total return chart or a "growth of $10,000" chart to see the past performance, not share price.

That said, I don't recommend PSLDX - the same answer applies to any fund.

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firebirdparts
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Re: Why not 100% PSLDX?

Post by firebirdparts » Tue Jun 30, 2020 9:39 am

BullHouse_BearMarket wrote:
Tue Jun 30, 2020 8:47 am
2. With such great performance, why is the price per share still at only ~$7.86?
This fund has big distributions; all growth has been exported to the user as cash. This is the real ( not imaginary) reason. Act accordingly.
A fool and your money are soon partners

BullHouse_BearMarket
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Re: Why not 100% PSLDX?

Post by BullHouse_BearMarket » Tue Jun 30, 2020 9:47 am

*Deleted*
Last edited by BullHouse_BearMarket on Tue Jun 30, 2020 9:51 am, edited 1 time in total.

BullHouse_BearMarket
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Re: Why not 100% PSLDX?

Post by BullHouse_BearMarket » Tue Jun 30, 2020 9:50 am

firebirdparts wrote:
Tue Jun 30, 2020 9:39 am

This fund has big distributions; all growth has been exported to the user as cash. This is the real ( not imaginary) reason. Act accordingly.
That makes sense. Thank you. Can you or someone explain what perfect storm of things has to happen for this fund to shutdown and all investment be lost?

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UpsetRaptor
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Re: Why not 100% PSLDX?

Post by UpsetRaptor » Tue Jun 30, 2020 9:56 am

BullHouse_BearMarket wrote:
Tue Jun 30, 2020 9:50 am
firebirdparts wrote:
Tue Jun 30, 2020 9:39 am

This fund has big distributions; all growth has been exported to the user as cash. This is the real ( not imaginary) reason. Act accordingly.
That makes sense. Thank you. Can you or someone explain what perfect storm of things has to happen for this fund to shutdown and all investment be lost?
"All investment lost" is a pretty large onus, but this fund would perform poorly in a scenario of high inflation/rising rates, in conjunction with a bear market in equities. So basically, the 1970s.

guyinlaw
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Re: Why not 100% PSLDX?

Post by guyinlaw » Tue Jun 30, 2020 2:30 pm

UpsetRaptor wrote:
Tue Jun 30, 2020 9:56 am
BullHouse_BearMarket wrote:
Tue Jun 30, 2020 9:50 am
firebirdparts wrote:
Tue Jun 30, 2020 9:39 am

This fund has big distributions; all growth has been exported to the user as cash. This is the real ( not imaginary) reason. Act accordingly.
That makes sense. Thank you. Can you or someone explain what perfect storm of things has to happen for this fund to shutdown and all investment be lost?
"All investment lost" is a pretty large onus, but this fund would perform poorly in a scenario of high inflation/rising rates, in conjunction with a bear market in equities. So basically, the 1970s.
This fund will likely perform better than UPRO/TMF in rising rate environment. The duration of bonds is shorter ~ 6 years (with 2 x leverage) vs 20y with 3x for TMF.

With Fed put and their confirmation that rates will stay low for many years, the bull market will likely continue. I expect PSLDX to outperform NTSX, SPY etc..

In any case, I wouldn't invest more than 30-50% of my total portfolio in PSLDX. If you are under 40, far away from retirement, you could go higher.
"Equity markets could get worse if the slowdown extends further, but also realize that the markets will rebound far before economic data improve."

ChrisBenn
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Re: Why not 100% PSLDX?

Post by ChrisBenn » Tue Jun 30, 2020 2:57 pm

guyinlaw wrote:
Tue Jun 30, 2020 2:30 pm
UpsetRaptor wrote:
Tue Jun 30, 2020 9:56 am
BullHouse_BearMarket wrote:
Tue Jun 30, 2020 9:50 am
firebirdparts wrote:
Tue Jun 30, 2020 9:39 am

This fund has big distributions; all growth has been exported to the user as cash. This is the real ( not imaginary) reason. Act accordingly.
That makes sense. Thank you. Can you or someone explain what perfect storm of things has to happen for this fund to shutdown and all investment be lost?
"All investment lost" is a pretty large onus, but this fund would perform poorly in a scenario of high inflation/rising rates, in conjunction with a bear market in equities. So basically, the 1970s.
This fund will likely perform better than UPRO/TMF in rising rate environment. The duration of bonds is shorter ~ 6 years (with 2 x leverage) vs 20y with 3x for TMF.

With Fed put and their confirmation that rates will stay low for many years, the bull market will likely continue. I expect PSLDX to outperform NTSX, SPY etc..

In any case, I wouldn't invest more than 30-50% of my total portfolio in PSLDX. If you are under 40, far away from retirement, you could go higher.
Where are you seeing the 2x leverage on the bond side? As if march 31st it looked like 1.5x to me?

Lee_WSP
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Re: Why not 100% PSLDX?

Post by Lee_WSP » Tue Jun 30, 2020 3:42 pm

UpsetRaptor wrote:
Tue Jun 30, 2020 9:56 am
BullHouse_BearMarket wrote:
Tue Jun 30, 2020 9:50 am
firebirdparts wrote:
Tue Jun 30, 2020 9:39 am

This fund has big distributions; all growth has been exported to the user as cash. This is the real ( not imaginary) reason. Act accordingly.
That makes sense. Thank you. Can you or someone explain what perfect storm of things has to happen for this fund to shutdown and all investment be lost?
"All investment lost" is a pretty large onus, but this fund would perform poorly in a scenario of high inflation/rising rates, in conjunction with a bear market in equities. So basically, the 1970s.
It would perform badly.

Inability to borrow would cause it to wind down operations.

ChrisBenn
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Re: Why not 100% PSLDX?

Post by ChrisBenn » Tue Jun 30, 2020 4:19 pm

Lee_WSP wrote:
Tue Jun 30, 2020 3:42 pm
UpsetRaptor wrote:
Tue Jun 30, 2020 9:56 am
BullHouse_BearMarket wrote:
Tue Jun 30, 2020 9:50 am
firebirdparts wrote:
Tue Jun 30, 2020 9:39 am

This fund has big distributions; all growth has been exported to the user as cash. This is the real ( not imaginary) reason. Act accordingly.
That makes sense. Thank you. Can you or someone explain what perfect storm of things has to happen for this fund to shutdown and all investment be lost?
"All investment lost" is a pretty large onus, but this fund would perform poorly in a scenario of high inflation/rising rates, in conjunction with a bear market in equities. So basically, the 1970s.
It would perform badly.

Inability to borrow would cause it to wind down operations.
If you look at it as 100% equity exposure + spread (150% bonds - borrowing costs for 150%) then it might be fine in a rising rates environment. It really depends on just 1.5x the spread of their average bond return vs. their borrowing costs. As borrowing costs go up one would expect bond yields to also go up. (Fine in the sense that the fund isn't at risk; obviously NAV of the bonds is going down - though if you hold over the average duration the higher coupon will on average make up for that)

Huge drops in the NAV could impact their ability to meet whatever collateral requirements they have (similar to a margin call) - which would caused a forced liquidation and low prices.

Inflation (Without rising rates) wouldn't be great (with effective long nominal bond exposure) - but I think that would just impact real returns, and I would expect their obligations to be nominal, not real. It's the rising rates that one would expect to come with inflation (leading to drops in NAV) that I think could put the fund at risk.

Ultimately this is a 2x fund, and if we come up with a scenario where stocks and bonds are both going down, then I think the expectation is for it to do a bit more (fees, expenses) than 2 time as badly as a 50/50 portolio. Note that nothing is doing great here though.

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firebirdparts
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Re: Why not 100% PSLDX?

Post by firebirdparts » Tue Jun 30, 2020 4:33 pm

BullHouse_BearMarket wrote:
Tue Jun 30, 2020 9:50 am

That makes sense. Thank you. Can you or someone explain what perfect storm of things has to happen for this fund to shutdown and all investment be lost?
I agree with the above assessment. Fundamentally, it's primarily a very diversified bond fund. So if debts get canceled around the world, all at once, that is probably the threat. It's not easy to imagine that happening. It does move like a 100% stocks and 100-ish% spread.

You'll probably laugh at me. I am repairing a hot tub, and I have the prospectus here in the floor to catch drips of PVC glue. all the plumbing underneath is PVC. According to the prospectus, here's what it was as of March 31:
134% securites including:
44% corporate bonds
2% municipal bonds
22% "government agencies" read fanny mae, Freddie Mac
55.5% U.S. Treasury
2% Non-agency MBS
2% asset-backed securies read student loans and even more mortgages
several other 1% items
5% cash
-7% contracts, this is mostly the S&P500 total return swap, but there are a lot of other doodads in there including not insigificant credit default swaps.
-32% debt

Some of the bonds were pledged as collateral for these total return swaps, FWIW.

There are approximately enough S&P return swaps to equal about 100% of the fund, so if the S&P500 drops by 50%, I guess they have to sell off about half the bonds. They actually lived through that in 2009, but I wasn't paying attention.
A fool and your money are soon partners

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