Tag Archives: etfs

Fund Watch: Balter And Natixis/ASG Prep New Funds

By DailyAlts Staff In this edition of Fund Watch, new fund filings for: Balter European L/S Small Cap Fund ASG Dynamic Allocation Fund Balter European L/S Small Cap Fund On September 15, Balter Liquid Alternatives filed a Form N-1A with the Securities and Exchange Commission (“SEC”) announcing its intent to launch its third mutual fund , the Balter European L/S Small Cap Fund. As is evident by its name, the new fund will take both long and short positions in small-cap European stocks, in pursuit of its objective of absolute returns. The fund is the successor to the S.W. Mitchell Small Cap European Fund, a hedge fund, which will transfer its assets to the institutional shares of the new fund upon its launch. S.W. Mitchell Capital LLP will continue to manage the fund as the sub-advisor. Typically, the Balter European L/S Small Cap Fund’s portfolio will consist of roughly 60 such stock positions, which may include both listed and non-listed equities; and the fund’s managers can also invest in debt securities, options, warrants, convertibles, and other derivatives. Its net-long exposure can be as great as 150%, and while its net-short exposure could rise to as much as 50%. The fund will have short positions at all times. The Balter European L/S Small Cap Fund’s predecessor fund has performance dating back to 2008. Its shares returned -6.5% that year, but then posted successive annual gains of 44.6% and 23.8% in 2009 and 2010. After losing 7.7% in 2011, the fund roared back with successive gains of 11.1% and 24.8% in 2012 and ’13, and then returned -0.5% last year. Shares of the new fund will be available in institutional and investor classes, with respective net-expense ratios of 2.24% and 2.54%. ASG Dynamic Allocation Fund Natixis Funds Trust II recently filed a Form N-1A with the SEC, announcing its plan to launch the ASG Dynamic Allocation Fund. The new fund’s objective will be long-term capital appreciation, with the protection of capital during unfavorable market conditions a secondary goal. It will pursue this end by means of dynamic tactical allocation across global markets and asset classes, overseen by investment advisor AlphaSimplex Group’s portfolio managers Alexander Healy, Robert Rickard, and Derek Schug. Healy, Rickard, and Schug will also be charged with the task of managing the fund’s annualized volatility, which is targeted at no more than 20%, as measured by the standard deviation of the fund’s returns. The fund will also use leverage, which will not exceed 200% of assets. Currently, ASG operates nine alternative mutual funds , including the ASG Global Macro Fund (MUTF: GMFAX ), which was launched in partnership with Natixis . That fund, which debuted on December 1, 2014, returned -3.45% in the first eight months of 2015, ranking in the bottom quintile of funds in its category. Over the three months ending August 31, the fund’s performance was better, in the top quartile, but still negative at -2.03%.

A Cure May Be In Store For The SPDR S&P 500 Trust ETF

When I warned about market correction in mid-August, I also discussed what factors would eventually cure what ails us. One of those factors is presenting itself Thursday, as the Federal Reserve offers clarity on an uncertainty weighing on investors’ minds and weighing down stocks. The probability of Fed inaction on interest rates or the possibility of a minor action with the removal of concern about October should serve stocks immediately. I expect such a scenario should provide immediate & significant upside to the SPDR S&P 500 Trust ETF, returning it toward its highs above $210 and higher as longer term factors. Risk to this thesis could come from a Fed rate action of 0.25% or if the Fed does not clear away concern about a potential action in October. When I authored my warnings about market correction in early to mid-August, I also indicated what the cure for stocks would eventually be. One of those factors appears to be about ready to help out, and that is clarification from the Fed. No matter what happens Thursday afternoon, the Federal Open Market Committee (FOMC) will provide some clarity to investors. Stocks should benefit from the removal of some uncertainty, and I see immediate upside of 2.5% to 5.0% probable for the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) post the Fed meeting. But any gains and the length of duration of upward direction will depend on the specifics of what the Fed does and says. The longer term for stocks and the SPY will continue to depend on the U.S. economy, energy sector issues, emerging market implications, seasonal capital flow factors and the Fed path and accuracy moving forward. 1-Year Chart of SPY at Seeking Alpha In my early to mid-August warnings of imminent market correction (see several links within the summary piece), I suggested the eventual cure for stocks would require a cocktail of medicines. I discussed the implications of seasonal capital flows and that the passing of time toward November 1st and a more welcoming capital flow environment would serve stocks then. I also suggested the U.S. economy mattered far more than the Federal Reserve, and that we would need to see health in the economy to gain traction. That means that the U.S. energy sector must heal or at least not meaningfully infect the rest of the economy. It also means that China only stumbles and does not fall, and that growth recovers in that important sector of the global economy. Finally, I said we needed Fed clarity, and that uncertainty about the Fed’s path was not serving stocks. Thursday, we will receive some clarity on the Fed’s path. Most likely, the Fed will succumb to market pressures and refrain from raising rates at this meeting. However, I’m not sure that is the best case scenario. Rather, I believe a minor rate hike of less than a quarter of a percentage point would serve to satisfy expectations that Fed action is happening this year while also easing concern that the Fed could act prematurely. If the Fed makes a minor move and indicates it is not likely to act in October, pushing expectations for the next hike to possibly December or March, it will serve stocks well. It is also likely to reiterate its data dependence and to note risks to the U.S. economy including China and emerging markets, the U.S. energy sector, and the strength of the dollar. But I also anticipate the Fed will note the strength of U.S. labor and the lack of inflation, which are positives. I suggest such an outcome would be just what the doctor ordered for the stock market. The result, in my view, would be a surge in stocks and a marching of the SPDR S&P 500 Trust ETF back towards previous highs certainly above $205, and probably to $210 or higher without much disturbance. Much depends on the specifics of the very complex data set we will get from the Fed. A risk lies in the possibility that the Fed raises rates by a quarter of a point. Such a scenario, I believe, would send a shock through the market and spur a selloff back to correction lows. That is not perfectly clear, given that investors would like to see the Fed finally get started at some point. However, I expect that given the latest poor indications from China and emerging markets, the Fed will refrain from further disturbing the global economy and the U.S. economy as a result. Despite the likelihood of inaction, in my opinion, the FOMC vote could be closer than in previous meetings. Investors will need to have some indication that October is not a threat as well, or this period of volatility will simply extend to the next Fed meeting. So if the Fed does not act, but leaves the possibility of an October action on the table for investors to worry and debate about, stocks could see their upside limited or completely erased. Over the long-term, what matters far more than the Fed are the health of the U.S. economy and the health of sectors of the global economy that threaten the U.S. economy. That means, not only must U.S. data continue to reflect progress, especially in the labor market and GDP data, but weakness in the U.S. energy sector and manufacturing (relative to it) must dissipate. Also, China must stabilize rather than deteriorate; if this occurs, expect global stocks to rally significantly. Finally, as September and October pass, significant capital flow pressure from institutions ending their fiscal years will dissipate and likely offer support to stocks as the institutions look forward with many securities trading at relative value. We are in a complex period now, where the market is supersensitive to news flow. It is the worst possible time for the Fed to be contemplating action, but it is our situation. Long-term investors should be patient now, but remain focused on the matters discussed herein. I cover the market closely, and invite relative interests in the SPY security and the market to follow my column here at Seeking Alpha . Disclosure: I am/we are long SPY. (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.

Cybersecurity – Beating HACK And CIBR From The Inside

Summary The ETFs, HACK and CIBR, overlap on 23 companies, six of which are among the top-ten holdings of each fund. Given the strength of the performance of some of the companies on which the ETFs overlap, it seems plausible to derive a smaller portfolio that would outperform either ETF. I consider two portfolios made up of holdings shared by both ETFs, and consider whether the performance gains are worth the tradeoff in security. When looking at a new ETF, I often find myself wondering if – given the ETF’s portfolio – there was a subset of that portfolio that would outperform the ETF itself, and not just outperform it, but outperform it by a significant amount . 1 How would one go about identifying that subset? I began thinking about this in detail as I wrote my last article, a comparison of two new ETFs – the PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ) and the First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ: CIBR ). 2 The funds, which take two fairly different approaches to investing in cybersecurity, have holdings that overlap with 23 companies. What I thought was particularly interesting was that the top-ten holdings in each portfolio overlapped on six companies. The funds weighted their holdings differently, with HACK having a modified equal-weighting structure, and CIBR being weighted according to market liquidity over the preceding 90 days. Would stocks in these companies outperform either or both ETFs? Group I The six companies that were among the top-ten-weighted holdings in both portfolios are: Cisco Systems, Inc. (NASDAQ: CSCO ) Fortinet, Inc. (NASDAQ: FTNT ) Imperva, Inc. (NYSE: IMPV ) Palo Alto Networks, Inc. (NYSE: PANW ) Proofpoint, Inc. (NASDAQ: PFPT ) Trend Micro Inc. ( OTCPK:TMICY ) The question: could holdings in these six companies ( Group I ) be reasonably expected to outperform HACK and/or CIBR? To answer the question, I traced the portfolios of the two ETFs back to August 1, 2010, and charted their performance through August 31, 2015. 3 I then tracked Group I apart from the ETFs. Each portfolio started with a $25,000.00 stake. 4 The results: (click to enlarge) Group I quite clearly outperformed both ETFs, growing the initial stake to $88,971.99 (a gain of more than 255% ), compared to HACK with $55,925.78 (~ 123%) and CIBR with $57,892.92 (~ 131%). A difference in growth of that magnitude over a period of five years certainly seems significant, by just about any standards. In principle, it would seem rational for an investor to choose to invest in the six companies that make up Group I rather than investing in either of the ETFs. A Caveat But while it might seem to be a good bet to buy shares in the Group I companies, upon closer examination there are some problems to consider. The following table lists some of these companies’ fundamental data: Of the six companies, only Cisco , Fortinet and Trend Micro stand up to close scrutiny. Each one is profitable; 5 all have manageable debt ( Cisco has the highest debt/equity ratio, at 0.44%, but its quick ratio is a very healthy 3.15); gross margin and operating margin for each are comparable to or better than those of their peers. The remaining three companies – Imperva , Palo Alto and Proofpoint – present a significantly different picture. None of these companies has made a profit in the five-plus years represented in the test; indeed, these companies have been losing substantial amounts of money annually. The companies have financed operations through sale of shares – thus diluting shareholders’ holdings – and by incurring debt. Only Imperva has maintained a low D/E ratio, with Palo Alto ‘s D/E rising just above 1, and Proofpoint ‘s D/E topping out at 3.78. Readers familiar with my approach to companies know that I focus heavily on fundamentals, particularly operating margin, returns, debt/equity and quick ratio. Only Cisco and Trend Micro come close to meeting my usual minimum standards. 6 Investing in companies that have a losing track record is a very subjective enterprise. On the one hand, I dismiss companies that habitually post losses out of hand; on the other hand, not all “losing” companies are bad bets. But investing in one requires that one take a leap of faith, and it’s not a leap to be taken lightly. I highly recommend serious study of such a company before investing in it. 7 Group II To go around the problem of investing in “losing” companies, I graded the 23 holdings over which HACK and CIBR overlapped. Interestingly, nine of those companies were operating in the red, and since operating margin and the three returns count heavily in my ranking system, those nine companies were excluded. Three more companies were excluded because they are foreign (this includes Trend Micro , even though it is one of the companies in Group I ). I still feel uncertain about foreign investments. After ranking the 11 companies remaining, I ended up with the following set of five stocks to make up Group II : 8 Check Point Software Technologies Ltd. (NASDAQ: CHKP ) CyberArk Software Ltd. (NASDAQ: CYBR ) F5 Networks, Inc. (NASDAQ: FFIV ) Qualys, Inc. (NASDAQ: QLYS ) VASCO Data Security International, Inc. (NASDAQ: VDSI ) The following table shows their “vital statistics”: In principle – on the basis of their fundamentals – I would consider these to be the top five of the 23 companies shared by the two ETFs. How do they perform? I subjected Group II to the same test I ran for Group I , with the following results: (click to enlarge) While it is clear that Group II does markedly better than either HACK or CIBR, it is also clear that it falls far short of the performance of Group I . The following chart shows how the two groups compare: (click to enlarge) Group I clearly outperforms Group II and does so quite handily, with its growth outpacing the latter group by more than 25%. I’m not certain that this means Group I is the better set of stocks, though; consider this chart: (click to enlarge) The past 20 months or so have been rough on the market in general, and particularly so for tech stocks. The spring of 2014 saw tech stocks take a hit with no general, significant driving force other than that the stocks were perceived as overvalued; this past summer saw the market as a whole go through a “correction” attributed to ((a)) growing concern over weakness in the Chinese economy , ((b)) a perceived weakening of the economic recovery in America , ((c)) a meltdown in oil prices , and ((d)) the prospect of the Fed raising interest rates . It is interesting to note, then, that Group II outperformed Group I during the stretch from January 1, 2014, through August 2015. The difference is not great, all things considered, but it serves to remind investors that a stock’s (or a portfolio’s) performance is dependent upon the perspective from which it is viewed. Assessment Moreover, since we are supposed to acknowledge that we cannot infer future performance simply on the basis of past performance, we need to look at an investment from a variety of perspectives. There is a distinct difference between the market of 2010 – 2013 and the market of 2014 – mid-2015 . The former was a significant part of the extended bull market that led the economy out of the Great Recession; the latter has been a period where the bull market has weakened (and maybe died), culminating in a summer-long correction . There is no surprise that stocks are going to rise (some, dramatically) when the market is hot; the surprise would be those companies that (continued to) drop in value. On the other hand, when the market in general is stumbling, one should maybe take note of performance that seems to “buck” the trend by showing a little strength; during such a period, 1200bps may have no small significance in comparing the relative strengths of a couple of portfolios. Looking at Group I , Imperva , Palo Alto and Proofpoint are losing money annually and persistently. According to Capital Cube, all three stocks are overvalued; Palo Alto has lost over $375 million in the past two years, yet currently commands a price over $179.00/share – with key valuations well in excess of its peers. 9 The stocks in Group II , on the other hand, have maintained solid fundamentals. Three of the companies ( Check Point , CyberArk and Qualys ) are perhaps overpriced, but Check Point is posting solid numbers comparable to F5 and VASCO , and none of the companies seems to be showing any problem areas. Being somewhat (!) risk averse, I would likely prefer the holdings listed in Group II , perhaps with Cisco (or Trend Micro ) added for good measure. However The advantage of an ETF such as HACK or CIBR is that one does not have to worry about the performance of the individual stocks in one’s portfolio – that is the fund manager’s job. There is a tradeoff involved, and it is up to the individual investor to decide if the prospective loss of growth that might be realized by investing in a basket of stocks is worth the work involved in choosing and monitoring a hand-picked selection of individual holdings. Disclaimers This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein. All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the Company’s SEC filings to the extent possible. All tables, charts and graphs are produced by me using pertinent SEC filings as provided by Capital Cube ; historical price data is from The Wall Street Journal . Data from any other sources (if used) is cited as such. All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views. Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully. ——————– 1 Of course, what counts as a “significant amount” is fairly subjective. A 25% improvement would be significant, I should think, but would 5% be significant – and in one year? Five years? I should think there would be a correlation between the length of time one was discussing and the level one would consider “significant” an improvement of 1000bps (when speaking of performance), or 10% (when talking about value) over five years would seem to be a safe margin to consider significant – while an improvement of 500 bps (or 5%) over 2 years would be perhaps a little less significant. Also, we can ask what it means to be “significant.” Again, this is fairly subjective, but let’s suppose we’re talking about the level of difference at which one would seriously consider investing in the subset, rather than in the ETF itself. I might consider the chance of a 2% improvement over the first year to be enough to convince me, while someone else might not be convinced with anything less than 5%. Yet another person might opt for the ETF even if there was reasonable prospect of improving the payout by 25% by investing in the subset. 2 ” 2 New ETFs Track Cybersecurity Growth ,” Seeking Alpha , August 24, 2015. 3 While the ETFs are new within the past nine months, I traced the performance of their portfolios as they existed on August 21, 2015, maintaining the same weighting throughout as they had on that date. Companies that did not start trading until after August 2010 were added during quarterly rebalancing and reconstitution; funds that would have applied to those companies were held in reserve until they “formally” joined the portfolio. To differentiate between the ETFs and the extension of their portfolios, I will refer to the portfolios as HACKʹ and CIBRʹ . Please note that the data for their portfolios is not intended to indicate how the ETFs themselves would have performed over the same period. 4 The portfolios for HACKʹ and CIBRʹ were weighted according to note 3 above. Group I was weighted equally. All portfolios were rebalanced and reconstituted quarterly. 5 For the period of the test (August 2010 – present) each of the three companies has recorded net profit for each of the years included. 6 In many of my articles I rely on a fairly small set of fundamental criteria that emphasize efficiency, effective management and financial responsibility. In the past, my basic standards were: OM > 25%; RoE, RoA and RoI > 15%; D/E < 0.5; QR > 1. 7 For my part, I have a moderate stake in Neuralstem, Inc. (NASDAQ: CUR ), and have had one for a few years. It has not made a profit since before I bought shares. I did my homework before investing in Neuralstem, and while its fundamentals are very weak, I believe that their business – and the science behind it – is sound, and all indications are that it will, in the very near future, show some of the enormous promise it has. Before it took a serious dive this year, it had been a four-bagger for me. 8 The number five is totally arbitrary. A group of six or more (or four or less) might work, but five seems like a nice number to work with. As luck would have it, an extension to six would have included Cisco, which missed membership in Group II by only a few points. 9 See here , for instance. Also, as a matter of fact, according to Capital Cube only Cisco – out of all of Group I – is undervalued. 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. Disclosure: I am/we are long CUR. (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.