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3 Mutual Funds To Buy On A Resurgent Chinese Economy

The Chinese economy has been at the root of the broader market malaise since the start of 2016. But, the world’s second largest economy showed signs of improvement in March. China’s factory indicators point to a pickup in the economy supported by greater stability in the yuan and a rise in its stock markets. Pressure on emerging markets including China eased due to the Federal Reserve’s cautious stance to hike rates in the future. Higher rates in the U.S. mostly results in outflows from these markets. China’s service sector also expanded last month, which bodes well for the country’s long-term goal of transforming into a consumer-driven economy. Increase in stimulus measures from Chinese authorities helped the service sector to move north. Given the recovery in manufacturing and services, it will not be unwise to invest in mutual funds that are exposed to the Chinese economy. When you add industrial profits gaining immensely in the first two months of this year and consumer sentiment touching record levels last month, China doesn’t seem to be in a bad proposition. Before we cherry pick some good funds, let’s take a look at the latest data: Manufacturing Expands After eight consecutive months of decline, China’s official manufacturing PMI came in at 50.2 in March. Any reading above 50 indicates expansion. There has also been a marked improvement in production and new orders. The production index went up to 52.3 in March from 50.2 in February, while the new orders index rose to 51.4 from 48.6 in February. A separate indicator, the private Caixin manufacturing PMI, rose to 49.7 in March from 48.0 in February. In spite of being below 50, it turned out to be the index’s highest reading in the past 13 months. Caixin Insight Group Chief Economist He Fan pointed out that “the output and new order categories rose above the neutral 50-point level, indicating that the stimulus policies the government has implemented have begun to take hold.” China-focused funds such as the Oberweis China Opportunities Fund (MUTF: OBCHX ) and the Matthews China Fund (MUTF: MCHFX ) are poised to benefit from this uptick in factory output. These mutual funds have invested in companies such as Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM ), China Mobile Limited (NYSE: CHL ), CNOOC Ltd. (NYSE: CEO ) and Tencent Holdings ( OTCPK:TCEHY ) that are direct beneficiaries of a rise in factory activities. Services Gain Momentum China’s official non-manufacturing PMI rose to 53.8 in March from 52.7 in February. This showed expansion in the service sector, which has become a major source of economic and employment growth in the country. Sub-indices of the non-manufacturing PMI including the new orders index, input price index, and sales price index all improved in March. The non-manufacturing PMI generally includes retail, aviation, technology, telecommunications, financials and construction sectors. Funds such as the AllianzGI China Equity Fund Class A (MUTF: ALQAX ) and the Eaton Vance Greater China Growth Fund Class A (MUTF: EVCGX ) are positioned to immensely benefit as they have significant exposure to the aforementioned sectors. 3 China-Focused Mutual Funds to Invest In Rise in both industrial and service activities in China will surely help its economy to navigate through troubled waters. Moreover, the country’s industrial profits climbed 4.8% to about $119.8 billion in the first two months of this year, according to the National Bureau of Statistics (NBS). Recovery in real estate industry was cited to be the reason behind this increase in industrial profits. NBS analyst He Ping added that the “positive trend was driven in part by quicker product sales of industrial firms and a narrowing in the decline of industrial producer prices.” Consumer sentiment too rose sharply in March. The Westpac MNI China Consumer Sentiment Indicator jumped 6.1% to 118.1 in March, its highest level since Sep. 2015. Banking on this optimism, it will be wise to invest in China focused mutual funds that have gained in the last one-month period. Further, these funds possess strong fundamentals, which will eventually help them continue gaining in the future as well. We have selected three such mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer minimum initial investment within $5,000, carry a low expense ratio and have given positive returns in the last four weeks. Matthews China Investor seeks to achieve its investment objective by investing a large portion of its assets in the common and preferred stocks of companies located in China. MCHFX’s 4-week return is 1.9%. Annual expense ratio of 1.14% is lower than the category average of 1.76%. MCHFX has a Zacks Mutual Fund Rank #1. AllianzGI China Equity A seeks to achieve its objective by normally investing a major portion of its assets in equity securities of Chinese companies. ALQAX’s 4-week return is almost 7%. Annual expense ratio of 1.70% is lower than the category average of 1.76%. ALQAX has a Zacks Mutual Fund Rank #2. Invesco Greater China Y (MUTF: AMCYX ) invests the majority of its assets in equity or equity-related instruments issued by companies located in Greater China and in other instruments that have economic characteristics similar to such securities. AMCYX’s 4-week return is 7.1%. Annual expense ratio of 1.63% is lower than the category average of 1.76%. AMCYX has a Zacks Mutual Fund Rank #2. Original Post 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.

Time To Invest In Tech ETFs?

Technology ETFs were badly hit in the first quarter of 2016, having returned minutely or posting massive losses. Among the gainers, most were from either the high-yielding or equal-weight or value-centric semiconductor segments (read: Tech ETFs that Braved the Storm in February ). Broad-based sell-off in high-growth stocks due to overvaluation concerns, global growth issues, and corporate recession kept this space off radar. Adding to the tension was LinkedIn’s (NYSE: LNKD ) lackluster guidance for the first quarter of 2016 issued in early February (read: LinkedIn Crashes: Should You Connect with Social Media ETF? ). Along with LinkedIn, the famous FANGs (Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ) and Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) (i.e. Alphabet) were also thrashed. Notably, the famous four contributed a lot to last year’s tech surge. However, the bloodbath in these stocks weighed down the tech-laden Nasdaq exchange, forcing it to be the worst performing index among the top three U.S. indices. Sell-Off in Tech Sector Looks Overdone; Why? However, things took a turn for the better in the last one month as risk-on sentiments returned to the market on a flurry of upbeat U.S. economic data. Plus, the Fed promised to take a cautious stance on the future interest rate policy indicating a longer low rate environment and underpinning the bullish sentiments for high-growth sectors like technology. If this isn’t enough, a dovish Fed dampened the U.S. dollar lending support to the tech sector, which has considerable foreign exposure. Yes, earnings of the sector is still far from anything that looks decent as evident from the expected earnings decline 5.2% for the first quarter (as per Zacks Earnings Trends issued on March 29, 2016), but future trends are reassuring. The sector’s earnings are expected to decline just 0.6% in the second quarter of 2016 and likely to enter the positive territory in the third quarter (expected growth rate is positive 4.6%). The revenue picture is reasonable enough with positive growth trend expected for every quarter of 2016. Out of the 16 S&P sectors, technology is currently reasonably valued with its P/E at 17.2x and 15.5X respectively for 2016 and 2017 expected earnings. While this goes in line with 17.4x and 15.4x P/E of the S&P 500 index, the valuation falls behind the forward P/E ratio of consumer staples, retail wholesale, conglomerates, energy and business services. All in all, after a beaten-down Q1, the sector is gaining traction to start Q2. So, investors intending a momentum play in the tech space can bet on the following ETFs, each of which underperformed in Q1 and is due for a strong reversal in Q2. The ETFs offered solid returns in the last five days too (as of April 1, 2016). PowerShares Dynamic Software Portfolio ETF (NYSEARCA: PSJ ) The fund comprises stocks of software companies. The underlying index looks to track companies picked up on criteria like fundamental growth, stock valuation, investment timeliness and risk factors. The 30-stock fund charges 63 bps in fees and added 5.3% in the last five trading days (as of April 1, 2016). PSJ is up just 0.6% in the year-to-date frame (as of April 1, 2016) and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook. PowerShares DWA Technology Momentum Portfolio ETF (NYSEARCA: PTF ) The PowerShares DWA Technology Momentum Portfolio tracks the Dorsey Wright Technology Technical Leaders Index which identifies companies that are showing relative strength. This 33-stock fund charges 60 bps in fees and returned about 4% in the last five trading sessions (as of April 1, 2016). However, the fund has lost about 5.6% so far this year (as of April 1, 2016). It has a Zacks ETF Rank #2 with a high risk outlook. iShares North American Tech-Software ETF (NYSEARCA: IGV ) This 58-stock ETF provides exposure to the software segment of the broader U.S. technology space. The product charges 48 bps in annual fees. The fund is down 2.2% in the year-to-date frame but returned 3.1% in the last five trading sessions (as of April 1, 2016). The fund has a Zacks ETF Rank #1 (Strong Buy) with a high risk outlook. PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ) The fund offers global exposure to those companies that ensure safety to computer hardware, software and networks, and fight against any sort of cyber malpractice. It tracks the ISE Cyber Security Index, holding 35 securities in its basket. From an industrial look, systems software accounts for nearly 60% of the portfolio. The fund charges 75 bps in fees per year from investors. HACK has lost about 7.3% so far this year but advanced 3.6% in the last five trading days (as of April 1, 2016). First Trust Technology AlphaDEX ETF (NYSEARCA: FXL ) The fund follows the StrataQuant Technology Index, which is a modified equal-dollar weighted index and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices using the AlphaDEX screening methodology. Software takes the top spot in the fund with about 24% weight. The 78-stock fund charges 63 bps in fees. This Zacks Rank #1 ETF is down 0.2% so far this year (as of April 1, 2016) but added over 2.8% in the last five trading days (as of April 1, 2016). Original Post

My Passion Is Puppetry

We are supposedly living in the Golden Age of television. Maybe yes, maybe no (my view: every decade is a Golden Age of television!), but there’s no doubt that today we’re living in the Golden Age of insurance commercials. Sure, you had the GEICO gecko back in 1999 and the caveman in 2004, and the Aflac duck has been around almost as long, but it’s really the Flo campaign for Progressive Insurance in 2008 that marks a sea change in how financial risk products are marketed by property and casualty insurers. Today every major P&C carrier spends big bucks (about $7 billion per year in the aggregate) on these little theatrical gems. This will strike some as a silly argument, but I don’t think it’s a coincidence that the modern focus on entertainment marketing for financial risk products began in the Great Recession and its aftermath. When the financial ground isn’t steady underneath your feet, fundamentals don’t matter nearly as much as a fresh narrative. Why? Because the fundamentals are scary. Because you don’t buy when you’re scared. So you need a new perspective from the puppet masters to get you to buy, a new “conversation”, to use Don Draper’s words of advertising wisdom from Mad Men . Maybe that’s describing the price quote process as a “name your price tool” if you’re Flo, and maybe that’s describing Lucky Strikes tobacco as “toasted!” if you’re Don Draper. Maybe that’s a chuckle at the Mayhem guy or the Hump Day Camel if you’re Allstate or GEICO. Maybe, since equity markets are no less a financial risk product than auto insurance, it’s the installation of a cargo cult around Ben Bernanke, Janet Yellen, and Mario Draghi , such that their occasional manifestations on a TV screen, no less common than the GEICO gecko, become objects of adoration and propitiation. For P&C insurers, the payoff from their marketing effort is clear: dollars spent on advertising drive faster and more profitable premium growth than dollars spent on agents . For central bankers, the payoff from their marketing effort is equally clear. As the Great One himself, Ben Bernanke, said in his August 31, 2012 Jackson Hole speech: “It is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases.” Probably not a coincidence, indeed. Here’s what this marketing success looks like, and here’s why you should care. This is a chart of the S&P 500 index (green line) and the Deutsche Bank Quality index (white line) from February 2000 to the market lows of March 2009. Click to enlarge Source: Bloomberg Finance L.P., as of 3/6/2009. For illustrative purposes only. Now I chose this particular factor index (which I understand to be principally a measure of return on invested capital, such that it’s long stocks with a high ROIC, i.e. high quality, and short stocks with a low ROIC, all in a sector neutral/equal-weighted construction across a wide range of global stocks in order to isolate this factor) because Quality is the embedded bias of almost every stock-picker in the world. As stock-pickers, we are trained to look for quality management teams, quality earnings, quality cash flows, quality balance sheets, etc. The precise definition of quality will differ from person to person and process to process (Deutsche Bank is using return on invested capital as a rough proxy for all of these disparate conceptions of quality, which makes good sense to me), but virtually all stock-pickers believe, largely as an article of faith, that the stock price of a high quality company will outperform the stock price of a low quality company over time. And for the nine years shown on this chart, that faith was well-rewarded, with the Quality index up 78% and the S&P 500 down 51%, a stark difference, to be sure. But now let’s look at what’s happened with these two indices over the last seven years. Click to enlarge Source: Bloomberg Finance L.P., as of 3/28/2016. For illustrative purposes only. The S&P 500 index has tripled (!) from the March 2009 bottom. The Deutsche Bank Quality index? It’s up a grand total of 10%. Over seven years. Why? Because the Fed couldn’t care less about promoting high quality companies and dissing low quality companies with its concerted marketing campaign – what Bernanke and Yellen call “communication policy” , the functional equivalent of advertising. The Fed couldn’t care less about promoting value or promoting growth or promoting any traditional factor that requires an investor judgment between this company and that company. No, the Fed wants to promote ALL financial assets, and their communication policies are intentionally designed to push and cajole us to pay up for financial risk in our investments, in EXACTLY the same way that a P&C insurance company’s communication policies are intentionally designed to push and cajole us to pay up for financial risk in our cars and homes. The Fed uses Janet Yellen and forward guidance; Nationwide uses Peyton Manning and a catchy jingle. From a game theory perspective it’s the same thing. Where do the Fed’s policies most prominently insure against financial risk? In low quality stocks, of course. It’s precisely the companies with weak balance sheets and bumbling management teams and sketchy non-GAAP earnings that are more likely to be bailed out by the tsunami of liquidity and the most accommodating monetary policy of this or any other lifetime, because companies with fortress balance sheets and competent management teams and sterling earnings don’t need bailing out under any circumstances. It’s not just that a quality bias fails to be rewarded in a policy-driven market, it’s that a bias against quality does particularly well! The result is that any long-term expected return from quality stocks is muted at best and close to zero in the current policy regime. There is no “margin of safety” in quality-driven stock-picking today, so that it only takes one idiosyncratic stock-picking mistake to wipe out a year’s worth of otherwise solid research and returns. So how has that stock-picking mutual fund worked out for you? Probably not so well. Here’s the 2015 S&P scorecard for actively managed US equity funds, showing the percentage of funds that failed to beat their benchmarks over the last 1, 5, and 10 year periods. I mean … these are just jaw-droppingly bad numbers. And they’d be even worse if you included survivorship bias. % of US Equity Funds that FAILED to Beat Benchmark 1 Year 5 Years 10 Years Large-Cap 66.1% 84.2% 82.1% Mid-Cap 56.8% 76.7% 87.6% Small-Cap 72.2% 90.1% 88.4% Source: S&P Dow Jones Indices, “SPIVA US Scorecard Year-End 2015” as of 12/31/15. For illustrative purposes only. Small wonder, then, that assets have fled actively managed stock funds over the past 10 years in favor of passively managed ETFs and indices. It’s a Hobson’s Choice for investors and advisors , where a choice between interesting but under-performing active funds and boring but safe passive funds is no choice at all from a business perspective. The mantra in IT for decades was that no one ever got fired for buying IBM (NYSE: IBM ); today, no financial advisor ever gets fired for buying an S&P 500 index fund. But surely, Ben, this, too, shall pass. Surely at some point central banks will back away from their massive marketing campaign based on forward guidance and celebrity spokespeople. Surely as interest rates “normalize”, we will return to those halcyon days of yore, when stock-picking on quality actually mattered. Sorry, but I don’t see it. The mistake that most market observers make is to think that if the Fed is talking about normalizing rates, then we must be moving towards normalized markets, i.e. non-policy-driven markets. That’s not it. To steal a line from the Esurance commercials, that’s not how any of this works. So long as we’re paying attention to the Missionary’s act of communication , whether that’s a Mario Draghi press conference or a Mayhem Guy TV commercial, then behaviorally-focused advertising – aka the Common Knowledge Game – works. Common Knowledge is created simply by paying attention to a Missionary. It really doesn’t matter what specific message the Missionary is actually communicating, so long as it holds our attention. It really doesn’t matter whether the Fed hikes rates four times this year or twice this year or not at all this year. I mean, of course it matters in terms of mortgage rates and bank profits and a whole host of factors in the real economy. But for the only question that matters for investors – what do I do with my money? – nothing changes . Stock-picking still won’t work. Quality still won’t work. So long as we hang on every word, uttered or unuttered, by our monetary policy Missionaries, so long as we compel ourselves to pay attention to Monetary Policy Theatre, then we will still be at sea in a policy-driven market where our traditional landmarks are barely visible and highly suspect. Here’s my metaphor for investors and central bankers today – the brilliant Cars.com commercial where a woman is stuck on a date with an incredibly creepy guy who declares that “my passion is puppetry” and proceeds to make out with a replica of the woman. Click to enlarge What we have to do as investors is exactly what this woman has to do: get out of this date and distance ourselves from this guy as quickly as humanly possible. For some of us that means leaving the restaurant entirely, reducing or eliminating our exposure to public markets by going to cash or moving to private markets. For others of us that means changing tables and eating our meal as far away as we possibly can from Creepy Puppet Guy. So long as we stay in the restaurant of public markets there’s no way to eliminate our interaction with Creepy Puppet Guy entirely. No doubt he will try to follow us around from table to table. But we don’t have to engage with him directly. We don’t have participate in his insane conversation. No one is forcing you keep a TV in your office so that you can watch CNBC all day long! Look … I understand the appeal of a good marketing campaign. I live for this stuff. And I understand that we all operate under business and personal imperatives to beat our public market benchmarks, whatever that means in whatever corner of the investing world we live in. But I also believe that much of our business and personal discomfort with public markets today is a self-inflicted wound , driven by our biological craving for Narrative and our social craving for comfortable conversations with others and ourselves , no matter how wrong-headed those conversations might be. Case in point: if your conversation around actively managed stock-picking strategies – and this might be a conversation with managers, it might be a conversation with clients, it might be a conversation with an Investment Board, it might be a conversation with yourself – focuses on the strategy’s ability to deliver “alpha” in this puppeted market, then you’re having a losing conversation. You are, in effect, having a conversation with Creepy Puppet Guy. There is a role for actively managed stock-picking strategies in a puppeted market, but it’s not to “beat” the market. It’s to survive this puppeted market by getting as close to a real fractional ownership of real assets and real cash flows as possible. It’s recognizing that owning indices and ETFs is owning a casino chip, a totally different thing from a fractional ownership share of a real world thing. Sure, I want my portfolio to have some casino chips, but I ALSO want to own quality real assets and quality real cash flows, regardless of the game that’s going on all around me in the casino. Do ALL actively managed strategies or stock-picking strategies see markets through this lens, as an effort to forego the casino chip and purchase a fractional ownership in something real? Of course not. Nor am I using the term “stock-picking” literally, as in only equity strategies are part of this conversation. What I’m saying is that a conversation focused on quality real asset and quality real cash flow ownership is the right criterion for choosing between intentional security selection strategies, and that this is the right role for these strategies in a portfolio. Render unto Caesar the things that are Caesar’s. If you want market returns, buy the market through passive indices and ETFs. If you want better than market returns … well, good luck with that. My advice is to look to private markets, where fundamental research and private information still matter. But there’s more to public markets than playing the returns game. There’s also the opportunity to exchange capital for an ownership share in a real world asset or cash flow. It’s the meaning that public markets originally had. It’s a beautiful thing. But you’ll never see it if you’re devoting all your attention to CNBC or Creepy Puppet Guy.