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Cancer Immunotherapy ETF Takes Curious Approach To Asset Allocation

Summary The Loncar Cancer Immunotherapy ETF was launched recently with the goal of targeting companies actively engaged in the treatment of cancer through immunotherapy. The fund’s investment in both healthcare mega-caps and biotech small-caps provide very different exposure to immunotherapy treatments. This fund looks more like a broader healthcare ETF than a pure play on cancer immunotherapy. The ETF world is becoming increasingly niche oriented lately and another niche ETF – the Loncar Cancer Immunotherapy ETF (NASDAQ: CNCR ) – recently joined the fray. Biotech has been a popular place to create a new product lately as ETFs targeting companies involved in genomics, drugs in late stage clinical trials and medical breakthroughs have all hit the market in the past 12 months. According to the fund’s fact sheet, the Cancer Immunotherapy ETF “is an equal-weighted index containing both large pharmaceutical and growth-oriented biotechnology companies that are leading in this approach.” It charges an expense ratio of 0.79% and equal weights the portfolio among 30 holdings. How it chooses those 30 holdings is what makes it curious. The fund commits around one third of its assets to some of the world’s biggest pharmaceutical companies that are developing immunotherapy treatment technologies. The remaining two thirds of assets are invested in biotechs that develop their own immunotherapy drugs and treatments. A look at the top holdings of the ETF shows a literal who’s who of the biggest healthcare companies in the world – Celgene (NASDAQ: CELG ), Pfizer (NYSE: PFE ), Amgen (NASDAQ: AMGN ) and Merck (NYSE: MRK ). As a result of the fund’s investment objective and stock selections, the ETF is one third invested in large- and mega-cap stocks and two thirds invested in small- and micro-cap stocks. The portfolio allocation and investing style suggests to me that this fund is more healthcare ETF and less cancer immunotherapy ETF. The mega-cap pharma companies in the portfolio may have cancer immunotherapy as part of their broad corporate strategy but by no means are these companies a pure play on this technology. Even the biotechs that are selected for inclusion in the portfolio have a somewhat low bar for what qualifies them for having exposure to cancer immunotherapy. As would be expected, these companies can have drugs in the pipeline whether they’re in later stage clinical trial or just starting out in the trial phase. But they also qualify if they have something as simple as a partnership with another company to work on developing immunotherapy treatment in the future. The fund’s portfolio makes it difficult to properly categorize this ETF. Its biotech allocation makes it a risky venture since many of these small companies may live or die on the success of a single drug. The significant exposure to the biggest pharmaceutical companies helps limit overall portfolio risk but provides little direct exposure to cancer immunotherapy since they have such broad, developed and diversified drug portfolios. Conclusion Investors looking for a pure play on cancer immunotherapy treatment technologies will likely be disappointed. The mega-cap presence in the portfolio provides a degree of safety for the fund but it also dilutes the exposure to immunotherapy. While many of the biotech holdings employ cancer treatment as a primary goal, there are a handful that have a more diversified drug pipeline further affecting the direct immunotherapy exposure. Individuals looking for more of a broad healthcare and biotech investment may find this choice in the ETF space intriguing but the level of direct exposure to cancer immunotherapy treatments makes this fund less than a pure play.

There Is Nothing Total About Total Return

Summary There are several methods for calculating total return, and the results of the different calculations can vary greatly. Total return is an important concept, and for many an indicator of how wisely they invest. Funds, advisors and even individual investors use total return to compare success and profit. Do you as an individual investor know what lies behind the total return concept, and does the number you get actually provide something meaningful to you? We all like to keep a score, and as investors total return is the score to talk about and show off. Unless you are an income-oriented investor, and actually are disciplined enough to only focus on income, your portfolio’s total return will fuel your hubris or smack you down all depending on Mr. Market. So considering the apparent importance of this number we should be talking about the same thing and measure the outcomes that really matter to us. But do we really do that? What is it that you measure when you calculate total return for your portfolio, and can you use the numbers the investment advisors and brokers give you? (click to enlarge) Total return is something I have found a bit difficult to wrap my head around. It is especially hard to calculate total return for a portfolio with cash flowing in and out. I have studied the different total return calculations to try to spot the differences, and decide which one I would use myself. In this article I will sum up my findings, and I hope to initiate a discussion to cast further light on this topic. I’m going to show how total return can be completely different values depending on what you want to measure and how you calculate it. And the “what do you want to measure” part is important – do you want to know how much your portfolio actually grew over a period, or how it performed versus other investment strategies? If you do not have an idea of what and how to measure total return you can end up with numbers that are totally irrelevant , as I have argued before. I will try to show the practical implications of the different calculations using examples. Hopefully that will make it easier to understand why different calculations give different answers. For the examples in this article I will use the daily closing prices from 2015 for Apple Inc. (NASDAQ: AAPL ). There has been quite a bit of volatility in this stock in 2015, so it will serve well as an example of how sequence of returns and cash flow influences total return calculations. Data is downloaded from Yahoo Finance. The simplest form of return: Dollar return Investors are building portfolios to make money grow into more money. Since more money is the ultimate goal, why could we not just measure the return as how much the portfolio value increased? If you started the year with $10,000 and ended with $12,000, with no contributions or withdrawals, the value of your portfolio would have increased with $2,000. You are in fact $2,000 richer at the end of the year. Even accounting for the cash flow is quite simple – just subtract from the year-end value any contributions and add any withdrawals. You will have full control of the increase or decrease in portfolio value. So why are we not happy with just looking at dollar returns? The main issue is that dollar returns cannot be compared across portfolios, and we want to be able to compare our performance against other portfolios. For many individual investors it’s a matter of comparing the performance of a financial advisor or portfolio manager against other providers of these services. To be able to compare we calculate the return as a percentage of portfolio value. In the example mentioned above the percentage return would be 20%. When you have no cash flow this simple calculation will provide your portfolio’s total return. But when we add cash flow to the portfolio the calculation becomes a bit more complex, and you actually have to make a choice regarding the calculation method. How cash flow is handled is actually the only thing separating the different approaches to calculating total return. Single purchase vs. dollar cost averaging Total return for a single purchase of stock is not very complicated. You take the sell price, subtract the buy price, add any dividend received, and divide that total by the buy price. There is no cash flow to complicate the calculations, and you don’t have to worry about reinvesting dividends. If you had bought shares of Apple on January 2nd and held them until October 30th you would have made a nice profit. P 0 = 109.33 (close price on January 2nd 2015) P 1 = 119.50 (close price on October 30th 2015) D = $0.47 + $0.52 + $0.52 = $1.51 Total stock return = ($119.50 – $109.33 + $1.51) / $109.33 = 10.68% This is the return without reinvesting dividends. We can complicate the calculation and reinvest dividends, but still have no other cash flow. Here is the result from a great dividend reinvestment calculator you can find at dividendchannel.com. For this short period (and modest dividend) reinvestment of dividends did not have any effect on the total return. But if you calculate over a longer period it will make a difference if you choose to reinvest dividends or not. We can do another calculation going back to 2012 when Apple started to pay dividends. In this example the total return from Apple increased from 113.27% to 117.52% when dividends were reinvested. We still have only one contribution of cash and a single stock portfolio, but already we have two different numbers for total return. The concept of total return gets more complicated when we start to look at a portfolio that receives monthly contributions, reinvests dividends and where money is withdrawn from the account occasionally. The cash flow will influence the total return calculation, and the sequence of contributions, withdrawals and dividend reinvestment will have significant effect on return calculations along with the stock’s sequence of return. There are two main approaches to this. The first is to ignore the cash flows and sequence of returns – this is called a time-weighted return. The other main approach is to account for both the cash flow, adjusted by the time the cash is at work in the portfolio and the sequence of returns. This is called a value-weighted return. So which one should you use? And which is it that you get from your broker? The short answer is that it depends on what you want to do with your total return. Do you want to compare it to an index or to other investors? Then a time-weighted return is the number you want, and this also is usually the total return you will get from your financial advisor or broker. But not all brokers think this is the best approach. Here’s a screen shot from Motif.com regarding return calculation. (click to enlarge) If you want your total return to more realistically represent the actual performance, in terms of loss or gain of your portfolio, you would have to use a value-weighted return. To show this I will use a portfolio investing $1,000 in Apple stock every month in 2015. As we previously saw, Apple is up over 10% for the year. Below is a table showing the portfolio value for each month of 2015. Date Period Portfolio   cash flow Value 01/30/15 $1,000.00 $1,071.62 02/27/15 $1,000.00 $2,184.22 03/31/15 $1,000.00 $3,111.54 04/30/15 $1,000.00 $4,116.69 05/29/15 $1,000.00 $5,314.46 06/30/15 $1,000.00 $6,104.88 07/31/15 $1,000.00 $6,860.34 08/31/15 $1,000.00 $7,368.10 09/30/15 $1,000.00 $8,155.92 10/30/15 $1,000.00 $9,904.50 A total of $10,000 was invested in the portfolio, but the portfolio value was only 9,904.50 at the end of October. The dollar return was -$95.50 for the portfolio despite the 10% appreciation of Apple in 2015. The reason for this is the sequence of returns. The table above shows how the price of Apple soared during the first five months of 2015, and then fell back during the next four months, before the final rally in October. For the portfolio this was most unfortunate. During the “good” months in the beginning of the year the shares from only a few months of contributions benefited from the rise in stock price. For the next few months, new shares were bought at peak prices before the stock tumbled. More shares were bought at a lower cost over the next few months, but even with those fortunate purchases and the October rally the portfolio ended up with a minor loss. Rearranging the sequence of the monthly returns will provide a different return. Many factors clearly have an effect on the return of a portfolio. And the gain or loss of a portfolio is the definitive measure of success or failure as an investor. I have calculated the total return of this portfolio using different approaches to total return to see how well they reflect the experienced success/failure for the investor. Apple stock return 10.68% Portfolio dollar return -$95.50 Simple return on invested capital -0.96% Time-weighted return (monthly periods) 9.07% True time-weighted return 10.64% Value-weighted return (Internal rate of return) 1.85% Value-weighted return (Modified Dietz) 1.87% A bit confusing isn’t it? But it seems quite clear that the value-weighted returns better represent the actual gain/loss of the portfolio than the time-weighted returns. The two different value-weighted returns results from two different methods of calculation. The results in this case were quite similar, but the discrepancies can be significant. Given the finding that the value-weighted return better reflects the actual return of the portfolio, why is the time-weighted return so popular? Imagine you are a financial advisor who told a client to buy Apple in January. The value of Apple appreciated 10% until the end of October, so it was quite good advice. But due to the client’s monthly purchases the portfolio actually ended up losing money. As a financial advisor you might find it a bit unfair if you were compared to other financial advisors based on that loss rather than on the 10% potential gain from the advice. That is the reason for why time-weighted return is the industry standard it allows for comparison based on the advisor’s performance without the client’s influence on the result through cash flow. But as you see from the different time-weighted returns in the table above, there are some traps in the time-weighted return calculation you have to be aware of. The only thing separating the two time-weighted returns above is the choice of sub-periods, but that resulted in a notable difference. Conclusion As an individual investor you might not have a financial advisor. You make your own decisions based on your own research. You are your own financial advisor. You will have to decide yourself what kind of total return you want to calculate for your portfolio. One thing is certain – there is nothing total about total return! Here are some factors that will influence how you calculate total return and the resulting number: Single stock or portfolio? Single purchase or several purchases? Cash flow and purchase dates Time-weighted return or value-weighted return? For time-weighted return: Choice of sub-periods For value-weighted return: Choice of calculation method I will follow up on this article with a few articles that takes a closer look at the different types of total return, how you calculate them and the potential mistakes you can make. Thank you for reading, and please do comment and ask questions! Remember I am just another individual hobby investor. I appreciate all forms of feed-back so I can widen my horizons and learn more about investing!

Why I’m Still Not Interested In NextEra

NextEra represents one of the most socially responsible industrial investments, but we believe valuations are not good enough to buy. The company continues to see a battle over what we believe is their largest catalyst – Hawaii. The company’s business remains strong in regulated markets. NextEra (NYSE: NEE ) has recovered about 5% since the last time we looked at the company, and today, we want to take a fresh look at the utility play after their latest round of earnings. We first looked at the company in late February and followed that with an update in June as well as September . As we have previously noted, we like a lot of aspects of NextEra but have not seen the value in 2015, feeling the company is fairly valued for the year. As we near year-end, how did we do? The stock is down 3% on the year as we felt it was worth in best-case scenario $96. The issues that we believe have kept valuations in check as well as our thesis is margin compression and consistency as well as the potential for the Hawaiian Electric (NYSE: HE ) deal. Today, we will wrap up our 2015 catalysts, look towards the future with 2016, and talk about potential targets for 2016 pricing. 2015 Catalysts Concluded, 2016 Focus Economic Moat Strength For us, in 2016, the main reason you invest into NextEra remains the same. The key strength for NEE remains its economic moat that exists from non-competitive agreements that the company has with many municipalities. These type of agreements mean that the company has negotiated a “fair price” deal with a certain geographic area that does not allow competition to enter the market. The idea is that it keeps prices lower for citizens and allows the company to also benefit from non-competition. NEE is attractive because 80% of its business is in the regulated area, which means higher margins, consistent revenues, and low risk for investors. This image from Market Realist tells the tale: (click to enlarge) (click to enlarge) In the latest earnings call, the company talked about its largest regulatory marketplace – Florida Power and Light: We continue to execute on our overall customer value proposition by delivering clean energy, low bills, and high reliability for Florida customers. Each of our capital deployment initiatives to provide low-cost, clean energy continues to progress in accordance with our development plans. Our generation modernization project at Port Everglades is on schedule to come online in mid-2016 and remains on track to meet its budget. Development of our three new large-scale solar projects remains on schedule, with each of these roughly 74 megawatt projects expected to be completed in 2016. These projects, once complete, will roughly triple the solar capacity on our system and add to the overall fuel diversity of our fleet, which is important for FPL and its customers. Will anything change on this front in 2016? The major regulatory change to watch in 2016 has to do with Hawaii not Florida. The company is seeking state approval after they acquired HE, and that has been the main focus of our articles in the past…it will remain our focus for 2016 as well. The company stands to benefit a lot from adding HE to this high margin regulated environment, and a lot of the value in the company is embedded in that opportunity. Hawaii – Another Regulated Market to Add Shareholder Value As we have noted previously: In 2014, NextEra bought Hawaiian Electric ( HE ) for north of $4B. The move was a chance to come into a new market that was in need of cost savings and be able to combine a regulated market with the company’s practice of making efficient utility deliveries. Further, NEE wanted to be able to bring its ability and knowledge of scaling renewable energy in an area that is burdened by extreme energy costs. Between the company’s initiatives in solar energy and knowledge of other sources, NEE stands to be able to generate a very strong value proposition for Hawaii while also continuing to promote its economic moat. So, how have things been moving since the last time we looked at the company… The last two times we have investigated NEE the key aspect for the company has been getting regulatory approval from Hawaii. When we first looked at the acquisition, NextEra was quite confident they could get the deal done in a timely fashion. Since then, things have gone up and down. For example, in April, HE’s CEO came out saying he was confident that the deal would be completed within a year, and the Hawaiian House of Representatives put a resolution in place to complete the deal by June 2016. Given the market is regulated, it is a major decision for Hawaii, consumers, etc. Yet, in the last report, we noted that the Governor of Hawaii had come out at least much less confident in the deal if not against the acquisition. As CEO James Robo noted: Steve this is Jim, obviously the state filed a testimony ten days ago saying that they opposed the deal in its current form and the Governor held a press release where he, press conference where he said he opposed the deal in its current form. I think the key, the keywords there in its current form, they also, the state also listed several conditions that would be, I think just positive for them to think about changing their view. And we are in the process of responding to that testimony and we think we have a very strong case to put forward to the Commission around the benefits to customers, the benefits to customers were actually pretty compelling and I think we’re going be able to make that case as we go forward. So, this was not necessarily a surprise to me that the state filed a kind of testimony that they did and we are going to continued to move forward on laying out our arguments and we look forward to the hearings we’re going to have in December to make our case. This news was not exactly the type of “positive” news that the company had hoped for. Since that comment in July, the Governor has said the process was still very early, and that he is looking forward to the company’s responses to testimony it presented. The process had grinded to halt. In the latest earnings call, the company noted: Steven Isaac Fleishman – Wolfe Research LLC And then, lastly, just could you maybe give us any color or latest thoughts on the Hawaiian Electric deal? James L. Robo – Chairman, President & Chief Executive Officer Sure. So we continue to work hard to get the final hurdle, which is state regulatory approval in Hawaii. We have recently gotten a couple intervenors to either fall away or announce their support, and I was very pleased that the IBEW announced their support for the transaction last week. And we continue to work it. I think my expectation, based on timing right now, is that we’re not going to get any kind of decision from the PSC until next year, and so we’re going to continue to work it and continue to talk to the parties to try to get it across the finish line. That was the company’s only mention in the call of the deal. Outside of the earnings, the news has been moving positively. As Robo noted, the largest union of electrical workers, representing 1500 workers, came out in support of the acquisition. That type of support is the kind that the company needs as they are seeking approval. The issue has come down to that the Governor wants 100% renewable energy in Hawaii by 2045. NextEra has not made those types of promises. Electricity is extremely expensive in Hawaii, so the move to all renewable would dramatically decrease costs and Hawaii’s dependence on shipping in electricity. NextEra came out recently saying that it would take $30B to get to that 100% renewable energy: Eric Gleason, president of NextEra Energy Hawaii LLC, said at a Waikiki business luncheon this week that getting the state off its dependence on oil would cost $30 billion over the next three decades. “There is no utility in the country that has as much on its shoulders as Hawaiian Electric does right now,” Gleason said. “Hawaii needs a financially very strong utility to either make or backstop something like $30 billion of investments over the next few decades. … There is a big need for capital to make all of this happen.” That number has scared the PUC, which approves the deal. They believe that cost will be passed onto customers, which would make high bills rise even more. The idea of HE getting the capital and infrastructure from NEE was that bills would get lower, but NEE argues that if it is predicated on getting to 100% renewable energy…it can brings bills down. Thus, we have the stalemate. With more support being thrown to NEE, the company has more grounds to pressure the government. We will continue to see this issue for the coming months, and the company’s getting the deal done in the timeframe they originally expected does not look likely. Does this materially change the outlook for NEE? It does not change any revenue/profits, but it changes potential revenue and profits. The deal added about 10% to the value of the stock, so if it falls through or is derailed…we could see that type of reduction in prices as well as our model. 2016 Pricing The company’s 2016 pricing will be delayed for us as we don’t see any material change in our current valuations with one more quarter to go in FY 2015 and the Hawaii deal in limbo. For now, we continue to like the $96 price tag we had originally floated at the beginning of the year. For 2016, we are set to see that price tag increase by the rate of earnings increasing, which is estimated at 5%. If Hawaii does go through, this could change this model, so we want to wait to see how this plays out and FY 2015 closes out. Conclusion NextEra has interesting catalysts to 2016, but a lot of the potential for another major run will be predicated on getting Hawaii right. The company’s valuation has come down with the flat move in the share price this year, which does set it up for probably a 5-10% move in 2016. Without success in Hawaii, though, we could see another flat to weak year in FY 2016. Recent issues in Hawaii Electric ( HE ) make me nervous, but the rest of the company’s business is extremely intriguing and strong, which neutralizes my fears there. With PEG still over 2.0, though, we aren’t interested in dipping a toe at this time still.