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ABR Dynamic Funds Launches Tactical Equity And Volatility Fund

By DailyAlts Staff On August 3, ABR Dynamic Funds launched a new liquid alternative mutual fund: The ABR Dynamic Blend Equity & Volatility Fund (MUTF: ABRVX ). The fund joins a growing list of funds that utilize volatility as an asset class, and will do so using a model-driven investment approach to tactically allocate its assets between equities, equity volatility, and cash. Typically, the ABR Dynamic Blend Equity & Volatility Fund will invest at least 80% of its assets in equities and equity-related derivatives, with total holdings split between three sleeves: Equities (i.e., instruments that track the S&P 500); Equity volatility (i.e., instruments that track the S&P 500 VIX short-term futures); and Cash (i.e., cash and cash equivalents). The index that the fund tracks is designed to capture favorable volatility movements in the equity markets while maintaining equity exposure to preserve positive performance during extended periods of rising markets. Objective & Approach The ABR Dynamic Blend Equity & Volatility Fund’s investment objective is to provide results that generally correspond to the ABR Dynamic Blend Equity & Volatility Index, as calculated by Wilshire; a benchmark index that measures the returns of a “dynamic ratio” of large-cap stocks and the volatility of large-cap stocks. In other words, the ratio of stocks, equity volatility and cash isn’t static over time. This is explained in the prospectus as follows: The Fund is systematically rebalanced once daily to replicate the ratio of the Index’s exposure to the S&P 500 Total Return Index, the S&P 500 VIX Short-Term Futures Index, and cash based on the investment model’s assessed volatility in the market and the historic returns of the underlying indexes. The Fund’s exposure to the S&P 500 Total Return Index increases in periods of relatively low market volatility, as determined by the Index, which reflects the investment model and compared to historic levels of market volatility. During periods of extremely low volatility in the equity markets, the Fund’s exposure to the S&P 500 Total Return Index may approach 100%. The Fund’s exposure to the S&P 500 VIX Short-Term Futures Index increases in periods of relatively high volatility. During periods of extremely high volatility in the equity markets, the Fund’s exposure to the S&P 500 VIX Short-Term Futures Index may approach 50%. The prospectus also notes that the fund “may also convert to a full cash position as necessary to remain consistent with the cash position weighting of the Index,” but doesn’t make it clear as to what type of market environment would trigger a move to cash. Management & Share Classes ABR Dynamic Funds is the fund’s investment advisor, and the firm’s Taylor Lukof and David Skordal are its portfolio managers. Mr. Lukof is the founder and CEO of Dynamic Funds and also CIO of ABR Management. Mr. Skordal is an accomplished professional trader turned portfolio manager with a dozen years of experience in the investment industry. Together, the two men are charged with the task of the day-to-day management of the new fund. Shares of the ABR Dynamic Blend Equity & Volatility Fund are available in investor (MUTF: ABRTX ) and institutional classes. Investment management fees are 1.75% Investor shares have a net-expense ratio of 2.25% and a minimum initial investment of $2,500 Institutional-class shares have a net-expense ratio of 2.00% and an initial minimum of $100,000. For more information, visit the advisor’s website . Share this article with a colleague

Equity CEFs: How To Buy The Dow Jones Industrial Average At A 10% Discount And A 6.9% Yield

Summary The Dow Jones Industrial Average (DJIA) is a simple index to correlate to as it only has 30 stock components. So what if I told you you could buy the DJIA at a -10% discount, receive a 6.9% yield and be even more defensive than the DJIA itself? Sound too good to be true? Well, that’s exactly what you can get in the new Nuveen Dow 30 Dynamic Overwrite CEF (DIAX). Index investing has long been looked upon as a simple yet effective way to get broad market exposure without having to do a lot of research. Over the last several years, index investing, particularly in funds that correlate to the major US market indices, such as the S&P 500, the Dow Jones Industrial Average and the NASDAQ-100, have been even more rewarding as the performance of these indices has run away from the vast majority of actively managed portfolios and mutual funds. So knowing the performance and popularity of index investing and how difficult it is to beat the major US based stock indices, who wouldn’t want to buy these indices at a wide discount? Say for example, I told you you could buy the equivalent of the Dow Jones Industrial Average at a -10% discount. Would you be interested? That would be like being magically transported back to the fall of last year when the markets were going through a 10% correction and the DJIA was trading in the 16,000’s rather than the 18,000’s today. Then let me tell you that not only could you buy all of the Dow 30 components at essentially -10% off their current price, I will also throw in an enhanced yield of 6.9%, significantly higher than the most popular ETF that correlates to the DJIA, the SPDR Dow Jones Industrial Average fund (NYSEARCA: DIA ) , which yields only 2.0%. And finally, what if I told you that you could also receive some downside protection if you thought the markets may have seen their best days and returns may be much more modest going forward. Probably a safe bet. In other words, if the markets flatten out or even go through a difficult period, this investment’s net asset value will actually outperform the DJIA. Well, guess what? There is such an investment, and it just hit its widest discount this year. What’s the catch? If the market indices have a huge year like in 2013, you’re probably going to give up some upside, but I’m willing to take that chance in 2015. I’ve been calling CEF investors insane for years based on what they buy and sell in this space and if you had followed my advice over the years, you would have been a heck of a lot better off now. So let’s take a look at this investment, the Nuveen Dow 30 Dynamic Overwrite fund (NYSE: DIAX ) , plus three others from one of the largest fund sponsors of mutual funds and CEFs available to investors. The New Nuveen US Equity Index Option CEFs Last summer, Nuveen announced the restructuring of all of their domestic (US) equity index option income CEFs to make them more streamlined and cost effective. The restructurings involved the merging of six of their funds into three funds (one S&P 500 index correlated, one DJIA index correlated and one NASDAQ-100 index correlated), thus becoming three much larger funds. One last fund, the Nuveen S&P 500 Dynamic Overwrite fund (NYSE: SPXX ) , would stand as is and just continue on as an S&P 500 correlated index fund with an updated option strategy. Here are the new Nuveen US equity index option CEFs (all information is as of 5/15/2015). Fund Ticker Market Price NAV Disc/Prem Market Yield Overwrite Target S&P 500 Buy/Write Income fund BXMX $12.85 $14.03 -8.4% 7.7% 100% Dow 30 Dynamic Overwrite fund DIAX $15.37 $17.09 -10.1% 6.9% 55% NASDAQ-100 Dynamic Overwrite fund QQQX $19.13 $20.57 -7.0% 7.3% 55% S&P 500 Dynamic Overwrite fund SPXX $14.20 $15.80 -10.1% 7.4% 55% All of the funds, except for the Nuveen NASDAQ-100 Dynamic Overwrite fund (NASDAQ: QQQX ) , received new ticker symbols and all of the funds received new names. None of the funds use leverage and none of them have any fixed income investments. In other words, they are essentially all equity index funds with an option sleeve of varying strike prices and expirations. Though the restructurings and mergers were announced last summer, they weren’t completed until late last year (12/22/14) so 2015 can really be used as the starting point for the new fund’s strategy and performance analysis. NOTE: For a more detailed look at the new structure and investment strategies of all four funds, please go to their Annual Report as of December 31, 2014. The crux of the restructurings, besides lowering the total number of funds from seven to four, involved an updated and more simplified approach to their index exposure as well as their option overwriting. All of the funds, except for the Nuveen S&P 500 Buy/Write Income fund (NYSE: BXMX ) , now have a 55% option overwrite percentage target with a range of 35% to 75% at the discretion of the portfolio managers. What this means is that the portfolio managers can adjust their option sleeve each month (or expiration period) consistent with their outlook for the markets or their particular index. This “Dynamic” option approach is designed to focus more on the options sleeve, i.e. the overall options positions with variable strike prices and expirations, rather than the stock portfolio itself. Prior to the restructurings and mergers last year, many of these same Nuveen index option CEFs just sold an established percentage of options against their index portfolios each expiration period without adjusting for market conditions. Not only that, many of the pre-merger funds wrote (sold) options against a very high 100% notional value of their stock portfolios. This was an extremely defensive option strategy that does not work well in a ramp up bull market. In fact, the pre-merger funds were so defensive that they were forced to reduce their distributions as the losses in their short option exposure accumulated during this bull market period. To give you a refresher course, option income funds work best in flat to even volatile up and down markets where no clear trend is established. Option income CEFs can still perform well in a bull market but the higher the percentage of options sold against their portfolios, the more difficult it will be for the fund’s NAV to keep up with their equity benchmarks. And selling 100% option coverage (based on the notional value) essentially means you believe the market has very little upside and you are willing to forgo any appreciation in exchange for the income derived from selling the options. In a down market or during a market correction, the NAVs of option income CEFs will certainly hold up better than their index benchmarks but they are not immune to NAV erosion in a prolonged bear market, even funds that sell options against 100% of their stock portfolios. Remember, the NAV of a fund represents its true value whereas the market price is established by investor demand and investor sentiment (often wrong) and can thus trade higher or lower than a fund’s NAV. The New Nuveen Performances So Far In 2015 So giving the new Nuveen index option funds more flexibility with their option overlays, i.e. making them more dynamic as opposed to static, should give the portfolio managers more opportunity to capture more NAV upside from their correlated indices. Only BXMX is maintaining a 100% option coverage though as we’ll see, that is not limiting its NAV performance so far this year. Here are the fund’s total return (Market and NAV) performances YTD compared to their benchmark ETFs. NOTE: Index ETFs make better comparables than the actual S&P 500, DJIA and NASDAQ indexes because ETFs include dividends whereas the indexes do not. Fund Ticker Mkt Tot Ret Perf NAV Tot Ret Perf Index ETF Index ETF Tot Ret Perf S&P 500 Buy/Write Income fund BXMX 8.2% 4.6% SPY 3.8% Dow 30 Dynamic Overwrite fund DIAX 1.4% 3.1% DIA 3.4% NASDAQ-100 Dynamic Overwrite fund QQQX 1.2% 5.3% QQQ 6.4% S&P 500 Dynamic Overwrite fund SPXX 1.1% 2.9% SPY 3.8% Here we can see that all of fund’s NAVs are at least keeping pace with their index ETFs and surprisingly, BXMX is actually beating the SPY index ETF despite its 100% overwrite option coverage. I’m not quite sure how this is happening other than that BXMX has about 300 positions out of the total S&P 500 positions while SPXX only has about 200. It’s not unusual for a fund to attempt to correlate to a broad index without taking on all of its positions and since the top positions and sector weightings are very consistent between all three S&P 500 related funds (SPY, BXMX & SPXX), it must be that BXMX’s portfolio managers, Ken Toft and Michael Buckius, have done a much better job in picking the bottom half of the fund’s portfolio out of the available 500 positions that make up the index. In any event, I would call your attention to the lagging market price performances of DIAX, QQQX and SPXX shown above despite their NAVs only slightly lagging their index performances. Is there an opportunity here? I think there is so let’s take a closer look So Why Are The Funds Seeing Widening Discounts? I own all of these funds across the board and except for BXMX, it’s been a bit disappointing to see the discounts widen in these funds as the year has progressed. I will get into why this may be happening in a moment but let me first show you the Premium/Discount graphs of two of the funds, DIAX and QQQX, from when the restructurings and mergers were completed in late December, 2014 (December 22nd to be exact) to today. Premium/Discount chart for DIAX from 12/22/2014 Premium/Discount chart for QQQX from 12/22/2014 As you can see, both DIAX and QQQX have seen their discounts widen substantially as the year has progressed from around -2% late last year to upwards of -10% for DIAX today. Considering both of these fund’s NAVs were outperforming their respective indices, the DJIA and NASDAQ-100, earlier this year when the indexes went negative, this is a surprise. Because despite a more flexible option writing strategy that should allow the fund’s NAVs to capture more upside, they are still more defensive than their respective indices in case the markets go negative. And yet, investors have sold off these funds as if the new strategies are not working. But then nobody, especially me, has called CEF investors very smart and in fact, most investors in these funds do just the opposite of what they should be doing. And that may be why these two funds, DIAX and QQQX in particular, have been selling off on their market prices despite their NAV performances. Because DIAX today represents the merger between Nuveen’s two old funds from last year, DPO and DPD. Though DIAX now is very similar to the old DPD from last year, except for the more dynamic option approach, this is not the case with DPO. DPO was essentially a leveraged version of the Dow Jones Industrial Average index and former shareholders of DPO were able to receive enhanced NAV performance when the DJIA was performing well. Could it be that former DPO shareholders are gradually ridding themselves of their converted DIAX shares because they no longer receive the leveraged exposure to the DJIA? Could be. And could QQQX, which represents the merger between the old QQQX and JLA funds, be suffering from the same selling affect from former JLA shareholders? JLA used to be one of the most defensive option income CEFs available to investors, selling 100% option coverage on its partly NASDAQ-100 and partly S&P 500 portfolio. So could it be that former JLA shareholders are gradually ridding themselves of their converted QQQX shares since they don’t receive the downside protection they once did in JLA? All of this is speculative and it could be that investors (both institutional as well as individual) may have owned all of the pre-merger funds across the board (like me) and after the restructurings and mergers were completed late last year, have reduced their positions in the combined funds since they are obviously quite a bit larger funds now. This would also explain why SPXX, which was the only fund that didn’t merge with another fund, hasn’t seen a dramatic change in its discount this year. Whatever the reason, I believe this is giving an opportunity for income investors to take a position or add to a position in DIAX and/or QQQX in particular, as once the selling pressure abates from former shareholders possibly, both of these funds should be able to reduce their discounted market prices. Conclusion I believe the major US indices, i.e. the S&P 500, Dow Jones Industrial Average and the NASDAQ-100, are in for more tepid returns going forward and may just be in a trading range for the foreseeable future, albeit not far from their all-time highs. And if that’s the case, then option income funds like the Nuveen index CEFs should continue to see less risky NAV performance compared to their correlated indices, i.e. NAVs that will slightly underperform on the upside while outperforming on the downside. And if the markets remain in a relatively flat trading range, then that will be just fine for these fund’s dynamic option strategies. Because when you get right down to it, index investing can be more exciting and even more lucrative when you invest in index option CEFs. Disclosure: The author is long DIAX, QQQX, BXMX, SPXX, SPY, DIA, QQQ. (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.

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.