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How To Find The Best Style Mutual Funds: Q1’16

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 929 different Large Cap Value mutual funds and at least 6296 mutual funds across twelve styles. Do investors need 524+ choices on average per style? How different can the mutual funds be? Those 929 Large Cap Value mutual funds are very different. With anywhere from eight to 741 holdings, many of these Large Cap Value 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 Blend ranks first for stock selection. Small Cap Growth ranks last. Details on the Best & Worst mutual funds in each style are here . A Recipe for Paralysis By Analysis I think the large number of Large Cap Value (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 741 stocks, and sometimes even more, for one mutual fund. Any investor focused on fulfilling fiduciary duties 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 The Barrow Value Opportunity Fund (MUTF: BALIX ) ranks first, the Brown Advisory Equity Income Fund (MUTF: BAFDX ) ranks second, and the Wall Street Fund (MUTF: WALLX ) ranks third. The Artisan Mid Cap Value Fund (MUTF: APHQX ) ranks last. 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 my 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 Vulcan Value Partners Fund (MUTF: VVPLX ) is the top-rated Large Cap Blend mutual fund and the overall top-rated fund of the 6296 style mutual funds that we cover. The mutual funds in Figure 1 all receive an Attractive-or-better rating. However, with so few assets in some of the funds, it is clear investors haven’t identified these quality funds. Disclosure: David Trainer and Kyle Guske II 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. 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.

Norway ETFs In Focus Post Rate Cut

In its latest meeting, Norway’s central bank lowered its key interest rate to an all-time low of 0.5% from 0.75%. This move was highly anticipated given a history of rate cuts and weak outlook. The outlook for Western Europe’s biggest crude producer, Norway, has gone from bad to worse in the last couple of months, thanks to persistently low oil prices. Norway is among the top 10 nations famous for oil exports and, with its comparatively low population, oil forms a key part of the country’s GDP. The central bank stated that the developments in the Norwegian economy have been weaker than expected, with unemployment expected to go northward from the current level of 4.5%. Negative Interest Rate on Radar The Norwegian central bank also hinted at further rate cuts and warned that it could even go to negative territory in order to revive the economy. Meanwhile, several other countries are also following a strategy of monetary easing, which generally comes in the form of an interest rate cut to boost growth. Earlier this month, the European Central Bank (ECB) came up with a more intensified economic stimulus and opted for multiple rate cuts and the expansion of its quantitative easing program to boost the economy. Apart from ECB, Norway’s neighbors Sweden and Denmark have also adopted this policy. Another European country – Switzerland – has lowest rates across the world and held the rates steady in March. Meanwhile, the Fed has also maintained its dovish stance. The central bank now expects the federal funds rate to rise to 0.875% by the end of the year, as compared with the previously expected 1.375%, implying only two rate hikes as compared to the previously expected four rate hikes. Although rate cuts are expected to boost economic activity, the Norwegian central bank noted that rock-bottom rates could hamper the profitability of commercial systems and affect the financial system adversely. A Closer Look at 2 Norwegian ETFs In the light of these developments, we highlight two ETFs – the Global X MSCI Norway ETF (NYSEARCA: NORW ) and the iShares MSCI Norway Capped Investable Market Index ETF (BATS: ENOR ) – that have gained 0.5% and 0.9%, respectively, in the last 5 days. Both have a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. NORW This is the most popular ETF tracking the Norwegian market with AUM of $59.4 million and average daily volume of almost 62,000 shares. The fund tracks the FTSE Norway 30 Index, holding 57 securities in its basket while charging 50 bps in annual fees from investors. The product is somewhat concentrated in both sectors and securities. The top three firms account for almost one third of total assets, while from a sector point of view energy dominates the fund’s assets with 30% share. The fund has a tilt toward large-cap stocks at 61%. ENOR This ETF follows the MSCI Norway IMI 25/50 Index, holding a basket of about 55 companies that are based or do most of their business in Norway. The product puts about 67.7% of total assets in the top 10 holdings, suggesting concentration. Although a capping methodology is applied, limiting the weight of any single stock to a maximum of 25% of total assets. Large caps are pretty prevalent, as these make up 61% of assets. With respect to sector holdings, energy again takes the largest share at 29.6%, followed by financials (20.1%) and consumer staples (15.3%). The product has amassed $17.9 million in its asset base while it trades in volumes of around 23,000 shares. It charges 53 bps in fees per year from investors. Original Post

Un-Expectedly High Expected Return Of Global Equities

It seems just about everyone I talk to these days is underwhelmed by the long-term expected return of the global stock market. I too am more worried than normal about owning equities. However, my defensiveness arises from their negative momentum, not their valuation, which I see as surprisingly attractive. The valuation picture is blurred by the dramatic divergence between US and non-US equities. For the past four and half years, the US equity market has outpaced non-US equities by more than 10% a year. After that relative outperformance, US equities do appear overvalued, but the attractive valuation of non-US markets more than compensates in a global portfolio. The table below shows the cyclically adjusted earnings yields (using the past 10 years of earnings) of each regional equity market. The Baseline regional weights I’m using fall in between the weights published by MSCI and those calculated by Bloomberg using their WCAP function. 1 Click to enlarge The earnings yield of the global equity market is 6.6%. To get to an estimate of the long-term expected real return, I assume that 60% of earnings can be paid out in dividends (besides sounding like a reasonable assumption, it also happens to be the average payout ratio from 1915 to 2015 in the US), which will grow at about 1.5% above inflation in the long term. Many observers prefer the even simpler estimate of just using the earnings yield itself, which is 6.6%, but I prefer basing the estimate on cash flow to investors, which is generally more conservative. This results in 5.5% for the long-term expected real return for global equities (6.6% * 0.6 + 1.5%). 2 So how attractive is a 5.5% expected return above inflation? Here are four perspectives to consider: US equities returned 5.4% after inflation in the 50 years from 1965 to 2015, which many people view as having been a good time to be an equity investor (although not nearly as good as the 8.2% from 1915 to 1965). The chart below shows that 5.5% is well above the average expected return of 4.5%. It is in the top decile of expected returns calculated this way since 1985, a period of time longer than the careers of 80% of the people currently employed in the finance industry. 3 By contrast, other assets, such as fixed income and real estate, are currently offering low expected real returns in the bottom decile of expected returns over the past 30 years. It is difficult to come up with a simple prospective measure of expected real returns for alternatives such as hedge funds, but they certainly have been struggling recently to generate the attractive returns they produced in the ’80s and ’90s. Caution: Equities can get a lot cheaper, quickly. Just a month ago, global equities were more than 10% lower than they are now, in case we need any reminder. While 5.5% appears attractive as a long-term expected real return, we need to keep in mind that we may see much higher expected returns than that in the future. Bottom line: Global equities are pretty attractively valued, and when they enter a period of positive momentum, we’ll probably see very healthy returns. Click to enlarge Footnotes: MSCI bases its weights on strict investible market cap data while Bloomberg bases theirs on unrestricted market cap. The Baseline weights used here go beyond market cap, using other economically relevant data to compute weights. See this note for details, and here for a further comparison of weighting schemes. Based on the belief that earnings and dividends will grow at less than the rate of real GDP growth due to various slippages. For a more detailed discussion, watch this video , and read this short note . Furthermore, if we think of this as the central case in the return distribution, and if we believe the long-term return is distributed relative symmetrically around this value, then there is a convexity adjustment that makes investing in equities even more attractive. A back-of-the-envelope illustration is to note that if we thought there were two equally likely long-term (say 30 year) outcomes for the real return, of say 5.5% + 2% and 5.5% – 2%, we would see that the return associated with the expected value of equities would be 6.02%, or 0.52% higher than the 5.5% base case. From US BLS data, here . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.