December 15, 2010....Bob Brinker has been recommending Vanguard GNMA Fund (VFIIX) on Moneytalk for several years now. Bob Brinker has always said that he believed the trading range for this fund was $9.50 to $10.50. Obviously, he was way off on the upside. The fund topped out at $11.13 on November 4th.
Brinker could just as easily be off on the down side. By December 6th, the fund had dropped from $11.13 to $11.05 and today it closed at $10.83.
As Brinker has pointed out, some investors don't care about the net-asset-value fluctuations -- they just want to collect the dividends. Of course, the dividends have dropped a lot from last year. According to Brinker, the fund is now paying 3.2%. But that is sure a lot more than money-market funds or short-term CDs.
I'm not sure how fast the dividends rebound as the net-asset-value drops. Brinker made this comment about it: "Oh yes. What you will see if you see a decline in the net asset-value of the Ginnie-Mae Fund, you would see a gradual increase in the yield."
As of the December issue of Marketimer, Brinker has made no changes in his portfolio GNMA allocations. His Marketimer fixed income investing portfolio holds 40% and his balanced portfolio III holding is at 20%.
Brinker has recently, repeated, recommended that those who own Vanguard Ginnie Mae Fund (VFIIX) and are concerned about dropping net-asset-value use a mental stop-loss at a chosen sell-price.
In my September 17, 2010 Moneytalk Summary, I wrote:
"Brinker rather adamantly explained that what he cares about for that fund is the net-asset-value and beyond that, he defers to the fund managers. And Brinker said that the duration of the holdings in the fund has come down over a period of years which demonstrates to him that the fund managers are aware of interest rate risk and know that if interest rates rise the NAV will decline.Last week, Brinker announced that VFIIX would go ex-dividend on December 29th. He said that those who have taken his suggestion to set mental-stops need to re-set the number lower based on the announced 23-cent ex-dividend.
Brinker pointed out that the fund had done exceptionally well, but suggests that anyone who is nervous about the fund's NAV, establish a mental stop loss, such as $10.90 which is about 1% below the current price.
So to me, the question is, what does one do now that the fund has dropped 30-cents from the high and is now below the $10.90 price and more than the 1% that Brinker mentioned as an example. Does one sell now or wait for the upcoming ex-dividend and THEN see what happens?
Kirk Lindstrom sees it this way: "Accounting for going x-dividend means you lower the stop to account for the price drop which happens AFTER it is paid. It would make no sense to subtract the dividend from the stop price before the dividend is paid."Personally, I don't think it's quite that cut-n-dried since the fund has already dropped more than the ex-dividend. I suspect many may be totally confused -- and Brinker was not clear about what to do if this happened.
Some points about Brinker's GNMA history to consider when making your decision:
In 2003, the one time that Brinker actually raised some cash (65%) just before a bear market, he did not recommend putting those cash reserves into Ginnie Mae Funds. Instead, he recommended Money Market Funds.
It's been years since Brinker changed the percentage of Vanguard Ginnie Mae Fund (VFIIX) in his fixed income investing. In April, 2003 he traded 15% of VFIIX for a 15% purchase of Vanguard High Yield Fund (VWEHX).
The next and last change was in April, 2004, when he reduced Vanguard Inflation Protected (VIPSX) from 25% to 10%. He reinvested 5% of that into VFIIX, bringing it up to 40% where it's been ever since. (And the other 10% from TIPS went into Vanguard Short-Term Corporate Fund (VFSTX).)
As for portfolio III, the balanced portfolio, Ginnie Maes have been at 20% for years.
There is one more thing that one needs to take into consideration when deciding when/if to sell VFIIX: What will you do with the money? You will no longer receive the relatively generous dividends, so that cost needs to be remembered as you do your due diligence and weigh your options.
A chuckle from RR: "Oh no, Lynn is hosting."