Tag Archives: investing

Best And Worst Q1’16: Large Cap Blend ETFs, Mutual Funds And Key Holdings

The Large Cap Blend style ranks first out of the twelve fund styles as detailed in our Q1’16 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Large Cap Blend style ranked second. It gets our Attractive rating, which is based on aggregation of ratings of 35 ETFs and 873 mutual funds in the Large Cap Blend style. See a recap of our Q4’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Large Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 19 to 1507). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Large Cap Blend style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The SPDR MSCI USA Quality Mix ETF (NYSEARCA: QUS ), the FlexShares US Quality Large Cap Index ETF (NASDAQ: QLC ), and the SPDR MFS Systematic Core Equity ETF (NYSEARCA: SYE ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) is the top-rated Large Cap Blend ETF and the Vulcan Value Partners Fund (MUTF: VVPLX ) is the top-rated Large Cap Blend mutual fund. Both earn a Very Attractive rating. The PowerShares Russell 1000 Equal Weight Portfolio ETF (NYSEARCA: EQAL ) is the worst-rated Large Cap Blend ETF and the Goldman Sachs Absolute Return Tracker Fund (MUTF: GARTX ) is the worst-rated Large Cap Blend mutual fund. EQAL earns a Neutral rating and GARTX earns a Very Dangerous rating. The Travelers Companies (NYSE: TRV ) is one of our favorite stocks held by DIA and earns a Very Attractive rating. Since 2004, Travelers has grown after-tax profit ( NOPAT ) by 14% compounded annually. Travelers has tripled its return on invested capital ( ROIC ) from 4% in 2004 to 12% on a trailing-twelve-months (TTM) basis and has generated positive free cash flow every year of the past decade. It should come as no surprise then that TRV is up 80% over the past five years. What may surprise some, though, is that TRV remains significantly undervalued. At its current price of $107/share, TRV has a price to economic book value ( PEBV ) ratio of 0.6. This ratio means that the market expects that Travelers’ NOPAT will permanently decline by 40%. If Travelers can grow NOPAT by just 2% compounded annually for the next decade , the stock is worth $182/share today – a 70% upside. Clean Harbors Inc. (NYSE: CLH ) is one of our least favorite stocks held by GARTX and earns a Very Dangerous rating. Clean Harbors had built a successful business prior to the global recession in 2008-2009. Unfortunately, the company has failed to regain the heights of 2008-2009. Since 2010, Clean Harbors has grown NOPAT by only 3% compounded annually while its NOPAT margin has declined from 8% to 3%. Similarly, the company’s ROIC has fallen from 13% in 2010 to a bottom-quintile 3% on a TTM basis. Meanwhile, the stock remains valued as if Clean Harbors were still operating at pre-recession levels, which makes it greatly overvalued. To justify its current price of $42/share, Clean Harbors must maintain its 2014 pre-tax margin (7.1%) and grow NOPAT by 12% compounded annually for the next 16 years . This expectation seems rather optimistic given Clean Harbors deteriorating margins and profits since 2010. Figures 3 and 4 show the rating landscape of all Large Cap Blend ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: 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.

Raskob’s Folly: When Optimism Fails

Optimism has a funny way of feeding off itself sometimes, bleeding into enthusiasm and excess. You’ve seen this story before with the internet boom and the housing bubble. But before that, it led to the rise of the 1920s, where people like John J. Raskob fueled the easy money market that “Everybody Ought to be Rich”. Raskob’s bold claim in the August 1929 issue of Ladies’ Home Journal was typical for the time: Suppose a man marries at the age of twenty-three and begins a regular saving of fifteen dollars a month – and almost anyone who is employed can do that if he tries. If he invests in good common stocks and allows the dividends and rights to accumulate, he will at the end of twenty years have at least eighty thousand dollars and an income from investments of around four hundred dollars a month. He will be rich. And because anyone can do that I am firm in my belief that anyone not only can be rich but ought to be rich. – John J. Raskob The Roaring ’20s ushered in a new economic prosperity that would last. Or so people thought. Raskob’s idea was simple. Systematically invest $15/month into stocks of good companies. At the end of 20 years, you could live off the $80,000 nest egg that he promised. (Let’s put these dollar amounts into perspective. The average person spent about 18 cents per meal in the 1930s, with an average income around $1,100. By 1950, the average income was about $3,200. So, $15/month – $180 per year – was possible, and interest on $80,000 would easily cover the average person’s income 20 years later.) Raskob’s idea wasn’t too far-fetched… except for his expectations. A month after his interview, on September 3rd, the market peaked at Dow 381, and on October 29th, the market crashed. The Dow wouldn’t see 381 again until 1954. Raskob’s timing was terrible. Or was it? I ran the numbers to see what would happen if someone jumped on the bandwagon and invested $15 on the first of every month starting in August 1929 until the end of 1949. Instead of finding “good companies”, I settled for investing in the Dow (but also ran the numbers for the S&P 500, along with a 60/40 split with 10-year Treasuries). Totals for 15/month Investment from Aug. ’29 to Dec. ’49 Total Investment Dow S&P 500 60/40 Dow/US 10-year 60/40 S&P/US 10-year $3,675 $9,951.70 $9,744.93 $7,924.93 $7,943.37 The S&P 500 and the Dow produced fairly similar results. The $15/month fell far short of Raskob’s expectations, but it shows he wasn’t entirely wrong. Putting money away every month was probably the best idea for the time, since it performed better thanks to the market crash . So, a savvy investor with a secure job, disposable income, trust in the financial system, and an iron stomach could have done just fine. Of course, for the average person, this was literally impossible. If the aftermath of the ’29 crash didn’t scare investors away, the Great Depression did. If they weren’t unemployed, their pay was being cut. Few people trusted their local bank. Why would they trust Wall Street? The average person wasn’t saving or investing. They were trying to survive. (The assumption of frictionless investing – no cost or taxes – covers the rest). But since we’re dealing in hypotheticals, I thought I’d reach a bit further to see if any other investment or strategy got closer to Raskob’s $80,000 target. Other Investment Totals for 15/month from Aug. ’29 to Dec. ’49 Savings Account Gold Small Cap Stocks Large Cap Mom. Small Cap Mom. Large Cap Value Small Cap Value $3,858.48 $2,043.07 $5,108.12 $14,157.04 $37,333.19 $15,730.23 $25,541.50 Everything fell short by more than half (I actually ran the scenario for more options, but left out the middling performers). The benefit of hindsight makes this a fun exercise, but that’s it. Costs, taxes, and the law (you couldn’t own gold after 1933) make it impossible or would severely drag down real results further (accuracy of the data from that far back is another issue to consider). Besides, it’s unlikely the average person suffered through the crash of ’29, the volatility of the 1930s, and the Great Depression and came out unscathed. It’s more likely they never got started. Even though stocks were the best-performing asset over that time, they were also the most hated, which explains a lot. Still, the lessons remain. Excessive optimism causes people to ignore the risk of being wrong. Raskob’s folly was an extremely enthusiastic view of the future, but his call to average into the market was solid advice, because averaging into a depressed market can actually help performance. Hated assets eventually perform well enough to become loved again. And as tough as it might be, saving more money and staying the course probably offers the best protection in case optimism fails you.

Liquid Alternative Investments For Ordinary Investors

Barron’s did a nice special report this week on AQR’s liquid alternative investments. AQR, which is run by Cliff Asness, John Liew and David Kabiller, is a pioneer in the liquid alternatives space and manages an impressive $141 billion in assets. They also happen to be a competitor of mine. My partner, Dr. Phillip Guerra, has developed an entire suite of liquid alternative strategies based on many of the same principles used by AQR. As Barron’s writes, Since U.S. stocks peaked in July, few investments have produced strong returns. Global stocks, junk bonds, and most commodities have declined-in many cases, sharply. And many so-called alternative investments have failed to provide hoped-for diversification benefits. Just look at the big losses suffered by some notable hedge funds. The situation hasn’t been much better among liquid alternatives, or mutual funds that use hedge fund strategies such as merger and convertible arbitrage, long/short equity, and trend-following in futures markets. Yet, against this tough backdrop, a bunch of academics are delivering. Their firm, AQR Capital Management (AQR stands for applied quantitative research), is a distinctive investment manager that seeks to translate academic insights about finance and the markets-such as the appeal of value and momentum investing-into winning quantitative strategies for institutional and retail buyers… Indeed, the stock market selloff since the start of this year has shaped up as a key test of whether liquid alts can deliver the promised diversification and protect investors during downturns. Liquid-alt funds have been rightly criticized for generally disappointing returns during the recent bull market-and high fees, to boot. During a raging bull market, alternative strategies will almost always underperform… as will most traditional long-only active managers. It makes sense to dump every last cent into an S&P 500 index fund and be done. But the kind of market we’ve experienced since 2009 isn’t normal. It was a product of low valuations following the 2008 meltdown and the loosest monetary policy in history from the Fed. But with the market now in expensive territory and with the Fed’s easy money policies slowly on the way out, an alternative strategy makes all the sense in the world, at least with a portion of your portfolio. You want returns that are uncorrelated to the market. You’re not betting against the market, mind you. You’re just looking for something that marches to the beat of its own drum. I like what AQR is doing. But there’s a big problem with it: While they advertise that their alternative funds are liquid, they are all but unattainable for the vast majority of investors. The minimum investment on many of their mutual funds is as high as $1 million. We can do it better. With an investment of just $100,000 (and actually less with our robo-advisor option), we can execute a comparable strategy and do so with far lower fees. To see how our results stack up against AQR and the rest, take a look here . I’m a big believer in the benefits of a long-term buy-and-hold strategy, particularly for younger investors. But I’m also realistic and realize fully that a long-only strategy will go through long periods of underperformance. From 1968 to 1982 – a period of 14 years – long-only investors in U.S. stocks wouldn’t have earned a single red cent. Now, I have no way of knowing if we are about to enter a long dry spell like that. But if you are in or near retirement, doesn’t it make sense to have at least a portion of your portfolio in a strategy that zigs when the market zags? Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. This article first appeared on Sizemore Insights as Liquid Alternative Investments for Ordinary Investors