Tag Archives: alternative

How Prices Of ETF BIB Are Seen By Market-Makers

Summary This discussion, not a conventional review of biotech development pipeline conditions, is a study of how prices for the ETF are evaluated by market pros and the market’s subsequent reactions. Market-makers [MMs], regularly called on to negotiate volume (block trade) transactions in BIB have a special insight advantage – knowing trends of buy-side “order flow.” Why buy? or why sell? often is far less important to resulting price trends than “By how much, and how long it is likely to persist.” The MMs reveal their conclusions by the way they protect themselves and their at-risk capital commitments – in hedging. Behavioral analysis lets us know. How has the subject security been behaving? The ProShares Ultra Nasdaq Biotechnology ETF (NASDAQ: BIB ) is an issue with about 2 ½ years of markets transaction history, just under the three-year minimum we like to have for historical research and behavioral analysis. But it turns out to be an active enough subject to provide a good deal of perspective, in a dynamically competitive arena of intense and continuing interest to big-money investment organizations. Figure 1 shows how buy-side transaction orders have been prompting MM’s conclusions about likely coming price ranges day by day over the past 6 months. Figure 2 extends that same analysis to the past 2 years by means of extracting daily forecasts on a once a week basis. Figure 1 (used with permission) Price ranges indicated by vertical lines in these pictures are forward-looking forecasts of the likely extremes for BIB during the life of the derivatives contracts used to hedge MM capital put at risk in the process. The heavy dot in each vertical marks the closing price of the day of the forecast, and separates the range into upside and downside segments. The current day’s Range Index [RI] of 14 measures the percentage of the whole forecast range that is below that market trade. It defines the historic sample of 24 prior forecasts of similar upside-to-downside proportions used to evaluate the present-day forecast. The distribution of RIs available during the past 5 years (only 627 here) is shown in the lower thumb-nail picture. Quality of prior forecasts is indicated by only one of the 24 priors failing to recover from the -4.8% worst-case price drawdowns to earn a gain under the portfolio management discipline standard regularly used to compare alternative investment results. The other 23 (96% of the 24) combined with the loser to produce an average gain of +16.4% in an average holding period of 5 weeks (25 market days). That relatively short holding period contributed to the CAGR of +356%, the magnet of our wealth-building interest. Figure 2 (used with permission) Figure 2’s expanded time dimension provides a sense of its longer experience and how the values seen now relate to the past. Another comparative dimension is how BIB now relates to other investment alternatives. Figure 3 lists other Biotech-focused ETFs and provides perspectives on their size, market liquidity, and year-to-date price behaviors. Figure 3 (click to enlarge) Included in this table are the Market-proxy ETF, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) and an inverse ETF, the ProShares UltraShort Nasdaq Biotechnology ETF (NASDAQ: BIS ) . BIS is structured to move in price 2x the opposite direction of its underlying index, while BIB holds mainly derivative instruments that leverage its price moves positively, to 2x the daily action of that same index. The index in question is the NASDAQ Biotech Index which is directly tracked by the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ). Its holdings are shown in Figure 4, strictly for perspective. Figure 4 An important aspect of any investment comparison is the trade-off between risk and reward. Figures 1 and 2 provide the data for BIB in side-by-side amounts of +13.3% and -2.9% in the rows of data contained in each. A visual comparison of those dimensions can be made from the map of Figure 5. Figure 5 (used with permission) The green % Upside Reward Scale at bottom of the map is quite understandable. But the red vertical scale of % Price downside may raise confusion between the downside portion of the forecasts and the worst-case price drawdowns of prior forecast experiences. Our experience is that the downside segment of the current-day forecasts is often exceeded by price drawdown experiences of prior like forecasts, and in turn, the current forecasts add to the priors. Besides it is not the forecasts that lead to capital losses (risk), but the experience of seeing investment prices descend below their entry cost prices, and staying there or getting worse, to the point where the investor throws in the towel and locks in a loss. When by having the fortitude to ride the stress out, he/she might likely see the position recover to a profit situation. So we use experiences rather than forecasts on the risk side of the equation. In Figure 5, BIB in position [3] clearly dominates most of the alternatives with a better trade-off. That adds to its quality advantage of a proven high-payoff history. BIS up in [6] is at the disadvantage of its “short” structure in a group where the current outlook is for higher stock prices. Conclusion: BIB currently presents a reasonably credible, albeit shorter, history of substantial rates of gain from earlier pro forecasts like that seen today. Investors should add to their own due diligence on the ETF’s competitive and profitability due diligence a hearty encouragement on the price-prospects front from market professionals.

Global X Southeast Asia ETF: Un-Emerging Market

Regional growth is very dependent on China’s economy. The fund is very heavily weighted in financial services. A few of the holdings operate in unique niches, with little competition. A proverb is timeless and has application generation after generation. For example, in Southeast Asia one might often hear that ‘ a tray full of money is not worth a mind full of knowledge ‘. That proverb will no doubt catch the attention of any ‘experienced’ investor. There’s quite a difference between “not knowing something” and “not realizing something”. The former seems to imply a lack of information: not knowing. The latter seems to imply that the information is there, but not understood: not realizing. Unfortunately, investors are often lost in the misty in-between of not knowing and not realizing. However, logic dictates that in either event, the odds are not in your favor. With that in mind, the question must be asked: has the emerging market expansion run its course? A critical bit of information is determining whether the Chinese economy is experiencing a normal correction, or looking for a sustainable bottom in an ongoing economic contraction. It’s difficult to say. There is one certain fact, though: the amazing bull market expansion of China’s once emerging economy pulled the entire global economy along with it and, in particular, the economies of Southeast Asia. Hence, are the odds in favor of a rebound in Southeast Asia? Picking and choosing individual investments from among countries with different varied rules and regulations would be a daunting task. If an investor were to choose an ETF, there’s only one way to enter that market: Global X Southeast Asia ETF (NYSEARCA: ASEA ) . According to Global X, the fund ” …seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE/ASEAN 40 Index …” The fund employs a passive methodology; 80% of total assets are invested in American Depository or Global Depository receipts; hence, most of the companies will be listed on OTC exchanges. The index is one of the five FTSE ASEAN Index series. The selected stocks of all of the ASEAN indexes are selected from “… Bursa Malaysia, Hanoi Stock Exchange, Ho Chi Minh Exchange, Indonesia Stock Exchange, The Philippine Stock Exchange, Singapore Stock Exchange and the Stock Exchange of Thailand… ” According to FTSE-Russell, the FTSE/ASEAN 40 index “… is designed to represent the performance of the largest companies in the ASEAN region’s markets …” So, the first bit of basic information is to know the geographic allocation of the fund. Data from Global X A quick overview of the included country’s annualized growth is outlined in the table below. Country Annualized GDP as of Q3, 2015 Core Inflation Debt/GDP Unemployment Rate Sovereign 10-Year Bond Ratings S&P, Moody, Fitch Singapore 1.9% 0.3% 99.3% 2.0% AAA, Aaa, AAA Malaysia 4.7% 2.5% 52.5 3.2% A-, A3, A- Indonesia 4.73% 5.02% 25.02% 6.18% BB+, Baa3, BBB- Thailand 2.9% 0.88% 45.7% 0.9% BBB+, Baa1, BBB+ Philippines 6.0% 1.8% 45.4% 5.7% BBB, BAA2, BBB- Averages 10.93% 3.60% Data from Trading Economics No doubt, these particular emerging markets have experienced a rate of growth that is the envy of the entire region, even when compared to the larger, more established economies such as Japan and Korea. However, this seems to be the ‘modus operandi’ of emerging markets throughout history. So without the economic pull of China, can these economies readjust and grow organically? Data from Global X Clearly, the fund heavily weights the Financial sector. Of the fund’s 40 holdings, 14 holdings, totaling 35% of the fund, are financials. Several of these financial services companies are global and importantly, most offer Sharia compliant financial services in a region of the world where 240 million Muslims or 40% of the entire population resides. Of the 14 financial holdings, there’s only one REIT. Also, six are either ‘holding companies’ or ‘groups’. This may serve as an advantage as the financial services of these holding companies are well diversified among the full spectrum of financial services, and in several cases, diversified internationally. Lastly, DBS Group Holdings ( OTC:DBSAY ) , Malayan Banking ( OTCPK:MLYNF ) , CIMB Group Holdings ( OTCPK:CIMDF ) , and Bangkok Bank ( OTC:BGKKF ) all have offices in the UK or New York, thus established in the major global financial centers. Financials 48.72% Ticker Fund Weighting Market Cap ( USD Billions) Yield P/E 5-Year EPS Growth Rate Primary Business DBS Group Holdings OTC: DBSAY 7.44% $41.267 3.66% 9.55 12.95% Global Financial Services Holding Company; Full line from retail to wealth management; Main subsidiary in London, UK; operations in Asia Overseas Chinese Banking OTC:OVCGF 7.02% $35.528 4.18% 9.48 12.23% Financial Services group; retail banking, insurance; equities and futures trading; headquartered in Singapore United Overseas Bank OTCPK:UOVEF 5.87% $30.935 4.44% 9.95 10.68% Banking Services from retail through corporate levels; asset, wealth and venture capital management; Clearing operations; Singapore Public Bank Berhad OTC:PBLOF 4.74% $16.316 3.02% 14.60 12.06% Banking group, retail, corporate lending, proprietary trading,, securities trading, some property holding; Kuala Lumpur PT Bank Central Asia OTC:PBCRF 4.23% $24.419 1.29% 18.43 19.07% a.k.a. Bank BCA conventional and Sharia retail services; underwriting and brokering; Jakarta Malayan Banking OTC: MLYNF 3.68% $18.736 6.84% 10.97 NA Holding Company for Maybank Group; offices in Singapore, Malaysia, New York, London Hong Kong and Bahrain; HQ: Kuala Lumpur Bank Rakyat OTCPK:BKRKF 2.995% $20.037 2.72% 10.90 26.92% a.k.a. Bank BRI; retail services, lending, and Sharia services; Jakarta PT Bank Mandiri Persero OTCPK:PPERF 2.12% $15.320 2.43% 10.21 20.47% a.k.a. Bank Mandiri; retail conventional and Sharia services; insurance, business finance, securities brokering; Jakarta CapitaLand OTCPK:CLLDF 2.05% $13.421 2.87% 11.79 -0.47% Real Estate investment; consulting, development, holding; shopping malls, residences; HQ Singapore CIMB Group Holdings OTC: CIMDF 2.04% $8.723 1.80% 16.89 -1.17% Financial services holding company; conventional and Sharia services; Offices in Malaysia, Indonesia, Singapore, Thailand, Cambodia and London, UK; HQ Kuala Lumpur SM Investments Corp. OTCPK:SVTMF 2.01% $13.851 1.29% 22.03 11.23% Investment holding company property, retail and banking service; convention centers, hotel holdings; merchandise trading; HQ Pasay, Philippines Siam Commercial Bank OTCPK:SMCBF 1.96% $11.665 4.86% 8.82 20.77% Financial service for retail and small-medium size business; non-performing loan solutions; Bangkok Kasikornbank PLC OTCPK:KPCPF 1.82% $10.207 2.61% 8.36 25.66% Commercial Banking; small-medium size business, credit, home loans, insurance, international transaction, security services; Bangkok Bangkok Bank Public Company OTC:BGKKF 0.75% $7.982 4.32% 8.15 12.06% Commercial Bank; retail, cash management, project and trade financing, credit; China, Hong Kong, US, UK, Singapore, Indonesia, Laos, Vietnam, Philippines; HQ: Bangkok Averages 3.48% $19.17 3.31% 12.15 1 14.04% 1 Excluding MLYNF Data from Reuters, Yahoo! The main reason mobile communication rooted itself so well in so many emerging markets is because it was far more cost efficient to construct cell-phone towers, or transmit content via satellite, than it was to run thousands of miles of copper across the country or countries . These are not so much ‘outstanding companies’ as much as they are necessary , particularly in rural areas. Telecom Service 20.05% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business Singapore Telecommunications OTC:SGTCF 7.16% $43.402 4.56% 15.80 -0.66% Telecom investment holding company; consumer, enterprise, digital solutions; Singapore, Australia, Asia, Africa; HQ : Singapore PT Telekomunikasi Indonesia NYSE: TLK 3.82% $21.323 2.75% 19.31 -24.81% Domestic and international telecom services; internet, Wi-Fi, data and satellite services; HQ: Bandung, Indonesia Advanced Info Services OTC:AVIKF 2.35% $15.902 6.47% 15.27 16.60% Mobile, call centers, broadband; IT solutions; Bangkok Axiata Group OTCPK:AXXTF 2.24% $12.350 3.62% 22.16 4.84% Telecom investment holding company; network services, mobile services; Kuala Lumpur Digi.com OTC:DIGBF 1.59% $9.047 4.81% 20.66 15.21% Telecom investment holding company; mobile, internet and services; Malaysia; HQ Kuala Lumpur Maxis OTC:MAXSF 1.45% $11.386 4.71% 30.70 -3.44% Telecom investment holding company; mobile, fixed line, international, broadband Philippine Long Distance NYSE: PHI 1.31% $8.984 6.63% 13.51 -5.62% Telecom services; fixed line, wireless, satellite and fiber networks; Makati, Philippines Averages 2.85% $17.48 4.79% 19.63 0.30% Data from Reuters, Yahoo! The industrial companies, again, are often diversified holding companies which span many other sectors. For example, Jardine Cycle & Carriage ( OTCPK:JCYCF ) may be considered a consumer discretionary holding via its marketing and sale of motor vehicles, but it also has investments in heavy equipment manufacturing, mining, agriculture and infrastructure management. Similarly, Sime Darby ( OTCPK:SMEBF ) has investments in agriculture, property holdings, equipment leasing, energy, utilities and land management. The most notable, unique and focused holding in the sector is Singapore’s Kepple Corp. (STI: KPLM) . Kepple is one of the few global, large scale, diversified marine engineering and construction companies. Further, its base of operation is centered among the busiest seaports on the planet. Industrials 9.69% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business PT Astra International OTCPK:PTAIF 3.20% $18.103 3.66% 14.31 13.82% Diversified vehicle component manufacture; financing, service; agri-logistics and IT; Jakarta Keppel Corp. Ltd. STI: KPLM 2.32% $8.199 7.55% 6.30 2.13% Marine construction, service, management; ship construction, repair, refitting; Singapore Sime Darby OTC: SMEBF 2.01% $10.347 3.46% 21.02 20.11% Industrial agriculture investment holdings; property, equipment; energy, utilities; palm oil, rubber, land management Wilmar International OTCPK:WLMIF 1.53% $13.079 2.78% 11.71 -7.97% Industrial agri-investment holdings; palm products, oil seeds, grains, sugar; Singapore Singapore Airlines Ltd. OTCPK:SINGF 1.39% $9.351 2.46% 23.58 11.70% Passenger and cargo transport; air charter services; operations managements, maintenance services; Singapore Airports of Thailand OTC:AIPUF 1.33% $11.811 2.00% 24.96 55.81% Airport and hotel management and services; Bangkok SM Prime Holdings OTC:SPHXY 1.24% $12.885 0.99% 21.90 4.60% Property Developer: malls, residence, office, hotel and convention centers; Pasay, Philippines Jardine Cycle & Carriage OTC: JCYCF 0.97% $9.473 3.46% 12.32 9.90% Auto and motorcycle, heavy equipment, mining manufacturer, mining, agribusiness, infrastructure management Averages 1.86% $11.97 3.27% 17.86 14.31% Data from Reuters, Yahoo! The utilities sector is pretty much focused on just that: utilities. These three companies focus on gas and electricity distribution, with some overlap in the energy sector via exploration and drilling. Utilities 5.60% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business Tenaga Nasional OTC:TNABF 3.90% $17.086 2.21% 12.12 13.05% Electric Utility; generation and distribution; Kuala Lumpur Petronas Gas OTC:PNAGF 1.50% $10.340 2.56% 19.88 NA Gas utility; processing, storage, transport and distribution; Kuala Lumpur Perusahaan Gas Negara OTCPK:PPAAF 0.70% $4.338 5.82% 9.91 3.36% Gas Utility; natural gas distribution; oil and gas exploration; Jakarta Averages 2.03% $10.59 3.53% 13.97 2 8.21% 2 Excluding PNAGF Data from Reuters, Yahoo! In consumer staples, CP ( OTC:CPBQF ) has a unique niche as the exclusive manager of all 7-Eleven stores in Thailand. Consumer Staples 4.69% Ticker Fund Weighting Market Cap Yield P/E 5 Year EPS Growth Rate Primary Business CP All Public CPBQF 1.79% $10.421 1.92% 30.44 15.27% Convenience store management; includes 7-Eleven; bakery, coffee shops, health and beauty; Bangkok Unilever Indonesia Tbk OTCPK:UNLRF 1.03% $20.052 2.19% 45.05 13.52% Household, personal care and food products under a dozen brand names; Jakarta Averages 1.41% $15.24 2.06% 37.75 14.40 Data from Reuters, Yahoo! There’s only one discretionary holding, Genting ( OTCPK:GIGNF ) , a diversified hospitality company. What makes it interesting, on its own merits, is its global reach, managing properties not just in Southeast Asia, but also in Australia, the UK and the Bahamas with plans to expand to China and Japan. Consumer Discretionary 4.64% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business Genting Singapore PLC OTC: GIGNF 1.18% $6.558 1.31% 54.22 NA Resorts, Hotels and Casinos, Australia, Bahamas, Malaysia, Philippines, Singapore, UK. Other regions in development Data from Reuters, Yahoo! The ‘drag’ on any fund these days is the energy company holdings, particularly the smaller scale exploration and drilling companies. The current market price simply cannot justify costs. Energy accounts for 3.12% of the fund. Energy 3.12% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business PTT Public OTC:PUTRF 1.95% $17.460 5.00% 12.65 1 -1.59% Gas and petroleum fuel and chemical products domestic and overseas distribution; Bangkok PTT Exploration and Products PCL OTCPK:PEXNY 0.75% $6.177 4.46% 15.15 1 -4.15% Petroleum exploration and production; pipeline and general energy investment; Bangkok Averages 1.35% $11.82 4.73% 13.9 -2.87% 1 Approximate Data from Reuters, Yahoo! Similarly, many materials manufacturers, like building and plastic related chemicals, have experience decreasing demand during the regional economic slowdown. The two materials manufacturer holdings are in those sub-sectors: chemicals and building materials. Materials account for 2.92% of the fund. Materials 2.92% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business Petronas Chemicals Group OTC:PECGF 1.61% $12.31 2.40% 20.72 NA Material investment holdings; chemicals, olefins, glycols, polymers, aromatics, fertilizers; Kuala Lumpur Siam Cement OTC:SCVPF 1.28% $14.203 3.40% 11.94 6.67% Industrial Supplies and building materials, ready mix, concrete, pulp, and chemicals; Bangkok Averages 1.45% $13.26 2.90% 16.33 ——– Data from Reuters, Yahoo! Lastly, the most defensive sector, Health Care, accounts for only 1.48% of the fund with IHH Health Care ( [[ IHHHF]]) . In a perhaps ‘over bought’ health care sector, this company occupies an interesting niche as a hospital management company with services in Central and Eastern Europe, the Middle East and North Africa. Health Care 1.48% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business IHH Health Care BHD OTC: IHHHF 1.48% $0.416 0.48% 68.38 Health Care holding company; hospital management in CEE, Middle East, N. Africa and Malaysia; Kuala Lumpur Data from Reuters, Yahoo! As for the fund itself, it first listed in February 2011. It’s comparatively small with $13.7 million in net assets. Its yield is relatively good, although it must be seen in the context of an ‘EM’ region with slowing growth. Management fees are rather high at 0.65% and the 3-month average daily volume is low at approximately 9,500 shares a day. The returns reflect the region’s economic slowdown: -19.57% year to date, -22.50% in the past year and -6.14% over 3 years. Since inception, the fund has been essentially flat, totaling a -1.26% return. If the fund presents any advantage, it’s in the list of those 40 companies. A few have what seems to be great future potential when the region turns the corner. (click to enlarge) Currently, there’s more risk on the downside than there is on the upside. The chart demonstrates clearly that. The shares traded at an all-time low in mid-August and well off the May 2013 all-time high. There’s absolutely no doubt that Southeast Asia has made remarkable strides among emerging markets. However, these cycles simply don’t go on forever. Even the arguably second largest global economy, China, has admittedly met the end of its externally sourced expansion and is now transitioning to a domestically driven economy. It’s just as reasonable to expect that China’s economy will find a bottom and start an expansion cycle again. Hence, the point of the matter is that, right now, realizing the risk is worth far more than knowing that there will be a turnaround, eventually. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

iShares MSCI New Zealand Capped ETF: The Other Down Under

Since the inception of the fund, the New Zealand economy has met some extraordinarily difficult obstacles. The dividends are above average, but the sustainability of some of the holdings seems questionable. New Zealand has a stable, well managed economy in a region experiencing a severe economic contraction. One would expect that a newly emerged economy such as New Zealand to eventually reorient itself towards domestic growth. To be sure, New Zealand is still heavily dependent on exports; up to 40% of GDP, in fact. New Zealand’s government is not letting any grass grow under its feet, however, making every effort to diversify its GDP sectors. According to the government’s promotional website, New Zealand Now , the World Bank ranks New Zealand as ” the easiest place in the world to start a business ” and ranks it third in economic freedom, after Hong Kong and Singapore. Even the well respected Forbes magazine has noted that “… Over the past 20 years, the government has transformed New Zealand from an agrarian economy dependent on concessionary British market access to a more industrialized, free market economy that can compete globally…” However, this growth has not come easily. New Zealand’s 21st century economy has been turbulent. During the boom years of the early 2000s, New Zealand began to experience increasing inflation, requiring the Reserve Bank of New Zealand to raise the benchmark lending rate several times. This led to an economic slowdown even before the economic crises of 2008 began! Then, as New Zealand wrestled to get its economy back on track, two devastating earthquakes struck the island nation. The first, Canterbury quake, struck in September of 2010 and the second, Christchurch quake , in February 2011, resulting in loss of life, injuries and damages totaling more than US$40 billion. New Zealand’s export economy is greatly dependent on trade in the Asia-Pacific region which caused the economy to suffer an unexpected double blow in late 2014 and early 2015. The first was the rather sudden economic contraction in the region greatly affecting strategic commodities, particularly metal ore and petroleum. The second was the European Union’s decision to end the EU dairy quota system. A global chain reaction followed, flooding the market with dairy products, thus collapsing dairy product prices. ‘Dairy’ happens to be New Zealand’s top export in the region. Data from OEC There’s one other little known fact about New Zealand’s commodities industry. New Zealand has recently discovered potentially large, very high quality oil reserves. These reserves (a major export to Australia at 16% of total, by the way) earned US$270 million in revenue for the government . Unfortunately, the very last thing global oil markets needed in 2015 was a brand new major oil field discovery. Data from OEC So is this a good time to have a stake in New Zealand’s economy? If so, there’s only one port of entry, found in BlackRock’s (NYSE: BLK ) portfolio of single focus country ETFs. It’s the iShares MSCI New Zealand Capped ETF (NYSEARCA: ENZL ) . The fund first listed on September 1, 2010; just three days before a devastating earthquake struck New Zealand’s South Island. The fund is not large, with approximately US$72.00 million of net assets. The expense ratio is 0.48%, reasonably in line with the industry average of 0.44%. The three-month average volume is adequate at approximately 25,000 per day; more than enough for a small position. The fund’s P/E ratio is 16.85 and the price to book multiple is 1.81 times. The volatility is a bit high at 1.37 times the S&P 500. The yield is a very attractive 5.44%; the trailing 12-month yield is 5.61% and the 30-day SEC yield is 3.62%, which is most likely why the fund is selling at a surprisingly high premium to NAV of 1.13%. If the companies in the fund are stable and profitable, this looks worth holding even just for the distributions. The best way to tell is to take a closer look, starting with the sector allocation. Data From iShares The fund leads off with a very defensive sector, Utilities at 18.58% of the fund. Equally surprising were the payout ratios: each well over 100%. This is significant since by Investopedia ‘s definition, “. ..payout ratio is the proportion of earnings paid out as dividends to shareholders… ” There’s a likely reason for this and it’s worth noting here before examining the entire fund. Over the past two years, the New Zealand Dollar has lost a great deal of value relative to the US Dollar. The high payout ratios may be, in part, due to the devaluation of the NZ Dollar vs. the US Dollar; note, too, the negative 5-year earnings growth. To give a simple example of how the currency exchange factors in, the market cap of Contact Energy Ltd. ( OTC:COENF ) in New Zealand Dollars is $34.01 billion; in US Dollars it’s $23.03 billion. Both currencies use the same symbol ” $ ” and this may be causing confusing on some widely used financial media sites; the market cap is listed as $34.01 billion in both US Dollars and New Zealand Dollars , which is impossible. Hence, it isn’t as much the underlying metrics as it might be the currency exchange, or lack of it. (click to enlarge) On the other hand, the total debt to equity measures is a little more in line with Utility companies. There’s one exception: Infratil (IFT) ( OTC:IFUUF ) at over 100%. This is a diversified utility with energy, transportation and social infrastructure holdings. Recently, Infratil and the nation’s sovereign wealth fund, New Zealand Superannuation , sold their combined holdings in Z Energy ( OTC:ZNRGF ) . The high total debt to equity as well as the high P/E may be a temporary reflection of the sale of that large portion of that equity holding. So although the numbers look a bit alarming, they may be reflecting a currency translation. Utilities 18.5839% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Contact Energy Ltd. OTC: COENF 5.6117% $2.318 5.51% 13.18% 143.34% 26.00 -6.63% 55.19% Meridian Energy Ltd. NZ: MEL 4.5252% $4.026 5.54% NA 133.60% 24.05 -3.56% 23.76% Mighty River Power Ltd. OTC:MGHTF 3.4734% $2.531 5.15% NA 417.02% 79.35 -31.34% 35.27% Infratil Ltd. IFUUF 3.1813% $1.170 4.29% 14.87% 261.34% 100.82 -12.45% 140.25% Genesis Energy Ltd. NZ: GNE 1.7923% $1.297 8.33% 17.22% 152.58% 18.31 -3.95% 52.49% Averages 3.27% $2.27 5.76% 15.09 excluding MEL and MGHTF 221.58% 49.706 -11.59% 61.39% Data from Reuters and Yahoo! and others The second largest weighting is Health Care at 15.65%. If one of the companies’ name sound familiar, it’s because it is. Fisher & Paykel Healthcare ( OTCPK:FSPKF ) was spun off from the famous appliance manufacturer of the same name. The health care spinoff is a global provider, specializing in respiratory devices. Health Care 15.65% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Fisher & Paykel Healthcare Ltd. OTC: FSPKF 7.8125% $3.158 1.77% 2.16% 65.11% 41.83 8.00% 24.44% Ryman Healthcare Ltd. OTC:RHCGF 4.7019% $2.783 1.77% 17.39% 13.69% 15.47 25.15% 41.65% Summerset Group Holdings Ltd. NZ: SUM 1.7655% $0.588 0.99% NA 11.57% 11.61 151.06% 44.24% Metlifecare Ltd. NZ: MET 1.0516% $0.628 1.03% NA 7.79% 7.55 0.99% 123.56% Orion Health Group Ltd. NZ: OHE 0.3233% $0.342 0.00% 0.00% 0.00% NA NA 0.00% Averages 3.13% $1.50 1.11% 9.78% excluding SUM, MET 24.54% 19.12 excluding OHE 46.30% excluding OHE 46.78% Data from Reuters and YaHoo! and others The more cyclical industrial sector contains three companies which all tie in together: Air transportation, airport management, and mail, parcel and freight transportation. The yields, payout ratio, P/E and debt to equity are well in line for this sector. Industrials 13.3491% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Auckland International Airport Ltd. OTCPK:AUKNY 8.5518% $4.301 2.73% 9.89% 77.76% 28.46 48.24% 56.61% Air New Zealand Ltd. OTC:ANZFF 2.9468% $2.160 5.61% 17.98% 55.05% 9.81 30.72% 118.17% Freightways Ltd. OTC:FTWYF 1.8505% $0.653 3.92% 11.84% 87.33% 22.33 13.02% 85.20% Averages 4.45% $2.37 4.09% 13.24% 73.38% 20.20 30.66% 86.66% Data from Reuters and Yahoo! and others New Zealand has a small consumer population and this is reflected in the fund’s telecom services holdings. Spark New Zealand ( OTCPK:NZTCF ) is the fund’s largest holding. Spark offers all telecom services, nationwide 3G and 4G Wi-Fi, fiber broadband, content, data and more. Chorus Ltd. ( OTC:CRRLF ) focuses on telecom infrastructure and provides 90% of all New Zealand’s fixed network connections to service providers. In short, both companies complement each other. Again, the data is scarce, but might indicate the two companies are still in a growth/buildout phase. Telecom Services 12.2952% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Spark New Zealand Ltd OTC: NZTCF 9.7968% $3.937 6.28% 3.86% 98.12% 15.67 149.11% 38.92% Chorus Ltd OTC: CRRLF 2.4984% $0.830 0.00% 0.00% 0.00% 15.80 NA 295.85% Averages 6.15% $2.38 3.14% 1.93% 49.06% 15.74 74.55% (excluding CRRLF) 167.39% Data from Reuters and Yahoo! and others ” SkyCity Auckland ” is the nation’s premier entertainment and convention center. Sky City Entertainment Group ( OTCPK:SKYZF ) manages property assets in SkyCity, Auckland . However, the interesting holding in the consumer discretionary sector is Trade Me Group ( OTC:TRMEF ) , an online marketplace which, except in size, is not too unlike eBay (NASDAQ: EBAY ). The sector yields are good, average payout ratio high but still well below 100%, as well as average debt to equity. Consumer Discretionary 11.1946% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Sky City Entertainment Group Ltd. OTC: SKYZF 4.3633% $1.703 4.71% 3.00% 90.71% 19.34 8.37% 85.58% Trade Me Group Ltd. OTC: TRMEF 3.1684% $1.562 3.73% NA 80.20% 21.08 4.69% 24.01% Sky Network Television Ltd. OTC:SKKTY , OTC:SYKWF 2.9325% $1.135 6.94% 16.47% 34.09% (of EPS) 9.80 10.77% 26.26% Warehouse Group OTC:WHGPF 0.7304% $0.609 6.15% -7.79% 105.84% 17.28 -4.93% 61.23% Averages 2.80% $1.25 5.38% 3.89% 77.71% 16.88 4.73% 49.27% Data from Reuters and Yahoo! and others The financials are dominated completely by REITS or property investment groups. The yields look really good and are well sustainable. Financials 10.0932% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Kiwi Property Group Ltd OTC: KWIPF 3.1954% $1.172 4.66% -3.84% 58.32% 12.65 NA 47.78% Goodman Property Trust REIT NZ: GMT 2.5863% $1.060 5.16% -1.05% 23.59% 9.62 112.29% 57.00% Precinct Properties New Zealand OTC:AOTUF 2.5743% $1.022 4.32% -2.34% 13.36% 11.43 NA 25.41% Argosy Property Ltd OTC:IGPYF 1.7381% $0.632 5.17% NA 66.30% 12.77 NA 68.66 Averages 2.52% $0.97 4.83% -2.41% (excluding IGPYF) 40.39% 11.62 ———- 49.71% Data from Reuters and Yahoo! and others It seems that, for any fund these days, the two weakest sectors in the entire Asia-Pacific region would be Materials and Energy. It’s a simply a matter of too much supply and too little demand. One of the problems of a smaller economy fund is that one or two companies may dominate the fund. Hence, when the domestic sector weakens, there are few ways for the fund to be diversified enough to offset it. Nuplex Industries ( OTC:NPXIY ) , although in the weak materials sector, is a company with good global reach; it produces polyester, vinyl-esters and coating resins. Operations are located in Germany, Russia, Netherlands, the UK and the Americas as well as the Asia-Pacific. Materials 9.9369% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Fletcher Building Ltd. OTC:FRCEF 8.0959% $2.205 6.15% 25.15% 209.57% 18.13 -2.50% 53.05% Nuplex Industries Ltd. NPXIY 1.841% $0.567 6.07% 12.47% 89.71% 15.16 -2.02% 40.68% Averages 4.97% $1.39 6.11% 18.81% 149.64% 16.65 -2.26% 46.87% Data from Reuters and Yahoo! and others In the energy holdings, Z Energy ( OTC:ZNRGF ) distributes a full range of fuels; NZ Refining ( OTC:NZRFF ) is a refiner of raw petroleum and ‘pipeline’ distributer. The investor should make careful note again that New Zealand may have some of the largest, untapped high quality oil reserves on the planet. Light Sweet Crude is the easiest grade to refine and has the most desirable qualities of all extracted oils. Right now, supplies of oil are so abundant that it simply wouldn’t be worth a major extraction investment. However, the potential cannot be ignored, especially as new technologies come to market which greatly reduce emissions from fossil fuels. Energy 5.2033% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Z Energy Ltd OTC: ZNRGF 4.2524% $1.835 3.68% NA 192.31% 50.16 NA 86.93% New Zealand Refining Ltd OTC: NZRFF 0.9509% $0.777 1.36% NA 19.02% 13.87 -17.36% 37.77% Averages 2.60% $1.31 2.52% ——— 105.67% 32.02 ———- 62.35% The IT holdings are pretty much standard, offering accounting and business services, mobile tablet device software particular for ‘B2B’. Information Technology 3.172% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Xero Ltd. OTCPK:XROLF 2.2816% $1.661 NA NA NA NA NA 0.00% Dilligent Corp. NZ: DIL 0.8904% $0.353 NA NA 0.00 61.21 NA 0.36% Data from Reuters and Yahoo! and others To sum up, much of the data may be distorted by currency translation. Further, the data gathered when going from sector to sector was inconsistent. This, again, may be due to currency adjusted data vs. unadjusted data. The New Zealand economy is in fact experiencing a slowdown, much in part due to the economic contraction of the two major ‘import economies’: Japan and China. However, New Zealand maintains a triple top credit rating: S&P, AA stable; Moody’s, Aaa stable; and Fitch, AAA stable. Lastly, is the interest in the fund itself. The full chart clearly demonstrates continued interest even as the relative value of the currency declined. Compare the chart below with the currency chart above. (click to enlarge) Some metrics of some of the fund’s holdings may give the impression that they are far more risky than they actually are. If the fund was currency hedged and the data more consistent, it would look far better. Over a long period of time, say in a retirement account, it might be well worth the risk to dollar cost average over time, reinvest dividends and use any market corrections as buying opportunities. The end result, especially in a tax deferred retirement fund, just might end up being a top performing portfolio asset. As always, the investor must weigh the risk to the region in general which is heavily dependent on the Chinese and Japanese economies and the demand for Australian raw commodities. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.