Tag Archives: alternative

Lipper U.S. Fund Flows: Large Seasonal Outflows

By Tom Roseen During the fund-flows week ended December 16, 2015, investors became somewhat bipolar ahead of the U.S. Federal Reserve’s two-day policy meeting, while oil prices continued to slide to lows not seen since 2009. OPEC’s report showed the cartel’s oil output had risen to its highest level since 2012, perpetuating the global glut in supplies. Also, new applications for U.S. unemployment benefits jumped to their highest levels in five months. At the beginning of the flows week, investors learned of a meltdown in Third Avenue Focused Credit Fund , a high-yield mutual fund; it began blocking investors from making redemptions, weighing heavily on other high-yield offerings as investors began to wonder if the related selloff might extend into other funds in the group. A two-day turnaround in oil prices and anticipation that the Fed would pull the trigger to raise its short-term lending rate in December pushed stocks higher in the middle of the flows week, with many investors believing conditions for a Santa Claus rally were beginning to take shape for the latter half of December. On Wednesday, December 16, investors appeared to shrug off reported weakness in November’s industrial production numbers and another slump in oil prices and cheered the decision by the Fed to raise its key interest rate for the first time in almost ten years. Also, the commitment to a gradual pace of increases over the future was seen as an attempt to ease investors’ worries about the change in ultra-low interest rates, which have been attributed by many to be a catalyst for the recent multi-year equity rally. Despite some late-week optimism, investors were net redeemers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), withdrawing a net $39.6 billion for the fund-flows week ended December 16. Investors turned their back on equity funds, fixed income funds, and money market funds, redeeming $13.2 billion, $15.4 billion, and $11.3 billion net, respectively, for the week, but they padded the coffers of municipal bond funds (+$0.3 billion) ahead of tax season. (Keep in mind, however, that year-end distributions can play a factor in the weekly flows calculations, if they fall on a Wednesday, along with the impact of tax selling at year-end. So, some of the big swings we witnessed this past week may be offset next week.) For the tenth week in a row equity ETFs witnessed net inflows, taking in $4.1 billion for the week. Despite initial concerns over the FOMC announcement, authorized participants (APs) were net purchasers of domestic equity ETFs (+$2.8 billion), injecting money into the group for a fifth consecutive week. They also padded – for the fourth week running – the coffers of nondomestic equity ETFs (to the tune of +$1.3 billion). As a result of the wild swings in oil prices and conviction about the Fed interest rate hike during the week, APs turned their attention to some out-of-favor issues, with Energy Select Sector SPDR ETF (NYSEARCA: XLE ) (+$1.3 billion), iShares MSCI EAFE ETF (NYSEARCA: EFA ) (+$1.1 billion), and iShares Core S&P 500 ETF (NYSEARCA: IVV ) (+$0.6 billion) attracting the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR S&P 500 ETF (NYSEARCA: SPY ) (-$0.8 billion) experienced the largest net redemptions, while WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) (-$0.5 billion) suffered the second largest redemptions for the week.

DMO’s Year-End Distribution Brings 2015 Yield To 14%

The closed-end fund, DMO, is the best opportunity in mortgage debt. Two distribution increases and two special distributions this year bring the fund’s 2015 yield to 14%. DMO has beaten ETF, ETN and mREIT comps on 2015 returns. I have been writing recently about Western Asset Mortgage Defined Opportunity Fund (NYSE: DMO ) ( here and here ) and have made clear that, in my opinion, DMO is the best current opportunity in mortgage debt. I’ve compared it to the 2x ETN, UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA: MORL ), and the unleveraged ETF, iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ). DMO’s leverage (31%) falls between MORL’s 2x and REM’s unleveraged status. Some readers have considered those comparisons invalid because DMO is more like a mortgage REIT than those ETPs, which hold (or index to) a portfolio of mREITs. So, I’ve compared it to the largest mREITs, Annaly Capital Management Inc (NYSE: NLY ) and American Capital Agency (NASDAQ: AGNC ) as well. All four of these names have been very popular among income investors on Seeking Alpha and they continue to have their defenders relative to DMO. In my view the best comparison to DMO is PIMCO Dynamic Income Fund (NYSE: PDI ). Although PDI is not a pure-play mortgage debt fund, its portfolio is typically about two-thirds mortgage debt. Here are current charts for these tickers from Yahoo Finance. (click to enlarge) The chart includes prices for all and NAV for the closed-end fund, DMO and PDI. I am writing today to note that DMO announced its year-end distribution ($0.6498, ex-dividend 28 Dec), and that distribution will bring its 2015 distribution yield to something near 14%. This will be at least the fourth consecutive year that DMO has returned a 14% yield. For 2015, total distribution is down from the two previous years and yield is down from all three. The decreases relative to past years reflect the more modest special distributions this year. Note, however, that the regular distribution is up. There have been two regular distribution increases this year, which to me indicates a vote of confidence by DMO management that the fund will continue to generate strong income in coming years. Market price, NAV and the fund’s discount status have varied over the period, as we see in this chart. For the past two years, the fund’s price has remained in a channel between $24 and $25, so capital preservation has been strong, unlike many high-yield CEFs , which have seen marked declines over the period. A recent decline has taken DMO to the mid-$23 range. But as the first chart shows, that decline is much less than that experienced by any of the comps except PDI. The discount has been closing as investors seek safer refuges in the high-yield space, but it has still been dropping to near -4% on a regular cycle. Last week’s drop to -6.1% presented a buying opportunity. I’ll continue to look for discount drops and am planning to add to my position as they occur. Total return for the fund has been excellent as we see in this 5yr (click to enlarge) and this 1 yr chart from Ycharts . (click to enlarge) High yield income has been pummeled in recent weeks. DMO has held up to this reasonably well. Much of the bearish sentiment in debt and credit is extending from apprehensions over energy company debt. Clearly this does not apply to a mortgage debt fund. I’m hopeful that DMO, and other high yield investments that are not carrying energy debt, will bounce back in 2016. The long-promised gradual upward trend in interest rates is finally begun. This may adversely impact DMO and presents the most significant risk factor for the fund. If the increases are, in fact, gradual — and there is no reason to think they will not be — mortgage credit may be well positioned to handle the rising rates better than most high-yield categories.

First Fed Hike Puts These ETFs In Focus

Months of speculation and nail-biting hearsay about the timeline of the first rate hike in almost a decade finally ended yesterday thankfully, with neither shocks, nor surprises. The Fed pulled the trigger at long last, raising benchmark interest rates by a modest 25 bps to 0.25-0.50% for the first time since 2006, making it official that the U.S. economy is out of the woods; though still has miles to go. The step also sets the U.S. apart from other developed economies and had a great impact on the global currency market. The Fed believes that the possibility of further improvement in the labor market as well as in inflation is ripe at the current level. Muted inflation mainly due to stubbornly low oil prices has been an issue for long for the Fed. But in the 12 months through November, the core consumer price index grew 2% (matching the Fed’s target), the highest reading since May 2014 , followed by the 1.9% advancement in October. Unemployment rate fell to 5%, a more than seven-year low level. Average hourly earnings are rising of late. What’s more noteworthy was that the Fed did not move an inch from the ‘ gradual ‘ rate hike trajectory. Also, the central bank indicated that while the job market criteria is apparently accomplished, the Fed’s future focus would be on the inflation reading, which is yet to pick up at a sustained pace. Global growth worry is another factor, which is holding the Fed back from acting fast on tightening. Fed’s Projection The Fed lowered its 2015 projection for personal consumer expenditure inflation to 0.3-0.5% from 0.3-1.0% and 0.6-1.0% guided in September and June, respectively. The projections were also slashed for 2016 and 2017 from 1.5-2.4% to 1.2-2.1% and from 1.7-2.2% to 1.7-2.0%, respectively. The expectations for 2016 and 2017 real GDP growth have been ticked down to 2.0-2.7% from 2.1-2.8% guided in September (Fed’s June prediction for 2016 was 2.3-3.0%) and to 1.8-2.5% from 1.9-2.6%, respectively. However, the real GDP growth expectation for 2015 has been changed to 2.0-2.2% from 1.9-2.5% projected in September. As already discussed, unemployment was the true healer with its 2015 expectation being 5%, almost in line with the 4.9-5.2% expected in September. The coming two years will also see the same uptrend as estimates for 2016 were lowered from 4.5-5.0% to 4.3-4.9% while the same for 2017 remained unchanged at 4.5-5.0%. The notable changes were in the projection for the benchmark interest rate for 2015, 2016 and 2017. Fed’s funds rate for the longer run may be maintained at 3.0-4.0% but projection for 2015, 2016 and 2017 were changed from negative 0.1- positive 0.9% to 0.1-0.4%, from negative 0.1- positive 2.9% to 0.9-2.1% and from 1.0-3.9% to 1.9-3.4%, respectively. Market Impact However, the historic move did not mess up the market, as the investing world was prepared well ahead of the meeting. In fact, the Fed gave the global market enough time to digest the news when the central bank brought the December rate hike possibility back on to the table in October end. With no drama in the December meeting, the market is now focusing more on a sluggish rate hike, not just the hike itself. As a result, probability of a dovish rate hike trail ahead cheered equity investors almost across the globe. Even the highly vulnerable areas like emerging markets also tacked on gains during the Fed meeting. This produced a handful of surprise winners and losers post meeting. However, bonds obeyed the rule book and started diving as soon as the Fed enacted the lift-off. The two-year benchmark Treasury yield jumped 4 bps to 1.02% on December 16 – a five and a half year high. However, the yield on the 10-year Treasury note rose just 2 bps to 2.30% and yield on the long-term 30-year bonds saw a 2 bp nudge to 3.02%. All bond ETFs were in the red. Given this, we have highlighted ETF winners and losers from the Fed move: The PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) – Natural winner The U.S. dollar is a common winner following the lift-off. The U.S. dollar ETF UUP gained 0.04% after hours. The iShares MSCI Emerging Markets (NYSEARCA: EEM ) – Surprise Winner Emerging markets normally fall out of favor in a rising rate environment as investors dump these high-yielding, but risky, investing tools for higher yields at home. However, possibility of a gradual hike boosted the emerging market ETF EEM by about 2% on December 16. The fund added 0.2% after hours. The SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) – Natural Winner The regional bank sector was pleased by the Fed decision and the resultant rise in yields, as it tends to benefit from the steepening of the yield curve. As a result, regional bank ETF KRE was up about 1% and added 0.1% after hours. The Market Vectors Gold Miners ETF (NYSEARCA: GDX ) – Surprise Winner but Potential Loser As soon as the greenback gains, commodity prices fall. Gold, one of the key precious metals, might have gained from the slower hike bet, but is likely to lose ahead. The SPDR Gold Trust (NYSEARCA: GLD ) tracking the gold bullion added over 1.2% while the largest big-cap gold mining ETF GDX added about 4% on the same day. The latter saw more gains as it often trades as a leveraged play on gold. But both lost over 0.3% and 0.6% in extended hours. The iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ) – Surprise Winner but Potential Loser Mortgage REITs perform better in a low interest rate environment. However, though high-yield REM added 3.2% yesterday, it might see a slump ahead. Original Post