Risk - the one word that nobody mentions. You certainly will not hear about it from your money manager. The investment managers and brokers who are allegedly investing your hard-earned money - watching out for your future - often have no training in how to evaluate investment risk. Nor do they really know about alternative investments, also known as non-correlated investments.
With investment management, you are supposed to go to a money manager, he looks over your investments, asks what your standard of living is, and prescribes a set of investments to keep your portfolio in good health, so you can live a life where your investments allow you to maintain your standard of living.
He doesn't do that. He doesn't intend to mislead you. He just doesn't know better. That's because many investment managers are actually failed brokers who never got training in how to properly build a portfolio - because nobody above them or even at the regulatory agencies have a way to evaluate risk. Nor have they had training in alternative investments aka non-correlated investments.
What we do know is that most portfolios must have a very healthy set of alternative investments or non-correlated investments - that is, investments that are not correlated to the overall U.S. market. Non-correlated investments reduce overall volatility, which is equivalent to risk.
My investment advisory newsletter, The Liberty Portfolio , is geared towards building a long-term diversified portfolio that aims to deliver returns that will be at least equivalent to the real cost of living increase we see each other - which is almost 10% - with less risk than the market. It will have a large percentage of assets in alternative investments and/or non-correlated investments.
Here are three holdings in The Liberty Portfolio that I'm revealing publicly for the first time, to give you an idea of the type of investments you should have.
Essential Investments: Oaktree Capital Group (OAK)Source: Shutterstock
Oaktree Capital Group, LLC (NYSE: OAK ) is a private equity firm, which means it raises money from institutions, pension funds, university endowments,, insurance companies, sovereign wealth funds and high-net-worth individuals, and invests that money in various securities. Specifically, it specializes in various forms of debt securities.
OAK stock makes money two ways. First, it charges management fees for handling the investments. Second, it reaps a percentage of the upside of any profits it makes from its investments.
Oaktree has the following holdings: corporate debt ($37 billion), distressed debt ($26 billion), control investing ($15.7 billion), real estate ($8.7 billion), convertible securities ($6 billion), and regular stocks ($3.6 billion). In short, Oaktree makes investments in distressed businesses with the intention of turning things around, and reaping returns of multiples of their investment. They invest in securities all over the world, both public and private, from Europe to emerging markets, from senior loans to junk bonds, from infrastructure to real estate and beyond.
96% of their aggregate funds older than 18 months have positive gross and net IRR's, with an aggregate closed-end fund IRR of 18.9%. Oaktree already has $100 billion under management, and another $20 billion still available to invest.
Oaktree currently offers a yield of about 8%.
Essential Investments: Nuveen Senior Income Fund (NSL)Source: Shutterstock
Nuveen Senior Income Fund (NYSE: NSL ) is a closed-end fund (CEF). CEFs raise capital in an initial public offering and then invest that money.
NSL invests in floating-rate senior notes. The "senior note" means it is the first in line to receive repayment in the event of bankruptcy. NSL invests in both secured and unsecured senior notes. "Floating rate" means the debt carries a variable interest rate, and has a 2-to-5-year maturity. This is the investment-grade bond market, in other words. Floaters protect the investor against a rise in interest rates.
Nuveen has a long history in this space with several well-managed funds. It has a current distribution rate of 7%, trades at a slight discount to Net Asset Value, and pays out monthly distributions. The fund holds debt in big-name companies such as Dell , Albertsons and American Airlines Group Inc . (NYSE: AAL )
Essential Investments: Guggenheim Alpha Opportunity Fund (SAOCX)Source: Shutterstock
Guggenheim Alpha Opportunity Fund (NASDAQ: SAOCX ) is what's known as a long-short equity fund. It both buys and shorts large baskets of stocks. The idea is that the managers choose on an individual basis whether to buy or short a given stock. The intent is to create a fund that is market neutral - that is, it is not correlated to how the overall market moves - while still aiming to profit from owning or shorting individual stocks.
Indeed, over the past three years, the fund has captured about 30% of the S&P 500's upside move but only 5.5% of its downside move. So the fund doesn't participate in all of the massive rallies of the index, but is barely exposed to the downside. This capture ratio is about what we would expect, as the fund is 39% net long when you look at the dollar weight of the fund, and how much of the dollar weight is held in stocks that are held long, and held short.
Again, we want low correlation, and sure enough, the fund's beta (statistical measure of volatility compared to the overall market) is 0.20, or it is only 20% correlated to the market.
The Guggenheim Fund has a 9.29% average annual return with a standard deviation of 8. Thus, the fund has a 95% chance of returning between -6.7% and +25% in any given year. I am happy to give up the 8% possible upside to avoid losing the 1.3% on the downside.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns OAK, NSL, and SAOCX. He has 23 years' experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.Compare Brokers
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.