Tag Archives: alternative

The Sweet Spot Of Zero Leverage Equity?

Global economic momentum is modest at best, equities and bonds are overvalued, and while allocating your funds entirely to gold, cash and shorts is enticing, it isn’t possible for the majority of money managers. What are investors to do then? The ranking of creditors and equity in the capital structure suggest that high-grade corporate bonds – and sovereigns – is the optimal allocation. When the going gets tough, the equity is wiped out, but as creditor, you are at least assured a recovery on your investment – even if it may be a slim one. This time could be different, however. As an alternative, I propose equities with zero leverage. There aren’t many around, and those that do remain unlevered are looked upon with suspicion by the market. After all, if the CFO hasn’t jumped on the bandwagon and issued debt to finance dividends and buybacks, she must be an idiot. But if you believe – as I do – that corporate bonds is the new bubble, being overweight equities with no leverage isn’t a bad idea. These securities won’t be immune to a crisis, but they offer two key advantages. Firstly, they likely will decline less than their overlevered brethren, and the risk of a bankruptcy is smaller. If a repeat of 2008 really beckons, capital preservation may turn out to be the key metric of survival, no matter the drawdown. Secondly, buying equities with zero, or very low, leverage is also a free option. If we are wrong, and the debt finance buyback and dividend party goes on, a portfolio of equities with zero leverage eventually will join the party too. In all likelihood, that means excess returns for your stocks. Once leverage has increased, you can sell and go looking for another batch of firms with no leverage, primed to lever their balance sheet to hand out money to shareholders. We concede that this latter rationale partly is a contradiction. But we would rather buy firms with a clean balance sheet than the alternative of buying equities that have already maxed out their potential for debt-financed shareholder gifts. Confusing charts; no directional clarity Meanwhile, looking at the macro, strategy and technical charts has left me confused – a bit like Macro Man , I suppose. Macroeconomic leading indicators have stabilised based on the most recent data. The year-over-year rate in the U.S. and EZ headline indices have climbed marginally, and have risen strongly in China. In Japan, however, the message from the headline index is grim. Global money supply growth has turned up further, helped by the U.S. and China. It is particularly encouraging to see that M1 growth has accelerated slightly in the U.S. On the contrary, my short-term charts of the market are sending a very unclear message. In the U.S. put-call ratios point to further upside despite the recent rally, while the advance-decline ratio continues to roll over. My equity valuation scores point to a slow grind higher in coming months, before a sell-off takes over towards the end of the summer. On sovereign bonds I remain bearish.

Homebuilder ETFs To Buy On Upbeat Data

After being stalled in the first quarter, the housing market started to show signs of a spring rebound. This is especially true given that new home construction and building permits rebounded in April, indicating that the U.S. economy is again gaining steam (read: Are Housing ETFs Ready to Ride on Spring Selling Season? ). U.S. housing starts climbed 6.6% to a seasonally adjusted annual rate of 1.17 million homes and much higher than the Reuters expectation of 1.13 million. The uptick in construction activity was broad-based with increases of 3.3% in single-family houses, and 10.7% in multi-family houses, including apartments and condominiums. Meanwhile, new applications for building permits, a construction bellwether for the coming months, rose 3.6% to an annual rate of 1.12 million after declining for three months. The data released early this week showed that homebuilder confidence remained unchanged for the fourth consecutive month in May as indicated by the National Association of Home Builders/Wells Fargo sentiment index. Builders’ outlook for sales over the next six months jumped to the highest level since December. This reflects that the housing market is still strengthening, though the pace of growth has slowed down (read: 5 Sector ETFs to Play Now ). This is because historically low interest rates and ongoing job creation will continue to fuel growth in a recovering homebuilding sector, creating a buying opportunity in homebuilders and housing-related stocks. In addition, slower and gradual rate hikes will not impede the growth prospect of the sector, at least in the near term. Given this, investors might want to look at the three homebuilder ETFs – the iShares U.S. Home Construction ETF (NYSEARCA: ITB ) , the SPDR S&P Homebuilders ETF (NYSEARCA: XHB ) and the PowerShares Dynamic Building & Construction Portfolio ETF (NYSEARCA: PKB ) – for their exposure to the sector. These funds have a solid Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting some outperformance in the months to come. Further, the residential and commercial building industry has a solid Zacks Rank in the top 34%. While the upbeat data failed to garner interest in the sector this week, investors could start piling up these products in their portfolio, especially if the upcoming home sales report due to release on May 24 also shows strength. In particular, PKB is outperforming with gains of 5.8% so far in the year while ITB and XHB have shed 2.5% and 3.5%, respectively. Investors seeking large profits in a short span could also take a look at the leveraged plays – the ProShares Ultra Homebuilders & Supplies ETF (NYSEARCA: HBU ) and the Direxion Daily Homebuilders & Supplies Bull 3x Shares ETF (NYSEARCA: NAIL ) . HBU provides double exposure while NAIL offers triple exposure to the index of ITB. However, the fund is relatively new in the space and has low trading activity, making it a riskier and a high-cost choice. Link to the original post on Zacks.com

My Week At Oxford’s Said Business School

I just spent the last week at Oxford University’s Said School of Business on its popular week-long Private Equity Program for senior executives. Say the word Oxford, and it conjures up images of a city of dreamy spires and ancient college courtyards. Yet if you squint your eyes on a rare sunny day in Oxford, the Said Business School campus looks more like Stanford University’s Business School in Silicon Valley than a medieval college situated on an 800-year-old university campus. That’s because Oxford Said is a very new school in a very old university. Even the establishment of Said back in the 1990s was controversial, as the dons of Oxford questioned whether business was a worthy topic of study. Fast forward 20 years, Oxford Said today is a thriving commercial venture led by former Harvard Business School professor Peter Tufano. Its halls are literally overflowing with students and executives from around the world bathing themselves in the reflected glory of the global Oxford brand. The executive education programs are held in a building appropriately named after Margaret Thatcher – even as Thatcher’s alma mater, Somerville College, originally a women’s school at Oxford College, refused to give her an honorary degree because the Oxford dons protested her cuts to higher education. Thatcher Business Education Centre, Oxford Said School of Business Although Oxford is a newcomer on the global business school scene, it’s hard to imagine a more geographically diverse group of students among a class of 30. On my right sat an auditor from a sovereign wealth fund in Oman; on my left was a pension fund manager from Ghana; and across the classroom was a snarky app developer and private investor from Portland, Oregon, who regaled the class daily with his varied choice of iconoclastic headgear. Private Equity in Perspective Oxford’s Private Equity Program is led by Professor Tim Jenkinson, a spritely, athletic and affable sixty-something former rower, who teaches students private equity as far afield as India, China and Silicon Valley. Private equity, as Jenkinson defines it, includes venture capital, growth capital, leveraged buyouts and turnarounds. However you define it, private equity – “capitalism on steroids” – does have an image problem. In the U.K. press, private equity is often synonymous with greed. U.S. investors still recall Oliver Stone’s 1987 film Wall Street , which told the story of a hostile takeover of Bluestar, which many regard – rightly or wrongly – as a quintessential private equity transaction. Stripped to its essence, leveraged buyouts (“LBO”) – the most popular form of private equity transaction – are simply a way of financing an acquisition of a company with its own steady and predictable cash flows until the company can be restructured and sold at a large profit. As ruthless as that sounds to the uninitiated, this is a perfectly rational strategy. Through the lens of private equity, many publicly traded companies are under-leveraged, and they leave a lot of money on the table – especially in an era of low interest rates. And as it turns out, private equity investors are pretty good at showing their investors the money. That’s also why the Oxford endowment – whose deputy Chief Investment Officer, Jack Edmondson, spoke at the program – has allocated 20% of its funds to private equity, thereby closely mimicking the asset allocation strategy of the highly regarded Yale endowment. Calculating Private Equity Returns Private equity is all about the numbers. And in terms of headline returns, the asset class is impressive. Yet as it turns out, this has much to do with the dark arts of how investment returns in private equity are calculated. Private equity calculates returns (and fees) on an Internal Rate of Return (IRR) basis, rather than “time-weighted return. The latter is the method you are more likely to see in your mutual fund or exchange-traded fund (ETF). But there are good reasons for private equity to use IRR. After all, private equity involves constantly flipping deals and funds are never fully invested, as they are in, say, ETFs. Still, some rates of return can be staggering – and deceptive. That’s why the Yale University endowment caused such a stir when it recently revealed that its return on venture capital deals (a subset of private equity) had been an astonishing 92.7% over the past 20 years. Had Yale achieved that rate of return on its entire endowment of $4.86 billion starting in 1996, the endowment would be worth $2,422,537,000,000,000 – or 8x more than the $300 trillion of the entire value of financial assets across the globe today. But if you use time-weighted returns, Yale’s venture capital portfolio’s 20-year return drops rather dramatically to 32.3%. And once you exclude the dotcom boom by looking only at the last 10 years, even the IRR drops to 18%. That’s still impressive. But at least it’s believable. Trends in the World of Private Equity Here are three major insights about private equity I took away from the week. First, academic studies confirm that private equity investments do make more money for investors. While the managements of publicly traded companies are “fat and happy” and today spend the bulk of their time on compliance and investor communications, the board members of private companies not only have skin in the game, but also have the time and energy to focus on improving the business. Combine that with leverage and the returns ramp up fast. Second, private equity is still in its infancy. Average allocations among funds is 4%, while most are targeting twice that level. Sovereign wealth funds – say Norway with its $875 trillion – alone could have a major impact on the asset class. Private equity is also emerging as the favored approach in fast-growing emerging markets. Perhaps that explains why one-third of the Oxford class was made up of students from Africa, Latin America and Eastern Europe. Third, private equity is becoming a victim of its own success. As with any popular asset class, too much money is chasing too few deals. That means returns to investors – “LPs” or limited partners in private equity jargon – are falling precipitously. Finally, here’s what worried me most: Private equity is now the number one career choice for newly graduating Oxford MBAs. That trend ruffles my contrarian feathers. Playing the Private Equity Game So can you be a player in the private equity game? The short answer is: “Not really.” Investors – the LPs – in private equity are almost exclusively pension funds, endowments and some family offices. But there are a few indirect ways you can gain exposure to the private equity game – though they are unlikely to yield the same type of returns. PowerShares Listed Private Equity Portfolio ETF (NYSEARCA: PSP ) is an ETF that invests in many of the private equity management companies that back deals, including those funded by business development companies (“BDCs”), by master limited partnerships (“MLPs”) and by other vehicles. In terms of investment strategies, “activist investing” is a close cousin of private equity. In that space, there are a handful of publicly traded vehicles including Carl Icahn’s investment partnership, Icahn Enterprises (NASDAQ: IEP ) , and Bill Ackman’s Pershing Square Holdings, Ltd. ( OTCPK:PSHZF ) which also trades OTC in the United States. Finally, a new Global X Guru Activist Index ETF (NASDAQ: ACTX ) , launched on April 29, tracks the investments of 50 of the largest and most successful activist investors. Six of Icahn Enterprises’ top 10 positions are included, such as Apple (NASDAQ: AAPL ) and eBay (NASDAQ: EBAY ). More than half of Bill Ackman’s Pershing Square Capital Management’s holdings are represented and include Zoetis (NYSE: ZTS ) and Canadian Pacific Railway (NYSE: CP ).