Tag Archives: alternative

Evaluating Alternatives In 4 Growth And Inflation Scenarios

By DailyAlts Staff Alternative strategies aren’t a homogeneous bunch. Due to their generally unbenchmarked nature, alternative funds within the same category can vary greatly in terms of their objectives, strategies, and risk/return characteristics, to say nothing of the wide diversity of funds and strategies across the universe of alternative styles. In a new white paper titled ” Alternatives in action: A guide to strategies for portfolio diversification ,” Putnam Investments’ Christian Galipeau, Brendan Murray, and Seamus Young set out to answer two questions: What are reasonable performance expectations for alternative investment strategies? How can these strategies fit into a portfolio of traditional assets? For their study, they looked at four alternative categories over the past 20 years, breaking those categories down into sub-styles where appropriate. Their findings: Not surprisingly, different strategies have performed better under different economic scenarios, but funds from the “Risk Reducer/Volatility Dampener” category – such as multi-strategy and global macro funds – have had the most consistent risk-adjusted returns over the past two decades. Classification of Styles For purposes of their analysis, the Putnam Investments authors break alternatives into four broad categories: Return Enhancers Inflation Hedges Risk Reducer/Volatility Dampeners Zero Beta/Zero Correlation The authors then look at how each category has performed under various economic environments over the past 20 years. For the Return Enhancers category, they look at the performance of the Cambridge Associates US PE Index as a proxy for private equity (“PE”). For Inflation Hedges, their benchmark is the S&P GSCI Gold Index Total Returns, as a proxy for precious metals. The Risk Reducer/Volatility Dampeners and Zero Beta/Zero Correlation categories are split into two and three sub-styles, respectively. The former includes multi-strategy and global macro funds, as measured by the Credit Suisse Hedge Fund Index for each style; and the latter includes managed futures, market neutral, and convertible arbitrage funds, also represented by Credit Suisse benchmarks. Future Economic Scenarios “Understanding how different alternative strategies may behave in different environments is essential to utilizing alternatives as an effective source of diversification over market cycles,” the authors write. They look at the performance of each style and sub-style over the period from 1994 to 2013, across four economic scenarios [Growth (G) / Inflation (I)]: G+/I+: Above-trend economic growth with above-trend inflation. G+/I-: Above-trend economic growth with below-trend inflation. G-/I+: Below-trend economic growth with above-trend inflation. G-/I-: Below-trend economic growth with below-trend inflation. As shown in the image above, “G+/I+” has been the most common scenario over the 20 years ending with 2013, but it isn’t necessarily likely to be the most common over the next 20. Performance Under Different Cycles Global macro funds provided the best risk-adjusted returns under G+/I+, G-/I+, and G-/I- scenarios – only the rare and unlikely G+/I- (high growth/low inflation) scenario did another style outperform global macro on a risk-adjusted basis, in this case private equity. The image below shows the risk-adjusted returns of all the strategies under review, as well as traditional assets, over the 20 years ending in 2013: But when using alternatives within a portfolio, another important consideration is how the strategies correlate with other assets in the portfolio. Not surprisingly, the Zero Beta/Zero Correlation sub-styles performed best in these terms, with market neutral funds having the lowest equity beta and correlation under the G+/I+ scenario, and managed futures earning that distinction under G-/I+ and G-/I- scenarios. In closing, the authors state that their study confirms that “alternative strategies can represent valuable innovations to the toolbox of portfolio choices.” Further, “in specific types of economic periods, the performance of some alternatives can diverge from their long-term characteristics.”

401(k) Fund Spotlight: Janus Triton

Summary Janus Triton is a small to mid capitalization growth stock fund. Triton has consistently beaten the Russell small capitalization growth indexes, but not the higher quality S&P 600 Small Cap indexes. Triton is overweight the technology sector, which comprises about 31% of the fund. A look at some of the fund’s largest technology holdings reveal the manager is true to the fund’s promise of investing in companies with “differentiated business models”. Introduction I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article, it is helpful to understand my approach to investing in 401(k)s . I strive to write these articles for the benefit of the novice and professional. Please comment if you have a question. I always try to give substantive responses. Janus Triton Fund The Janus Triton Fund has the following share classes: I will assume the “T” shares for this article, since that is the share class that holds the most assets of the fund. It is also the primary share class used by Janus to evaluate historical calendar year returns. The net expense ratio for the T shares is .93. Evaluating Historical Performance Triton is a small/mid capitalization (“cap”) growth fund. Janus compares the fund’s historical performance to the Russell 2000® Growth Index and the Russell 2500™ Growth Index and it comes out favorably, as shown on the following table: as of September 30, 2015 1 Year 3 Year 5 Year 10 Year Janus Triton – T Shares 5.1% 14.2% 14.1% 11.4% Russell 2500™ Growth Index 3.4% 13.8% 13.9% 8.4% Triton Outperformance (Underperformance) 1.7% .4% .2% 3.0% Russell 2000® Growth Index 4.0% 12.9% 13.3% 7.7% Triton Outperformance (Underperformance) 1.1% 1.3% .8% 3.7% Triton has outperformed both growth benchmarks over all four of these time periods. Most notably, Triton’s outperformance in the important (for long term investors at least) 10-year category ranged from 3.0% to 3.7%. This particular 10-year period is also noteworthy, because it included one of the worst bear markets in U.S. stock market history. However, taking a step back, it is important to ask the question: “Are the Russell indexes the best for comparison?” Perhaps they are if your fund is always outperforming them. There are other widely used small cap indexes from S&P that have outperformed the Russell small cap indexes over time. (This article explains the difference between the two.) The S&P Small 600 Index tends to hold a bit higher quality stocks. For example, it requires index members to have at least four consecutive quarters of positive earnings. I drew up a chart of Triton versus the SPDR S&P Small Cap 600 Index ETF (NYSEARCA: SLY ) and the SPDR S&P Small Cap Growth Index ETF (NYSEARCA: SLYG ) since March 1, 2009 (arguably the approximate date of the current secular bull market). Here is what it looks like: JATTX Total Return Price data by YCharts A:JGMAX C:JGMCX I:JSMGX N:JGMNX S:JGMIX R:JGMRX T:JATTX Out of the three, the SPDR S&P Small Cap 600 Growth Index ETF was the winner, but only slightly. Overall, I think it could be said that all three have pretty much been running neck and neck throughout this bull market. According to Barrons , Triton has outperformed 89% of its peers, as measured by the Lipper Small Cap Growth Index, over the last five years. I think the fact that it beat such a large percentage of its peers, but still trailed the S&P Small Cap 600 Growth Index ETF during this bull market, really speaks to the quality of the S&P Small Cap 600 indexes. Overall, the fund has a solid performance track record. If available in a 401(k), I would likely choose either of the similar S&P Small Cap 600 Indexes though instead. The index gives you a lower expense ratio, so you have a slight advantage right out of the gate. Triton, like so many other mutual funds, is so widely diversified that it really cannot stray to far from the index as long as it remains fully invested. The problem is not so much that the fund holds 120 different stocks, it is that there are only four stocks that comprise more than 2% of the fund each. Other Noteworthy Tidbits Triton does have a substantially overweight position in information technology (31% of the fund as of October 31, 2015) compared to the Russell 2500 ™ Growth Index’s (21%). The fund may present a good angle for investors interested in having more exposure to the sector without going overboard. However, the overall fund has a forward Price to Earnings (“P/E”) multiple of 24, which is very high. I suspect that some of the information technology stocks it holds are widely overvalued. Let us dig a little deeper. The industries the fund has most exposure to are Software (12% of fund) and Information Technology Services (9%). The following table lists the fund’s largest holdings within these two sectors and their trailing twelve month (“TTM”) and forward looking P/E multiples (taken from Yahoo! Finance). Company P/E Multiple (Last 12 Months) Forward P/E Multiple SS&C Technologies Holdings ( SSNC ) 98 22 BlackBaud ( BLKB ) 121 36 Cadence Design Systems ( CDNS ) 30 19 Euronet Worldwide ( EEFT ) 44 22 Broadridge Financial Solutions ( BR ) 24 18 Jack Henry & Associates ( JKHY ) 30 26 I tend to focus on forward looking multiples and most of these are too high for my liking, although I was a bit off on my speculation of wild overvaluation. They are not in the extreme territory of some overplayed growth stocks. Janus states in the Triton fund description that: “The Fund invests in small-cap companies with differentiated business models and sustainable competitive advantages that are positioned to grow market share regardless of economic conditions.” Glancing at the business descriptions of just these six companies leads me to believe that Triton’s manager is following through on this promise. These companies strike me as those that are not going away anytime soon and could continue to experience solid growth in their niches (e.g., payment processing for small financial institutions and designing web solutions for non-profits). Conclusion The Janus Triton Fund is a solid option for 401(k) investors looking to get exposure to small/mid cap growth stocks. I would not choose the fund over the S&P Small Cap 600 Growth Index, but that is rarely a choice. Triton has consistently beaten the comparable Russell growth indexes and most of its peers. I would likely choose it, or at least give it a higher allocation, than other such available options. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to Americans within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser.

The Vanguard Utilities ETF Is On My Holiday Shopping List

Summary The expense ratio and dividend yield are both great. The dividend yield could be further enhanced by changing the weighting structure to emphasize utility companies with stronger yields. The Federal Reserve meeting on December 16th may include a rate increase that could create some nice sale opportunities on utilities. As we prepare for the holidays, I’m getting my shopping list ready. One of the additions to my list is the Vanguard Utilities ETF (NYSEARCA: VPU ). I’ll take investors through my reasoning for putting this on the list as a potential acquisition for the middle of December or later. Expense Ratio The ETF is posting .12% for an expense ratio. What else is there to say? That is a solid expense ratio and makes this fund one of the cheapest options for exposure here. Largest Holdings The diversification within the ETF is pretty weak. For a very long term holder it might make sense to replicate the ETF by just buying the underlying securities and taking higher trading costs to eliminate the expense ratio. However, an expense ratio of only .12% would be difficult to beat without a fairly long time horizon or a large volume of commission free trades in the account. (click to enlarge) The major holdings here are the same ones I would expect to see. Duke Energy Corporation (NYSE: DUK ) is a fairly huge utility company and frequently at the top of the list for utility ETFs. All around this appears to be a reasonable portfolio for an investor that wants to get more utility companies into their portfolio without having to buy the companies individually. Top Dividend Yields The following chart demonstrates the top 10 utilities for dividend yield that have increased their dividend for at least the last 5 consecutive years: Symbol Company Name Yield Years CNP CenterPoint Energy 5.34% 10 SO Southern Company 4.81% 15 DUK Duke Energy Corp. 4.62% 11 PPL PPL Corp. 4.39% 14 STR Questar Corp. 4.07% 36 ALE Allete Inc. 4.02% 5 DGAS Delta Natural Gas 4.01% 11 ED Consolidated Edison 3.95% 41 AEP American Electric Power Co. 3.95% 6 NWN Northwest Natural Gas 3.91% 60 There is quite a bit of cross over between the list as DUK, PPL, AEP are on the top 10 holdings and the 10 utilities for high yields. Because VPU is using a market capitalization weighting scheme, their top holdings are dominated by the largest capitalization utility companies. Using a market capitalization weighting scheme is great for keeping expenses low and maintaining a passive style, but the strategy does nothing to boost the dividend yield of the portfolio. If the price of shares in a utility is increasing but their dividend is not, that utility will see their ranking within the portfolio increase. While I’d prefer to see a focus on utility companies that offer a strong combination of high yields and expected growth in their dividends over the next several years, I’m still consider VPU as a potential holding due to the very low expense ratio and desire to maintain diversification in my portfolio. Looking For Utilities With the Federal Reserve poised to raise rates in December, it seems like a great time to be fishing for good prices on utility companies with an eye to keep buying as long as rates are going up and prices are going down. Utilities tend to have a significant correlation with bonds and an increase in rates will generally send share prices lower. To put that a different way, an increase in bond yields will drive an increase in utility yields. If the price of the utility is falling simply because bond yields are moving higher and the utility yield needs to move in a similar fashion, that is a fine buying reason for me. VPU or Individual Utilities If my portfolio was large enough to plan on buying 10 individual utilities with material allocations to each, I’d be treating individual utilities as being a superior plan to simply buying into VPU. However, going into December I am also looking to beef up my position in equity REITs with the Schwab U.S. REIT ETF (NYSEARCA: SCHH ), and my international positions with the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) or the Schwab International Equity ETF (NYSEARCA: SCHF ). Since I won’t have a great deal of cash left over, I would be more likely to look at taking VPU rather than buying up the individual securities. Conclusion Utility companies can act as a form of income investment because of their strong dividend yields. Unlike buying into a bond portfolio investors can expect that the level of dividends will be increasing over time which makes up for the portfolio having more risk than a simple bond portfolio. I’ve added VPU to my list of ETFs to keep an eye going through December and into early 2016 as a possible candidate. I won’t make those moves in the next few days, but I’ll be looking to see if shares fall hard after the Federal Reserve meeting on December 16th.