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Multialternative Funds: Best And Worst Of November

Mutual funds and ETFs in Morningstar’s multialternative category generally suffered losses in November, with the average fund losing 0.20% for the month. Year-to-date through November 30, the category averaged returns of -1.24%, but over the longer term, multialternative funds have generated three-year returns of +2.95% with a Sharpe ratio of 0.58. That’s not bad, but not all that great, either – particularly when viewed in terms of beta and alpha relative to the Morningstar Moderate Target Risk Index , an index consisting mainly of traditional stocks and bonds. In this monthly review of the best and worst multialternative funds from November, only one of the six featured funds has a track record long enough to analyze its three-year returns – and it was the month’s very worst performer, too. This shows the emerging nature of the category, which typically combines several alternative strategies, often employed by different underlying managers, within a single ’40 Act mutual fund. (click to enlarge) November’s Best Performers The top-performing multialternative mutual funds in November were: The Catalyst Macro Strategy Fund returned an impressive +4.57% in November, but those seemingly stellar returns were barely above its 2015 monthly average. The fund’s one-year return through November 30 stood at a whopping +46.90%, which is an average of roughly 3.90% in gains per month. Even better, for the first eleven months of 2015, the fund averaged gains of roughly 4.76%, with year-to-date returns of +52.40% – wow! But the fund launched on March 11, 2014, and thus it doesn’t have a track record long enough to analyze its three-year returns in terms of beta and alpha. The LoCorr Multi-Strategy Fund also launched recently, on April 6 of this year, to have three years’ worth of returns. In November, it returned +3.14%, making it the second-best multialternative fund to own that month. Finally, the Natixis ASG Global Macro Fund rounded out November’s top three with gains of 1.99%. Year to date through November 30, the fund was down 2.65%. It launched in late 2014, and thus also lacks a sufficient track record to analyze further. (click to enlarge) November’s Worst Performers The two Virtus funds were the second- and third-worst multialternative funds in November, with respective one-month losses of 3.14% (VAIAX) and 2.69% (VSAIX). Both VAIAX and VSAIX have been hampered by the decline in the energy sector. Both funds were launched on the same day in 2014, and thus, they don’t have three-year return data, but they had posted respective one-year returns of -10.27% and -10.35% through November 30. The PSP Multi-Manager Fund was November’s worst-performing multialternative mutual fund, enduring losses of 4.77% for the month. This dropped the fund’s one-year returns through November 30 to a flat 0.00%, while its year-to-date returns through that date were still moderately in the black at +0.69%. Over the longer term, the fund generated annualized returns of +2.55% for the three years ending November 30, with a 0.97 beta and a -3.43 alpha. Its three-year Sharpe ratio stood at 0.32. (click to enlarge) Conclusion As a whole, Morningstar’s multialternative category had three-year returns of +2.59% through November 30. This month’s batch of multialternative funds mostly lacked the track records to evaluate in terms of three-year betas, alphas, and Sharpe ratios – and perhaps that says something about the category and the relative youth of many of the funds in the category. Past Performance does not necessarily predict future results. Meili Zeng and Jason Seagraves contributed to this article.

Value Investing In Cyclical Stocks

Cyclical stocks tend to be reliable profit generators in a value investor’s portfolio. Cycles exaggerate the valuations because they cause uncertainty in the market. So arguably, value investing should work very well. In practice, it can be hard to identify the right investment candidates and pick the right time to invest. We all know that value investing involves buying stocks at prices depressed below the intrinsic value. Cheaper the stock, better the purchase, as theoretically, the potential returns (normalizing the price to value) are higher and the inherent risk of capital loss is lower (the stock is already at distressed levels, where investors have given up). Most cycles in essential commodities are predictable. Phase 1 – Growth and Investment: The business in an industry goes through a period of growth, managers become more confident and hire more employees, invest in assets and new projects and build new plants and increase capacity. There are new entrants in the industry as it grows with above-average profits. The analysts build Discounted Cash Flow and other models that assume good earnings growth for the near future and a possible terminal growth rate thereafter (which is almost always a positive number). This results in higher multiples being assigned to the stocks in the industry than the historical average. Wall Street firms do a lot of business with these growing companies flush with profits, and are therefore inclined to look upon them in a kind light. Investors pile in. Phase 2 – Peaking: All the capacity expansion via new capital investments and new entrants in the industry finally reaches a point where it starts to exceed market demand. The profit margins get squeezed as the marginal unit of production starts to sell at cost or below cost. The high-cost and smaller economies producers start to exit the market. A few players may merge to improve their economies of scale or add in new line of businesses to support the company until the cycle in this line of business recovers. Wall Street starts getting disappointed many quarters running, as the earnings come in lower than expected. Phase 3 – Decline and Disinvestment: Supply now starts to exceed the demand. Product price falls. Weaker and high-cost producers are unable to stay in business, and make an exit. Larger and lower-cost producers may choose to exacerbate the situation by making counterintuitive moves, such as increasing production, to drive the prices further down and hasten the exit of weaker competitors – as long as they are able to at least break even. Predatory pricing is generally illegal in most developed economies, but increasing production is not, and can easily be blamed to an error in judgment. Analysts don’t understand what is going on, and if they do understand the competitive games being played, they do not talk about it. Investors start to lose interest and move on to greener pastures. Businesses disappear, jobs are lost, capital projects are cancelled or postponed, assets are scrapped, and eventually, the supply starts to decrease. Phase 4 – Trough: Supply has finally dipped below the demand. The surviving businesses have started to gain their pricing power back and have begun to enjoy improved profit margins. They have also emerged from the cycle with a bigger market share as a large number of competitors closed shop. At this point, Wall Street has likely lost all interest in these companies, and analysts have dropped coverage of their stock. In Phases 3 and 4, the stock is likely to be undervalued. The cheapest and safest time to invest is in Phase 4. However, timing the bottom of a cycle is difficult and almost impossible. The best a value investor can do then is decide to invest some time after the decline has started and has gone to some depths, and then choose the stocks of the companies that are more likely than others to survive and come out with an increased market share. Which Kind of Industries Does Cyclical Investing Work In? In industries with low-to-zero cost of entry, such as software or internet, cycles do not exist, or if they do, they are short-lived. Some barriers to entry for new competitors can be established by increasing the switching costs for existing customers – it is difficult for the whole enterprises to switch over to Macintosh when all their business systems are written for Windows. However, these switching costs are not insurmountable. The story is very different in industries where a significant capital investment is required to enter an industry or a market. For example, airlines, mining, shipping, automotive production, most manufacturing, real estate development, etc. In these industries, capital projects may also have multi-year lead times before they start contributing to the business. Therefore, a project started today (such as a new ship ordered to be built when the market was doing very well) could take years to complete. When it is complete, though, the company may be adding new capacity in an environment of glut. Therefore, the cycle of boom and bust may be quite drawn-out in these industries. To invest profitably in these cycles, 3 things are required: Pick an industry that is not going to disappear anytime soon or be substituted out with something completely new. Pick companies that are strong enough to outlast the down cycle, or at least, are stronger than most of their competitors. Wait. Understand that these industries are going to go through structural changes and countless investor confidence ups and downs before the winners and losers are determined. Track if your pick continues to be a strong contender as a winner, but otherwise, mostly wait. Finding Values in Phase 3 and Phase 4 Stocks Finding good value stocks in Phase 3 and Phase 4 of the cycle can actually be very hard. As value investors, we are trained to look for the following: Low P/E ratio stocks – These are the companies whose earnings have been decimated. If anything, a great value stock here might actually sport a sky-high P/E ratio. The trailing 12-month or 5-year values are no longer typical, and the future earnings estimates are worthless. Low P/B ratio stocks – Since we are looking at asset heavy industries, it is worth pointing out that the valuation of the assets on the books typically get written down when the industry is in stress like this. Profitability ratios like ROI, ROA, etc. are all atypical and therefore useless. Therefore, cyclical investing for a value investor is much more of an art than science. Things like the strength of the balance sheet , economies of scale, management experience and skill, customer relationships, their ability to raise funds, cash and debt levels in the business, etc. become much more important. We still need to consider the valuation, and the valuation comes from asking the question: What is this business worth to a sophisticated buyer (competitor, private equity, etc.)? Sophisticated buyers are the ones who are buying for long-term strategic advantage. Now consider the plight of a retail investor who has no time to analyze these companies, and more than likely there is no longer any Wall Street coverage on these stocks (or if there is, it is much reduced from its heyday). These stocks will be volatile, and if you think you are getting a great value, it should not be a surprise that the stock is an even greater value a few weeks or months down the line. For most cyclical investments like this, I generally ease into my full allocation by starting small and then adding more and more over time when the cost can be improved. Sometimes, the extent of the future declines may surprise, but the declines themselves are to be expected. It takes time to hit Phase 4 and then turn around.

Is Consolidated Edison A Good Income Investment With Its Underperforming Total Return?

Summary Consolidated Edison’s dividend is high at 4.1% and has been increased each year over the last 41 years making Consolidated Edison a dividend aristocrat. Consolidated Edison’s total return underperforms over the last 35.8 month test period but its cash flow is good to make the dividend safe that will most likely be increased in. Consolidated Edison’s revenue growth is not great at 2% going forward but is very stable and the company business is defensive. This article is about Consolidated Edison Inc. (NYSE: ED ) and why it’s an income company that’s being looked at in The Good Business Portfolio. Consolidated Edison is a holding company with its business being an electric and gas utility in the North East United States. The Good Business Portfolio Guidelines, total return, earnings and company business will be looked at. Good Business Portfolio Guidelines. Consolidated Edison passes 7 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. There are many good business companies that don’t break many of these guidelines but will still not be considered for the portfolio at this time. For a complete set of the guidelines, please see my article ” The Good Business Portfolio: All 24 Positions .” These guidelines provide me with a balanced portfolio of income, defensive and growing companies that keeps me ahead of the Dow average. Consolidated Edison is a large-cap company with a capitalization of $17.829 billion. The Company operates through its subsidiaries, which include Consolidated Edison Company of New York, Inc. (CECONY), Orange and Rockland Utilities, Inc. (O&R) and the Competitive Energy Businesses. Consolidated Edison has a dividend yield of 4.1% that has been increased each year for 41 years. The dividend grows slowly but is extremely safe. Consolidated Edison therefore is a income story. The average payout ratio is 67% over the past five years which leaves plenty of cash remaining for investment after paying its high dividend Consolidated Edison’s cash flow is good at $1.2 Billion which leaves it with plenty of cash allowing it to pay its high dividend and have cash left over for company equipment modernization. I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Consolidated Edison has a three-year CAGR of 2% not meeting my overall requirement. Looking back five years $10,000 invested five years ago would now be worth over $15,379 today (from S&P IQ). This makes Consolidated Edison a good investment for the income investor with its steady slow growing 4.1% dividend that has been raised for over the last 41 years each year but does not meet the 5% CAGR growth I require. Consolidated Edison’s S&P Capital IQ has a two-star rating or sell with a price target of $59.0. This makes Consolidated Edison slightly over priced at present but a good choice for the income investor that does not need much capital gains growth and wants a safe income stream. Total Return and Yearly Dividend The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Consolidated Edison did worst than the Dow baseline in my 35.8 month test compared to the Dow average but does have a positive total return of 24.54% over the test period of 35.8 months.. I chose the 35.8 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014 and the losing year of 2015 YTD. I have had comments about why I do not compare the total return to the S&P 500 average. I use the Dow average because the Good Business Portfolio has six Dow companies in it and is weighted more to the Dow average than the S&P 500. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. This total return makes Consolidated Edison appropriate for the income investor with the steady slow growing dividend of 4.1%, but the aggressive investor should look for companies with more growth potential. It is expected that the dividend will be increased from its present $0.65/Qtr. to $0.67/Qtr. in January of 2016. DOW’s 35.8-month total return baseline is 30.71% Company Name 35.8 Month total return Difference from DOW baseline Yearly Dividend percentage Consolidated Edison Inc. 24.54% -6.17% 4.3% Last Quarter’s Earnings For the last quarter Consolidated Edison reported earnings on November 5, 2015 that missed expected at $1.44 compared to last year at $1.48 and expected at $1.48. They reaffirmed yearly earnings of $3.90 – $4.05. This was a fair to weak report. Earnings for the next quarter are expected to be at $0.52 compared to the last year at $0.58. The steady slow growth in Consolidated Edison over long periods of time should provide a company that will continue to have slightly below average total return but provide steady income for the income investor. Business Overview Consolidated Edison, Inc. (Con Edison) is a holding company. The Company operates through its subsidiaries, which include Consolidated Edison Company of New York, Inc. (CECONY), Orange and Rockland Utilities, Inc. (O&R) and the Competitive Energy Businesses. CECONY delivers electricity, natural gas and steam to customers in New York City and Westchester County. Orange and Rockland Utilities Inc. (O&R) delivers electricity and natural gas to customers located in south-eastern New York, northern New Jersey and north-eastern Pennsylvania. O&R’s utility subsidiaries include Rockland Electric Company and Pike County Light & Power Company. Competitive energy businesses provide retail and wholesale electricity supply and energy services. The Competitive Energy Businesses include three subsidiaries: Consolidated Edison Solutions, Inc. (Con Edison Solutions); Consolidated Edison Energy, Inc. (Con Edison Energy), and Consolidated Edison Development, Inc. (Con Edison Development). The good cash flow of Consolidated Edison, Inc. allows the company to expand its business slowly and modernize its equipment as the population of its service area increases over time. Takeaways and Recent Portfolio Changes Consolidated Edison Inc. is an income company choice considering its steady slow growth and its total return underperforming the Dow average. Consolidated Edison is a buy for the income investor that is willing to have underperformance of total return but have a steady increasing income and have safety of a defensive company business. Consolidated Edison is not being added to The Good Business Portfolio right now since there are no open slots in the portfolio and the total return underperforms the DOW average for the 35.8 month test period. Bought Eaton Vance Enhanced Income Equity Fund II (NYSE: EOS ) to bring it up to 6.5% of the portfolio. Great income fund that beats the DOW average. Trimmed Cabela’s (NYSE: CAB ) to 4.6% of the portfolio, want to take a little off the table while its up due to the buyout possibilities. The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Home Depot (NYSE: HD ) is 8.3% of portfolio, Walt Disney (NYSE: DIS ) is 7.5% of the portfolio and Boeing (NYSE: BA ) is 8.9% of the Portfolio therefore BA and HD and now in trim position with DIS getting close. I have written individual articles on EOS, CAB and HD, if you have an interest please look for them in my list of previous articles. Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.