Tag Archives: income

Health Care In Emerging Markets: A Compelling Investment Opportunity

Click to enlarge Many emerging market countries today are struggling to find a new growth model. Those that are reliant on commodity exports have been hit especially hard in the wake of China’s economic transition and a broader slowdown in the developed world that has weighed on commodity prices. Policy tightening in the U.S. has put additional pressure on developing markets that are heavily influenced by capital flows. Those with precarious fiscal positions, including trade/current account deficits and elevated foreign debt levels have been particularly affected. These dynamics, along with more than four years of economic growth and earnings deceleration, have led to increasingly negative investor sentiment about emerging markets. Meanwhile, valuations have generally become very attractive. Although we continue to wait for an inflection point in economic growth before becoming more bullish on emerging markets, select opportunities for discerning investors exist. We believe that certain investments in the health care sector offer attractive long-term investment opportunities. Health care services/products are underpenetrated in emerging market countries and total spending on health remains well below the levels seen in developed markets. Click to enlarge Relative to developed markets, out-of-pocket expenses as a percentage of total health expenditures are high. Generally, greater consumption of health care products and services occurs as out-of-pocket expenses fall. Click to enlarge Insurance products are also becoming more ubiquitous, and government expenditure on health as a percentage of total government spending is low. These factors in aggregate suggest that there is considerable scope for growth in emerging market health care spending as emerging economies move more in line with their developed market counterparts. Click to enlarge In addition to emerging markets having the scope to increase health care spending, developing economies have the benefit of rapidly rising levels of income and wealth, especially compared to developed markets. Empirical evidence shows a strong correlation between rising incomes and increased spending on health care, as medical care is one of the first areas in which individuals tend to increase spending as incomes grow. With wages and salaries expected to continue rising in emerging markets, consumers are slowly gaining access to services and products that were once out of reach. We believe that this trend will create myriad investment opportunities for years to come. Furthermore, we expect this investment theme to be more insulated from cyclical economic factors given the vital, essential nature of obtaining better health care. As an example, consumer health expenditure growth in many emerging markets remained robust throughout the Global Financial Crisis; 2008 – 2009 annual health spending per capita in Brazil, Russia, India, and China grew 11% on average. We believe the beneficiaries of this investment theme will be present across a number of different industries within the health care sector. These include insurance providers, pharmaceutical manufacturers, hospital owners/operators, medical equipment and supplies manufacturers/distributors, and other health care service/goods providers. Target companies do not need to be domiciled within emerging market countries to benefit from this theme provided a significant share of revenues and operating profits comes from developing markets. Despite the favorable structural backdrop for rapid growth in emerging market health care spending, it is important for investors to understand individual country dynamics and reforms that may aid or impede the consumption of health care. Investors should focus on fundamentally sound companies that have above average growth rates, attractive valuations, and are taking share at the expense of their competitors.

Passive Investing – I Doth Protest Too Much

One of my favorite blogs, The Monevator blog , did a brief write-up on my new paper this weekend . If you don’t read their website you’re missing out because they consistently post some of the best financial content around. Anyhow, they had a very fair and objective view of the paper and approach to portfolio construction. However, one point that I seem to lose a lot of people on is my discussion of active and passive investing. So, I wanted to take this space to clarify a bit. Financial commentary doesn’t have a uniform definition for passive investing. Googling the term brings up the several different results: Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio. – Wikipedia Passive investing is an investment strategy involving limited ongoing buying and selling actions. – Investopedia The first definition is vague because there are limitless numbers of market cap weighted indexes these days, some of which are not well diversified and not low fee. Additionally, why should passive indexing be limited to market cap weighted index? Is it really correct to say, for instance, a fund like MORT , with 23 REIT holdings, reflects passive investing better than say, the equal weight S&P 500 ETF? An “index” is a rather arbitrary construct in a world where there are now tens of thousands of different indexes. The second definition is equally vague since an investor can hold a handful of stocks in a buy and hold strategy and limit ongoing buying and selling. Clearly, we shouldn’t call that passive investing in the sense that a low fee indexer would advocate. The new technologies such as ETFs have really muddled the discussion here as there’s now an index of anything and everything. So, as Andrew Lo notes: “Benchmark algorithms for high-performance computing blurred the line between passive and active.”¹ Along the traditional low fee indexing thinking I am tempted to define passive indexing as any low fee, diversified & systematic indexing strategy. But that could include all sorts of tactical asset allocation strategies that have systematic allocations. I don’t think it’s appropriate to call a tactical asset allocation strategy “passive”. So we’re back to a very blurry area in this discussion. In order to clarify this discussion I arrived at the following simple distinction: Active Investing – an asset allocation strategy with high relative frictions that attempts to “beat the market” return on a risk adjusted basis. Passive Investing – an asset allocation strategy with low relative frictions that attempts to take the market return on a risk adjusted basis. This definition has its own problem because we have to define “the market”. Is “the market” the USA, global stocks, global bonds, etc.? I’d argue that “the market” is the Global Financial Asset Portfolio, the one true benchmark of all outstanding financial assets. Therefore, anyone who deviates from this portfolio is making active decisions that essentially claim “the market” portfolio is wrong for them. This would mean that the only true “passive” strategy is following the GFAP. Obviously, not everyone does that and in fact, probably no one does it perfectly so that would mean we’re all basically active. Some people are active in silly ways (like day traders) and others are active in smart ways (diversified inactive indexers). Of course, I am a full blown supporter of low fee, low activity indexing. So please don’t confuse this as an attack on “passive indexing”. And yes, I am admittedly being overly precise. I certainly doth protest too much as Monevator says. But I am really just trying to establish a cohesive language here because I see too many people these days claiming they’re “passive” when they’re really being quite active. The worst offenders of this language problem are high fee asset managers who sell “passive” strategies cloaked as low fee platforms. I find that dishonest and extremely harmful. A little bit of clarity in this discussion is helpful in my opinion. ¹ – What is an Index? Lo, Andrew.

Is The Value Style Outperformance Sustainable?

Until the market’s (S&P 500 Index) recent rebound from the February 11, 2016 low, investors have essentially gone two years with flat returns in stocks. Certainly it has not been a market that has just traded sideways, but one with significant volatility, both up and down. The most recent recovery has pushed the S&P 500 Index back into the trading range in place since late 2014. Technically, this recent rally into the higher range opens up the potential for the Dow to move to the top of this higher range, 18,300 and the S&P 500, 2,130. Contributing to the improved equity market since the February bottom has been the strength in value and cyclically oriented sectors: energy, financials and industrials. As the below chart shows, energy is up 15.8%, financials are up 14.4% and industrials are up 11%. These three sectors are more heavily weighted in the value oriented indices like the iShares S&P 500 Value Index (NYSEARCA: IVE ). Financials account for over 25% of the value index versus an 8% weighting in the growth index (NYSEARCA: IVW ). Energy represents 12% of the value index versus only 1% in the growth index. The improvement in the value segments of the market has led to the large value index outperforming its large growth counterpart since the February bottom and so far in all of 2016. One reason investors should consider maintaining a written record of their thoughts around their market decisions is the ability to go back and review the outcome of those decisions. With respect to this value/growth phenomenon taking place in 2016, the market went through a similar adjustment in early 2014. I wrote a post on March 26, 2014, almost exactly two years ago, Why It Matters That Value Stocks Are Outperforming Growth Stocks . Subsequent to that post, and for the following two years, growth actually outperformed value. Click to enlarge One factor I noted in the 2014 post was value would outperform if economic activity was strengthening. What actually occurred though was a peak in GDP growth at 4.6% in Q2 2014 which declined to 2.1% in Q4 2014 and .6 in Q1 2015. In fact, economic growth weakened and growth resumed leadership until the beginning of this year. One economic variable discussed in the post from two years ago was the strength in industrial production. Until January’s data was reported in February, the monthly change in industrial had been negative for three consecutive months. As the below chart shows, industrial production exhibited strength in January. Additionally, manufacturing was positive on a year over year basis with Econoday noting, “Total year-on-year industrial production also remains in the negative column, at minus 0.7 percent, a disappointment but a contrast to manufacturing where the year-on-year rate is modest but accelerating, at plus 1.2 percent.” “A negative in the report is a downward revision to December, to minus 0.7 percent from minus 0.4 percent. But the revision doesn’t take much away from the January surprise where strength, based in manufacturing and underscoring January’s rise in retail auto sales, should help ease concern over the economy’s first-quarter performance.” As seen in the sector chart earlier in this post, energy and financials have been strong performers in this value rebound. Energy related stocks have seen an improvement due to the increase in oil prices into the high $38/BBL area from the mid $20/BBL reached on February 11th. I am not convinced this rally in oil is sustainable given the continued oversupply in the oil market. Lastly, both large and small value have outperformed the S&P 500 Index on a long term basis going back to 1927. Of late though, value has lagged its blended index counterparts over the last 10-year time period as can be seen in the below chart. Click to enlarge Source: The BAM Alliance The takeaway for investors is the risk of going all in or all out of any one style. One can invest in the blended index of course, or simply tilting one’s allocation between growth or value may be a better approach. With that said, maybe a tilt towards value is an opportunity at this point in time. The one caution is the much higher weighting in energy within the value index and the anticipated volatility in energy prices.