Tag Archives: etfs

The V20 Portfolio Week #12: The Value Of Doing Nothing

Summary The V20 Portfolio increased by 5% while the S&P 500 rose 3%. Doing “nothing” has value. Dex Media and Conn’s should release material news in January. Things are looking up as we wrap up the year. The recent rally sent the S&P 500 into positive territory for the year, and the V20 Portfolio benefited as well. Although the market closed early this week, the V20 Portfolio posted a respectable gain of 5% versus S&P’s gain of 3%. There were no major news for any of our holdings and there were no major movers. Quite a boring (but profitable) week I would say. At times like this, I feel that it’s important to review the V20 Portfolio’s philosophy. Doing Nothing In 2015, the V20 Portfolio only entered into seven positions and only completely exited one (Perion Network (NASDAQ: PERI )). To some, this may seem lazy. “What? The Traveling Investor only studied seven stocks and called it a year?” Rest assured that a lot more work was being done behind the scene, much of which I’ve shared with the Seeking Alpha community, such as my Low P/E series or Diamond, Rock, Or Coal series . However, that is not the point. What I’m really trying to say is that there is value in doing “nothing.” When you know that your portfolio contains the best stocks (out of the ones you’ve studied), what’s the benefit of replacing one? There is none. While I’ve looked at hundreds and hundreds of stocks, none of them made the cut to supplant any of our current holdings (including cash). Of course, the reason why it is difficult is the result of V20 Portfolio’s high return objective. It is quite easy to identify a stable company that can return 3% annually, but it’s quite another story to spot a company that can return 20% with reasonable certainty over the long-term. Near-Term Outlook I’ll talk about some near-term catalysts that could impact the V20 Portfolio in the near-term and I’ll save the discussion of 2016 for next week. Dex Media (NASDAQ: DXM ) is nearing its third deadline. After two extensions of the forbearance period, we should receive another update by January 4th, 2016. There is no doubt that any news, both good and bad, will introduce significant volatility to the stock. However, from the portfolio’s perspective, the volatility is restricted to the upside. As of December 24th, 2015, the position only accounted for 0.5% of the total portfolio. Conn’s (NASDAQ: CONN ) will be releasing December 2015 sales data in January. Recently there has been some weakness the retail sector due to poor industry data. U.S. retail sales were below forecasts for the last three reporting periods (September to November). While Conn’s has continued to churn our very good numbers (November comps were up 8%), it is clear that the market is still betting against it given the way the stock has been performing (down almost 50% from its high in July). While I do not think that comps growth can stay elevated at 8% forever (and I don’t think any retailer is capable of such a feat), I do believe that Conn’s will not experience a sales meltdown that many investors have been fearing since it started to tighten its credit policy, and December sales data could be data that can revert investors’ current pessimism. Note: I spend a great deal of time researching every company in the V20 Portfolio (~40% YTD). If you are looking for some ideas that could complement your own portfolio, you can click the “follow” button and be updated with my latest insights. Premium subscribers will get full access to the V20 Portfolio. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

4 Tactical/Momentum ETFs: A Disappointing 1-Year Anniversary

Summary Four ETFs, introduced late last year, have the ability to switch between stocks and bonds, on a tactical/momentum basis. How did these four funds fare during the August correction? Since inception, only one of the four ETFs has outperformed the global market portfolio. Introduction In a Nov. 2014 article entitled ” Comparing 4 Tactical/Momentum ETFs “, I introduced four newly-debuted tactical/momentum ETFs that have, at the minimum, the ability to switch between stocks and bonds depending on tactical factors such as momentum (thus equity-only momentum funds are not considered). I later provided a short update on the performance of the four ETFs in a Aug. 2015 article entitled ” An Update On 4 Tactical/Momentum ETFs “. In that article, I noted that while the four ETFs averaged only -1.19% over the preceding nine months, underperforming U.S. stocks (via the SPDR S&P 500 Trust ETF (NYSEARCA: SPY )) at +5.35%. However, that update article was published just before the S&P 500’s first 10% correction in several years. The last few months of market action has been…interesting, to say the least, and with the 1-year birthday of these four tactical/momentum ETFs having just recently elapsed, I thought that now would be a good time to review the performance and allocation of these four funds. The funds The four funds included in this analysis listed below. For more detailed information regarding these funds, please refer to my previous article . Cambria Global Momentum ETF (NYSEARCA: GMOM ). GMOM invests in the top 33% of a target universe of 50 ETFs based on measures of trailing momentum and trend. The fund rebalance monthly into ETFs with strong momentum and are in an uptrend over the medium term of approximately 12 months with systematic rules for entry and exit. Global X JPMorgan US Sector Rotator Index ETF (NYSEARCA: SCTO ). SCTO invests in a portfolio of one to five ETFs selected out of a pool of ten U.S. sector ETFs and the iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ). The fund rebalances monthly to invest in a maximum of 5 U.S. sectors that have demonstrated the strongest positive recent performance. If less than 5 sectors have demonstrated positive performance over this time period, the remainder will go to SHY. Global X JPMorgan Efficiente Index ETF (NYSEARCA: EFFE ). EFFE invests in any combination of 13 ETFs drawn from 5 asset classes. The fund rebalances monthly, constructing an “efficient frontier” by calculating the 6-month returns and volatilities of multiple hypothetical portfolios based on different combinations of the index component universe, then selects the combination of assets that resulted in the highest return over the 6 month observation period with an annual realized volatility of 10% or less. Arrow DWA Tactical ETF (NASDAQ: DWAT ). Implements a proprietary Relative Strength Global Macro model developed by Dorsey Wright & Associates, holding approximately 10 broad-based positions. Assets include long/short exposure to domestic, international and emerging market equities and bonds (government, corporate, agency), real estate, currencies and commodities. Details of the four funds are shown in the table below (data from Morningstar ). GMOM SCTO EFFE DWAT Yield [ttm] 2.33% 0.50% 0.68% 0.39% Total expense ratio 0.94% 0.86% 0.86% 1.52% Management fee 0.59% 0.69% 0.69% 1.22%* Acquired expense ratio 0.35% 0.17% 0.17% 0.30% Inception Nov 4,2014 Oct 22,2014 Oct 22,2014 Oct 1,2014 Assets $25.92M $13.47M $8.11M $7.80M Avg vol. 12K 11K 12K 7.6K Annual turnover 16% 63% – 111% *Composed of management fee 1.00%, other expenses 0.22%. All four funds have low but not negligible volume, and should provide sufficient liquidity for ordinary investors. Additionally, all four funds have increased in assets since a year ago. GMOM increased slightly from $23.85M to $25.92M, while SCTO increased from $11.54 to $13.47. DWAT showed a sizable increase from $5.18M to $7.80. However, the biggest winner over the pats year appears to be EFFE, which more than tripled in size, from $2.58M to $8.11M. Performance Let’s now take a look at the performance of the four tactical/momentum ETFs in 2015, with the U.S. market (via SPY) included for comparison. GMOM Total Return Price data by YCharts The analysis of this total return price chart reveals some interesting features. Firstly, none of the tactical/momentum ETFs were able to keep pace with SPY in the first eight months of the year, i.e. before the August correction. This might not be surprising for GMOM, even EFFE and DWAT, as these draw ETFs from a wide pool of asset classes and not only U.S. equities, which has been one of the best-performing markets during this difficult year. However, the egregious performance of SCTO is concerning. The fact that SCTO underperformed SPY by the largest margin over the first eight months of 2015 is especially surprising given that its investment universe is restricted to only U.S. industry sectors and what is essentially a cash proxy! How on earth did it lag SPY by nearly 10% over the first eight months of the year if its mandate is to “invest in a maximum of 5 U.S. sectors that have demonstrated the strongest positive recent performance.” Global X provides a monthly allocation report for SCTO. We can see from the report that has had significantly allocations to SHY (i.e. cash) during the first eight months of the year, ranging from 20% in Feb. 2015 to 80% in Jul. 2015. (click to enlarge) Can we understand the reasons for SCTO’s serious underperformance compared to both SPY as well as the other three tactical/momentum ETFs? Analysis of the monthly allocations of SCTO suggests that this may have been due to the ETF being too sensitive to fluctuations in the equity markets, causing it to switch very frequently between equity and cash. For example, SPY suffered a -2.96% loss in Jan. 2015, which caused SCTO to switch to 80% equities in defensive sectors such as REITs (NYSEARCA: RWR ), consumer staples (NYSEARCA: XLP ), healthcare (NYSEARCA: XLV ) and utilities (NYSEARCA: XLU ) and 20% cash at the start of February. Of course, SPY then posted a 5.62% return in February, led by high-beta stocks, and the defensively-positioned SCTO sorely lagged during this rally. Similarly, SCTO was 100% invested in equities when SPY suffered a -2.03% loss in Jun. 2015, then switched to 80% cash for July, during which SPY reversed course to the tune of a 2.26% gain. SCTO then switched BACK to 100% equities at the start of August, just in time for the correction. Talk about bad timing! But let’s step back and analyze all four of the ETFs during this period. Responding to the correction The following chart shows the total return performance of the four tactical/momentum ETFs as well as the U.S. equity market and the U.S. bond market (NYSEARCA: AGG ) from just before the August correction to the end of the year. GMOM Total Return Price data by YCharts All four tactical/momentum ETFs dropped sharply with SPY in August as the correction hit. This is not surprising given that most of these ETFs would be expected to have a sizable allocation to U.S. equities given its status as one of the better-performing markets in early 2015. However, what happens after the correction is illuminating. At the start of September, GMOM, SCTO and EFFE decrease suddenly in volatility, suggesting that they have shifted significantly to bonds or cash. This is confirmed at least for SCTO which showed a 100% allocation cash in September. This shift therefore allowed those three funds to avoid the equity market gyrations in September. On the other hand, the performance of DWAT tracked closely with SPY, suggesting that this fund had not yet made a switch away from equity holdings. As expected, none of four ETFs were able to capture the ferocious snap-back rally exhibited by SPY in October (+8.51%). DWAT increased by around half that of SPY, while SCTO also rose slightly due to its 18.6% allocation to REITs and 21.4% allocation to utilities, however, the rest of SCTO was in cash. Rather unfortunately, all four funds appear to have switched back into an equity-heavy portfolio in November and December, just as the rally subsided and choppy market behavior resumed. This can be deduced given that all four ETFs follow the ebbs and flow of the broader market during these two months. Discussion and conclusion To say that all four tactical/momentum ETFs have disappointed in their first year of existence would be an understatement. None of the four funds were able to avoid the August correction of 2015. Three of the four funds (GMOM, SCTO and EFFE) then switched to cash or bond-heavy portfolios in September, which caused them to completely miss the stock market rebound a month later. This phenomenon was more comprehensively analyzed for GMOM in my Nov. 11 article ” GMOM: Momentum Swings From Bonds Back To Stocks “. On the other hand, based on its price action compare to SPY, DWAT appeared to remain fully invested in equities in September, but reduced its equity exposure to approximately 50% in October. As DWAT is an actively-managed ETF, it is not clear whether the delayed reduction of equity exposure involved any discretionary decisions by the portfolio manager. The next chart shows the total return performance, over the past 13 months, of the four ETFs compared to both SPY and a global market portfolio (via the Cambria Global Asset Allocation ETF (NYSEARCA: GAA )) at -1.02%, which Seeking Alpha author GestaltU has proposed is a superior benchmark for global tactical asset allocation [GTAA] strategies than the S&P500. We can see from the chart below that DWAT has had the best total return performance of -2.77% out of the four tactical/momentum ETFs during this time span, followed by GMOM at -6.87%. EFFE and SCTO had the lowest total return performances of -8.02% and -8.96%, respectively. Thus, DWAT was the only ETF to outperform the global market portfolio GAA since last November, and all four ETFs underperformed SPY. GMOM Total Return Price data by YCharts Going forward, what can we expect from these ETFs? Currently, the four ETFs show very different equity/bond distributions (data from Morningstar). SCTO has the highest equity allocation at nearly 100%, followed by DWAT at 74%. GMOM has a nearly 50:50 split of equities and bonds. EFFE is the only ETF with more bonds (60%) than stocks (40%). However, given that at least three of the four funds (all except DWAT, whose schedule is unspecified) rebalance monthly, these allocations are likely to change in January. In terms of the North American (mainly U.S.) versus international allocation of their equity portion, all except GMOM are fully domestic. GMOM contains 87% U.S. equities and 13% international equities. On a personal level, I have sold my holdings of GMOM a few months ago. I have replaced this the iShares MSCI USA Momentum Factor Index ETF (NYSEARCA: MTUM ) (as described in Left Banker’s article here ). My existing holding of the First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ) has also done very well. Both have outperformed SPY over the past year. MTUM Total Return Price data by YCharts Note that those two ETFs are momentum-based but are not “tactical” in the sense that they cannot switch to bonds or cash, and moreover they are purely U.S. based. If the U.S. market enters a bear market, it is likely that those two funds will underperform the tactical/momentum ETFs described above. I am simply performance chasing the U.S. market here? Perhaps, but I lost patience in watching the NAV of GMOM gradually decline as it got caught between whipsaws. With my sale of GMOM, this will likely be my last article on tactical/momentum ETFs for the time being, unless their performance improves to such an extent that they warrant consideration for investment.

Integrating Water Risk Analysis Into Portfolio Management

By Monika Freyman, CFA My previous article, ” Liquidity Risks of the H2O Variety ,” explored growing investor awareness about water risks within their portfolios and how that awareness plays into their investment decision making. Here, I will examine some of the increasingly sophisticated approaches that investors can take to integrate water risks into portfolio management. My recent survey of 35 institutional investors’ water integration practices found that while many investors think their methods, tools, and databases need to improve and evolve, they also found it worthwhile to integrate water into their research processes. And no wonder. As population pressures create competition for water, global groundwater supplies are declining and climate variability is increasing – leading to longer droughts and more intense flood events. All these factors pose risks that are hard to ignore. Water risk analysis happens at different stages of investment decision making, from the initial asset allocation strategies, to portfolio level analysis, through to the buy/sell decision. For example, one pension fund brought together portfolio managers from different asset classes to study how different markets, investment instruments, and geographic regions are exposed to the global water crisis. A few investors were also consistently analyzing their portfolio’s water risk exposure or its water footprint. Although far from a perfect approach – often missing location specific data or wastewater production metrics – portfolio water footprinting can be helpful in flagging companies and sectors with high water risk exposure relative to a benchmark and highlighting where further analysis is warranted. Various forms of portfolio analysis and attribution software allow managers to run water use metrics versus an index. For an example of water footprinting, see this South African study . At the individual security level, investors identified three critical research steps to obtain a comprehensive picture of water risk exposure: Understand Corporate Water Dependency: This varies by sector and, of course, company, with some industries relying heavily on access to abundant freshwater suppliers directly or in their supply chain. Corporate water dependency is not always easy to assess, but some companies are making the task easier by reporting their water use and wastewater trend data more consistently on their websites, in their annual reports, SEC filings or to data aggregating organizations, such as CDP Worldwide’s Water Program . Combine Water Dependency Data with an Assessment of Water Security: This gives a more comprehensive picture of corporate water risk exposure. A company may have high water needs but have their operations located in relatively water abundant regions. Another company, however, may be operating in regions of high water competition and drought. Such assessments are not simple to perform, but evolving tools, such as World Resources Institute (WRI)’s Aqueduct corporate water risks map , the World Wildlife Fund (WWF)’s Water Risk Filter , and other efforts are seeking to make the task easier. Get a Sense of Corporate Water Risk Awareness and Response: This step is essential because a company may have high water needs and poor water security, but mitigate the risks very effectively by elevating water issues to strategic decision making and putting water management and reporting systems in place. Tools such as The Ceres Aqua Gauge can be used to assess how well companies are managing their water and their exposure to water risks. For a more comprehensive list of third-party water tools and analytics, An Investor Handbook for Water Risk Integration is a helpful resource. Once water risk analysis is conducted on a corporation or security, our research found that fund managers use this information in a variety of ways, from avoiding high water risk industries or companies, to influencing internally created company environment, social, and governance (ESG) scores, to clarifying corporate engagement priorities. Several managers use their corporate water risk assessments to influence or modify financial projections or their weighted average cost of capital assumptions. For example, one fund manager studying companies in Brazil conducted scenario analysis modeling regarding how much the market cap of companies would be impacted if they had to absorb more of the costs of treating their wastewater discharges, especially as drought intensified and communities and regulators were becoming less tolerant of water use and pollution. Once impacts to market cap were assessed and shared with the management of those companies, engagement on those issues was far more pointed and productive. Other managers were trying to get a deeper understanding of the probability of large financial losses due to strategic risks related to water, such as not being able to grow revenue, access new markets, or develop new facilities. No matter what methodology one chooses to deepen water risk analysis practices, the most critical things to keep in mind are that water risks can lead to unlimited financial impact and loss. If a company loses access to water, a community kicks them out of a region due to water concerns, or permission to discharge wastewater is denied, the financial and strategic implications can be immense. For example, Newmont Mining (NYSE: NEM ) has postponed a $5 billion project in Peru due to community concerns over its water practices. In addition, it is important to look at sector specific issues, as water risks related to mining are obviously very different to those in semi-conductor manufacturing and so on. An Investor Handbook for Water Risk Integration includes a sector-specific cheat sheet on these issues. And most important of all: No matter how incomplete your water risk analysis starts off, it will likely provide a better understanding of sector or company risks (and opportunities) – which ultimately should add predictive power to your existing research processes. The goal is not to be perfect in your methods from the outset, but to begin including water risk analysis into your portfolio management practices. Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.