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Best And Worst Q1’16: All Cap Value ETFs, Mutual Funds And Key Holdings

The All Cap Value style ranks fourth out of the twelve fund styles as detailed in our Q1’16 Style Ratings for ETFs and Mutual Funds report. Last quarter , the All Cap Value style ranked fourth as well. It gets our Neutral rating, which is based on aggregation of ratings of 11 ETFs and 272 mutual funds in the All Cap Value style. See a recap of our Q4’15 Style Ratings here. Figure 1 ranks from best to worst the seven all-cap value ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated all-cap value mutual funds. Not all All Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 2025). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the All Cap Value style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Five ETFs are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Northern Lights Fund Trust II Al Frank Fund ( VALAX , VALUX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. The PowerShares FTSE RAFI US 1000 Portfolio ETF (NYSEARCA: PRF ) is the top-rated All Cap Value ETF and the Transamerica Partners Institutional Large Value Fund (MUTF: DIVIX ) is the top-rated All Cap Value mutual fund. PRF earns an Attractive rating and DIVIX earns a Very Attractive rating. The First Trust Value Line Dividend ETF (NYSEARCA: FVD ) is the worst-rated All Cap Value ETF and the Copley Fund (MUTF: COPLX ) is the worst-rated All Cap Value mutual fund. FVD earns a Neutral rating and COPLX earns a Very Dangerous rating. Wells Fargo & Company (NYSE: WFC ) is one of our favorite stocks held by PRF and earns an Attractive rating. Wells Fargo was also featured as a long idea in November2015. Wells Fargo’s ability to grow after-tax profits ( NOPAT ) has been extremely impressive. Over the past decade, the company has grown NOPAT by 12% compounded annually. Over this same time, Wells Fargo has consistently earned a double-digit return on invested capital ( ROIC ) and over the trailing-twelve-months, earns an 11% ROIC. Despite the impressive business strength, the company remains undervalued. At its current price of $48/share, Wells Fargo has a price-to-economic book value ( PEBV ) ratio of 0.9. This ratio means that the market expects the company’s NOPAT to permanently decline by 10% from current levels. If Wells Fargo can grow NOPAT by just 5% compounded annually for the next decade , the stock is worth $67/share today – a 40% upside. Orbcomm Inc. (NASDAQ: ORBC ) is one of our least favorite stocks held by FRAVX and earns a Dangerous rating. Over the past five years, Orbcomm’s NOPAT has declined by 20% compounded annually. In fact, the business has never generated positive economic earnings in any year since going public in 2006. Orbcomm currently earns a bottom-quintile ROIC of 1%. In spite of the poor fundamentals, ORBC is up nearly 20% in the last year and is now significantly overvalued. To justify its current price of $7/share, Orbcomm must grow NOPAT by 34% compounded annually for the next 14 years. Figures 3 and 4 show the rating landscape of all All Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme. 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.

The V20 Portfolio Week #21

The V20 portfolio is an actively managed portfolio that seeks to achieve an annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read the last update here ! Current Allocation *Only available to Premium Subscribers Planned Transactions *Only available to Premium Subscribers ————– It’s been a while since I gave a public weekly update. Premium subscribers have continued to receive weekly updates regarding allocation and planned transactions. It was quite encouraging to have some readers email me regarding this short hiatus, I am glad that I have provided value to you. Since the last update , the V20 Portfolio rose by 12.8% while the S&P 500 (NYSEARCA: SPY ) was virtually flat. As we wrap up February, the V20 Portfolio suffered a minor setback towards the end of the month, shedding 2.3% while the S&P 500 gained a modest 1.6% over the past week. Portfolio Update When the portfolio declined significantly in January, we took the opportunity to make some moves. Now that the portfolio is rebounding, we shall sit and wait patiently. One of our minor holdings, Intelsat (NYSE: I ), reported earnings on Monday. Shares have almost halved since then, falling from $3.01 to $1.69 as of Friday, contributing to 81% of the decline over the past week. On the bright side, the company is now trading at less than 1x TTM P/E. As I’ve mentioned in previous updates, the problem with Intelsat is not a matter of profitability, but one of liquidity. As the result of the meltdown in the high yield market, it is becoming increasingly probable that a restructuring will take place due to the company’s large debt load ($15 billion), assuming current market conditions persist. While it sounds scary, it is a risk that we should be willing to take. For one, the underlying business is still generating healthy amount of cash flows. Secondly, I believe that the equity holders (Silverlake, BC Partners, and Fidelity, controlling 80% of shares) have enough incentives to put together a deal that would be favorable to shareholders in the event of a restructuring. Of course, this is not just blind faith. Given the fact that they haven’t sold shares during the IPO, it is fairly clear that it is in everyone’s best interest to not let creditors get away with a low ball offer. Furthermore, the risk to the portfolio is also contained through Intelsat’s small allocation in the V20 Portfolio (2.4%). Looking Forward While half of our holdings have reported earnings ( SAVE , ACCO , I), Conn’s (NASDAQ: CONN ) and Magicjack (NASDAQ: CALL ) (58% of long position) have yet to announce their fourth quarter results. In Conn’s case, two big questions have already been answered thanks to the company’s monthly updates. Sales have continued to grow at a rapid pace (+7.4% in Q4) and delinquency rates have started to decline. As for MagicJack, the company recently initiated two previously announced initiatives: a new service offering with Movistar and a new SMB (small medium businesses) subsidiary. There isn’t significant fixed costs for the Movistar deal, but for the SMB initiative, there will be an initial investment of around $10 million this year. However, both of these initiatives will drive growth, which is a critical component to turning around investor sentiment, an important step that could push the stock back to its fair value quickly. Performance Since Inception Click to enlarge Disclosure: I am/we are long ACCO, CONN, CALL, I, SAVE. 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.

Is Indexing Just Another Wall Street Fad?

Here’s an interesting comment from value investor Seth Klarman on the rise of indexing (this is from 1991!): Klarman is obviously biased because he’s in the business of selling a high fee asset management platform. If indexing is right, then his form of highly active alpha chasing asset management is wrong. This is basically what Bill Ackman was saying when he lashed out against indexing earlier this year. Anyhow, I think Klarman and Ackman are brilliant and I could never do what they’ve done over the years, but I did want to highlight some of the comments here because there are common concerns that I don’t think are fully warranted. SK: Indexing is predicated on efficient markets. CR: No, this is one point I’ve reiterated in my repetitive posts on the myth of passive investing . Indexing doesn’t work because markets are efficient. Efficiency has nothing to do with it . Indexing works because the costs of active management are so high. Bogle outlined this thinking back in 2003 . SK: The higher the percentage of all investors who index, the more inefficient the markets become as fewer and fewer investors would be performing research and fundamental analysis. CR: This is the paradox of indexing. Indexing, by definition, requires active management. In order for the passive indexers to remain passive, they need active managers to make the markets that fulfill their indexing needs. There cannot be a world of only passive indexers. So, if indexing is eating the world, then there should be more opportunities for active managers in the form of market making and index arbitrage opportunities. Active managers like high frequency trading firms are flourishing in this world. Indexing doesn’t kill active management. It just forces it to change. And if Klarman is right, then he should embrace indexing as it could create more opportunities for more active managers to discover inefficiencies. SK: If everyone practiced indexing… CR: Nope, this is impossible. Indexing requires active management to implement the various index fund strategies that exist. Speaking of which, there are so many “indices” out there today that the whole idea of indexing has become rather nebulous. The indexing world is comprised of all sorts of different strategies that try to take advantage of different inefficiencies in the market. Index funds are just product wrappers doing exactly what Seth Klarman is trying to do in his hedge fund. For instance, the Vanguard Value Fund is trying to capture the value premium by holding a specific set of stocks that meet a certain “value” criteria. The only real difference between this index fund and Seth Klarman’s hedge fund is that the Vanguard fund is lower fee, more tax efficient and more diversified. SK: “[Indexing] means that in a proxy contest, it makes no real difference to the manager of an index fund whether the dissidents or the incumbent management wins the fight”. CR: The vast evidence on the failure of active managers over the decades shows that public market investors don’t understand corporations better than managements. I don’t see how this evidence adds credence to the idea that we should want public investors to be even more active in the daily management activities of corporations… If anything, the failure of active managers means we should want public investors to voice fewer opinions about how companies should be run and instead of voting with their proxies, stick to voting with their wallets. SK: I believe that indexing will turn out to be just another Wall Street fad. CR: Well, this was fabulously wrong. Indexing assets have exploded since 1991 as more active strategies have floundered.