Positioning Managed Money in Your Portfolio
Adding fund products to investment strategy should be a carefully-weighed decision. They are useful. But they have management fees, and some have significant commissions. Make sure there is a good reason before agreeing to pay.
Managed money works well for things an investor does not know much about. An example is options trading. Writing covered calls is a good way to generate additional portfolio income. I did some of that for clients at a financial firm years ago. But my experience level is not the highest. So I picked out a fund: Eaton Vance Enhanced Equity Income II (NYSE: EOS). It provides the benefits of options trading, a roughly 8% dividend with no leverage, and I am learning by observing the managers. After a few years of watching from the stands it will probably make sense to start my own covered call strategy.
Managed money can also be used to mediate risk. Buying high-yield bonds, for example, is potentially lucrative. But think about putting $10,000 into one high yield bond issue vs. a fund. If you buy the individual issue and it defaults, interest payments stop and you may not get any principal back either. If you put that same $10,000 into a high-yield fund and one issue in the portfolio defaults it is likely you will not even notice. I have some Pimco High-Income Fund (NYSE: PHK) to cover this sector. Pimco High-Income has a current yield right now of 13-14%.
Managed money can also be a good way for novice investors to begin. One of the first things I bought when getting started was Invesco Growth and Income, at that time known as Van Kampen Growth and Income (Symbol: ACGIX). That is an all stock portfolio made up almost exclusively of larger-capitalization U.S. companies, and served as a pretty good “Stock Market 101″. But it is advisable to stay involved. Try not to put money into the fund and never look at it again. Keep your eye on what the managers are buying and selling. Formulate opinions about why they do things with an eye toward making your own purchases of individual securities in the future.
A final reason for using managed money is hedging your own decisions. Nobody gets it right all the time. By buying a fund you are allowing different thought processes to govern a portion of assets. If you miss out on something another person may catch it. I own municipal bonds for instance. But the portfolio also has some Nuveen All-American Bond Fund (Symbol: FLAAX). Putting a lot of money into this concept probably does not make sense. But it is healthy in moderation within the context of broad strategy.
Using closed-end funds is preferable if you can find one that suits your needs. In the examples above Eaton Vance and Pimco are closed-end. Invesco and Nuveen are open-end. Closed-end funds present two big advantages. First, the cost is lower. Open-end funds have bigger commissions on them. There are different ways to buy. But the broker I periodically deal with favors A shares. When you buy A shares you pay about a 4-5% commission up front to get in. Then you can sell whenever you want without penalty. The only commissions on closed-end funds are related to making a stock trade. You can do that many places these days for under $10. The second advantage relates to timing of sale. When you put in an order to sell open-end funds it is hard to know what the fill will look like. Open-end fund shares trade once a day, after the market closes. If the market is flying early in the day by close things could easily come back down to Earth. Closed-end funds trade just like stocks. You can place an order at any time and, assuming it fills right away, take advantage of whatever market conditions are currently unfolding. Closed-end funds do have a lot less volume than well-known common stocks. The ones I use typically trade hundreds of thousands of shares a day, compared with millions of shares a day for something like General Electric (NSYE: GE). But I have never run into liquidity problems at that level of activity. Chances are it would be the same for most average individual investors.
Appropriate use of managed money is a good way to enhance portfolio returns. But be discriminating about your choices. Paying management fees and commissions when it is not necessary does not help performance.
© 2016 invessentials.com – Essentials of Investing Articles presented here are general opinions for your own consideration. They are not specific advice for any one investor.
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