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The Generation Portfolio: Target

Summary The quarter’s first full earnings week treated the Generation Portfolio kindly with the exception of Wal-Mart, whose unexpectedly dismal report blew a hole in the entire retail space. I took the sympathy weakness in big box retailers to add some Target Corporation shares, given that it is a recovery play whose situation is unrelated to Wal-Mart’s issues. Looking ahead, the Fed appears to be on hold for the time being, which is affecting the REIT and banking sectors. Background This is a weekly column that I write about an account that I manage for others, which I call the Generation Portfolio . I also discuss the current trading environment, my general investing philosophy, and any other ideas that seem relevant. Last week , for instance, I threw out some ideas about the herd-like mentality that has taken over the market due to the growth in index funds . To summarize that discussion, I have nothing against index funds in theory, and in fact own a few myself . In practice, though, the mass popularity of index funds tends to create distortions in the market. They are not quite the panacea that many would dearly love to believe they are, though they serve many investors well. The Generation Portfolio is built of stocks, not funds, because I find stocks to be easier to analyze and better suited to my cash flow objectives. So far, that strategy has worked as intended. The Importance of Cash Flow Regarding my income objectives, I have written about my own views of the importance of cash flow before . My theory is that a portfolio should be run like a business, with the cash that it generates reinvested into the enterprise whenever possible after you take out whatever expenses you need to cover. Thus, it is essential for a portfolio to generate enough cash flow to fund continuing operations – which, in the context of a portfolio, means the addition of new sources of cash flow which will keep the business thriving. It is a variation on the “buy low, sell high” mantra. The objective, in fact, is not to buy low and sell high, though of course that’s always preferable. I think that confuses some people, as not having as your objective the sale of what you buy at a higher price seems vaguely un-American or something. So, let me explain what I mean by that. The “buy low, sell high” objective is for speculators, or to use another word that annoys some people, “gamblers.” Nothing wrong with gambling, and life itself is a gamble. Some people are very good gamblers, and everyone has their own talents. However, for most people, you need to arrange matters to give you better table odds than they typically give you in Vegas (or the market) if you want to succeed at investing. My own view is that if you speculate enough and don’t have a good dollop of luck or some edge, you will speculate all your money away eventually. I’ve heard enough stories from people who have blown out accounts to reinforce that view. The speculator table is tilted against you because powerful, well-funded market interests collectively have more of whatever it is that you, the individual investor, can ever bring to the table – knowledge, brains, experience, capitalization, research tools, anything that makes a difference. They can outlast you, they have research and algorithms you’ve never heard of, and they can react faster than you. You may beat them sometimes because everything in the market is about probabilities, and even the biggest investment firms can’t control those. Those victories, though, just encourage you to continue onward until you aren’t quite so lucky. The odds are always in the house’s favor, though by a slim margin. Those with the odds in their favor are the ones with the fancy office buildings and slick marketing tactics. Some folks just learn that too late, or deny it forever. So, instead, if you want to win, the objective (as I see it) for the core of a prudent portfolio (there is always room for some fun speculation) is not to buy low and sell high, because that game is for likely losers. As the classic poker saying (repeated by Warren Buffett) goes, “If you don’t know who the patsy at the table is, it’s you.” Instead, my objective is to buy growing, dependable, and in other words quality cash flow cheap and then keep it so long as it remains quality. If you do that, the “selling high” part will take care of itself. And, best of all, you may not need to sell at all. However, you will have to ride out the shifting currents and forget about current prices except in a grand strategic fashion. That’s tough to do. There are many ways to build cash flow, and some investors just don’t like dividends. Those folks usually have studies from this, that or the other place to back up the theory that it is better to sell part of your portfolio to generate cash flow rather than rely on dividends for it. It’s a valid strategy, though I could spin out all sorts of issues with it. Whatever works for you is terrific. My preference is to generate cash flow by collecting dividends from Quality Stocks . Dividends are automatic and don’t require any transactions or thought, and the less thought I have to devote to a mundane task, the better. If you have sufficient funds to diversify across and even within sectors, that also is a good strategy to put into practice to minimize risk. Thus, the Generation Portfolio pursues an income strategy across companies and sectors that is designed to generate reliable and growing cash flow and minimize damage from random stock disasters. “It is a market of stocks, not a stock market.” If you’ve been following the market long enough, you have seen someone go on one of the financial channels and grandly announce, “it is a market of stocks, not a stock market.” Broadly speaking, my interpretation is that people who say that mean to emphasize that stock picking is still important. I tend to agree, because someone has to choose among and between stocks. Plus, there are so many index funds these days that advising someone to buy an index fund is pretty meaningless. If everyone simply bought the same index fund, there wouldn’t be much of a stock market left, and different index funds can have vastly different performance. If everyone buys different index funds, that creates the same type of performance differentials between them that individual stocks themselves offer. Ultimately, the whole rationale behind index funds collapses and you get a market of stocks, um, funds again. As the monastery leader in James Hilton’s “Shangri La” said, “moderation in all things.” This week was a good example of the need for such moderation. The herd was moving one way – the broader market was up – but parts of the herd went the other way (down). The biggest part heading lower was being led by a mad cow, and if you had all your calves in that particular group, your family wound up in the prickly bushes. Ultimately, the misled followers will rejoin the main herd, but it’s a painful experience until they do. I think you’ll figure out what I mean by all that by reading on. The Week That Was The market dipped slightly in the middle of the week. Ultimately, though, it surged higher despite some earnings weakness. The move higher was likely due to growing consensus that the Fed will not raise interest rates in the current weak economic environment. The market now has been up for three straight weeks, but the losses of August and September have not been fully recovered. The Nasdaq is up 3.2% this year, but the Dow is down 3.4%, and the S&P 500 is down 1.3%. Transactions I prefer to buy on weakness and the overall market didn’t provide much of that this past week. I did pick up some Target Corporation (NYSE: TGT ) due to its price decline following a terrible Wal-Mart Stores, Inc. (NYSE: WMT ) earnings report. Target is recovering from its Canadian discontinued business charges, but its core operations appear sound. Generation Portfolio to Date Below are the transactions to date in the Generation Portfolio. The Generation Portfolio as of 17 October 2015 Stock Purchase Date Purchase Price Latest Price Change Since Purchase WFC 8/25/2015 $ 51.75 $ 52.88 2.18% DIS 8/25/2015 $ 98.75 $108.16 3.26% BMY 8/25/2015 $ 59.75 $ 64.49 7.93% MFA 8/25/2015 $ 7.05 $ 7.03 0.28% OHI 8/31/2015 $ 33.95 $ 36.28 6.86% CVX 9/02/2015 $ 77.90 $ 91.20 17.19% PG 9/03/2015 $ 69.95 $ 74.90 7.08% CYS 9/04/2015 $ 7.68 $ 7.93 3.26% KO 9/09/2015 $ 38.50 $ 42.02 9.14% MPW 9/10/2015 $ 10.89 $ 11.73 7.71% WMT 9/10/2015 $ 64.40 $ 58.78 (8.56%) VTR 9/10/2015 $ 52.80 57.09 7.90% KMI 9/11/2015 $ 29.95 $ 32.43 7.55% WPC 9/14/2015 $ 56.75 $ 61.46 8.30% T 9/17/2015 $ 32.50 33.78 4.09% VZ 9/17/2015 $ 44.95 44.80 (0.56%) MMM 9/18/2015 $139.90 $148.66 6.29% JPM 9/22/2015 $ 60.89 $ 62.43 2.87% PX 9/23/2015 $101.30 $109.43 8.03% VER 9/25/2015 $ 7.87 $ 8.34 5.97% WMB 9/28/2015 $ 39.48 $ 42.28 7.09% MAIN 9/28/2015 $ 27.47 $ 29.32 6.73% PFE 9/28/2015 $ 32.69 $ 34.41 5.26% TGT 10/16/2015 $ 75.15 $ 75.05 (0.13%) Latest prices and percentages are those supplied by the broker, TD Ameritrade, as of the close on 16 October 2015. A large legacy position in Ford Motor Company (NYSE: F ) and some other small legacy positions are omitted. There currently are 21 positive positions and three negative positions in the Generation Portfolio (I go strictly by the broker’s calculations of gain and loss, as they know best). According to a spreadsheet that I maintain, the Generation Portfolio overall currently is up between 5-6%, just as it was last week. That does not include dividends received to date, and some of the positions may have gone ex-dividend but not yet paid the distributions. Dividends One of the aims of the Generation Portfolio is to generate dividends, hence the name. Some will hit the account this week, but there was no change from last week. Dividends Received To Date Stock Date Received Type VTR 9/30/2015 Ordinary KO 10/01/2015 Qualified CYS 10/14/2015 Ordinary VER 10/15/2015 Ordinary MPW 10/15/2015 Ordinary WPC 10/15/2015 Qualified For now, at least, I am receiving the dividends in cash and will use them opportunistically as they accumulate. Analysis of Holdings While there were many earnings reports delivered during the week, the only one that really rocked the establishment was Wal-Mart’s on Wednesday. In some ways, that one should have been the most foreseeable, but it took everyone by surprise. Wal-Mart is the country’s largest private employer , and giving even a fraction of its workforce a raise will always have consequences for its bottom line. Those consequences did show up in its lowered guidance for the next few fiscal years. Wal-Mart gave no updates to its guidance before earnings to suggest this, which puzzled some analysts. Wal-Mart is the best possible example of why I keep individual positions relatively small and diversify. Since Wal-Mart dragged the entire big box retail sector lower, I decided to take advantage of the lower prices and add some Target. It may not have been at an ideal price, but Target’s issues are completely different than Wal-Mart’s. I had to ignore headlines such as “Wal-Mart’s Disappointing Sales And Earnings Forecasts Spell Doom For The Industry,” but someone has to provide goods to communities across the country. I wrote up an article on my reasons for adding Target here . Aside from Wal-Mart, my personal biggest surprise of the week was how well oil/gas energy stocks held up after their bonanza performance a week ago. Just goes to show how oversold the entire sector was. The REITs also are moving higher, which is gratifying. I’ve spent the past year studying them, and they appear to have stabilized for now. The banks had some difficult moments during the week after Generation Portfolio stock JPMorgan Chase delivered a sketchy earnings report . As I have written elsewhere, my view is that REITs and banks will tend to move in opposite directions . Bank weakness was in part due to the growing belief that the Fed will remain on hold at least until next year; banks want higher interest rates to increase their spreads. However, another factor behind their stability was simply that banks were already oversold and haven’t really recovered like some other sectors since the August sell-off. General Discussion This is the section where I basically just ramble on about what I am seeing in the investing world that might affect my investments. I don’t expect everyone (or anyone) to agree with my perspective, but it is how I see things right now. There is growing saber rattling in the world. Events in Syria are in flux, Putin is on the loose, North Korea is making its usual noises. Defense stocks have been showing some life recently. That also, in my opinion, is why oil stocks have recovered a little ground despite the continuing supply/demand situation; good sectors to be in if things get worse. The key to the next Fed move in my view lies in the next two jobs reports. If those reports are strong, the Fed may gather up its courage and raise rates. In my humble opinion, that would be the wrong move, but they typically don’t ask me. However, I don’t expect strong reports and don’t expect the Fed to raise rates. Taking a more strategic perspective, in my opinion, the next Fed move is completely up in the air now. Everyone assumes that the Fed will raise rates. However, the market has forced treasury yields lower recently, not higher. That is not a good environment for the Fed to raise rates, because they would be fighting the market. That can lead to an inverted yield curve, as in 2004-2006, which can be a precursor to a recession – as in 2004-2006. (click to enlarge) As the chart shows, the 10-year Treasury bond yield has fallen recently. It currently sits at 2.04%. Not only is it down from the heights of the summer, but it is even down slightly from its 2.06% rate at the end of the third quarter just a few weeks ago. I can’t tell you how many times over the past year someone has said to me with great authority that rates are headed higher, and soon. The simple fact is that, at least so far, they’re not trending higher unless you cherry-pick dates. Whenever I see someone state with great confidence that the Fed’s next move must be to raise rates, because everyone says that and we are all supposedly waiting in great trepidation of the great event, I like to pose a simple question: what if the economy weakens further? What does the Fed do then? Raising rates in the teeth of a weakening economy or, knock on wood, a recession would be foolhardy. It’s simply unrealistic at the moment. If the economy does weaken for whatever reason, the Fed doesn’t have a lot of tools left to fulfill its dual mandate of stable prices and full employment. It does have one that it could always resort to again that nobody seems to expect: another round of quantitative easing. Since nobody is talking about it, it can’t happen – right? We shall see. Returning to energy stocks again, I find it amusing that now some folks are starting to question the viability of the entire solar sector. This is one of those hot-button cult areas that invites negative comments whenever I go near it, but I like to provide alternate viewpoints and welcome them in comments. Solar has its place, but it is not quite the end-times panacea its proponents wish. Back in 2014, when I wrote my positive article about Hawaiian Electric – shortly before it rose about 50%, that is – people were predicting the doom of the entire utility sector and lambasting me for questioning the inevitable hegemony of solar and the temerity to recommend a dinosaur utility in a Mesozoic-era industry. Now, strangely enough due to events in Hawaii , that wheel has turned. Go figure. Actionable Ideas l have been watching defense stocks such as LMT and RTN closely, and would add one on a buying opportunity. I also have a couple of more high quality REITs on the radar screen, there still are some good values in the sector. The healthcare sector also still has some opportunities, though the Generation Portfolio has a couple in there already. Still, I’m not averse to over-weighting a defensive sector that is undervalued. I am watching a few other stocks like Honeywell International Inc. (NYSE: HON ), which sold off despite a fairly decent earnings report, and a few other big names. So far, earnings reports for the third quarter have been a touch weak, which fortunately were somewhat expected . The market can handle anything, it just doesn’t like unnecessary surprises (Wal-Mart). We’ll see how the coming week’s earnings go, led by IBM (NYSE: IBM ), Google’s parent Alphabet (NASDAQ: GOOG ), Microsoft (NASDAQ: MSFT ), Boeing (NYSE: BA ), GM (NYSE: GM ) and Caterpillar (NYSE: CAT ). Of particular interest to the Generation Portfolio will be: Verizon Communications on Tuesday before the open; Coca-Cola Company on Wednesday before the open; CYS Investments, Inc. after the close on Wednesday; 3M Company on Thursday before the open; and Procter & Gamble Co. and Ventas, Inc. before the open on Friday. Conclusion It was an upbeat week for the market despite some weak earnings reports from industry bellwethers. A dismal earnings report from Wal-Mart sent it sharply lower and induced sympathy selling in other big box retails. I took the weakness as an opportunity to add some Target stock $10 below its very recent price. Looking ahead, the Fed appears to be on hold for now, which should give some strength to interest-sensitive sectors such as REITs. Overall, the Generation Portfolio had another good week despite the Wal-Mart disaster, and dividends are starting to accumulate.

The iShares MSCI Austria Capped ETF: Does Vienna Wait For You?

Although an wealthy EU member with low unemployment it does not have a top line economy. The domestic financial sector lacks dividend distributions. The Materials sector is the funds best performing sector, even though it’s third in weighting. Mention “The Blue Danube Waltz”, and the Waltz King, Johann Strauss, immediately comes to mind. The waltz is a clever composition of a flowing waltz melody with instrumental interpretations of sounds one might have heard along the banks of the river Danube in 19th century Austria. However, this peaceful gentle flowing melody of the river waltz belies a turbulent history. Austria was almost continually at war in Europe, dating back to Napoleonic era and before. It was at the very center of the spark which ignited powder-keg Europe leading to the Great War, and sided with the axis powers of the Second World War, sharing the fate of the of the defeated. It was perhaps only through luck and a continent totally exhausted by war that Austria remained undivided between the Soviets and Western Europe. Located literally on the border of Cold War era Europe it became a center of intrigue and haunted by its past, until relatively recently. Austria embarked on a new epoch in its long history when it officially became a European Union member nation, January 1, 1995, adopting the Euro four years later. However, what of this new Austrian economy in this new economically united, post-cold war era Europe? In particular, is its economy growing sufficiently to serve as a focused investment for individual investors? For those who wish to consider it, there’s only one fund to choose from: the iShares MSCI Austria Capped ETF (NYSEARCA: EWO ). According Europa.eu , Austria’s per capita GDP, at approximately $46, 400 is well above the EU-28 average and pretty much in line with Denmark, Germany, Ireland, Netherlands, and Sweden. However, its current annualized growth rate is anemic at 0.4%, a full 100 basis points below the EU average. Its debt to GDP ratio is slightly below the EU average at 84.5% of GDP and runs a surprisingly high annualized inflation rate of 1.5%, well above the EU’s 0.6% annualized rate. Its unemployment rate, at 5.6% is well below its fellow EU member nations at over 10%. According to the CIA’s World Factbook , household spending is the largest contributor to GDP at 55%, followed by fixed capital investment at 21.1%, and government spending at 19.5%. Austria is a net exporter of goods and services, generating a trade surplus of 4.3% of GDP. As far as its domestic manufacturing economy, Austria’s Purchasing Manager’s Index indicates expansion, albeit slow, at 52.5 and capacity utilization is at 84%. This compares with the larger Eurozone PMI of 52 and capacity utilization of 81.1. It indicates a good domestic economy but not nearly as strong as, for instance, the U.K. or Germany. The fund tracks the MSCI Austria Investible Market Index 25/50 in U.S. Dollars. The ‘cap’ puts the fund in compliance with internal revenue code, in that: … at the end of each quarter of its tax year no more than 25% of the value of the RIC’s assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the fund should not exceed 50% of the fund’s total assets… The iShares Austrian fund is nearly identically to the MSCI index, with the exception of a larger than usual cash allocation. It’s rare to see a cash allocation in excess of the fund’s sector allocations. In this case the 2.07% cash or derivative holdings are in excess of both the Utilities allocation, 1.46% and the Consumer Discretionary allocation at 1.72%. Specifically, the fund carries 2.0316% U.S. Dollar cash holding as well as 0.0382 Euro cash holding, totaling 2.0698%. There is also a small, 0.0019%, BlackRock (NYSE: BLK ) short term treasury holding and the fund is currently short, -0.0006% of USD/EUR forward contracts. (click to enlarge) Outside of the cash or derivative, the fund lists 27 holdings of Austrian based companies. Of the 27 holdings, 8 are Financials, 9 are Industrials, 4 Materials, 2 IT, 2 Energy and one each of Consumer Discretionary and Utility. One would expect that the heaviest weight sector to be the best in dividend distributions. This is not the case here. Of the eight holdings, only four have regular dividends and the entire sector allocation yield average is 1.85125%. Five of the eight holding’s major business is in Real Estate, only two in Banking and one Insurance company. Further, three of the holdings did not have appreciable earnings, nor were the Returns on Investment and Equity; three of the holdings recording negative ROI/ROE. Generally, although a large segment of the fund, Austria does not have a strong financial services sector. Financial Holdings OTC Symbol (if listed) Fund Weighting Market Cap (billions) Dividend Yield Payout Ratio Price/Earnings ROI/ROE Beta Sub Sector Erste Group Bank AG OTCPK:EBKDY 18.5952% $12.475 0.00% 0.00 N/A NA/-0.24 1.72 Banking Raiffeisen Bank OTCPK:RAIFY 4.4942% $4.594 0.00% 0.00 N/A NA/-6.12 1.62 Banking IMMOFINANZ AG OTC:IMMZF 4.4717% $2.778 0.00% 0.00 N/A -3.03/-5.42 1.29 Real Estate CA Immobilien Anlagen CAIV.VI* 3.8768% $1.836 2.71% 37.81% 17.59 2.87/4.87 0.72 Real Estate Buwog AG BWOA.VI* 3.2732% $2.075 3.71% 52.85% 14.28 3.47/8.22 N/A Real Estate UNIQA Insurance Group UNIQ.VI* 3.1128% $2.750 5.29% N/A 7.57 10.86 0.63 Insurance Conwert Immobilien Invest CONW.VI* 2.7511 $3,399 0.00% 0.00% 29.57 1.54/3.39 0.73 Real Estate S Immo Ag SIAG.VI* 1.5964 $0.653 3.10% 39.50% 14.34 2.39/6.63 0.55 Real Estate (Data From iShares and Reuters; *VI: Vienna Exchange) For example, Erste Group serves the domestic retail and small to midsized business banking segment. The company has a negative return on equity, does not offer a dividend, and has a very high P/E of over 100. Immofinanz invests in private and commercial properties. It is international serving Germany, Czech Republic, Hungary, Romania, Poland and Russia. However, has a negative ROI and ROE, negative EPS at -0.21 and no dividend growth. As a last example, UNIQA is an insurance group serving Central and Eastern Europe with a diversity of insurance products. However, it should be noted that its largest shareholder is Raiffeisen Bank, the second most weighted fund’s financial holding. Again, the financial sector may be adequate for the domestic economy, it isn’t as strong as other EU financial sectors in the same class. The second heaviest weighted allocation is Industrials. Andritz ( OTCPK:ADRZY ) designs and produces specialized electromechanical, pulp and paper, metals, biofuels and separation systems for those respective industries. Wienerberger ( OTCPK:WBRBY ) manufactures piping, clay blocks/bricks/pavers, ceramic and plastic pipes and water management products. The company is international with operations in Europe and North America. Zumtobel Group ( OTC:ZMTBY ) specializes in lighting solutions and control equipment. It’s small but profitable company manufacturing equipment under different brand names. Although there are a few interesting manufacturers, they are generally domestic and the metrics are relatively weak. Those in the fund seem typical of the Austrian industrial sector. Hence, over 65% of the fund is weak on several scores, particular on dividends, earnings and return on investment or equity. Industrial OTC Ticker (if listed) Fund Weighting Market Cap (billions) Dividend Yield Payout Ratio Price/Earnings ROI/ROE Beta Sub Sector Andritz ADRZY 7.6699% $4.9336 2.36% 24.76% 17.05 12.27/26.30 0.53 Diversified Wienerberger WBRBY 4.5323% $2.250 0.90% 28.82% N/A -4.64/-8.33 1.29 Construction Hardware Oesterrichische Post OTC:OERCF 3.3356% $2.43 6.07% 87.74% 14.40 14.29/23.40 0.33 Parcel/mail Delivery Zumtobel Group ZMTBY 1.9077% $0.980 1.09% 21.08% 55.67 2.18/4.87 1.36 Lighting solutions Flughafen Wien OTCPK:VIAAY 1.6418% N/A N/A N/A N/A N/A N/A Vienna Airport solutions Palfinger OTCPK:PLFRY 1.5042% $1.071 1.34% 13.48% 19.51 6.66/10.34 1.19 Hydraulic Lift Equipment Semperit Holding OTC:SEIGF 1.1757% $0.665 3.81% 265.14% 12.53 7.57/12.11 0.63 Rubber/Plastic Products Porr AG ABGV.VI* 0.9568% $0.778 3.14% 15.11% 12.97 5.64/12.53 -0.27 Construction equipment FACC FACC.VI* 0.9407 $0.364. N/A N/A N/A -0.63/-1.21 N/A Aerospace Defense (Data From iShares and Reuters; *VI: Vienna Exchange) The third largest sector is Materials, comprised of four holdings and seems to be the best sector of the three. Its average dividend yield is over 2.68%, P/E average 27.73 and fairly good return on investment and equity. Voestalpine ( OTCPK:VLPNY ) is a holding company manufacturing extruded, pressed and forged steel products for the automotive and construction industry. Its metric are good with a P/E of 8.43, a 3% dividend, selling at 4.36 times cash flow and an approximate payout ratio of about 40% of cash flow. Mayr Melnhof Karton ( OTC:MNHFF ) as the name suggests, produces packaging in the form of folding carton and carton board, mostly for the food and household product industry. It operates through subsidiaries, 40 locations distributed among 18 countries. Again the metric are surprisingly good: a 2.54% dividend yield, a P/E of 15, a payout ratio of about 38 and sell at about 9 times cash flow. Materials OTC Ticker (if listed) Fund Weighting Market Cap (billions) Dividend Yield Payout Ratio Price/Earnings ROI/ROE Beta Sub Sector Voestalpine VLPNY 8.9081% $6.492 3.02% 40.30% 8.40 7.61/12.76 1.22 Steel products Mayr-Melnhof Karton MNHFF 3.1386% $2.397 2.43% 38.00 15.63 10.30/12.59 0.45 Packaging Lenzing OTC:LNZNF 1.8928% $1.923 1.55% 110.52 71.79 1.22/2.26 0.80 Chemicals RHI OTC:RXHKY 1.809% $0.896 3.73% 56.42 15.09 4.34/10.50 0.91 Ceramics, metals, glass (Data From iShares and Reuters; *VI: Vienna Exchange) Summing up, sometimes individual nation funds, particularly those in the EU can be exceptional performers. This is not one of those funds. In all fairness, the fund is merely tracking the MSCI index, which it does rather well. As an individual EU member state economy Austria does well domestically: employment, social services, income and wealth distribution. Also, as a contributing EU and Eurozone member state, it does play a positive, albeit small part. Unfortunately, though, as a single country focused investment it does not have the strength, at least not yet, to generate significant dividend growth or capital appreciation, mainly because of its weak financial sector, which is focused on Real Estate. As such, an investor might certainly want to keep the fund in mind, but also be aware that it might not provide a positive risk/reward contribution to a long term portfolio. (click to enlarge) As for the fund itself the returns have been acceptable since inception in 1996, at 3.80%, but have generated negative returns over a 10 year period. As the chart indicates the fund had a spectacular run from the low of about $7.00 a share to just over $40.00 before giving up those gains during the global economic crises. The fund has managed consistent dividend returns, however, its 12 month trailing yield is 1.69% and its current annualized yield is 2.30%. 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.

The iShares Core Conservative Allocation ETF: AOK Is A-OK

An atypical fund of funds. An unusual construct containing non-traditional ETF sectors. Surprisingly good capital appreciation and consistent monthly dividends. Any individual investor who might catch equity and bond market news in bits and pieces during the course of the day is most likely feeling a bit of angst. Analyst and economist have seemed to become ‘polarized’ in their thinking. Some argue that impending inflation looms on the horizon; other that a fathomless deflation has already begun. Some argue that the global economy is still growing at an above average pace while others claim we’re on the verge of a deep global recession. Who has time to study markets and also go about the daily routine? Then again, what investor can ignore the change in sentiment over the past year? Well, there’s a way to continue with a well-disciplined, consistent investment strategy without taking undo risks and still do quite well. BlackRock’s iShares Core Conservative Allocation ETF (NYSEARCA: AOK ) ma y be the exact right place to stick with a long term disciplined investment plan and protect those hard earned retirement or future college fund savings until the time is again right to diversify. There are advantages in choosing this ‘fund of funds’ over traditional conservative investments. First, investment dollars are not being locked in as they would be if one had purchased U.S. Treasuries or a major financial institution’s certificate of deposit. Further, its Treasury holdings diversify across the span of all maturities. It’s not exclusively fixed income U.S. Treasuries, but also allocates among equities via other iShares “Core” funds including S&P 500 large, mid and small caps, European and Asia-Pacific core holdings as well as a small emerging market allocations. However, the greatest portion of all of the fund’s asset classes are U.S. focused, or global companies whose business is mostly in U.S. markets. (Data from BlackRock) In order to grasp this fund as a good safe haven play in uncertain times, a closer examination of the allocations, individual components and returns need to be examined in greater detail. For example, a large portion of the fund is classified as ‘ Other ‘ and as ‘ Supranational’ . That’s an unusual name for a sector to say the least! (Data from BlackRock) According to Investopedia, Supranational is: … an international organization, or union, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the wider grouping … As examples, the European Union, the International Monetary Fund, and World Trade Organization are ‘Supranational organizations’. Indeed, scrolling through iShares comprehensive asset listings, there is indeed a ‘Supranational’ sector. The breakdown is summed up in the following table, and well worth noting. Supranational Organization Fund Symbol Fund Weighting Brief Description African Development Bank Medium Term Notes AFDB 0.06% NGO for economic development in Africa Asian Development Bank Medium Term Notes ASIA 0.13% NGO for economic development in Asia Development Bank of Latin America CAF 0.01% NGO Financing and Technical Assistance Council of Europe Development Bank COE 0.06% NGO Social Investment Projects European Bank for Reconstruction Medium Term Notes EBRD 0.07% NGO for Entrepreneurship European Investment Bank EIB 0.43% Bank of the European Union for EU Member States Inter-American Development Bank IADB 0.17% NGO Financial and Technical Support Latin America and Caribbean International Bank for Reconstruction Medium Term Notes IBRD 0.24% WTO Sponsored for Developing Countries International Finance Corporation IFC 0.10% NGO Private Sector Development in Emerging Markets Nordic Investment Bank NIB 0.03 NGO Financial Development for Nordic and Baltic Countries Total 1.3% (Data from BlackRock) Most, if not all of the above mentioned Non-Government Organization (NGO) Banks do receive support from governments, or other supranational organizations but operate mostly independent of governments for the social and economic betterment in developing regions. The point of the matter is that the ‘medium term notes’ or other NGO investments seem reasonably secure since they are ‘backed’ by larger ‘parent’ organizations or part of a government’s foreign aid budget. The second undefined label, ‘ Other ,’ is a bit more complicated, to say the very least. Scrolling through the holdings, it seems that ‘Other’ includes a wide ranging, globally diversified collection of assets. The number of global holdings was quite surprising. There are small holdings of equities, bonds and agency notes allocated in over 52 countries. They are summarized in the Bar chart below. The sum total of ‘other’ holdings is 7.7%. Other Holdings: All less than 1.00%; Total: 7.7% of all holdings. (Data from BlackRock) Hence, there’s a bit more risk in that sector; however to be fair, these other holdings are extremely diverse, and very lightly weighted. What remains to be examined then, are the actual funds in the fund. A little care must be taken here, too. First, when the number of holdings is considered in each of the funds, all part of iShares “Core” ETFs theme, there is bound to be ‘overlaps’. So the fund does lack efficiency. However, with most of the Fund in U.S. Treasuries and S&P large cap equities, it should serve its purpose as a defensive holding in the current global economic environment. The investor should keep in mind, though, that the steady capital appreciation may have much the do with the extraordinary advanced economy bond purchasing programs and flight to quality trade into sovereign bonds. That being said, the fund has, in fact, performed rather well and has consistently paid monthly dividends since inception, November of 2005. (click to enlarge) As noted, the fund is composed mostly of fixed income; about 69%. Investors should also take note that it has become a common practice for corporations or governments to issue bonds denominated in stronger foreign currencies, for example, in Euros, Pound Sterling, Yen or U.S. Dollars. There are many good reasons for this strategy. It might be that two nations share a special trade relationship, for example the U.S. and Mexico. Another is to attract foreign fixed capital investments by having a large foreign currency reserve of the foreign investor. Also, it is a means to make bonds with weak domestic economies more attractive to investors seeking an added measure of security. However, the strategy could backfire if the issuer’s native currency weakens sharply against the stronger currency, thus making it more expensive to service the debt. Bond ETF Funds Symbol Number of Holdings Type of Holdings Distribution Yield Weighted Average Coupon Weighted Average Maturity Premium / Discount Expense Fee Weight in AOK Fund iShares Core U.S. Treasury Bond ETF GOVT 120 1 to 30 year U.S. Treasuries 1.36% 2.24% 7.05 years Premium 0.02% 0.15% 16.18% iShares Core Total USD Bond Market ETF IUSB 1547 Global U.S. Dollar Denominated Bonds 1.68% 3.26% 7.11 Years Premium 0.18% 0.15% after 0.01% waiver 41.93% iShares Core U.S. Credit Bond ETF CRED 2542 U.S. Dollar denominated, sovereign, supranational, corporate, local authority notes and bonds 3.35% 4.17% 10.18 years Premium 0.16% 0.15% 11.49% (Data from BlackRock) Next, the fund extends globally with comprehensive U.S., European and Pacific index equity holdings. It’s also important to keep in mind, as described above, that the “Supranational” and the “Other” holdings have a “theme” all their own as well as a structure just like a sector with merely a skeleton of weightings. However, in total, the ‘Other’ and ‘Supranational’ sectors carry a rather heavy allocation weight: Supranational ranks between Switzerland and China, and the “Other” is the fund’s second largest ‘geographic allocation’. Equity ETF Fund Symbol Number of Holdings Type of Holding Distribution Yield Price / Earnings Price / Book Equity Beta Premium / Discount Weight in AOK Fund iShares Core S&P 500 ETF IVV 505 S&P 500 2.20% 19.13 2.75 1.20 Discount -0.04% 13.83% iShares Core MSCI Europe ETF IEUR 991 Large, Mid and Small Cap Europe 4.02% 17.65 1.83 0.99 Premium 0.49% 7.31% iShares Core MSCI Pacific ETF IPAC 861 Large, Mid and Small Cap Pacific 2.45% 14.31 1.37 0.82 Premium 0.19% 4.62% iShares Core MSCI Emerging Markets ETF IEMG 1787 Large, Mid, Small Cap emerging Market 1.93% 19.21 3.13 0.72 Premium 1.10% 2.81% iShares Core S&P MidCap ETF IJH 401 Mid Cap S&P 500 1.51% 20.08 2.29 1.09 At NAV Par 0.00% 1.21% iShares Core S&P SmallCap ETF IJR 602 Small Cap U.S. Equities 1.30% 20.57 1.96 0.97 Premium 0.02% 0.51% (Data from BlackRock) Lastly, just a few quick facts about the fund in the table below. iShares AOK Symbol Number of Holdings Type of Holding Distribution Yield 12 Month Trailing Yield Expense Ratio Equity Beta Premium / Discount Average Volume iShares Core Conservative AOK 9 ETFs plus Supranational and Diversified Global Assets Mostly Equities plus Government, Agency, Corporate Fixed Income 1.46% 2.10% 0.39% 0.25% Discount -0.08% Appx 6000 daily; Recent 11,000 Appx (Data from BlackRock) All said and done, on the surface the fund seems rather simple: nine ETF holdings mostly in U.S. assets. However, when the details are examined, there’s nothing small nor simple about this fund, at all. Although a core conservative fund of funds, it’s quite diversified, global, comprehensive and complex! The main point being that either for short term safety or in terms of long term performance, the fund is, without a doubt, A-OK!