Author Archives: Scalper1

4 Strong-Buy Small-Cap Value Mutual Funds

A small-cap value fund is a good choice for investors seeking diversification across sectors and companies, and focusing on gaining exposure to stocks that are trading at discounts. Investors with a high-risk appetite should invest in these funds. Small-cap funds generally invest in companies having market caps lower than $2 billion. The companies, smaller in size, offer growth potential and their market capitalization may increase subsequently. Meanwhile, value stocks are those that tend to trade at a price lower than their fundamentals (i.e. earnings, book value, debt-equity). It is a common practice to invest in value funds for income or yield. However, not all value funds solely comprise companies that primarily use their earnings to pay dividends. Investors interested in choosing value funds for yield, should be sure to check the mutual fund yield, which is the dividend payout divided by the value of the mutual fund’s shares. Below we share with you 4 top-rated, small-cap value mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and we expect the fund to outperform its peers in the future. CornerCap Small Cap Value (MUTF: CSCVX ) seeks capital growth over the long run. CSCVX invests the lion’s share of its assets in small cap companies located in the US. CSCVX defines firms with market capitalization below $3 billion as small cap. The CornerCap Small Cap Value fund returned 9.4% over the past one year. As of September 2015, CSCVX held 221 issues with 0.69% of its assets invested in Fidelity Southern Corp. (NASDAQ: LION ). Perkins Small Cap Value Fund A (MUTF: JDSAX ) invests a large chunk of its assets in common stocks of undervalued small-cap companies. JDSAX invests in securities of companies with market capitalization similar to those listed in the Russell 2000 Value Index. JDSAX may invest a maximum of 20% of its assets in cash or equivalents. The Perkins Small Cap Value A fund returned 5.7% over the past one year. JDSAX has an expense ratio of 1.03% as compared to the category average of 1.23%. Northern Small Cap Value (MUTF: NOSGX ) seeks long-term growth of capital. NOSGX invests a major portion of its assets in equity securities of companies having market capitalization within the universe of the Russell 2000 Value Index. NOSGX may focus on a particular sector including financial services. NOSGX may invest in companies that may not provide any dividend. The Northern Small Cap Value fund returned 5.6% over the past one year. Robert H. Bergson is the fund manager of NOSGX since 2001. Queens Road Small Cap Value (MUTF: QRSVX ) invests generally in securities of small-cap companies located in the U.S. QRSVX seeks to provide capital appreciation by investing the majority of its assets in equity securities of companies. The Queens Road Small Cap Value fund returned 6.3% over the past one year. QRSVX has an expense ratio of 1.24% as compared to the category average of 1.23%. Original Post

AGG: A Solid Bond Fund Offering Low Expenses And Diversification

Summary The expense ratio on AGG is one of the drawing factors for this fund. At .08% it is one of the cheapest bond funds in the market. The fund has extensive diversification in the maturity of the bonds which provides more diversification in the risk. The credit ratings are fairly high with a significant allocation to treasury securities. Allocation to MBS does not thrill me since mREITs are available at material discounts to book value, but the low expense ratio still helps the expected return. Overall, there is more to like about this fund than to dislike. The major risk factor facing the fund is rising domestic rates. The iShares Core Total U.S. Bond Market ETF (NYSEARCA: AGG ) is a highly diversified bond fund with a reasonable yield, great expense ratio, and great liquidity. Expenses When I’m looking for a bond ETF, I normally want to see diversification in the holdings. The only real exception would be if I’m looking for treasuries with a fairly steady maturity date. Getting any thorough due diligence on the bonds in a fund can require having a higher expense ratio to cover the costs of doing research. The challenge for a bond fund with a high expense ratio to create solid returns is that it requires them to be doing sufficient research to consistently produce superior default estimates to those available in the market or to have a method for acquiring bonds at a discount by dealing in illiquid bonds where counterparties are more difficult to find. Some funds are able to offer low expense ratios and mitigate their risks by strictly dealing in the most liquid bonds where pricing is most likely to be efficient and relying on the market to ensure that the risk/return profile is appropriate. Generally I favor ETFs that have low expense ratios and strictly deal in highly liquid bonds where the pricing will be more efficient. The expense ratio for AGG is a .08%. This is one of the funds falls into my desired strategy of using highly liquid securities and a very low expense ratio to rely on the efficient market to assist in creating fair values for the bonds. Yield The yield is 2.41%. The desire for a higher yield should be fairly easy for investors to understand. Bond funds that offer a higher yield are offering more income to the investor. Unfortunately, returns are generally compensating for risk so higher yield funds will usually require an investor either take on duration risk or credit risk. In many situations, an investor will take on a mix of the two. Junk bond funds generally carry a high degree of credit risk but low duration risk while longer duration AAA corporate funds have only slight to moderate credit risk combined with a significant amount of duration risk. Theoretically treasuries have zero credit risk and long duration treasuries would have their risk solely based on the interest rate risk. Duration The following chart demonstrates the sector exposure for this bond fund: At the present time I’m concerned about taking on duration risk in early December because of the pending FOMC (Federal Open Market Committee) meeting. I believe it is more likely than not that we will see the first rate hike in December. I think a substantial portion of that probability has already been priced into bonds, so investors willing to take the risk prior to the meeting could see significant gains if the Federal Reserve does not act. Even though most of the impact is priced in, I suspect it will happen and that there will be some impact on rates which may trigger a solid opportunity for starting investments in bonds. I’ll be looking to increase my positions in interest sensitive assets if rates move higher. I’ve been focused on bond funds that are free to trade for me or have a longer duration exposure to corporate debt, but AGG is a pretty solid option for investors looking to add bonds in December. Credit Risk The following chart demonstrates the credit exposure for this bond fund: The exceptionally high rating to triple AAA stocks includes positions in treasury securities. The very high credit rating of this fund is excellent for investors looking for something that can withstand a sharp decline in the equity market. Rather than declining with equity markets this bond fund should see strength in share prices when investors are scared about the risk of higher defaults and weaker equity performance. When things look ugly, this fund should perform well. When things look great, this fund should underperform some of the riskier options. Sectors The following chart demonstrates the sector exposure for this bond fund: I have some concerns about the sector allocation including a substantial allocation to MBS Pass-Through securities. There are several mREITs where investors can get MBS exposure at a substantial discount to book value. On the other hand, that exposure also includes exposure to hedging the portfolio with Eurodollar Futures contracts in most scenarios and the expenses of management for an mREIT will dramatically exceed the .08% expense ratio of holding AGG. Conclusion Overall the diversification here is pretty solid and I don’t see much to complain about. This is one of the largest bond funds on the market and it offers great liquidity, a decent but not incredible yield, and a very low expense ratio. That liquidity extends to the point of millions of shares trading in a single day. That keeps the bid-ask spread small and makes trading in and out the ETF much easier for investors that want to use it to stabilize their portfolio value.

Momentum, Quality And Low Volatility: Continuing The Quest For Smarter Beta

Summary In November I introduced a smart beta portfolio based on MSCI’s indexes for quality, momentum and low volatility. The semi-annual rebalancing of those indexes is complete. I review the previous six-month performance and determine the components of the rebalanced MQLV portfolio. In early November I proposed the idea of using the iShares smart beta ETF portfolios as a filter for building one’s own risk-premia portfolio ( A Quest for the Smartest Beta ). I started from three ETFs, each indexed to a single factor: Low Volatility, Momentum and Quality. iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) iShares MSCI USA Momentum Factor ETF (NYSEARCA: MTUM ) iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ) Taken together, these three ETFs make a solid holding as seen in this table showing results of an equal weighted portfolio of the three ETFs vs. the S&P 500 since the inception of QUAL, the youngest of the three, in August 2013. (click to enlarge) Starting from the premise that each of the ETFs is selecting for a single “smart-beta” factor I wanted to look at the intersection of the three funds. I asked if there were overlapping positions in all three ETFs. I compared their full sets of holdings looking for that overlap. There were 14 funds shared by all three. I reasoned that since each of the 14 passed the MSCI filters for low-volatility, momentum and quality, it could be worth looking at a portfolio comprising all 14, in effect, a portfolio located at the intersection of Quality, Momentum and Low Volatility. June through November Results The 14 stocks from the end of May rebalance are: Arch Capital Group Ltd (NASDAQ: ACGL ) Accenture PLC (NYSE: ACN ) Axis Capital Holdings Ltd (NYSE: AXS ) Chubb Corp (NYSE: CB ) Chipotle Mexican Grill Inc. (NYSE: CMG ) Home Depot Inc. (NYSE: HD ) Eli Lilly (NYSE: LLY ) Nike Inc. Class B (NYSE: NKE ) O’Reilly Automotive Inc. (NASDAQ: ORLY ) Reynolds American Inc. (NYSE: RAI ) Starbucks Corp (NASDAQ: SBUX ) Sigma Aldrich Corp (NASDAQ: SIAL ) Visa Inc. Class A (NYSE: V ) W.R. Berkley Corp (NYSE: WRB ) Each of the ETFs is rebalanced to a revised index twice annually, on the last business days of May and November. So, when I looked at the portfolio, let’s call it MQLV , it had a five-month record from its “inception” on the last business day of May. It had performed well. For the five months from June 1 to Nov 1, it turned in a CAGR of 41.0% vs SPY’s -1.30%. Now that the full cycle is complete we can update performance at the close of the six-month holding period. It performed thusly: (click to enlarge) That is a quite impressive performance record. In a market environment where the S&P 500 index could only muster a 1.74% total return, MQLV chalked up nearly 19%. Sharpe (2.21) and Sortino (7.29) ratios are at rarely seen levels. Pretty good evidence that there may well be something to this idea. Not in any way definitive, of course; it is, after all, a single cycle. But those results are surely saying “Hey, look over here.” Rebalancing for December through May Now that MSCI has rebalanced the indexes, I let’s have a look at the changes. The current overlap for the three funds has moved from 14 to 18 stocks. Eleven remain from the previous list. There are seven new entries, and three have dropped off. The additions are: Costco Wholesale Corp (NASDAQ: COST ) Henry Schein Inc (NASDAQ: HSIC ) Lockheed Martin Corp (NYSE: LMT ) Mcdonalds Corp (NYSE: MCD ) Public Storage REIT (NYSE: PSA ) Travelers Companies Inc (NYSE: TRV ) Ulta Salon Cosmetics & Fragrance I (NASDAQ: ULTA ) And the deletions: Chipotle Mexican Grill Inc. Reynolds American Inc. Sigma Aldrich Corp CMG is no longer included in MTUM’s holdings but remains in USMV and QUAL. RAI was dropped from QUAL; it remains in USMV and MTUM. SIAL was acquired. The sector mix is dominated by Consumer Discretionary and Financials which account for 12 of the 18 positions. (click to enlarge) If we combine these 18 positions into an equal-weighted portfolio, the portfolio metrics are as follows: (click to enlarge) (from investspy.com based on one-year’s data) One-year performance for these 18 is outstanding, having beaten SPY 27.7% to 3.5% for the year. This is, of course, no indication of what the portfolio will do over the next six months between now and the next rebalance, but it does auger well for success. And, let’s not forget, 11 of these holdings were included in the previous iteration which trounced SPY handily. Here is a correlation matrix for the holdings. (click to enlarge) Running the portfolio through Portfolio Visualizer’s four-factor analysis produces the following regressions. Once again, it’s based on one-year’s data. (click to enlarge) As commenters pointed out in discussing the November article, there is little exposure here to size, all but three of the size exposures are negative. Several suggested that I should include the value factor. I argued that value was inherent in some of the selection criteria used by USMV and QUAL, so adding an ETF like the iShares MSCI USA Value Factor ETF (NYSEARCA: VLUE ) would be redundant. That point of view was confirmed to a large extent by including the VLUE and the iShares MSCI USA Size Factor ETF (NYSEARCA: SIZE ) portfolios in the analysis as a follow-up ( Expanding the Smart Beta Filter: Does It Help? ). Now, from the results of this regression analysis of the Fama-French factors, we can see that value exposure is, in fact, fairly high. This result confirms my sense that value was being addressed at least partially, even though it is not a specific factor for any of the three source ETFs. HSIC, LLY, LMT, SBUX are negative for value, but the rest are positive or neutral. Unsurprisingly, momentum exposure–the only factor specifically selected for by a source ETF–is high; only LLY is negative here. Given the extraordinary success of the June through November record I am excited to see how the rebalanced portfolio performs. At 18 positions this is a fairly large commitment for an outright investment, but it could well be worth some serious thought. To me, the concept appears sound and the track record, limited though it may be, is supportive. Is it actionable? I’d like to think so, but the hard evidence, however impressive, is sketchy. So any action taken would be largely based on an appreciation for the conceptual basis of the strategy. I’ll be keeping this updated as we move forward.