Tag Archives: etf
PJP: Will Big Pharma Continue To Outperform In 2016?
Summary This $1.59 Bln ETF has been a steady performer this year. Was December’s shareholder distribution a nice holiday gift? Will a defensive strategy for investors and further healthcare reform benefit investors going forward? We answer these questions and provide our recommendation on this attractive sector fund. The PowerShares Dynamic Pharmaceuticals Portfolio ETF (NYSEARCA: PJP ) is a well established, (June 23, 2005), pure pharmaceutical ETF, with a small but well capitalized portfolio of 23 companies, that are equal weighted. The underlying index, the Dynamix Pharmaceutical Intellidex Index with the symbol {DZR} has 2X holdings. Both the Fund and the Index are rebalanced and reconstituted in February, May, August and November. Many of the most well known firms in the pharmaceutical industry are within this ETF and it has attracted a fair sized institutional following and would be considered a “satellite” holding, as per Morningstar. We decided to analyze this attractive fund to see if the returns it has exhibited in 2015 will continue and how it will perform in a rising rate environment in 2016. As expected, our market capitalization did not have any surprises but is informative. PJP Market Cap Market Capitalization Weight Large cap 63.60% Small cap 24.40% Micro-cap 12.00% This is courtesy of xtf.com. Morningstar, as we previously noted uses a slightly different categorization. They state Giant at 43.95%, Large 20.21%, Medium: 4.45%, Small: 23.77% and Micro: 7.62%. In general it would be considered a large capitalized growth fund. It is interesting that there are no medium sized firms in this ETF, in terms of capitalization. We will explain why shortly after reviewing the industry sectors of the ETF. In terms of the style of the firms in the ETF, this is confirmed in our analysis. PJP Style Style Objective Weight Growth 65.30% Blend 17.60% Pure Growth 8.20% Pure Value 0.00% Value 8.90% These numbers concur with the fund sponsor, PowerShares (Invesco), who uses Large-Cap Growth at 36.15%, Large-Cap Blend at 22.48%, and Small-cap Growth at 32.08%. Only Large-Cap Value and Mid-cap Growth are a distant 4.99% and 4.29%, respectively. Though the fund is based upon U.S. securities, there is a rather small exposure to the euro. PJP Country/Currency Exposure Country Weight Currency Weight United States 96.108% USD 96.108% Ireland 3.892% euro 3.892% This euro weighting applies to well known Ireland based firm, Perrigo Company PLC (NYSE: PRGO ). PRGO was in the news in 2015 when Mylan Labs (NASDAQ: MYL ) failed in an attempted takeover of Perrigo. This exposure, even with a large move in the dollar-euro, should be negligible to this ETF in 2016. Our sector weight is obviously 100% Healthcare, but the industry weightings within the sector is informative. PJP Industry exposure Industry Weight Pharmaceuticals 61.75% Biotechnology 30.27% Medical Equipment/Health Care Equipment & Supplies 7.98% Our industry weighting here sheds light on the nature of the market cap and style of the firms in the ETF. The majority of the Biotech firms would fit into the Small-Cap Growth market cap. Once a firm reaches scale within Biotech either through product developed or approval on a new drug or medical device, it is either acquired or “rolled-up” into another biotech or pharmaceutical firm. As such, there is little room both in the ETF and in the marketplace for a Mid-cap Biotech firm. As noted, with over 30% of the ETF in Biotech and with a long business cycle it is safe to assume that develops will continue in the sector, regardless of the economy in 2016. Using this ETF as a defensive position in 2016 is quite appropriate. This was our similar interpretation when we recently analyzed the First Trust NYSE Arca Biotechnology Index ETF (NYSEARCA: FBT ) . In order to determine the overall risks and rewards, we decided to analyze the entire portfolio. Due to its small size it was not overwhelming, but simply whelming. We analyzed all 23 components, their symbols, ratings, (Moody’s and S&P), if any, and their weight within the ETF and the underlying index {DZR}. In this fund’s case we will also show their individual year to date and 12 month performance. PJP Portfolio Name/Symbol 12 month return Ratings, (Moody’s/S&P) Weight- PJP Weight- Index, {DZR} Eli Lilly & Co. (NYSE: LLY ) 21.96% A2/AA- 5.108% 5.00% Bristol-Myers Squibb Co. (NYSE: BMY ) 15.76% A2/A+ 5.060% 5.00% Johnson & Johnson (NYSE: JNJ ) -1.28% Aaa/AAA 5.043% 5.00% Amgen Inc (NASDAQ: AMGN ) 0.06% Baa1/A 4.978% 5.00% Pfizer Inc. (NYSE: PFE ) 3.06% A1/AA 4.952% 5.00% Merck & Co Inc (NYSE: MRK ) -8.53% A1/AA 4.875% 5.00% Allergan plc (NYSE: AGN ) 21.06% Baa1/BBB- 4.845% 5.00% Gilead Sciences Inc. (NASDAQ: GILD ) 10.44% A3/A- 4.774% 5.00% Akorn Inc. (NASDAQ: AKRX ) 1.17% B1/B 4.446% 4.00% Lannett Co. Inc. (NYSE: LCI ) -3.47% B2/B+ 4.379% 4.00% Novavax Inc. (NASDAQ: NVAX ) 43.24% NR/NR 4.326% 4.00% Celgene Inc. (NASDAQ: CELG ) 7.75% Baa2/BBB+ 4.316% 4.00% Mylan NV -4.83% Baa3/BBB- 4.219% 4.00% Biogen Inc. (NASDAQ: BIIB ) -11.71% Baa1/A- 4.105% 4.00% Ligand Pharmaceuticals LGND 104.61% NR/NR 4.072% 4.00% Baxter International Inc. (NYSE: BAX ) -5.80% Baa2/A- 4.032% 4.00% Abbott Laboratories (NYSE: ABT ) -1.64% A2/A+ 3.954% 4.00% Depomed Inc (NASDAQ: DEPO ) 20.08% NR/NR 3.922% 4.00% Perrigo Co. PLC. -11.10% Baa3/BBB 3.904% 4.00% Impax Laboratories Inc. (NASDAQ: IPXL ) 35.76% B1/BB 3.880% 4.00% Prestige Brands Holdings Inc. (NYSE: PBH ) 43.56% B2/B+ 3.710% 4.00% Heron Therapeutics Inc. ( OTC:HRTX ) 183.38% NR/NR 3.695% 4.00% Medicines Co/The (NASDAQ: MDCO ) 33.17% NR/NR 3.403% 4.00% As per the fund’s prospectus, the fund invests in proportion to the weightings of the index. These weightings shift often due to changes in share value over time. Our top 10 holdings represent 48.46%, while the bottom 13 represent 51.538%. The index is fairly evenly fixed at either 5.00% or 4.00% weights. The performance of the individual holdings are of course slightly muted due to no position having an overweight influence. Fortunately, the outsized performance of Heron Therapeutics at 183.38% for the year easily eclipses any loss from Biogen at -11.71% or Perrigo at -11.10%. A few of the companies in the fund have been mentioned as takeover targets after the failed acquisition of Perrrigo by Mylan, MYL. One company mentioned in Bloomberg is Impax Laboratories. It will be interesting to see how the Pharmaceutical and Biotech landscape changes in 2016 as continued talk on healthcare and pharmaceutical price reform influence the sector. One thing we are fairly certain of is that the sector will not be quiet no matter how robust or sluggish the U.S. or global economy is. As noted above we also did a credit rating analysis on the portfolio. The breakdown is informative. PJP Underlying Credit Ratings S&P Weight Moody’s Weight Upper Investment Grade 33.766% Upper Investment Grade 41.853% Aaa 5.043% AAA 5.043% A1 9.827% AA 9.827% A2 14.122% A+ 9.014% A3 4.774% A/A- 4.978%/12.991% Lower Investment Grade 30.399% Lower Investment Grade 13.380% Baa1 13.928% BBB+ 4.316% Baa2 8.348% BBB- 9.064% Baa3 8.123% Non Investment Grade 16.415% Non Investment Grade 16.415% BB 3.880% B1 8.326% B+ 8.089% B2 8.089% B 4.446% Nonrated 19.418% Nonrated 19.418% While it is noteworthy that the some of the highest rated, (in terms of debt) securities such as JNJ (-1.28% 12 month performance) didn’t break even, it is not surprising. The companies in this ETF that have taken the greatest risks and have some of the poorest balance sheets and lowest credit ratings, produced outstanding results. With a combined 35.833% of the ETF’s underlying credits in non-investment grade and non-rated securities we expect the outsized returns to continue in the NR or lower rated securities. Fortunately, due to the opportunities and continued growth in the marketplace, established companies such as Eli Lilly still outperform (+21.96% 12 month) the general market and are highly likely to do so in 2016. Regardless of the underlying credit ratings, the performance of the holdings should be quite impressive for shareholders in 2016. Based upon the components and structure we analyzed the overall performance of the ETF and the index. PJP’s Performance, Fees and Recommendation Category PJP {ETF} DZR {Index} Net Expense Ratio .56% NA Turnover Ratio 47.00% NA YTD Return 10.68% 11.19% 1-Year Total Return 9.58% 9.97% Dividend Yield/SEC Yield 3.85%/0.56% NA Beta (Shares vs. Morningstar U.S. Healthcare Tr)/holdings 1.18, (11/30/15)/ .90 NA P/E Ratio FY1/current 22.42/20.04 NA Price/Book Ratio FY1/current 4.42/3.82 NA Our net expense ratio of 0.56% compares favorably against an asset median of 0.51%. Our turnover ratio of 47% is much higher than the asset class median of 18.00%. It basically reflects the quick discarding of poor performers and acquisitions. The divided yield was 3.85% for the year and reflects quarterly income with the majority, ($2.47021 per share) paid in December. The annual short term gains paid this year on December 31 are $1.13178 per share. This is a large reduction from 2014’s total of $1.65068, which included $0.34712 in long term gains along with $1.30356 in short term gains. Overall we are quick satisfied with the 2015 distribution but do realize there are tax implications from some share holders who reinvest their gains. Taking into consideration the market year to date return and the total distributions we calculated a total return of approximately 14.28% for the year. The constant discussion of healthcare reform and price gouging actions, (whether morally or commercially justified) will continue in 2016. In any event, we expect the underlying large and growing components to continue significant growth into 2016. We do expect some of the names in this ETF to be acquired over the next year and new products that are in the pipeline to be approved. In addition, institutions only own 19.32% of this fund, according to Fidelity. While we would expect more participation from institutions, we feel that the majority of shareholders here will be quite patient with this ETF as a “satellite” holding and not sell on a whim. As it is an election year, and there has already been significant pontificating on pharmaceutical prices and the general nature of the pharmaceutical business, we do not expect volatility in the sector to subside. One positive for this sector is whether the economy contracts in the U.S. or globally, this sector will maintain its defensive status going forward. We recommend a strong buy of this attractive sector fund into 2016 and beyond.
10 Charts That Explained Markets In 2015… And Will Impact 2016
Summary 2015 will be remembered for weakness in commodity markets, which bled over into global equities and U.S. high yield debt. In 2016, the divergence between monetary policy in the United States and the rest of the developed world could shape global financial markets. Underpinning all global markets is the ongoing transition of the Chinese economy from one driven by fixed investment to one led by domestic consumption, an unrivaled economic experiment. Below are what I believe are ten of the most interesting charts of 2015. The topics depicted had outsized impacts on financial markets in 2015, and will continue to be important considerations as the calendar turns to the New Year. While oil stole many of the headlines in 2015, falling by nearly two-thirds over the past eighteen months, a broad commodity index moved to its lowest level since 1999. Industrial metals, precious metals, and agricultural commodities were all pressured by a slowdown in global growth. Global Commodities Trade at 16-Year Low (click to enlarge) Source: Bloomberg, (Data through mid-day 12/24/15) Stress in commodity markets was primarily blamed on moderating Chinese growth. While the Chinese growth rate has receded, the absolute change in the size of the Chinese economy was still roughly equivalent to its absolute growth in 2006 and 2007 when the economy was growing at double digit growth rates. In 2015, the Chinese economy grew in absolute terms by the size of the entire Swiss or Saudi Arabian economies. Said differently, the Chinese economy still grew in nominal terms by the size of all the goods and services produced in Switzerland in a year. The China effect on commodity prices has been less of a function of flagging growth rates, and more of a function of the party’s efforts at transitioning the economy from an investment-led to a more domestic consumption-driven economy. Chinese Economic Growth in Absolute Terms is Still Tremendous Source: Bloomberg, World Bank While China had an impact on commodity prices, the strengthening dollar also was a big story. When the value of a dollar rises, it takes fewer dollars to buy a given commodity. These global commodities traded in dollars also become more expensive in local terms, potentially reducing demand. As the graph below shows, the dollar is at its strongest points versus a basket of global peers in the last decade-plus. As the Fed normalizes monetary policy further, higher interest rates on dollar investments could also spur a rally in the greenback, which could further pressure commodity prices and U.S. exporters and multinationals with large foreign businesses. The U.S. Dollar Index Strengthens Against Global Peers (click to enlarge) Source: Bloomberg, (Data through mid-day 12/24/15) A key theme in 2016 could be the divergence of U.S. and European monetary policy. Lend money to the German government today for ten years, and they will pay you 0.64% per year. In April, that figure was an astonishing 0.075%. That figure is still negative for 10-yr Swiss government bonds at -0.09%, meaning investors pay for the privilege of the Swiss government to hold their money in Swiss francs. Higher interest rates in the United States could continue to rotate money from the low rates in the developed world (Europe and Japan) and more stressed emerging economies. Shifting capital flows will create volatility and opportunity. German 10-yr Highlights Ongoing European Economic Weakness Source: Bloomberg Speaking of volatility, U.S. investors may have been unnerved by an uptick in market volatility in 2015, but that volatility paled in comparison to the volatility on the shallower Shanghai exchange. Chinese Volatility Could be Part of New Normal (click to enlarge) Source: Bloomberg, Standard and Poor’s One of my key themes has been the long run risk-adjusted outperformance of lower volatility assets relative to their higher beta cohorts. I wrote an expansive series this summer on the L ow Volatility Anomaly , or why lower risk stocks have outperformed their higher risk brethren over time. That theme continued in 2015 as a low volatility component of the S&P 500 outperformed high beta stocks and the broader market gauge on an absolute basis. Low Volatility Outperforms (Again) (click to enlarge) Source: Bloomberg, Standard and Poor’s; (Data through 12/23/15) This preference for lower volatility assets also extended to the topical high yield bond market ( as described in this piece ). Driven by the underperformance of commodity-sensitive speculative grade bonds, the High Yield Index is under the most stress since early in the economic recovery in 2009. This stress can be seen by the sharp underperformance of lower rated riskier ratings cohorts versus the performance of the higher rated BB junk bonds. Chasing Yields Led to Bad Outcomes in High Yield Source: Barclays; Bloomberg While the last two graphs compared different quality classes within an asset class, the next graph depicts the volatility of the 30-yr Treasury versus the S&P 500. As one would expect upon the unwind of vol-suppressing extraordinary monetary accommodation, interest rate volatility increased in 2015 as shown by the variability of the performance of long duration Treasuries. For investors seeking shelter from equity volatility in fixed income, long duration securities with higher interest rate sensitivity may not be the haven for you. (This is a topic I have also covered in the past through an examination of the volatility of the bonds and equity of Apple (NASDAQ: AAPL )). Equity vs. Rate Volatility (click to enlarge) Source: Bloomberg; Standard and Poor’s; U.S. Treasury The Fed rate increase was in large part driven by a firming in the labor market that pushed the unemployment rate down towards its estimated natural rate of unemployment. A different perspective of the labor market shows that labor force participation is at its lowest level in nearly forty years. While we have seen a cyclical recovery in employment figures, the economy still faces secular headwinds from an aging population. Perhaps, there is more slack in the labor market than suggested by official employment statistics. If so, the failure of wage inflation to materialize could increase the risk of policy error by the Fed. How Healthy is the Labor Market? Labor Force Participation at Multi-Generational Lows (click to enlarge) Source: Bloomberg, Bureau of Labor & Statistics; (Data through 11/30/15) The weak economic recovery post-crisis has kept the U.S. economy from operating at its full potential. Limited investment by a necessarily more austere government after record cyclical deficits has pushed the average age of government fixed assets to its oldest age on record. Similarly, corporations have been more apt to invest in their own securities through record share buybacks than undertake capital investment in the real economy, extending the age of the private capital stock. Older fixed assets and infrastructure could be another structural headwind that pressures domestic economic growth. A Growth Drag from Aging Infrastructure? Source: Bureau of Economic Analysis 2015 was a fascinating year in financial markets. Plunging commodities, flagging Chinese growth, ultra-low rates in Europe, and the underperformance of higher risk investments in the United States all were symptomatic of tumultuous global markets. Domestically with equity multiples still above historical averages and yields on investment grade assets still historically low, forward returns are likely to fail to compensate investors for a continued heightened volatility. Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.