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Robo Rise Barred By High Client Acquisition Cost

Robo-advisors need clients to operate and the cost of acquiring clients in financial services is high. To us, this is the elephant in the robo-advisor room that is seldom discussed – which we believe is a strategic failure of the highest order. It is an overriding concern that hangs over all other discussions about robo-advisors. Acquisition costs include the costs of initially finding a prospect and then converting those prospects into clients, with the inevitable attrition rate that those conversions incur. When total costs are compared to clients gained, the results can be surprisingly high. Lucian Camp calculates the cost of acquiring a client in the UK to be around £200 (US$312). This cost is beyond the means of many advisory firms, which is why they grow rather slowly – largely through word of mouth referral. In the past, they might have relied on product manufacturers and distributors to provide them with marketing support. Under new regulations in the UK, such supports are now largely no longer possible, but they continue to thrive in the US marketplace. In a world where former specialties have become commoditized, being able to make a financial product or service no longer makes you special as it once did. Where, in the past, you may have been able to extract an economic rent because you occupied a position of advantage, market forces have now equalized you. Today, the ability (knowledge) and capacity (cash flow) to quickly market financial products to scale is what separates successful financial services businesses from the ‘also-rans’. It does not matter if you arrive at the marketplace with a better mousetrap if that trap is hidden where the mice cannot find it. Cheese – in the form of marketing, advertising and promotion – will help to attract them. But cheese isn’t cheap. We return, once again, to our initial caution – robo-advisors are very good at servicing customers, but do nothing to attract customers. Putting a robo-adviser to work effectively requires considerable investment in marketing and promotions, with no guarantee of success. Vitamins and supplements are equally generic. Yet, a family business in Australia figured out how to create a brand that made generic inputs ‘special’. In late 2015, a Chinese firm acquired the vitamin and supplement company, Swisse, for A$1.5 billion (US$1.05 billion). Swisse is a marketing machine – it is constantly in the news, through its sponsorship of high-profile ambassadors and it spends a lot of money on advertising. It is rumored that its annual marketing budget is A$50 million (US$35 million) when the cost of the raw materials for all of the products it makes is less than A$5 million (US$3.5 million). Vitamin C is not special – being part of the brand image and lifestyle Swisse promotes is special. More than US$1 billion worth of special! Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: For FA audience/ Gil Weinreich

Emerging Markets Back On Track: 5 Outperforming ETFs

Emerging markets, which were the worst hit by slowing economic growth, China turmoil and the prospect of higher interest rates in the U.S., seem to have been rebounding in recent weeks. This is especially true as the two most popular ETFs – the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) and the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) – climbed over 5% in the past five days against gains of 3.4% for the iShares MSCI ACWI ETF (NASDAQ: ACWI ) and 3% for the SPDR S&P 500 ETF (NYSEARCA: SPY ) , suggesting that the worst might be over. Impressive gains came on the back of stabilization in commodity prices, hopes of additional stimulus from central banks from Asia to Europe, and China’s latest step to arrest the slowdown that led to some gains in emerging market currencies. Additionally, investors’ lack of hope for a rate hike anytime soon fueled the rally in the stocks. Further, data from the Institute of International Finance, which showed that capital flows into emerging markets turned flat in February after seven straight months of outflows, injected fresh optimism into the emerging markets. Notably, net emerging market outflows decreased to $200 million last month, with Latin America pulling in the maximum capital of $2.7 billion, followed by inflows of $1.7 billion in Africa and the Middle East, $1.5 billion in Europe and $300 million in Asia. Apart from positive developments, low valuations made these stocks tempting. As a result, several emerging market ETFs performed remarkably well over the past five days. Of those, we have highlighted the ones that emerged as the true winners of this short-covering rally. PowerShares FTSE RAFI Emerging Markets Portfolio ETF (NYSEARCA: PXH ) – Up 6.4% This ETF follows the FTSE RAFI Emerging Markets Index and offers exposure to the largest emerging market stocks based on four fundamental measures – book value, cash flow, sales and dividends. Holding 336 securities in its basket, the fund allocates no more than 3.4% in a single security. Financials (31%) and energy (22.6%) take the top two spots. In terms of country holdings, about one-fourth of the portfolio goes to Chinese firms while Taiwan, Brazil, and Russia round off the next three spots with a double-digit exposure each. The fund has amassed $282.1 million in its asset base, and trades in a good volume of around 265,000 shares a day. It charges 49 bps in annual fees from investors and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. iShares MSCI BRIC ETF (NYSEARCA: BKF ) – Up 5.7% This fund targets the four BRIC countries with highest exposure of 57.1% in China, 19.6% in India, 13.7% in Brazil and the rest in Russia. It tracks the MSCI BRIC Index and holds 308 stocks in its portfolio. However, it is skewed towards the top firm – Tencent Holdings ( OTCPK:TCEHY ) – at 6.82%. Other firms hold no more than 4.84% of assets. In terms of sector exposure, financials dominates the fund return with 30% of the portfolio, followed by information technology (18.4%) and energy (12.4%). The fund has accumulated $154.9 million in AUM and trades at a lower volume of 21,000 shares per day on average. It charges 72 bps in expense ratio and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a Medium risk outlook. EGShares Emerging Market Consumer ETF (NYSEARCA: ECON ) – Up 5.5% This ETF targets the consumer sector of the emerging markets by tracking the Dow Jones Emerging Markets Consumer Titans 30 Index. It holds 30 stocks in its basket with heavy concentration on the top firm – Naspers ( OTCPK:NPSNY ) – at 10.3%. The other firms hold less than 5.7% share. From a country look, South Africa occupies the top position with one-fourth of the portfolio while China and Mexico round off the top three with over 16% share. The fund has amassed $549.6 million in its asset base and sees solid average trading volume of more than 352,000 shares. The expense ratio comes in at 0.83%. Schwab Emerging Markets ETF (NYSEARCA: SCHE ) – Up 5.5% This fund tracks the FTSE Emerging Index, holding 776 stocks in its basket. None of the securities accounts for more than 4% of total assets. The product is slightly tilted towards financials at 25%, closely followed by technology (14%) and energy (8%). Here again, China takes the top spot at 26.5% while Taiwan and India receive a double-digit allocation each. SCHE is one of the popular and liquid options in the emerging market space with AUM of $1.5 billion and average daily volume of 848,000 shares. It charges 14 bps in fees per year from investors and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. First Trust Emerging Markets Small Cap AlphaDEX ETF (NYSEARCA: FEMS ) – Up 5.5% This fund follows the NASDAQ AlphaDEX Emerging Markets Small Cap Index and targets the small cap segment of the emerging market space. Holding 206 securities, the fund is well spread out across each component as each security holds less than 1.5% share. Taiwanese firms take the top spot at nearly 24.2%, closely followed by China (18.2%) and Brazil (12.4%). From a sector look, about one-fifth of the portfolio is allocated to information technology while financials, industrials, and consumer discretionary round off the next three spots with a double-digit allocation each. The product is often overlooked by investors, as depicted by AUM of $36.3 million and average daily volume of roughly 22,000 shares. The expense ratio comes in higher at 0.80%. Original Post

5 Real Estate Fund Picks On Record Construction Outlay

The real estate industry is off to a solid start this year ignoring the winter weather, which always acts as a resistance. Construction outlay touched a record high in January, while building permits remained unchanged. Existing home sales also posted record gains in January indicating that the housing industry is firmer than what most believed. In February, the NAHB/Wells Fargo housing market index that reflects home builders’ sentiment continued to remain above the 50 mark, indicating improvement. Moreover, historically low mortgage rates and a rise in wages is expected to give the real estate industry a boost. Hence, it will be prudent to invest in real estate mutual funds for solid returns. Construction Spending Rises in January Outlays on construction rose 1.5% to a seasonally adjusted annual rate of $1.41 trillion in January from the upwardly revised estimate of $1.12 trillion in December, according to the Commerce Department. Construction spending touched the highest level in January since Oct. 2007. Spending also rose a whopping 10.4% year over year. Money was spent on both private and public infrastructure. In the private sector, spending increased 0.5% to $831.41 billion in January from December’s figure of $827.35 billion. Single family residential construction and multifamily construction soared 7.7% and 30.4% from year-ago levels, respectively. Private non-residential construction too surged 11.5% year over year. Coming to the public sector, total spending increased 4.5% in January following a 3.3% monthly gain in December, with spending on educational facilities gaining a solid 11.7% year over year. This sharp rise in spending in January came in after outlays gained momentum last year. In 2015, construction spending was up 10.5% to $1.097 trillion from $993.4 billion in 2014. This steady rise in spending toward new construction is a telltale sign of the health of the real estate industry. Moreover, construction spending as a percentage of GDP rose 6.2% in the quarter ending Dec. 31. This is a commendable rise from the year-ago increase of 5.8%. However, if we consider the last 50 years average during this period, spending gained 8.4%. This shows that the rise is still below the historical average, which in many ways represents pent-up demand. Building Permits Remain Steady There is also good news on the construction permit front. Building permits are a precursor to construction activity. It indicates the future growth of housing activities. Building permits were revised to a seasonally adjusted rate of 1.204 million in January, unchanged from December’s figure, according to the Commerce Department. Earlier, it was reported that permits were down 0.2% to a seasonally adjusted rate of 1.202 million in January. Meanwhile, the other part of the report that shows the number of privately owned new houses on which construction has started was not so encouraging. In January, housing starts declined 3.8% to a 1.1 million annualized rate from 1.14 million in December. A crippling east coast winter storm was cited to be the reason behind this drop in housing starts. If this be so, it is a seasonal factor, which in the long run won’t leave any impact. Moreover, with the job market strengthening, it is expected that demand for more construction will increase. Average hourly earnings gained almost 0.5% in January from the previous month’s figure to $25.39. Average hourly earnings also rose 2.5% year over year. And this happened while the unemployment rate declined from 5% in December to 4.9% in January, the lowest since 2008. Record Home Sales Existing home sales for January hit the highest level since July last year. This indicates that the housing industry is in better shape than earlier estimated. Existing home sales increased 0.4% in January to a seasonally adjusted annual pace of 5.47 million. This is contrary to the consensus estimate of sales of homes owned earlier dropping to 5.33 million from December’s revised pace of 5.45 million. Additionally, existing home sales registered an annual increase of 11% in January, the largest yearly increase registered since Jul 2013. Pending home sales mostly track existing home sales. Pending home sales also advanced 1.4% in January from year-ago levels, its 17 straight month of year-on-year gains. However, purchase of new-single family homes decreased 5.2% in January from a year earlier. Nevertheless, home loan rates are drifting downward, which is expected to boost home sales in the near term. The 30-year fixed mortgage rate is about 3.8%, while the 15-year fixed loan rate is down to around 3.2%. Rates are currently hovering at historically low levels. 5 Real Estate Funds to Invest In Investors continue to remain optimistic about the outlook of the real estate industry in the U.S. According to KPMG’s 2016 Real Estate Industry Outlook Survey, 91% of real estate investors and executives surveyed said that real estate fundamentals will improve this year. Almost 74% of them believe foreign investment in the U.S. real estate will increase over the next 12 months. Record rise in construction activities, steady permits for building activities and healthy surge in home sales at a time when weather plays a spoilsport have boosted their sentiment. Add to this, low mortgage rates and you know why they sound so confident. Moreover, there are hints that spending plans on infrastructure may rise in the future. Democratic presidential candidates Hillary Clinton and Bernie Sanders have already promised to increase infrastructure investment. While Clinton plans to spend $275 billion on infrastructure, Sanders wants to deploy $1 trillion. Banking on these positive trends in the real estate industry, it will be prudent to invest in funds related to the housing space. Here we have selected five such real estate funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, offer minimum initial investment within $5000 and carry a low expense ratio. Franklin Real Estate Securities A (MUTF: FREEX ) seeks to maximize total return. FREEX invests a large portion of its assets in equity securities of companies operating in the real estate industry. FREEX’s 3-year and 5-year annualized returns are 8.2% and 9.1%, respectively. Annual expense ratio of 0.99% is lower than the category average of 1.29%. FREEX has a Zacks Mutual Fund Rank #2. Neuberger Berman Real Estate A (MUTF: NREAX ) seeks total return. NREAX invests a major portion of its assets in equity securities issued by real estate investment trusts and other securities issued by other real estate companies. NREAX’s 3-year and 5-year annualized returns are 6% and 7.4%, respectively. Annual expense ratio of 1.21% is lower than the category average of 1.29%. NREAX has a Zacks Mutual Fund Rank #2. PIMCO Real Estate Real Return Strategy A (MUTF: PETAX ) seeks maximum real return. PETAX seeks to achieve its investment objective by investing in real estate-linked derivative instruments. PETAX’s 3-year and 5-year annualized returns are 4.3% and 11.6%, respectively. Annual expense ratio of 1.14% is lower than the category average of 1.29%. PETAX has a Zacks Mutual Fund Rank #2. Davis Real Estate A (MUTF: RPFRX ) seeks total return. RPFRX invests the majority of its assets in securities issued by companies principally engaged in the real estate industry. RPFRX’s 3-year and 5-year annualized returns are 6.6% and 7.9%, respectively. Annual expense ratio of 0.96% is lower than the category average of 1.29%. RPFRX has a Zacks Mutual Fund Rank #1. T. Rowe Price Real Estate (MUTF: TRREX ) seeks long-term growth. TRREX invests a large portion of its assets including borrowings for investment purposes in the equity securities of real estate companies. TRREX’s 3-year and 5-year annualized returns are 9.1% and 9.4%, respectively. Annual expense ratio of 0.76% is lower than the category average of 1.29%. TRREX has a Zacks Mutual Fund Rank #1. Original Post