Tag Archives: article

Robo-Advisors Are Desperately Clinging To A Dangerous Dogma

I’ve recently argued that the success of passive investing potentially sows the seeds of its own demise . Patrick O’Shaughnessy also made a similar point recently and probably a bit more eloquently. But, to dig deeper into the push towards passive, there’s one big problem I have with virtually every one of the major robo-advisors that very few folks seem to be talking about. That is they all seem to advocate a heavily overweight position in equities, and for the most part, this is skewed towards U.S. equities. For example, below is the allocation Wealthfront would put me in. It’s 91% in stocks, 49% U.S. stocks and 42% foreign, and 9% muni bonds (This is its taxable allocation, but the retirement allocation is very, very similar). Click to enlarge I assume this massive equity overweight is simply based on the, “stocks for the long run,” dogma that everyone has bought into in recent years. The trouble with this is that it fails to take into account the simple fact that, in recent years and across a wide variety of time frames, bonds have outperformed stocks and with far less volatility, or what some might call, “risk.” As The Economist points out , “there was a point in 2011 when equities had lagged Treasury bonds over the previous 30 years.” 30 years! Intrigued, I decided to run some of the numbers myself. The chart below tracks the difference in performance between Vanguard’s S&P 500 index fund versus its long-term treasury fund. It dates back to the start of 1999; that’s as far as StockCharts.com will let me go. Notice that since then, bonds have nearly doubled up on the performance of stocks, and this includes some of the greatest years in stock market history! This time frame is especially compelling to me because stocks are currently valued, according to the Buffett yardstick and a few other valuable measures, just as highly today as they were back in 1999-2000 . Click to enlarge We can also just look at the past 10 years. Stocks have had an incredible run recently; surely they’ve outperformed bonds over the past decade. Nope. Bonds win again and, if you owned them instead of stocks, you felt much better about your investments during the financial crisis and were thus much more likely to stick with your investment strategy through that difficult period. Click to enlarge So it’s fascinating for me to see so many hang on so fiercely to the idea that buying and holding U.S. stocks over any and all time frames is the way to go despite their much greater volatility and lagging performance in recent years. And to see this dogma take form across every robo-advisor I’ve found just validates how deeply ingrained this dogma has now become. In fact, Wealthfront is so in love with the idea it wouldn’t put any of my money at all into long-term treasuries. Why not? Because it’s clinging to a dogma that perhaps worked at one point a long time ago, when stocks were more consistently fairly valued. But this dogma hasn’t worked for quite a long time now. Maybe this is why Ray Dalio’s firm, which has adopted just the opposite dogma – overweight bonds versus stocks because they offer better risk-adjusted returns over the long term – has become the largest hedge fund firm by assets in the world. Now I’m not saying you should forget stocks and put all your money in bonds. But there is a wonderful case to be made for diversifying across a variety of asset classes. Wealthfront makes it appear as if it’s doing so. It’s not. In fact, it would just put all my money in the stock market and say, “good luck!” True diversification is something very, very different and also something far more valuable. Sadly, it may take another painful bear market in equities before the robos learn this important lesson.

Terraform Is Alpha Utility Dog Per Analysts In March

Utilities SML Dogs Line-Up For March Yield (dividend / price) results from here verified by Yahoo Finance were calculated as of March 15, 2015 for S mall, M id, & L arge cap Utilities stocks. S mall cap firms were valued at $200M(illion) to $2B(illion); M id cap firms were worth $2B to $10B; L arge caps were valued above $10B. Those yield results led to the actionable conclusions discussed below. Fifty In The Money Since late 2011 this report series has applied dog dividend methodology to uncover possible buy opportunities in each of eight major market sectors listed by Yahoo Finance: basic materials ( BasMats ), consumer goods ( ConGo ), financials ( Fins ), healthcare ( Heal ), industrial goods ( IndiGo ), services ( Svcs ), technology ( Tec ), and utilities ( Utes ). In the past three years the series expanded to report (1) dividend yield; (2) price upside; (3) net gain results based on analyst 1 yr. target projections. This article is intended to reveal bargain stocks to buy and hold up to one year. See Dow 30 article for explanation of the term “dogs” for stocks reported based on Michael B. O’Higgins book ” Beating The Dow ” (HarperCollins, 1991), now named Dogs of the Dow . O’Higgins system works to find bargains in any collection of dividend paying stocks. Utilizing analyst price upside estimates expanded the stock universe to include popular growth equities, as desired. Dog Metrics Marked Utilities Stock by Yield (click to enlarge) Click to enlarge Actionable Conclusion (1) Diversified Utilities Show Most By Yield Of ten stocks with the biggest utilities sector dividend yields after February, per Yahoo Finance, 5 were of the diversified type; 2 gas; 3 electric. Tops by yield was one the five diversified firms, TerraForm Power Inc. (NASDAQ: TERP ) [1]. The four other diversified firms placed third, sixth, eighth, and ninth: Transalta Corp (NYSE: TAC ) [3]; Pattern Energy Group Inc (NASDAQ: PEGI ) [6]; Brookfield Renewable Energy Partners LP (NYSE: BEP ) [8]; Just Energy Group, Inc. (NYSE: JE ) [9]. The two gas utilities placed second, and fifth, Suburban Propane Partners (NYSE: SPH ) [2], ONEOK Inc. (NYSE: OKE ) [5]. Three electric utilities placed fourth, seventh, and tenth: Abengoa Yield PLC (NASDAQ: ABY ) [4], NRG Yield Inc. (NYSE: NYLD ) [7], and Brookfield Infrastructure Partners L.P. (NYSE: BIP ) [10], completed the March utilities top ten list. Utility Dog Dividend & Price Results Compared With Dow Dogs Graphs below per market close 3/15/16 compared relative strengths of the top ten utilities sector dogs by yield with those of the Dow industrials index. Annual dividend history from $10,000 invested as $1k in each of the ten highest yielding stocks along with the total single share price of those ten stocks made the data points shown in green for price and blue for dividends. (click to enlarge) Click to enlarge Actionable Conclusions: (2) Utilities Charged As (3) Dow Dogs Charged Too After 2/17/16 dividend from $10k invested as $1k in each of the top ten utilities stocks continued to plummet earthward 13% while aggregate single share popped up 18% to make a bullish move. Dow dogs charged as dividend dropped and price soared after February. Projected annual dividend from $10k invested as $1K in each of the top ten declined 6.95%. At the same time, aggregate single share price increased 17% to confirm the bullish charge. The Dow dogs overbought condition (in which aggregate single share price of the ten exceeded projected annual dividend from $1k invested in each of the ten) expanded. [I invite you to sign on to my premium site, The Dividend Dog Catcher, to share my discussion about how the Dow (short of tossing out IBM) could in one move return to a normal balance where dividends from 10 $1k investments can again exceed the aggregate single share price of those top ten stocks.] (click to enlarge) Click to enlarge Actionable Conclusion (4): Dow Dogs Remain Overbought The overhang was $291 or 79% for April; widened to $320 or 90% to begin May; soared to the new record $406 or 112% in June. The Dow bubble deflated as Dupont replaced IBM in the ten slot of the top ten for July to peg the gap at $269 or 71%, then inflated again as IBM replaced Pfizer to widen the gap to $331 or 85% for August. September brought some sanity back to the runaway Dow when the gap stood at $279 or 67%. October increases in price by CVX and XOM pushed the gap to $334 or 85%. November changed out MCD for WMT, and GE for KO. The resulting price over dividend gap went to $303 or 78%. As of December 4 the gap stood at $294 or 75%. Come January 12, prices of the ten Dow top dogs fell, and dividends rose, as Boeing replaced General Electric to reduce the overbought gap to $215 or 53%. February moves put the gap at $230 or 55% February 16. March hyped the move to $370 or 94%. This gap between high share price and low dividend per $1k invested defines the Dow over-bought condition. Meaning these are low risk and low opportunity Dow dog stocks. The Dow top ten average price per dollar of annual dividend is $25.65. (click to enlarge) Click to enlarge Conversely, the utilities dog chart shows them as increasingly higher in risk but also potentially as higher gain pups than those of the Dow. The utility top ten average price per dollar of annual dividend as of March 15 was $11.97. (click to enlarge) Click to enlarge Wall Street Wizard Weights One-year median target price set by brokerage analysts multiplied by the number of shares in a $1k investment were used to compare ten stocks showing the highest upside price potential into 2017 out of 30 selected by yield. The number of analysts providing price estimates was noted after the name for each stock. Three to nine analysts have proved to provide the most accurate mean target price estimate. Actionable Conclusion (5) Ten Utilities Dividend Dogs Showed March Upsides of 5.81% to 42.18% (6) Three Were Downcast 5.62% to 11.53% (click to enlarge) Click to enlarge To quantify top dog rankings, analyst mean price target estimates provide a “market sentiment” measure of upside potential. Added to the simple high yield “dog” metrics, analyst mean price target estimates provided another tool to dig out bargains. Actionable Conclusions: Wall St. Wizards Forecast Average (7) 5.56% Upsides & (8) 10% Net Gains from Top 30 Utilities Dogs By March, 2017 Top thirty dogs from the utilities sector were graphed below to show relative strengths by dividend and price as of March 15, 2016 and those projected by analyst mean price target estimates to the same date in 2017. A hypothetical $1000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter the analyst mean target price was used to gauge the stock price upsides and net gains including dividends less broker fees as of 2017. Historic prices and actual dividends paid from $30,000 invested as $1k in each of the highest yielding stocks and the aggregate single share prices of those twenty stocks divided by 3 created data points for 2016. Projections based on estimated dividend amounts from $1000 invested in the thirty highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by 3 created the 2017 data points green for price and blue for dividend. (click to enlarge) Click to enlarge A 5.5% lower dividend was projected from $10K invested in this group while aggregate single share price was seen to increase by 2.25% in the coming year. The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts have historically provided more accurate projection estimates. Estimates from only one analyst were not applied (n/a). A beta (risk) ranking for each stock was provided in the far right column on the above chart. A beta of 1 meant the stock’s price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stock price movement opposite market direction. Actionable Conclusion (9): Wall St. Wizards Estimated Ten Utilities Dogs Would Net 10.5 % to 53.5% by March 2017 Six of ten top dividend yielding utilities dogs were verified as being among the ten net gainers for the coming year based on analyst 1 year target prices. So this month the dog strategy for this sector as graded by Wall St. wizards was 60% accurate. Ten probable profit generating trades were revealed by Thomson/First Call in Yahoo Finance by 2017: (click to enlarge) Click to enlarge TerraForm Power Inc was projected to net $534.50 based on the median price estimate from nine analysts plus dividends less broker fees. A Beta number was not available for TERP. Pattern Energy Group Inc was projected to net $393.65, based on dividend plus median target price estimates from twelve analysts less broker fees. The Beta number showed this estimate subject to volatility 22% more than the market as a whole. NRG Yield Inc was projected to net $360.78 based on estimates from fourteen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 2% more than the market as a whole. Just Energy Group, Inc. was projected to net $250.45 based on dividends plus a median target price estimate from three analysts less broker fees. The Beta number showed this estimate subject to volatility 24% more than the market as a whole. Pepco Holdings (NYSE: POM ) was projected to net $243.73 based on estimates from four analysts plus dividends less broker fees. The Beta 34% less than the market as a whole. Western Gas Equity (NYSE: WGP ) was projected to net $205.59 based on estimates from sixteen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 53% more than the market as a whole. Suburban Propane L.P. was projected to net $157.29 based on dividends plus the lowest target price estimate from one of eight analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 66% less than the market as a whole. Brookfield Infrastructure Partners L.P. was projected to net $149.10 based on dividends plus the median target price estimate from seven analysts less broker fees. The Beta number showed this estimate subject to volatility 17% more than the market as a whole. The AES Corporation (NYSE: AES ) was projected to net $114.00 based on dividends plus a median target price estimate from eleven analysts less broker fees. The Beta number showed this estimate subject to volatility 18% more than the market as a whole. South Jersey Industries (NYSE: SJI ) was projected to net $104.85 based on estimates from four analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 47% less than the market as a whole. The average net gain in dividend and price was 25.14% on $10k invested as $1k in each of these ten utilities dogs. This gain estimate was subject to average volatility 15% more than the market as a whole. Actionable Conclusion (10): (Bear Alerts) Analysts Predicted Three Utility Dogs To Show Net Losses of 3.3% to 9.88% By March, 2017 Three probable losing trades revealed by Thomson/First Call in Yahoo Finance in 2017 were: (click to enlarge) Click to enlarge Southern Company (NYSE: SO ) was projected to lose $33.07 based on dividend and a median target price estimate from fourteen analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 97% less than the market as a whole. Northwest Natural Gas (NYSE: NWN ) was projected to lose $96.41 based on dividend and a median target price estimate from two analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 68% less than the market as a whole. Consolidated Edison (NYSE: ED ) was projected to lose $98.81 based on dividend and a median target price estimate from thirteen analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 2% opposite the market as a whole. Average net loss in dividend and price was 7.61% on $3k invested as $1k in each of these three utilities dogs. This loss estimate was subject to average volatility 89% less than the market as a whole. A Graphic Comparison of Utilities Price Action For Contrarians (click to enlarge) Click to enlarge Last Year upside price performance for these three Utility “losers” is in mighty contrast to the marked downside price history shown by analysts upside utility star stock, TERP. Dog Metrics Extracted Fewer Bargains From Five Lowest Priced Highest Yield Utility Dogs Ten small, mid, and large cap utilities equities were culled by yield from here . Yield (dividend / price) results verified by Yahoo Finance did the ranking. (click to enlarge) Click to enlarge Actionable Conclusions: Analysts Allege 5 Lowest Priced of Ten Highest Yield Utilities Dividend Dogs (11) Generate 23.41% VS. (12) 21.1 % Net Gains by All Ten by March 15, 2017 (click to enlarge) Click to enlarge $5000 invested as $1k in each of the five Lowest priced stocks of the top ten utilities dividend kennel by yield were predicted by analyst 1 year targets to deliver 16.99% more net gain than $5,000 invested as $.5k in all ten. The third lowest priced utilities dividend dog, TerraForm Power Inc , was projected to deliver the most net gain of 53.45%. Lowest priced five utilities dividend dogs for February 17 were: Transalta Corp; Just Energy Group, Inc.; TerraForm Power Inc; NRG Yield Inc; Abengoa Yield PLC, with prices ranging from $4.48 to $17.72. Higher priced five utilities dividend dogs for February 17 were: Pattern Energy Group Inc; ONEOK Inc.; Suburban Propane L.P.; Brookfield Infrastructure Partners L.P., whose prices ranged from $18.76 to $39.80. This distinction between five low priced dividend dogs and the general field of ten reflects the rare miss in the “basic method” Michael B. O’Higgins employed for beating the Dow. The same technique has been used to find the more rewarding dogs in the Utilities kennel. The added scale of projected gains based on analyst targets contributed a unique element of “market sentiment” gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. Its also the work analysts got paid big bucks to do. A caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change. Gains/declines as reported did not factor-in any tax problems resulting from dividend, profit, or return of capital distributions. Consult your tax advisor regarding the source and consequences of “dividends” from any investment. See my instablog for specific instructions about how to best use the dividend dog data featured in this article. –Fredrik Arnold Stocks listed above were suggested only as reference points for a small, mid, and large cap utility equities dividend stocks as of March, 2016. These were not recommendations. Three of these utilities sector dividend pups qualify as valuable catches! Check out the now 30 Dogs of the Week found on The Dividend Dog Catcher premium site. Click here for more information or to subscribe . One click will answer all your questions about price and guarantees. Sign up. It’s virtually no risk. If for any reason you choose to end your subscription, you’ll get a prorated refund from Seeking Alpha. Perhaps the Seeking Alpha Marketplace is the best financial advisory bargain on the internet. Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same. Graphs and charts were compiled by Rydlun & Co., LLC from data derived from www.dividend.com ; finance.yahoo.com ; analyst mean target price by Thomson/First Call in Yahoo Finance. Disclosure: I am/we are long CSCO, PFE, VZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Best And Worst Of February: Multi-Alternative Funds

Multi-alternative mutual funds and ETFs endured another tough month in February, losing 0.49% in the aggregate versus a one-month return of 0.48% for the Morningstar Moderate Target Risk Index. Although the category was down 6.12% for the year ending February 29 (slightly better than the Index return of -6.47%), macroeconomic and market forecasts have kept investor interest strong, with category-wide inflows of more than $18 billion for the year ending February 29. The biggest recipient of investor inflows was the John Hancock Global Absolute Return Strategy Fund (MUTF: JHAIX ), which saw its asset base grow by a whopping $3.58 billion for the year ending on Leap Day. On the flip side, the multi-alternative fund that suffered the biggest outflows was the Goldman Sachs Absolute Return Tracker Fund (MUTF: GARTX ), which saw its asset base fall by more than $966 million. Surprisingly, the differential between the annual return of the two funds, for the period ending February 29, was small: -4.77% for JHAIX and -5.20% for GARTX. For the month of February, the funds posted respective returns of -1.56% and -0.12%, which failed to make the top three – but also kept the two funds out of the category’s doldrums. Best Performers in February The three best-performing multi-alternative funds in February were: Grant Park Multi Alternative Strategies Fund (MUTF: GPAAX ) KCM Macro Trends Fund (MUTF: KCMTX ) Astor Macro Alternative Fund (MUTF: GBLMX ) Grant Park’s fund took the top spot among multi-alternatives in February, returning +3.65%. Its one-year returns of -0.47% still ranked in the top decile of the category, and that’s one of the reasons it was able to garner more than $93 million in investor inflows for the year ending February 29. The KCM and Astor Macro funds posted respective one-month gains of 3.13% and 2.83% in February. Since the Astor fund only launched on April 1, 2015, only the KCM fund had a one-year track record: Its annual return through February 29 stood at -8.45%, ranking in the bottom 30% of its category. This, along with its higher than average annual volatility of 12.16%, can help explain why investors withdrew $2.89 million from the fund for the year. Worst Performers in February The three worst-performing multi-alternative funds in February were: Granite Harbor Alternative Fund (MUTF: GHAFX ) Granite Harbor Tactical Fund (MUTF: GHTFX ) Palmer Square Absolute Return Fund (MUTF: PSQAX ) February was a tough month for Granite Harbor, as two of its alternative funds were the period’s worst performers. GHAFX fell a stunning 17.50%, and GHTFX dropped a nearly-as-bad 16.78%. For the year ending February 29, the pair of one-star rated funds were down 22.74% and 23.37%, respectively, each ranking in the bottom 1% of the category. The Palmer Square Absolute Return Fund looks a lot better by comparison, despite ranking as the third-worst multi-alternative fund in February. It lost 7.50% for the month and was down 19.24% for the year – both bad numbers, but considerably less so than Granite Harbor’s funds. Nevertheless, its outflows of more than $84 million were far steeper than either of the Granite Harbor funds, whose comparatively small sizes ($14.7 million and $12.5 million, compared to PSQAX’s $160.2 million) lead to smaller absolute outflows of $21.3 million and $16.6 million for the year ending February 29. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.