The Challenges of Finding Investment Income

I was fortunate to be in Boca Raton, Florida last week at the GAIM conference on hedge funds, enjoying a 50 degree temperature advantage over NY. I had the opportunity to meet with several retired people who live in Florida either part-time during the winter or all year. Chatting with them about investments really brought home to me the challenge many face of obtaining sufficient stable income on which to live. Bonds purchased years ago are maturing and the replacement opportunities are far less attractive. Equities remain a scary place although the strong start to the year is leading to modestly improved risk appetites. But for many retired baby boomers, they are having to confront significantly lower investment income than they imagined perhaps as recently as 6-7 years ago. There remains a great deal of cash on the sidelines.

Discussions of Master Limited Partnerships (MLPs) were well received. Indeed, MLPs have had a good year already less than a month into 2013, with returns year-to-date that are double all of 2012. Barring a disaster over the next couple of days, January will be one of the five strongest months since 1996 (as far back as the Alerian MLP Index goes). We continue to like MLPs as an investment, although distribution yields of 5-6% with growth rates of 4-6% suggest a long term annual total return of 10-12%. January has pretty much delivered that in one month, so some moderation shouldn’t be surprising.

Dividend yielding stocks have similarly bounced back, as the concerns about investment tax rates that were so pervasive in December turned out to be somewhat more negative than reality.

We have recently made a couple of small sales. Insurance companies have been seeing improved pricing and consequently their discounts to book value have been narrowing. We sold the last of Aspen Re (AHL) as it approached 80% of book value. We continue to own AIG which is still just a little over 50% of book value and looks set to continue shrinking its shares outstanding through buybacks, thus raising its book value. We also sold Republic Services Group (RSG) which we felt was fully valued. We remain constructive on equities overall though, so will be looking for opportunities to reinvest this cash.

At the GAIM hedge fund conference I gave my presentation about my book, The Hedge Fund Mirage. Hedge fund investors largely agreed with my findings (at least, the ones I spoke to) and my conclusions echoed many of their personal experiences. Most of the delegates with whom I chatted agreed that the hedge fund industry needs to make some changes if it is to thrive. My bet is that it will – there are far too many intelligent people with their careers in the business to assume that they’ll fail to adapt to the difficult return environment so many face.

George Soros, who knows a thing or two about hedge funds and how they operate, said in Davos last week that hedge funds couldn’t beat the market because of the fees they charge. He must have read my book.