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401(k) Fund Spotlight: Neuberger Berman Genesis

Summary The Genesis Fund has stayed true to its investment objective, despite financial information providers having trouble categorizing it. The Genesis Fund has consistently outperformed the Russell 2000 indexes over the longer term. The Genesis Fund has lagged its peers over the last five years. The Genesis Fund is clearly a superior small cap option for those who desire to maintain small cap exposure through a bear market. With a forward price to earnings multiple of 23, the “value” focus of the fund is questionable. Introduction I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article it is helpful to understand my approach to investing in 401(k)s . I strive to write these articles for the benefit of both the novice 401(k) investor and the professional asset allocator. Please comment if you have a question. I always try to give substantive responses. Neuberger Berman Genesis Fund The Genesis Fund has the following five share classes: 401(k) plan investors are most likely to encounter either the R6 shares or Trust shares. The R6 shares have the lowest expense ratio at .78, while the Trust shares are a bit higher at 1.10. For the sake of this article I will assume the Investor shares – NBGNX, which are no-load shares with a reasonable expense ratio of 1.01. These shares have a low minimum investment of $1,000 and are the most likely class for retail investors considering the fund outside of a 401(k) plan. Fund Style The Genesis Fund’s stated focus is that of high-quality, smaller capitalization (“cap”) company stocks that tend to lean more towards the value camp. Financial information companies have juggled their label of the fund’s investment objective to fit their “little boxes” and “cookie cutter categories”. Investors searching the websites of various information providers and online brokers will find this fund’s category ranging from small cap value to mid cap growth. Even with the median capitalization of its 145 holdings at $3.2 billion, the fund should not be considered a mid cap fund. Here is why … If an investment fund says they are long term investors in smaller capitalized companies that they believe present good values, then this is what should happen if they are successful. They should end up with companies worth $3 to $5 billion that they paid $1 to $2 billion for five to ten years ago. Another way of looking at this is that the fund should have low portfolio turnover and the largest holdings should be strong performers. My analysis reveals that this is what has been happening with the Genesis Fund. I went back to the Genesis Fund’s holding report from July 31, 2012 and compared it with its current holdings. There were a great deal of similar names. The fund’s average annual portfolio turnover of 17% over the last ten years also confirms this. There were several companies held in 2012-often in much smaller amounts-that now make up some of the fund’s top 10 holdings. The following chart reveals six of these that have been strong performers over the last five years: WST data by YCharts These six companies were West Pharmaceutical Services (NYSE: WST ), Zebra Technologies (NASDAQ: ZBRA ), Church & Dwight (NYSE: CHD ), Sensient Technologies (NYSE: SXT ), ICON Public Limited (NASDAQ: ICLR ), and Westinghouse Air Brake Technologies (NYSE: WAB ). If one must categorize the fund, I think small cap blend (or core) or really just plain small cap equity is the best option. The key takeaway for investors here is the assurance that the fund’s management has a strong track record of doing what they say they are going to do. This parallels with the fact that the fund’s lead managers, Judy Vale and Robert D’Alelio, have been at the helm for more than 16 years now. Performance History When it comes to evaluating the performance of the fund versus a benchmark, the Russell 2000 Index and the Russell 2000 Value Index are good options. This is also what Neuberger Berman uses. The fund should not be compared to mid cap indexes or mid cap funds. The following table shows how NBGNX has fared against these indexes: Annualized as of June 30, 2015 3-Year 5-Year 10-Year Inception (9/27/88) Genesis Fund – Investor Shares 15.0% 15.4% 9.2% 12.5% Russell 2000 Index 17.8% 17.1% 8.4% 9.9% Russell 2000 Value Index 15.5% 14.8% 6.9% 10.8% The further the historical horizon is extended, the greater the fund’s outperformance has been. Near term though, it has lagged the index. There are also a fair amount of small cap oriented funds that have handily outperformed NBGNX over the last five years. Using the Barrons Fund Screener , I compared it to other small cap funds with at least $1 billion in assets (the Genesis fund is very large with almost $12 billion in assets). The following chart provides a few examples of the retail shares of other funds that have done better over the last five years: GTSIX Total Return Price data by YCharts The four peer funds in this chart are Invesco Small Cap Growth – Investor shares (MUTF: GTSIX ), Hodges Small Cap – Retail shares (MUTF: HDPSX ), JPMorgan Small Cap Equity – Select shares (MUTF: VSEIX ), and Brown Capital Management Small Company – Investor shares (MUTF: BCSIX ). Note: Durable Under Fire Though It is important for novice investors to understand that most mutual funds are almost always fully invested. They tend to keep a blind eye toward macroeconomic developments and try to outperform in their little corner of the market. If a bear swipes the market they may not die, but they will most certainly be wounded. The Genesis Fund has an impressive history of outperformance during bear markets. The fund (institutional shares) has logged an annualized return of -18.4% in the last six major bear market periods (May to Aug 1998, Mar 2000 to Sep 2001, May to Sep 2002, Jul 2007 to Mar 2009, May to Aug 2010, and May to Sep 2011). This is an outperformance of at least 10% against all of the following related indexes and peer fund benchmarks: Russell 2000 Value -28.4% Russell 2000 -35.7% Small Value -29.1% Small Blend -31.5% Small Growth -38.2% Portfolio Positioning A 401(k) investor who wants exposure to small caps has good reason to choose the Genesis fund over a small cap index fund. However, in plans with multiple, active small cap options, there may be a better fund available. I am not a buy and hold (blindly) investor. When I have enough evidence of an approaching storm-every cycle has at least one-I get out of equity town. My current forecast calls for another two years of sideways action for the U.S. stock market from the levels we are at now. In 401(k) plans I am focused on large cap funds with high dividend yields to traverse this sideways market. I view the small cap fund/index arena as broadly overvalued. The Genesis Fund bears witness to this. Despite professing a value approach, the fund’s forward Price to Earnings (P/E) multiple as of June 30, 2015 was a whopping 23.1! Sorry, but I don’t call that value. The fund’s miniscule .33% dividend yield is also another kick to my idea of what makes up value. I cover several different small cap companies – a few of which I have written about on Seeking Alpha – that trade at substantially lower multiples and have much higher dividend payments. Conclusion The Genesis Fund is a good car to board, but only on the right train. For those who must always own a small cap fund, for whatever reason, the fund is a good option if you want a bit more protection for a potential bear market. For regular market environments, many 401(k) plan participants may likely have another small cap fund option available that has performed better in recent times. In any market environment, the fund is a better option than a small cap index. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to Americans within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

TECO Energy: What A Difference A Day Makes

Over the past decade or so TECO Energy has shown stagnant growth and average investment results. Recently the company received a bid to be acquired at a much higher share price. This article shows the difference that just a single day can have on an investment. Over the past decade or so, Tampa, FL-based TECO Energy (NYSE: TE ) has been what I would classify as an “average” investment. You have a slow growing business that just sort of plugs along and pays out a large percent of its earnings in the form of dividends. It’s the classic utility model. I’ll show you what I mean. Here’s a look at the company’s history from the end of 2005 through the end of 2014: TE Revenue Growth -1.8% Start Profit Margin 7.0% End Profit Margin 8.3% Earnings Growth 0.1% Yearly Share Count 1.3% EPS Growth -0.6% Start P/E 17 End P/E 22 Share Price Growth 2.0% % Of Divs Collected 43% Start Payout % 76% End Payout % 93% Dividend Growth 1.6% Total Returns 5.6% TECO began the period with a little over $3 billion in revenue and ended with a bit less than $2.6 billion, or a compound growth rate of -1.8% per annum. Granted certain operations have been sold or discontinued, but it remains that the company as a whole was not growing on the top line. Based on the $3 billion in revenues, TECO earned about $211 million – representing a profit margin of about 7%. By 2014 the margin had expanded to 8.3%, resulting in a net profit of $213 million. In other words, despite the revenue decline, the overall company profitability increased ever so slightly. Yet this slight advantage did not remain for shareholders. At the beginning of the period the company started out with roughly 208 million shares outstanding. By the end of the period this number had grown to 235 million. As such, the earnings-per-share growth also was negative – coming in at -0.6% annually. At the end of 2005 shares of TECO were exchanging hands around $17, resulting in a trailing multiple of about 17. By the end of 2014 the share price had climbed to $20.50, indicating a multiple closer to 22. This is why it’s important to allow for a wide range of possibilities. During this same time frame a company like Union Pacific (NYSE: UNP ) was providing 20% EPS growth, yet it saw P/E compression . On the other hand, TECO was providing negative EPS growth yet saw a higher multiple. When you suggest anything is possible, it’s not just a coverall – strange things happen in the investment world. Due to this multiple expansion, shareholders saw the share price increase by about 2% annually. This is nothing to text home about – especially over a decade period – but still something considering the growth headwind. The real story for TECO has been its dividend. The company, like many utilities, has committed to paying out a large portion of earnings in the form of dividends. Although this payout did not grow much, it did allow for a solid and consistent cash flow. Over the period an investor would have collected about $7.50 per share in dividend payments against capital appreciation of just $3.50. In total this equates to total annual returns of about 5.6% per year. Hence the beginning reference to “average.” Actually it’s slightly impressive given the lack of growth, but basically investors received the dividend payment along the way and not much more. Had you owned a couple thousand shares it could have paid for your electric bill, but there were certainly better wealth providers during this time. Both the business and investment performance of the company wasn’t especially inspiring. Yet this changed a bit due to a recent announcement. On September 4, 2015, TECO announced that Canadian-based Emera Inc. ( OTCPK:EMRAF ) would acquire TECO Energy for $27.55 per share, representing a 48% premium to the July 15th price and roughly 31% higher than the previous close. As a result, shares opened the next trading day over 20% higher, moving to about $26 per share. This is the sort of thing that transforms an investment. During the past decade, shares of TECO Energy have provided about 5.4% annualized returns (quite similar to the exercise above, but moving away from the 2005 and 2014 year-ends.) As a result of the buyout offer, shareholders suddenly have a 7% annualized gain. Over the past five years shares have provided 8.5% annualized returns (incidentally, demonstrating what a move from a low to high earnings multiple can do in the face on a stagnant business.) As a result of the higher price on September 8th, this 8.5% annualized return is suddenly a 12.5% annualized gain. Naturally you can’t predict whether or not a buyout offer will come. Yet the above result is instructive. For one, it shows that business performance and investment performance can vary. The typical investor over the last decade or so actually saw their underlying earnings claim decrease. Had you owned the entire business you would have had a slightly greater claim, but due to share issuance common stockholders were diluted. Still, even though the growth rate was negative, overall returns were still positive. This happened for two reasons. First, investors were willing to pay more for less earnings power. Strange things happen in the investment world, so you can never count out multiple expansion (or contraction). Investor sentiment waxes and wanes as the business results tend to be a bit steadier. Yet even if the multiple had remained steady, thus resulting in negative share price appreciation, your overall returns would not have been negative. Due to a solid and slow growing dividend, you were able to accumulate cash payouts along the way. There’s a lot to be said for collecting dividends while you wait for something good to happen. Of course these payouts can’t always “protect” you, but they can still provide a nice return buffer. You won’t shout in joy over 4% returns, but it’s not an awful consolidation prize. Further, you can reinvest these payments to increase your income. In a more abstract sense, this example demonstrates why it can pay to remain patient. Had you purchased shares a few years ago with an earnings multiple below 15 (or higher), the subsequent decline in earnings and rise in share price resulted in a multiple over 20. You could have then elected to sell, but naturally that would have concluded in missing out in a 20%-plus higher price today. Of course you can’t predict this, but the idea is to be ready for the outcome. If that sort of “missing out” would bother you, then perchance there are worst things in the world than collecting a solid dividend payment while a company regains its footing. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

Falling Stock Prices And Share Buyback Programs

Summary The bear market is making share buybacks cheaper for companies. Smart companies will leverage this market and buyback more shares. Buying PKW or a few buyback achievers in this bear market will yield above-market returns for investors with a long-term time horizon. This bear market is causing short-term pain and panic for investors, but it is also making one particular feat of financial engineering even more appealing: share buybacks. The stock buyback idea is simple: companies generate cash flow from operations, and they use that cash to buy stocks on the open market at market prices. In short, companies buy their own stock through profits, which in turn lowers the total amount of shares outstanding. That will then raise the earnings per share ratio since the denominator is being reduced by the buybacks. Share buybacks have become more common since 2008, and they’ve become controversial. This summary of why buybacks are criticized is worth reading. The main concerns are threefold: By buying shares, a company may be overpaying for its own shares, especially if the shares are trading above book value. Companies should invest excess profits into research and development to grow revenues instead of buying back shares. Companies can actually raise the float of the company even as they buy shares, if they issue shares to employees or executives while also engaging in a buyback program. A company’s history of share issuances and buybacks should be analyzed carefully before buying. With these caveats in mind, there are reasons to like share buybacks and the companies that invest in them. Companies with excess profits, like Apple (NASDAQ: AAPL ), have enough cash lying around for buybacks, dividends, and investments. After AAPL began issuing dividends and doing buybacks, it purchased Beats, acquiring a popular and high-margin headphones manufacturer and music streaming service, and cash on hand still rose to over $200 billion . When a company cannot stop accumulating cash and has enough to consider a stock buyback, the pace and amount of a buyback program needs to be planned meticulously with a macroeconomic view in mind. This is where management effectively becomes a macro hedge fund, planning on when to buy its own company’s stock based on how the market will treat the company in the future. Likewise, investors need to consider this as well, for one simple reason: buybacks yield higher returns in bear markets. A hypothetical example of a share buyback problem by a company with a $10 billion market cap and a $5 million share buyback program makes this clear. In a bull market, the company ends up buying less shares than in a bear market – and a faster buyback program buys even more than a longer one. The chart above tells us something interesting: more aggressive share buyback programs and a bear market are good for shareholders. They reduce the total number of shares outstanding by a larger amount for the same amount of money spent; in fact, a more conservative share buyback program that lasts twice as long will result in more than half the amount of shares reduced in a bull market. Bear markets send a clear signal to management: aggressive share buybacks will benefit shareholders, and more aggressive ones can offset selling pressure that is coming from a broader panic. They can also benefit shareholders in the interim if the bear market continues. The Easy Way: PKW Thus, paradoxically, a bear market can benefit the buyback achievers. However, timing the purchase of those achievers and ensuring they will maintain enough free cash flow to continue, or even accelerate, buybacks is the tricky part. An easy way to make this bet is to buy the PowerShares Buyback Achievers Portfolio ETF (NYSEARCA: PKW ), which attempts to hold companies that have reduced outstanding shares by 5% or more in the past 12 months. This simple focus means the company ends up holding a group of great companies across sectors, most of which have strong business fundamentals while also aggressively returning capital to shareholders by buying shares. Part of the beauty of PKW is its low exposure to energy, a beaten up and feared industry due to falling oil prices, and its relatively high exposure to consumer discretionary stocks. If this bear market is unrelated to the fundamentals of the economy, and Americans really are returning to work and will start spending more, this allocation will benefit investors on top of the buyback play. Looking at the fund’s holdings directly, we see some impressive names: PKW isn’t perfect: its holdings include companies that are facing serious headwinds, most notably International Business Machines (NYSE: IBM ), the fund’s second largest holding. IBM is seeing double-digit revenue declines and may struggle to maintain buybacks, let alone profitability, if it cannot stop those declines from worsening. Express Scripts (NASDAQ: ESRX ) has recovered from steep revenue declines in 2014, but its top-line growth has been tepid and below inflation, indicating a real decline in revenues. Stockpickers’ Alternative A better way to outperform in this bear market may be to target companies with a history of strong buybacks, rising revenues, and the potential for higher FCF. What companies fit the bill? Home Depot (NYSE: HD ), Apple, Boeing (NYSE: BA ), Monsanto (NYSE: MON ), and Time Warner (NYSE: TWX ) all have strong revenue growth and a solid track record of large share buybacks. Even excluding the buyback factor, a purchase of these companies yields a portfolio with a P/E about 20% below the P/E of the entire S&P 500. If an investor believes this bear market is likely to continue and has a long-term time horizon, buying large-cap dividend-yielding stocks, which traditionally provide strong positive returns over a long-term time horizon, is a smart decision. But an even smarter decision may be to focus those purchases on buyback achievers, thereby benefiting even more from the bearish hysteria of the current market. Disclosure: I am/we are long BA, HD. (More…) 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.