Archive for the 'Retirement' Category

Sequoia Fund To Open Up Again

Kurt Brouwer April 28th, 2008

The venerable Sequoia Fund — closed to new investors since 1982 — is slated to reopen to new investors on May 1. The reopening of Sequoia startled me a bit when I heard the news because this fund has been closed for most of my career.

If you are not familiar with the fund, it follows Warren Buffett’s investment style and strategies as closely as any mutual fund does. This brief report from Morningstar give you a bit more on the fund’s history and investment record [emphasis added]:

Fund Times: Sequoia To Reopen After 25 Years (Morningstar, April 28, 2008)

Sequoia Fund (SEQUX), run by investment advisor Ruane, Cunniff & Goldfarb, will reopen its doors to new investors on May 1, 2008. This grand old fund has been closed since Dec. 23, 1982. The New York-based fund shop says that its shareholders have aged since that time and consequently, attrition has become an issue. Indeed, the fund has generated an annualized 6.1% gain over the last decade–beating both its large-blend category and the S&P 500 Index by a wide margin–but its assets under management have fallen from $5.0 billion as of year-end 1998 to $3.8 billion through March 2008. Like many other great value offerings that have reopened recently–including Dodge & Cox Stock DODGX and Longleaf Fund LLPFX–this fund’s managers also want to take advantage of the recent market volatility to invest in new ideas or add to existing positions.

…The portfolio is compact with roughly 10 to 25 stocks. (Berkshire Hathaway BRK.A alone represents a fourth of the fund’s assets.)…

For more on the fund’s history and investment strategy, you can go here to its web site. Unlike most mutual fund web sites, it is not very marketing-oriented.

The fund was founded in 1970 by Bill Ruane and Rick Cunniff and it compiled a very good track record during the 1970s, which were difficult years for stock investors. Then, the fund closed right at the start of the greatest bull market in history.

The fact that Ruane and Cunniff closed the fund back in 1982, was viewed as shocking by many mutual fund companies because gathering assets is the name of the game for many funds. Sequoia clearly marched to the beat of a different drummer back then. By opening up now, it may be continuing that tradition.

California Public Employees Take Big Hit On Real Estate

Kurt Brouwer April 26th, 2008

CALPERS or the California Public Employees Retirement System has $241 billion in assets, so the struggles it is having with real estate have to be taken in context. Nonetheless, the potential loss of a billion here or a billion there — after a while it adds up to real money. This piece documents how a deal that included lots of smart people just blew up [emphasis added]:

Calpers-Linked Land Partnership Gets Default Notice (Wall Street Journal, April 26, 2008, Michael Corkery)

A large California land partnership involving one of the largest U.S. pension funds has received a notice of default on a $1 billion loan after failing to meet certain terms of its lenders.

LandSource Communities Development LLC, a partnership that involves the California Public Employees’ Retirement System, received the default notice Tuesday, amid talks to restructure $1.24 billion of debt. The partnership, which owns 15,000 acres in Southern California, had received an extension to meet its current loan terms, including a required payment, but the deadline expired on April 16. The default notice applies to about $1 billlion of the total debt.

…Partnerships such as LandSource were a common way to own and develop land during the housing boom. They provided high returns to investors and lenders and a way for builders to keep highly leveraged land off their books. But the ventures have run into trouble as the value of undeveloped land has plummeted and as demand for new homes has eroded.

MW Housing Partners, which includes Calpers, took a 68% financial stake in LandSource in early 2007 amid the slowing housing market. Cerberus Capital Management’s LNR Property Corp. unit has a 16% stake, and home builder Lennar Corp. has a 16% stake. Lennar and LNR operate the management of LandSource. None of these equity partners is liable for the debt if LandSource defaults. Calpers and Cerberus representatives declined to comment.

…LandSource’s trouble followed mounting stress at two large joint ventures in Las Vegas, called Kyle Canyon Gateway and Inspirada, involving many of the nation’s largest home builders. One partner in these ventures said Friday that it is unlikely that it will meet its obligations to the deals. The partner, home builder Kimball Hill Homes, announced Wednesday that it had filed for Chapter 11 bankruptcy protection…

The part I like most about this is that the joint venture partners seem to be ready to take the loss very quickly. Instead of hanging on for years and years, these investors are taking the hit and moving on. Assuming this trend continues in other real estate ventures that are struggling, we will be able to move much more quickly through the down cycle.

If you are one of the 1.5 million public employees or retirees who gets retirement and healthcare benefits from CalPERS, no doubt you hate to see this sort of thing. But, CalPERS has done very well with real estate over the years and this is just the flip side of those good years. It comes with the territory.

Safe and Sorry — Even Bond Funds Can Disappoint

Kurt Brouwer April 10th, 2008

Many bond funds really struggled in the tough environment this year. Shefali Anand writes on what happened. You may also find a quote or two from a familiar name in this piece [emphasis included below]:

Safe and Sorry: Even Bond Funds Can Disappoint (Wall Street Journal, April 8, 2008, Shefali Anand)

…Bonds are supposed to be pillars of stability during times of tumult in the market. And indeed, the broad Lehman Brothers U.S. Aggregate bond index — which tracks taxable bonds, including Treasury notes, corporates and some mortgage securities — is up about 2.3% since the start of this year through April 4.

Yet a fifth of all investment-grade U.S. taxable bond funds tracked by Morningstar Inc. are in the red for that same period. A few bond funds that placed big bets on mortgage securities have posted shockingly big drops. The Regions Morgan Keegan Select Intermediate Bond fund is down 44% since the start of the year and 72% over the past year. State Street Global Advisors Yield Plus and Schwab YieldPlus have fallen 18% and 23%, respectively, since the start of the year.

And even the relatively successful funds that invest in inflation-protected Treasury securities — which are up as much as 6% so far this year — face new risks. If interest rates rise, the price of Treasury bonds will tumble — likely quite sharply in the short-term.

…To be sure, this is an unusual time for bond markets, and in some cases, it might serve investors well to hold for the long-term. If a fund has been hurt lately, investors shouldn’t necessarily dump it headlong. Try reading the manager’s recent commentary to figure out what is hurting the fund. Kurt Brouwer, a fee-only planner at Brouwer & Janachowski Inc. in Tiburon, Calif., suggests that investors might ask themselves if, based on the fund managers’ track record and holdings in the fund, they would buy the fund today. If not, it might be time to get out.

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Where Have All The Workers Gone?

Kurt Brouwer March 10th, 2008

The February job report was pretty dismal (see Weak Jobs Report Reinforces Recession Fears) with a decline of 63,000 jobs. However, one aspect of the report that was not noted very much or was actually misinterpreted when it was noted, was the fact that the unemployment rate actually went down slightly from 4.9% to 4.8%. What happened?

One theory espoused in a piece from the Associated Press was that the ranks of ‘discouraged’ workers — that is those who were too discouraged to look for work — went up by a few hundred thousand. And, since discouraged workers are not included in the ranks of the unemployed, the unemployment percentage went down. Here is what the AP story stated [emphasis added]:

“…Dangerous cracks in the nation’s job market are deepening. Employers slashed jobs by the largest amount in five years and hundreds of thousands of people dropped out of the labor force – ominous signs that the country is falling toward a recession or has already toppled into one…”

Unfortunately for the Associated Press, that statement I emphasized was wrong. I imagine the normally-reliable Jeannine Aversa just misinterpreted the data. And, I hope the AP will correct this gaffe pretty quickly. The Bureau of Labor Statistics report referenced in the AP story actually refutes what she wrote. The BLS report stated [emphasis added]:

“…there were 396,000 discouraged workers in February, about the same as a year earlier…”

More importantly, the level of discouraged workers was actually down in February from the level in January when there were 467,000 discouraged workers, therefore the AP story was clearly incorrect.

So, if an increase in the ranks of the discouraged is not the answer, what actually happened? One other possibility I can think of has to do with baby boomers and the size of the labor force. The BLS tracks statistics on growth in the labor force and labor force participation rates. Both are showing a decline recently.

The first chart from the BLS shows growth in the civilian labor force (in thousands) over the past couple of years. As you can see, the number had been growing steadily, but it declined in January. This alone is interesting, but not conclusive. However, it does indicate that the labor force itself was shrinking:

bls-labor-force-vers-ii-bls-labor-force-lns11000000_14118_1205173010511.gif
The second chart from the BLS is more interesting in that it shows a steady and significant decline in the labor force participation rate , beginning back in late 2006. This is shown as a percentage of the population:

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California City On Verge Of Bankruptcy

Kurt Brouwer February 21st, 2008

Yikes. A potential municipal bankruptcy in California? I guess we really are done with Good News On The Economy for now. The situation in Vallejo does not sound good. Vallejo — on San Francisco Bay north of SF — is close to bankruptcy due to its underfunded pension plan for union employees in the police and fire departments [emphasis added].

Vallejo On Brink Of Bankruptcy (NBC11.com, February 19, 2008, John Boitnott)

The city of Vallejo is on the brink of becoming the first California city ever to declare bankruptcy, City Council members said Tuesday.

Vallejo may run out of cash as early as March, council member Stephanie Gomes said.

“Not only that, but now we have 20 police and fire employees retiring because they are afraid of not getting their payouts,” Gomes said. “That means we have another few million dollars in payouts that we had not expected. So the situation is quite dire.”

Gomes said the situation has been building for more than a decade.

“This has been happening for quite a while. For 15 years the city council has been putting Band-Aids on the problem. (It has been) extending contracts and deferring payments for public safety to the next years as a way of balancing the current budget.”

Public safety contracts for police and fire services make up 80 percent of the city’s general fund.

“We’ve been spending more than we’ve been making for 20 years and it’s time to pay the piper,” Gomes said.

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