Tag Archives: georgia

‘Ride An Elephant’ In 2016

By Carl Delfeld In the 19th century, there was a common expression used to describe the early intrepid explorers of the American West. They were said to be “seeing the elephant” – that is, they were seeing “all that could be seen.” On Wall Street today, brokers looking for 10-bagger stocks, and portfolio managers seeking big gains, are similarly said to be “hunting for elephants.” In the 21st century, the best chance of finding these elephants is by looking for them in emerging and frontier markets. These markets have growth that may be up to three times that of America and Europe, which is fueled by a young, vibrant consumer class, as well as some of the world’s most fascinating cultures, nature, and landmarks. One great New Year’s resolution for you would be to see the elephants with your own eyes this year. I can assure you that you’ll learn a lot, have great fun, and uncover some big opportunities that you would otherwise miss sitting in your living room. Investing With the Big Shots I’ve been fortunate enough to have on-the-ground experience in many of these markets, particularly in Asia and Latin America. Last year I teamed up with Global Frontiers, which organizes and leads institutional research trips in these dynamic markets. On these trips we meet with the insiders and heavy hitters that help shape a country’s power structure, stock market, and foreign policy. I’ve also developed friendships with a small circle of tycoons – sometimes referred to as “Taipans ” – a term which roughly translates to “big shots.” If you meet and spend any time with such tycoons, a light bulb could go off in your head. You’re better educated and have much better circumstances compared to most new tycoons. So what gives them their edge? Why do they see opportunities that elude the rest of us? The answer is, they think big and are very attentive to what’s happening on the ground in other countries and markets. They have great personal and professional networks that feed them valuable intelligence. Add a pinch of imagination, and a shot of courage, and you have a potential tycoon. If you wish to become a Taipan, I suggest you look beyond China and India in the coming year to a story that’s being completely missed by even the most sophisticated investors. Ten Southeast Asian nations will move ahead in 2016 as part of an ambitious, America-backed initiative to join their economies in a common market. The goal is to increase their common influence, form a counterweight to China, and boost prosperity for the region’s 622 million citizens. These countries share more than geography. They have a young tech-savvy population with a rising middle class and booming consumer markets. For example, Indonesian consumer spending has more than doubled in the last decade as it nears a $1 trillion economy. Singapore is already the world’s richest nation on a per capita basis. And Vietnam has the fastest-growing economy in the world and is projected to do even better this year. There are country ETFs for almost all of these countries, but for one-stop shopping, consider the Global X Southeast Asia ETF (NYSEARCA: ASEA ). This basket of 40 stocks was off 20% in 2015, giving you a nice value entry point. If Asia is too far and too exotic for your tastes, visit Latin America. The Brazilian market has suffered both major losses and a plummeting currency, so your U.S. dollar will go far whether you spend it or invest it in Brazil. I visited Panama last year and was astonished at the progress it’s made as a regional trade and financial center. Getting to see the project aimed at doubling the size of the Panama Canal made the trip worth-while. Other ideas? The energy-driven iShares MSCI Colombia Capped ETF (NYSEARCA: ICOL ) was down over 40% last year, while the iShares MSCI Mexico Capped ETF (NYSEARCA: EWW ) held up extremely well on a relative basis, even as Mexico becomes a favorite base for global manufacturing. Mexican wages are now actually below those in China. I encourage you to get going and see these opportunities for yourself. Then consider investing in a blend of these markets that are trading at bargain basement prices, and offer some of the best hedges on the U.S. dollar. This is your opportunity – now go out and seize it. Link to the original post on Wall Street Daily

Guggenheim Defensive Equity: Another Defensive ETF That Failed Miserably To Do Its Job

As the equities markets are crashing all over the planet, more conservative players look to play defense by considering defensive investments and related exchange traded funds to hedge against the current correction. Defensive Stocks and Sectors During market downturns, high volatility and economic uncertainties, many investors use a risk aversion strategy by rotating to defensive sectors through buying defensive stocks and ETFs to shelter from the storm. Defensive Stocks and Sectors are those deemed non-cyclical and not very dependent on the overall economic cycle. The traditional sectors considered defensive are utilities, consumer staples and healthcare. After all, consumers cannot easily manage without gas and electricity, soap and toothpaste and of course their medicine. Other sectors deemed defensive are the telecom sector and the US real estate REIT sectors. Part of what makes defensive stocks and sectors appealing is their relatively higher and “safer” dividend which caters to investors wanting equity exposure but less risk. DEF Fund Description The Guggenheim Defensive Equity ETF (NYSEARCA: DEF ) seeks investment results that correspond to the performance, before the Fund’s fees and expenses, of the Sabrient Defensive Equity Index (the “Defensive Equity Index”). The Fund invests at least 90% of its total assets in US common stocks, American depositary receipts (“ADRs”) and master limited partnerships (“MLPs”). Guggenheim Funds Investment Advisors, LLC (the “Investment Adviser”) seeks to replicate the performance of the Defensive Equity Index which is comprised of approximately 100 securities selected from a broad universe of global stocks, generally including securities with market capitalizations in excess of $1 billion. For more information about this ETF click here . ETF methodology and Sector Allocation Index selection methodology is designed to identify companies with potentially superior risk/return profiles to outperform during periods of weakness in the markets and/or in the American economy overall. The Index is designed to actively select securities with low relative valuations, conservative accounting, dividend payments and a history of outperformance during bearish market periods. The Index constituents are well-diversified and supposed to represent a “defensive” portfolio. The sector allocation of this ETF is as follows: DEF Dividend and Fees DEF pays a respectable dividend of 3.31% and charges an acceptable management fee of 0.65%. The Perfect Defensive ETF? At first glance, DEF looks like a pretty diversified ETF, positioned within the right sectors to hedge against economic downturns in its focus on traditional defensive stocks, including utilities, real estate and consumer defensive. With its highly regarded investment advisor Guggenheim and an investment strategy that seems logical, DEF might even look like the perfect defensive ETF, as its name suggest, but is it really? Performance of DEF in the past 30 days The following chart depicts the performance of DEF against the S&P 500 index tracked by the SPDR S&P 500 ETF (NYSEARCA: SPY ) during the past 30 days ending Friday January 15, 2016: Click to enlarge As noted on the chart above, DEF utterly failed as a defensive ETF as it tumbled 6.4% when the S&P 500 Index fell 8.4%. Let us compare the performance of DEF against the average performance of the five defensive sectors: Source ycharts.com The failure of DEF is even more evident based on the above table as DEF tumbled by 6.4% against an average decline of 4% for the five main sectors considered to be defensive. So what went wrong with this ETF which seems to tick all the right boxes? In order to understand what went wrong we have to dig a little deeper. Three reasons DEF failed to do its job as a defensive ETF Geographical allocation issues A high 9.3% geographical exposure to the Asian market, of which about one-third relating to emerging markets. The allocations include countries such as Singapore, Taiwan, Japan and Asian emerging markets, all of which are very sensitive to China and took a large hit from the Chinese stock market crash. Stocks in this category include Telekomunik Indonesia (NYSE: TLK ), Japanese Nippon Telegraph & Tele (NYSE: NTT ), and Korean SK Telecom Co (NYSE: SKM ). Direct exposure to China (China Mobile (NYSE: CHL ), China Petroleum & Chemicals (NYSE: SNP ), and Chunghwa Telecom (NYSE: CHT )). About 2% is allocated to South American markets which are highly dependent on commodities and tend to be more sensitive to economic and market volatility and uncertainty. Stocks in this category include Banco De Chile-ADR (NYSE: BCH ) and Mexican Grupo Aeroportuario PAC-ADR (NYSE: PAC ). Sector Allocation issues The Fund has a high 8.2% exposure to the energy sector including oil and gas Master Limited Partnerships. These sectors got hammered the past month. DEF holds indeed high risk stocks for the current environment, such as National Oilwell Varco (NYSE: NOV ) and Targa Resources Partners (NYSE: NGLS ). A 3.2% exposure to the basic material sector which has been diving for the past two years, as commodity prices reached multi-year lows on concerns of a China slowdown. Stocks in the ETF include AGL Resources (NYSE: GAS ) and Syngenta AG (NYSE: SYT ). A very high exposure of 14.5% to the telecom sector proved to be too much for a defensive ETF, as the sector plunged 7.6% to become one of the ugliest defensive plays for the past month. Stocks in the ETF include Verizon (NYSE: VZ ), Frontier Communications (NASDAQ: FTR ), NTT Docomo and Vodafone (NASDAQ: VOD ). Passive Investing Strategy The most notable problem with DEF Fund lays in the fact that it uses a “passive” or “indexing” investment approach which makes it vulnerable as economic conditions change. DEF does not have a dynamic system in place to exclude currently risky sectors which once used to be considered safe, such as the oil sector and commodities sector, or to limit exposure to disfavored regions and countries. Conclusion Guggenheim Defensive Equity DEF – don’t get fooled by its name! The same can be said about other Defensive ETFs which may seem right at first glance. Investors should still do their due diligence and closely examine how the underlying assets are invested before putting money at work. Special note I am currently sharing on Seeking Alpha additions to my high-yield “Retirement Dividend Portfolio” (target yield 6% to 9%), with the latest one: Hedging My High Dividends with German Exposure . Follow me for future updates!

Why Invest In Chile?

I’ve heard it said that asset allocation means always having something to complain about. A brilliant asset allocation will have long periods when one or more component of the portfolio fails to appreciate. And for investment management a long period of time can be a decade or more. This past year the MSCI Chile Gross Index lost -16.58% as measured in US dollars. Chile is down -50.64% since it peaked at the end of April, 2011 with a 5-year annual return of -13.04%. The longer the downturn for a particular portfolio holding the greater the feeling that we should simply eliminate it from the portfolio. It is “doing nothing but going down” we say because our minds are apt to frame the movement in the present tense rather than the past tense. Our brains are very quick to find short term patterns and project them forward as long term trends. This cognitive ability is useful in many areas, but it is not particularly useful in investment management. Investments are inherently volatile. The rebalancing bonus which comes from having an asset allocation is dependent on two variables: volatility and correlation. The more volatile and less correlated your asset classes are the greater the rebalancing bonus you get from having those components in your portfolio. When you compare Chile to the S&P 500 Total Return since the beginning of 1988 when the Chile Index began, the S&P 500 had a 1,540.25% appreciation, growing $10,000 into $154,669. It averaged 10.28% annually. Even though the S&P 500 had phenomenal growth during the time period, it also experienced an entire decade where it dropped -29.48% and a 30 month period where it dropped -43.75%. Over the same time period, Chile had a 3,585.25% appreciation, growing $10,000 into $368,524. It averaged 13.75% annually. Click to enlarge Having twice as much growth as the S&P 500 over 28 years comes with the price of greater volatility. The standard deviation of annual returns for the S&P 500 was 14.39% while the standard deviation for Chile was 24.21%. This type of volatility is normal for the markets. While you might have had more money putting everything in Chile, we recommend a blended portfolio. Each individual component of a balanced portfolio is more volatile than the portfolio as a whole. Thus, adding a little bit of Chile to your portfolio can boost returns and reduce volatility on account of the rebalancing bonus. In fact, over this time period the mix which had the lowest volatility was 12% Chile and 88% S&P 500. This blended portfolio had an average return of 10.96% and a standard deviation of just 14.25%. This is a boost to annual returns of 0.68%. Over this time period, adding 12% Chile to your portfolio resulted in an extra $29,095 over the S&P 500 alone. Creating a mix of 19% Chile and 81% S&P 500 would have had no more volatility than a portfolio of 100% S&P 500. But this portfolio would have averaged 11.32%, and extra 1.05% annually and earned an additional $46,784. The return of these blended portfolios over long periods of time produce a risk return curve which can help investors find what asset allocation produced the greatest return for a given amount of risk. These blended portfolios are called the efficient frontier and produce curves between moving from 100% S&P 500 to 100% Chile. Click to enlarge Notice that with only these two choices, investing any less than 12% in Chile is not on the efficient frontier because there is a portfolio for which a greater return could have been achieved while experiencing an equal or lower volatility. In actual portfolio construction, there are dozens of components which are being fit together to craft a brilliant investment strategy for long term time horizons. Our current asset allocation model usually invests less than 2% of a portfolio’s value in Chile. Even if Chile were to lose half of its value the portfolio value would only go down 1%. Assuming that Chile doesn’t move in sync with other investments in the portfolio, this is a level of volatility which is acceptable for the potential additional return. As it turns out, the correlation between the monthly returns of Chile and the S&P 500 are low at 0.46. It is always disappointing when an investment category fails to perform as hoped. But after an investment has fallen in price it is often that much more attractive looking forward. Unlike individual stocks, a country index cannot go to zero. If the Chile index approached zero, you would be able to take your pocket change and buy every publicly traded company in Chile. Long before you could do that, people much wealthier than you would notice how low the price was and they would buy every company in Chile. Low prices for a country index is best thought of as the index going on sale. Stocks often move on very light trading as a few sellers push the stock price lower. Market makers who hold all the stocks in the index gradually move the price lower when there are more sellers than buyers. A market maker is forced to buy when there is no one else interested in buying. But at some point the price is low enough to wake up other potential buyers and the movement in price finds resistance. This can cause greater swings of volatility often over long periods of time. As a result, you should not be afraid of an major index. Assuming there were good reasons to be invested in it in the first place , a 3, 5 or even 10 year down turn is not a reason to abandon your brilliant investment strategy.