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Is Abenomics 2.0 Boosting Japan Mutual Funds?

In late September, Japanese Prime Minister Shinzo Abe had announced the second stage of his popular Abenomics plan. The “stage two” plan is aimed to resuscitate the Japanese economy. Among other things, the goal is to boost Japan’s gross domestic product by a significant 20% to $5 trillion by 2020. Following this, Japan Stock mutual funds have gained relatively well. In October, the sector gained 7.9% and in November Japan stock funds added 1.3%, which helped it to finish among the top gainers for the month. Morningstar data also shows that Japan Stock funds are leading one-month gains currently. Abe unveiled a new set of economic initiatives, which he dubbed as “Abenomics 2.0.” He promised to take Japan into a new era of prosperity. His proposals have, however, been met with both bouquets and brickbats. Some economists and market watchers have questioned the viability of the proposals. For instance, executives from leading business lobby termed Abe’s numerical targets as “outrageous” and “impossible.” During the first phase of Abenomics, Japan’s benchmark, Nikkei 225, had shown a significant uptrend. Though it is too early to predict whether the new targets are already having a positive impact, Nikkei 225 has gained 4.5% since Sept. 29. The focus once again shifts to Japan mutual funds, which were topping the charts earlier this year before stumbling in the third quarter. Japan’s economic situation is not as fragile as is widely believed. So, it’s not a bad idea to pick Japan mutual funds which are poised to benefit under existing conditions and will gain further as the economy continues to gather steam. Abenomics 2.0: The Three Arrows Abe outlined several new policy measures late last month, which he calls “Abenomics 2.0.” Abe spoke of new targets or his new “three arrows”: achieving a higher GDP over the next five years, providing support for child care and better social security. The last two are aimed at improving child rearing and care for the elderly for economically distressed families. Abe also aims to boost social security by offering care to the nearly 150,000 people who are slated to enter nursing homes. He also said that he would increase employment opportunities for the retired. Several prominent newspapers and economists have questioned where Abe will find the resources to fuel the last two initiatives. Has There Been A Positive Trend? Market watchers and economists have also pointed to the fact that several of Abe’s initial targets are still unfulfilled. Others question the efficacy of the first phase of Abenomics and have argued that only the monetary policy has proven to be effective. However, an assessment of the state of Japan’s economy by the Financial Times tells us a different story. The study has praised Abenomics’ record on improving corporate governance standards. The objective of these changes has been to increase return on equity and raise the number of independent directors. The ability to push through reforms in the agricultural sector has also been praised. Japan’s unemployment rate of 3.3% is much lower than several developed economies. Real monthly wages recorded their first yearly increase in July in more than two years. Additionally, the average wage increase for fiscal 2015 is 2.2%, the highest level achieved in 17 years. Japan Mutual Funds Japan Stock fund category had emerged as the best gainer in the first half of 2015. The market rout since then has dragged down major categories. However, Japan funds were less affected than its neighboring regions. Japan funds are up nearly 14% year to date, according to Morningstar. This is the best year-to-date gain so far among all fund categories. Banking on the optimism, investors interested in investing in Japan region may bet on the following three mutual funds. These funds carry either a carry a favorable Zacks Mutual Fund Ranks. The following funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance. The minimum initial investment is within $5,000. These funds are in the green over year to date and one-year periods. The three- and five-year annualized returns are also favorable. Fidelity Japan Smaller Companies Fund No Load (MUTF: FJSCX ) seeks capital appreciation over the long term. It invests most of its assets in Japanese securities or other instruments economically connected with Japan. FJSCX invests in securities of companies with market cap similar to those listed in Russell/Nomura Mid-Small Cap Index or the Japanese Association of Securities Dealers Automated Quotations (JASDAQ) Index. Fidelity Japan Smaller Companies currently carries a Zacks Mutual Fund Rank #1. FJSCX has gained 13.7% and 13.5% over year-to-date and one-year periods, respectively. The three- and five-year annualized returns are respectively 18.7% and 12%. Annual expense ratio of 1% is lower than the category average of 1.43%. T. Rowe Price Japan Fund No Load (MUTF: PRJPX ) invests a lion’s share of its assets in companies located in Japan. The fund invests in companies of all sizes and across Japanese industries. Managers use a bottom-up stock selection process while also being aware of industry outlooks. T. Rowe Price Japan currently carries a Zacks Mutual Fund Rank #1. PRJPX has gained 16% and 11.7% over year-to-date and one-year periods, respectively. The 3- and 5-year annualized returns are respectively 12.7% and 7.8%. Annual expense ratio of 1.05% is lower than the category average of 1.43%. Rydex Japan 2x Strategy Fund A (MUTF: RYJSX ) seeks to give returns that correspond to two times the performance of the fair value of the Nikkei 225 Stock Average. RYJSX invests in common stocks having market capital within the range of those listed in the index. RYJSX invests a lion’s share of its assets in securities that have the potential to return two times the performance of the underlying index. Rydex Japan 2x Strategy Fund Class A currently carries a Zacks Mutual Fund Rank #2. RYJSX has gained 20.3% and 11.8% over year-to-date and one-year periods, respectively. The three- and five-year annualized returns are respectively 20% and 6.8%. Annual expense ratio of 1.54% is lower than the category average of 2.03%. Original post

PURA’s New Draft Decision In The UIL/Iberdrola USA Merger

Summary Last summer, Connecticut regulators ruled against the proposed merger of UIL and Iberdrola USA. The merging parties submitted a new application, and later reached a settlement with intervenors. On November 24, PURA released its draft decision approving the merger. With only a few requirements left, the merger could be completed by the end of the year. Investors now need to think about the value of the new combined company. Investors relying on the February merger announcement presentation in its valuation analysis are likely using stale data. Iberdrola USA’s ( OTCPK:IBDRY ) ( OTCPK:IBDSF ) proposed acquisition of UIL Holdings (NYSE: UIL ) passed a major milestone when Connecticut’s Public Utility Regulatory Authority (PURA) issued a draft decision approving the merger on November 24. This was a big change in tune compared to its previous draft decision rejecting the merger back in July. (An article discussing the rejection can be found here ). At that time, PURA was not convinced the deal was in the public interest, as clearly shown from this excerpt from the original draft decision: The Applicants have not provided any measurable or quantifiable commitments that unequivocally assure the Authority that the public interest of the ratepayers will not be harmed. A new merger application was filed on July 31, and UIL addressed many of PURA’s issues with the original application. (Article discussing the updated application is here ). In September, the merging parties were able to reach a settlement agreement with the Office of Consumer Counsel. The settlement addressed items like ring fencing, rate freezes, and goals for customer service improvements. Another part of the settlement involved UIL’s former English Station power plant. This plant had been retired and sold years ago, and there was a dispute over environmental cleanup costs. UIL agreed to pay up to $30M to clean up the site. All briefs filed by intervenors since the settlement have basically supported the merger, so it is unlikely that the draft decision will face opposition. PURA plans to issue a final decision on December 9. The merger also requires approval from the Massachusetts Department of Public Utilities. Massachusetts doesn’t have the same statutory timeline requirements as Connecticut, so there is not a definitive date to expect a decision. A settlement agreement has already been reached with the Massachusetts Attorney General and the Department of Energy Resources, so UIL has requested for the DPU to issue a decision by December 18. UIL feels it is almost done with receiving approval from the SEC. It filed its second amendment to its S-4 filing in October. The company has not received comments from the SEC on the second amendment, but it said the SEC comments about the first amendment were relatively minor, so it is unlikely there would be any SEC concerns that would cause a roadblock to the merger. With the regulatory approvals essentially completed, the final requirement to get the merger done is to receive shareholder approval. A vote has been scheduled for December 11. Assuming the merger passes these final hurdles, the merger will be completed, creating a new company by the name of Avangrid, ticker AGR. Now that it looks like the merger will happen, UIL’s shareholders need to seriously think about how to value the company’s shares. A couple of important items come to mind. First off, each UIL share will receive $10.50 in cash. In some ways, shareholders would probably prefer a slight delay in completion of the merger until January so that they don’t have to pay the taxes on this payment until they file their taxes for 2016. When the merger was announced in February, the companies estimated 2016 earnings at $700-730M and 2017 earnings at $800-850M. One thing to remember is that IUSA was using IFRS accounting before the merger. UIL and the new AGR will be using the US GAAP going forward. These accounting choices impact the results in the financial statements (see more on the accounting impact here ), and the February estimates were made before the differences were quantified. It turns out that IUSA’s 2014 income was $20M lower under US GAAP than under IFRS. This means there is a risk the 2016 estimate is too high. Also, UIL has made more spending commitments as it has negotiated with the regulators, which could also be a drag on future earnings. Of course, after the companies combine, they could discover more cost savings opportunities, which would lift future earnings higher. Another point to keep in mind is that utility valuations have fallen since February. In the original merger presentation the P/E of the combined company’s utility peers was 17.5x in 2016. Today, the average of this group is 16.5x. Table 1 (click to enlarge) Source: FactSet, UIL February merger presentation , and Garnet Research, LLC In February, based on the midpoint of the earnings guidance provided, UIL’s shareholders would be receiving compensation of almost $51/share based on 2016 multiples or $54.50/share based on 2017 multiples. The value based on current 2016 multiples drops about $2.40/share compared to February, and current 2017 multiples give a value about $2.80 below February. UIL’s stock price has been in the low-$50s/high-$40s range for a few months, and it is very possible people are zeroing in on the old numbers from the February presentation that are starting to get stale. Conclusion The current regulatory situation suggests that the UIL/IUSA merger creating Avangrid will be completed in the next few weeks with little controversy. Investors now have to focus on the outlook for the combined company, but it is likely many have been depending on information from the February merger presentation. This information is getting a little stale, with a number of new data points suggesting that investors should be using lower values. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

5 Strong Buy Vanguard Mutual Funds

Vanguard is one of the world’s largest asset management corporations that manage around $3 trillion in assets. It offers nearly 160 domestic funds and 120 funds for foreign markets (as of Dec. 31, 2014). It offers asset management and financial planning services to clients across the world. Unlike other mutual fund companies, Vanguard is owned by the funds themselves, which helps its management focus better on shareholder interests. Among other advantages, it claims to offer low-cost, no-load funds. Vanguard was founded by John C. Bogle in 1975. Below, we share with you 5 top-rated Vanguard mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy), and we expect the fund to outperform its peers in the future. Vanguard Health Care Fund Inv (MUTF: VGHCX ) invests a major portion of its assets in securities of companies primarily involved in operations related to the healthcare domain. VGHCX invests in healthcare companies including pharmaceutical firms, medical supply companies and companies engaged in operations related to medical and biochemical. VGHCX may invest a maximum of half of its assets in companies located in foreign lands. The Vanguard Health Care Investor Fund has returned 10.3% in the year-to-date frame. Jean M. Hynes is the fund manager of VGHCX since 2008. Vanguard Morgan Growth Fund Investor (MUTF: VMRGX ) seeks capital appreciation over the long run. VMRGX uses multiple advisors to invest in domestic companies that are believed to provide above-average revenues and earnings growth. VMRGX invests in securities of companies having large and medium sized market capitalizations. The Vanguard Morgan Growth Investor Fund has returned 7.1% in the year-to-date frame. VMRGX has an expense ratio of 0.40% as compared to the category average of 1.19%. Vanguard Growth and Income Fund Inv (MUTF: VQNPX ) invests in a diversified group of stocks chosen with the help of quantitative analysis. VQNPX seeks stocks that are believed to provide dividend income and have impressive growth prospect and that, as a group, appear likely to provide higher returns than the Standard & Poor’s 500 Index while having similar risk characteristics. VQNPX invests a minimum of 65% of its assets in companies included in the index. The Vanguard Growth and Income Investor Fund has returned 2.2% in the year-to-date frame. As of September 2015, VQNPX held 786 issues with 3.33% of its assets invested in Apple, Inc. (NASDAQ: AAPL ). Vanguard New York Long-Term Tax-Exempt Fund Inv (MUTF: VNYTX ) seeks tax-exempted current income. VNYTX generally invests in municipal debt securities of New York state, local governments and other affiliates. VNYTX invests a lion’s share of its assets in securities that are expected to provide return free from federal and New York state taxes. VNYTX generally maintains a dollar-weighted average maturity between 10 and 25 years. The Vanguard New York Long-Term Tax-Exempt Investor is a non-diversified fund and has returned 3.2% in the year-to-date frame. VNYTX has an expense ratio of 0.20% as compared to the category average of 0.87%. Vanguard High-Yield Tax-Exempt Fund Inv (MUTF: VWAHX ) invests a large chunk of its assets in municipal securities that are rated investment grade by a nationally recognized statistical rating organization (NRSRO). However, a maximum of 20% of VWAHX’s assets may get invested in securities that are rated below investment grade. The Vanguard High-Yield Tax-Exempt Fund has returned 3.2% in the year-to-date frame. Mathew M. Kiselak is the fund manager of VWAHX since 2010. Original post