Many U.S. dollar short term yields have tripled (yes!) since the Federal Reserve began their rate raising regime last year. The average U.S. very short term taxable money market fund (MMF) is now paying 2.40% (7 day average rate, annualized) http://www.ibcdata.com/
Given the current rather modestly upward sloping yield curve (http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.html), the average MMF yield of 2.4% captures 52% of the 20 year Treasury bond yield, 57% of the 10 year note yield and two-thirds of the two year note's yield. The 2.4% yield comes to you with none, or virtually none, of the risk to the note's and bond's market price should rates go up. And if rates DO go up, as I believe they will over a long period of time, your money market fund rate will go up too, something your note or bond rate will not do. (See below for the only partial exception which is inflation-indexed Treasuries.)
Despite these considerable advantages of a money market fund for investors, 2.4% per annum is quite "coincidentally" the current rate of increase of the U.S.Consumer Price Index, with food and energy excluded: http://www.nasdaq.com/econoday/reports/US/EN/New_York/cpi/year/2005/yearly/05/index.html. Thus the Lord, seemingly, both giveth and taketh away, and after taxes one is worse off still. The tax part can be avoided by using Municipal Money Market funds, currently paying on average 2.2% (IBC Data), but the toll of CPI inflation is still, alas, operative.
There are four inflation defensive short term bond funds which are fairly well known (and doubtless others less well known), from reputable firms, and with some operating history. These four also have reasonably small minimums required for purchase: Hussman Strategic Total Return, PIMCO Commodity Real Return, Permanent Portfolio, and Prudent Bear Global Income. Each of these has an effective note duration of under two years, so comparing them with the 3.64% yield of the current two year Treasury note is instructive. I also listed three Vanguard short term bond or note funds with similar approximately two year durations. Vanguard is one of the kings of US mutual funds and with very low operating expenses, even more important in low yield funds than, say, in stock funds. (Click on the image thumbnail for a large pop-up image.)
The Permanent Portfolio Fund and Vanguard Short Term Treasuries Fund have been around the longest, and it is instructive to look at their relative yields both for the past five years and for 17.5 years since late 1987. (All yields are total returns with dividends and capital gains reinvested as recieved without consideration of tax.) The Vanguard Fund's most recent five year return is 0.90% less than its 17.5 year return, while Permanent Portfolio's return for the post five years is nearly double it's 17.5 year return. Vanguard holds only US T notes, although it can and does vary the duration, while Permanent Portfolio holds foreign sovereign bills and notes to a much greater degree than US bills, as well as gold bullion and some stocks. The 1980's to 2000 were not kind, on balance, to foreign currencies or gold, but the kindness returned from 2000 through 2004. Nevertheless Permanent Portfolio's 17.5 year total return was only one-half percent less than that of Vanguard's despite a nearly continuous US bond bull market going for Vanguard.
The Hussman Fund limits itself to US bills and notes and US listed gold stocks and a few dividend stocks. The Prudent Bear Global Income Fund has a portfolio similar to Permanent Portfolio's list. PIMCO's Fund, despite its long name, is one of the simplest in its construction. PCRDX limits itself to fairly short duration US Treasury Inflation-Protected notes (TIPS), and carries in addition an unleveraged call option on the Dow Jones/AIG Commodity Index (DJACI). This is an anti-inflation double dipper since the TIPS principle (not the interest rate) is adjusted upwards quarterly by the amount of the CPI increase, and the DJACI option reflects the price variation of all US-traded physical commodity futures plus three metals traded in dollars in London. Therefore both consumer and producer price inflation is captured.
DJACI is also re-balanced by committee each July so that profits are taken in out-performers and put back into under-performers. (Check some of the excellent literature on this fund at: http://www.allianzinvestors.com/mutualFunds/profile/PMCR/literature_A.jsp)
PCRDX, although stressing the commodity connection, is unleveraged in the sense that if one deposits $10,000 into the fund one gets $10,000 worth of the commodity index's appreciation or depreciation via the option, and $10,000 worth of actual TIPS notes, less the cost of the option, which is a modest cost. This is NOT a commodity fund in the highly leveraged sense that either Jimmy Rogers or John Henry runs.
Each of these four funds has an operating cost to investors of over 1% per year, which is not high by industry standards and nowhere nearly as high as costs are to hedge fund or commodity fund investors. Since Vanguard has a TIPS only Fund (VIPSX) with an annual cost of only 0.17% (!), I suspect they will wake up one morning and clone PCRDX at one-fourth the PIMCO/Allianz investor cost. But Vanguard moves no faster than a tortoise at best, so it may be a while.
One naturally gets some price volatility with anything other than actual cash, a bank CD, or a short term money market fund, so one will still want such a non-volatile fund or account for living expenses even if holding one or more of the funds discussed here or ANY other bond fund.
I have owned PCRDX for several years as well as the Vanguard TIPS and Short Term Investment Grade Fund. I am still evaluating the others and have gained respect for the managers of all three others. I'm leaning toward David Tice's Prudent Bear Global Income Fund as an additional fund since it is less complicated and seemingly less rigid than the other two. Bear in mind that any of these funds would be considered only for that portion of one's investments allocated for shorter term interest bearing investment funds in a generally inflationary environment. If you believe deflation is coming or still exists, you would want to look elsewhere.
I must add that I am solely a private investor of my own and close family funds only, and with no ties of ANY kind to any of the funds or their advisors, the investment industry, banks, or any publishing medium whatsoever. If you are on your own be sure you do your own due diligence via Google or with your own sources.
Recent Comments