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PIMCO Total Return Gets Its Mojo Back

PIMCO has been in the news for all the wrong reasons lately, after more than $100 billion of clients money followed Bill Gross out of the door. But come early February there are signs the bond giant is getting its act together. While former CEO Bill Gross has moved down the street to run a new (much smaller) bond fund at Janus Capital Group Inc (NYSE: JNS ), his old fund – PIMCO Total Return Fund (MUTF: PTTRX ) – is doing just fine without him. The fund is performing so well in fact, that Morningstar has reinstated PTTRX with its coveted five star rating – the highest rating possible. PTTRX lost its fifth star at the end of 2013 following a long period of underperformance, caused by Gross betting the house against Treasuries in 2011. Gross was so sure Treasuries would fall he sold the entirety of PTTRX’s holdings, while using derivatives to bet against them. His bet was way-off, Treasuries went on to become one of the best-performing asset classes of the year. The result was PTTRX rankings plummeted to No. 87 in its category for 2011. They recovered in 2012 when PTTRX placed 12 – but the recovery didn’t last long. Gross’s mistimed call on equities meant PTTRX came in at Nos. 60 and 71 for 2013 and 2014, respectively. That patchy performance caused investors to start abandoning the fund long before Gross decided to quit. By September 2014 (Gross’s last month in charge.) PTTRX had suffered 16 consecutive months of outflows. At its peak in May 2013, PTTRX had assets of $290 billion. By the time Gross left, assets had fallen to $220 billion. In the wake of Gross’s departure, investors withdrew another $85 billion. But far from being the end of PTTRX, its trio of new managers have returned the fund back to winning ways. So far this year PTTRX has returned 1.45%, beating the Barclays U.S. Aggregate benchmark by 0.38 percentage points. While Morningstar ranks it at No. 6 in its category, beating 95% of its competitors. Despite the turnaround, investors are still abandoning the fund, with a reported $11.6 billion of outflows in January, leaving it with assets of $134.6 billion at month’s end. Sarah Bush, a Morningstar analyst, predicts the fund will continue shrinking through the first half of 2015. She believes that some institutional investors didn’t pull out of Total Return right away because they wanted to take some time to research comparable funds. Gross’s new fund on the other hand is still finding his footing, his new Janus Global Unconstrained Bond Fund (MUTF: JUCIX ) – ranks 80th in its category with a year-to-date return of -0.08. Indeed, JUCIX is lagging the bond benchmark by 1.15 percentage points. With the WSJ reporting that inflows into his new fund fell to about $86 in January, the lowest amount since Gross took over running the fund in early October. JUCIX has net assets of $1.5 billion, of which approximately $700 million comes from Bill Gross’s own account.

Greek ETF Faces Volatility On ECB Move

After last month’s political instability, Greece received yet another blow from the European Central Bank (ECB). The ECB on Wednesday announced that it would no longer accept Greek government debt as collateral for regular central bank loans, cutting off access to a key source of funding for Greek banks. This is likely to put fresh pressure on the country’s new government to rewrite the terms of its €240 billion bailout from the troika of the European Central Bank, the International Monetary Fund (NYSE: IMF ) and the European Commission (EU). Greek bonds are presently junk rated and are thus below the ECB’s minimum threshold to qualify as collateral. The recent move by the ECB means that the Greek central bank will now have to provide its banks with Emergency Liquidity Assistance (NYSE: ELA ), putting Greek banks in a tight corner as these are already facing signs of capital flight. The banks had earlier used their holdings of Greek government bonds to borrow from the central bank at an interest rate of just 0.05%. However, Greek banks will still have access to funds through the ECB’s emergency lending program, though the loans will carry a higher interest rate. However, the credit risk of the loans stays on the books of the Greek central bank. The move by ECB is significant as it sends a clear signal to Greece’s new Prime Minister Alexis Tsipras that the lenders are determined to force Greece to reach a compromise about any new potential debt terms. Moreover, it implies that if the Greek central bank is unable to solve its funding issues, the nation’s cash strapped government would have to step in for rescue. Market Impact The recent move by the ECB to tighten the country’s banking system made investors nervous, who then dumped Greek shares. Investors feared that ECB’s latest announcement might lead Greece to exit from the Euro zone. The Greek stock market shed more than 9% in early trading on Thursday following ECB’s move. Moreover, the Global X FTSE Greece ETF (NYSEARCA: GREK ), which tracks the performance of Greek stocks, plunged more than 10% on Wednesday following ECB’s announcement. Though GREK managed to recover part of its losses on Thursday and gained 4.4%, investors should cautiously trade the product. Below we have highlighted some of the details about the product. GREK in Focus The product tracks the FTSE/ATHEX Custom Capped Index and is home to a basket of 22 stocks. The fund manages a small asset base of $150.7 million and trades in solid volumes of 560,000 shares per day. The product holds a small basket of 24 stocks and is heavily concentrated in the top five holdings that make up for a combined 43.4% of assets. Financials takes the top spot at 32.5% in terms of sector holdings, followed by consumer discretionary (14.4%), consumer staples (13.4%) and materials (9.8%). The fund charges a fee of 65 basis points on an annual basis. The fund is down 7.3% in the year-to-date frame and currently has a Zacks Rank #3 or Hold rating.

How To Increase The Dynamic Energy Of Your Portfolio

In physics, the dynamic energy of an object is a measure of how much energy the object can release under favorable conditions. In a similar way, a stock portfolio has higher dynamic energy when it consists of stocks with great upside potential thanks to a headwind and its resultant sell-off. The article suggests replacing some stalwarts, whose growth has stumbled but still trade at elevated P/E, with some oil stocks that have been extremely punished due to the oil plunge. In physics, the dynamic energy of an object is a measure of how much energy the object can release under favorable conditions. To clarify this through an example, two objects that are still, with the one at the sea level and the other one on the top of a hill, both have zero kinetic energy. However, the one on the top of the hill possesses much greater dynamic energy because a minimal push can make it start moving at an increasing speed, whereas the other one will remain still under any conditions. Given this definition, investors should try to build a portfolio that has high dynamic energy, i.e., its stocks will greatly appreciate under favorable conditions. Of course this does not involve purchasing extremely high-risk stocks that will return great profits under extremely specific conditions, which have minimal chance of prevailing. Instead this strategy involves purchasing stocks that have asymmetrical reward to risk, as they have been beaten to the extreme due to a temporary headwind despite their strong fundamentals. In the past, it was much easier to build a portfolio with high growth potential. More specifically, all an investor needed to do was to purchase some stalwarts, such as Coca-Cola (NYSE: KO ), PepsiCo (NYSE: PEP ), McDonald’s (NYSE: MCD ), Wal-Mart (NYSE: WMT ), General Mills (NYSE: GIS ), Philip Morris (NYSE: PM ) and Procter & Gamble (NYSE: PG ), and hold them forever without even checking on them. As these companies have historically grown their earnings per share [EPS] at a rate higher than 10%, they have historically offered excellent returns to their shareholders. However, as these stalwarts have now expanded to almost every country, further growth has become much harder to accomplish and hence their EPS growth has stumbled in the last 2 years, as shown in the table (data from morningstar.com for 2013-2014 and finance.yahoo.com for 2015): KO PEP MCD WMT GIS PM PG 2013 growth -4% 10% 4% -3% 19% 2% 6% 2014 growth -2% 5% -8% -2% 1% -5% 4% 2015 growth [Exp.] 0% 4% 5% 5% 0% -10% -2% P/E TTM 21 21 19 17 22 16 21 Given the low growth rate of the above stalwarts, their high market cap and their relatively high P/E, investors should realize that a portfolio consisting largely of such stocks possesses limited upside (fortunately it also has limited downside, as these stocks greatly outperform the market during a downturn). Therefore, investors should add some stocks that have been unfairly beaten to the extreme due to a temporary headwind. At the moment, there are some off-shore drillers and oilfield service companies that possess strong balance sheets and great managements but have been sold off to the extreme due to the sell-off of their entire sector. Investors should realize that oil is very cyclical in nature and hence it will not remain for many years at its current level, which is half of the level that prevailed in the last 4 years. To be sure, the number of oil rigs has consistently decreased in the last 10 weeks, reaching the level of March-2010, and will keep declining if oil remains pressured. Moreover, all oil companies have significantly curtailed their capital expenses for future growth, which will ultimately result in lower production levels in the future. Thus it is a question of time before oil returns to a more reasonable range, which will render more rigs profitable than the current price does. The table below includes some stocks with strong earnings and low amounts of debt, which will strongly recover when oil returns to a more reasonable level, around $70-$80. The table depicts the decline of these stocks off their peak in the summer, the upside from their current price to their peak and the upside from their current price to half way till their peak, which will correspond to an oil price within $70-$80. NOV HAL ESV NOV Decline off peak 41% 42% 46% 40% Upside to peak 69% 72% 85% 67% Upside if oil rises to $70-$80 35% 36% 43% 33% P/E TTM 9 11 5 6 Given the extremely low P/E of Ensco (NYSE: ESV ), its low debt and its high dividend yield (10%), it is the stock with the greatest upside potential if oil rises to $70-$80. Noble Energy (NYSE: NE ) has a very low current P/E but its forward P/E is higher, around 9, while the company also carries a much higher relative amount of net debt ($7 B) than Ensco, standing at about 9 years’ earnings. National Oilwell Varco (NYSE: NOV ) has a low P/E and high backlog, which can fully protect its profitability for at least one more year, while its balance sheet is essentially debt-free, as its net debt ($2 B) is worth only one year’s earnings. Halliburton (NYSE: HAL ) has a low P/E but its earnings are expected to plunge almost 50% this year so it is a riskier choice. To sum up, investors should always look for stocks that have strong fundamentals but have been punished due to a temporary headwind, thus possessing great upside potential. As the market always overreacts to headwinds and any factor of uncertainty, it is only natural that asymmetric reward to risk shows up whenever an unforeseen headwind emerges. Of course this does not mean that an entire portfolio should consist of such stocks, particularly in the case of defensive investors. Nevertheless, when a stock of a portfolio reaches an overvalued level that leaves very limited further upside, it is prudent for investors to exchange that stock with another one as shown above so that their portfolio maintains high dynamic energy. Disclosure: The author is long ESV, NOV. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.