Tag Archives: etfs

China Funds And Black Monday

By Jake Moeller Lipper’s Jake Moeller examines the performance of China-themed funds during Black Monday week. Most investors will have been familiar with the compelling thematic stories about China for many years: population, infrastructure growth, urbanization, etc. Until 2011 all the China funds available in the market were equity funds. Today, there are nearly 100 UCITs funds (and considerably more share classes) with a China focus available in Europe. They cover not only equities; funds can be found specializing in emerging-market bond, mixed-asset, currency, and money market sector classifications. If we accept that mutual fund production reflects investor sentiment, we can illustrate the successful pervasion of the China story. In 2015 up to June we have seen 13 new major China fund launches in Europe (it will be interesting to see how many funds are launched in the second half of the year!). Indeed, nearly 50% of all the China-themed UCITs vehicles have been launched since 2010, with total assets under management for all of these funds increasing from €19 billion in 2010 to some €28 billion today-an increase of 47%. But as a whole, these figures represent a very small proportion of the overall UCITs market. (click to enlarge) Source: Lipper for Investment Management The variation of returns among China-themed funds during the Black Monday event was considerable and almost exclusively negative-only two funds returned a positive figure for the seven-day period ending 27 August 2015 ( Prescient China Conservative E [Hedged] USD , up 1.62%, and Amundi Eureka Cina 2015 , up 0.29%). Casualties at the other end saw losses over the same period of up to 18.2%. Some big name losers over the period included AllianzGI’s China A-Shares , which fell 13.8%; BNP Paribas Investment Partners’ Flexi I CSI 300 Index , which returned minus 15.5%; and KBC Horizon China , returning minus 17.3%. The overall average return during this seven-day period was minus 5%. It is an unusual practice and possibly unwise to spend too much time examining such short-term performance-especially in collective investment vehicles, but the overall volatility of some of these examples was breathtaking in isolation. Let’s not forget, though, that over that same short period the Investment Association U.K. All Companies sector, for example, also returned minus 5%-a figure comparable to the average return of the China fund. Similarly, the IA North America Sector returned -5.6% over the same period. Consider also some longer-term performance. Taking the one-year period to 27 August, there were some fairly impressive returns even with the Black Monday correction. KBC Horizon China , so maligned in our seven-day analysis, returned 57% over this period; Allianz China A-Shares (USD) , 69%; and the average of all the funds was a fairly robust 10%.

How To Find The Best Style Mutual Funds: Q3’15

Summary The large number of mutual funds hurts investors more than it helps as too many options become paralyzing. Performance of a mutual funds holdings are equal to the performance of a mutual fund. Our coverage of mutual funds leverages the diligence we do on each stock by rating mutual funds based on the aggregated ratings of their holdings. Finding the best mutual funds is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available? Don’t Trust Mutual Fund Labels There are at least 871 different Large Cap Blend mutual funds and at least 5971 mutual funds across twelve styles. Do investors need 500+ choices on average per style? How different can the mutual funds be? Those 871 Large Cap Blend mutual funds are very different. With anywhere from 18 to 1347 holdings, many of these Large Cap Blend mutual funds have drastically different portfolios, creating drastically different investment implications. The same is true for the mutual funds in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Blend ranks last. Details on the Best & Worst mutual funds in each style are here . A Recipe for Paralysis By Analysis We firmly believe mutual funds for a given style should not all be that different. We think the large number of Large Cap Blend (or any other) style mutual funds hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many mutual funds. Analyzing mutual funds, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 1347 stocks, and sometimes even more, for one mutual fund. Any investor worth his salt recognizes that analyzing the holdings of a mutual fund is critical to finding the best mutual fund. Figure 1 shows our top rated mutual fund for each style. Figure 1: The Best Mutual Fund in Each Style (click to enlarge) Sources: New Constructs, LLC and company filings How To Avoid “The Danger Within” Why do you need to know the holdings of mutual funds before you buy? You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the mutual fund’s performance will be bad. Don’t just take our word for it, see what Barron’s says on this matter. PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND If Only Investors Could Find Funds Rated by Their Holdings… The Calvert Large Cap Core Portfolio (MUTF: CMIIX ) is the top-rated Large Cap Blend mutual fund and the overall best fund of the 5971 style mutual funds that we cover. The worst mutual fund in Figure 1 is the Harbor Funds Mid Cap Value Fund (MUTF: HAMVX ) which gets a Neutral rating. One would think mutual fund providers could do better for this style. Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, style, or theme. 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. I have no business relationship with any company whose stock is mentioned in this article.

The Big, Bad Floating NAV Is Coming Your Way

Summary Prime money market funds are going to be reporting their net asset values on a floating basis due to recent SEC rules. The effect will be to render these funds costlier, both on an accounting and a tax basis, and might lead to an outflow from these funds. However, the weighted average maturity of these funds, one measure of their riskiness, is well within SEC guidelines. The big, bad floating NAV is coming your way In 2014 the SEC adopted amendments to rules that govern certain types of money market funds. In particular prime money market funds – those that invest in corporate debt securities will have to report floating Net Asset Values (NAVs) instead of posting fixed NAVs as has hitherto been the case. Thus at any given time, capital appreciation or depreciation will have to be reported, leading to a move towards money market funds with a Treasury or municipal bond focus. Instead of assuming a fixed NAV of $1.00, investors will have to confirm the posted NAV price. There will also be liquidity management issues, since the use of these money market funds for intra-day liquidity management will be much diminished, given the uncertainties about the NAVs for these funds. Companies would have to monitor the marking-to-market value of these funds on their balance sheets. Finally, all sales of money market fund shares would become taxable events. Rule 2A-7 risk limiting provisions amended Traditionally SEC’s Rule 2A-7, adopted in 1983, allowed money market funds to use amortized cost to value the funds so long as they kept within very strict parameters. Since money market funds are not insured by the FDIC, they have traditionally had to keep within limits about the three primary risks they face. Of course, the first was interest risk, credit risk and liquidity risk (the risk that a borrower will not pay its obligations when due). Of course, the first two kinds of risks do not affect money market funds which invest in Treasuries or municipal bonds. But all three risks affect prime money market funds. With a fixed NAV based on amortized cost, investors did not need to track their capital gains and losses, since all of the return of a money market fund is paid out in dividends. In addition, a stable NAV allowed these funds to offer such services as check-writing and the other general features available to deposit accounts, while allowing investors to have access to some upside features. The daily dividend on the fund is based on the accrued interest based on amortized cost. At least that was the situation before the recent amendments by the SEC. On Weighted maturities and interest rate sensitivities. Given the above mentioned advantages of the stable NAV for money market funds, it was imperative to keep the funds within certain risk bounds. One way to do this was to limit the maximum weighted average maturity (WAM) of the funds. An increase in interest rates would decrease a fund’s shadow price. One measure of the sensitivity of any fund with respect to a change in interest rates is the fund’s weighted average maturity (the WAM). The WAM is the measure of the average maturity of the bonds in the fund’s portfolio, and the SEC rules provided that funds, in order to use amortized cost, could have a maximum WAM of 60 days. The higher the WAM, the more sensitive the shadow price of the fund would be to changes in interest rates. When redemption of funds is high, especially in times of crisis, (as was the case between 2007 and 2008), then shadow prices will fall below $1, and the WAM is especially helpful to understand the riskiness of these funds. Recent measures of WAM show relatively low riskiness. Money market funds are obligated to disclose their net assets, 7-day interest rates and WAMs on a monthly basis. Extracting some of this data from the SEC web site for four representative prime money market funds (those of BMO, BNY Mellon, Legg-Mason and Fidelity) show that all of these funds have WAMs well below 60 days. The shadow prices (not shown) are $1 for BMO and BNY Mellon, $1.002 for Fidelity and $1.0001 for Legg Mason in the period shown. Legg Mason, with a WAM over the period for its prime funds of 6 days, carries a 7-day rate on average of .23%. (The figures below come from the N-MFP disclosures on the SEC website). Does this mean there is no cause for concern? The above-mentioned trends do not mean that there is no cause for concern. Shadow prices of these funds are notoriously resistant to reflecting trends in markets. In September of 2008, 90 percent of prime money market funds had shadow prices within 5 basis points of $1, as reported by the ICI. Nevertheless, when floating NAVs become part of the investor’s framework, it is likely that they will not be as volatile as feared if current trends in the weighted average maturity are any indicator. 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.