Tag Archives: investing

Can Airlines Funds Take Off On Profit Outlook, Low Fuel Cost?

The Airline sector is witnessing improving trends right now, and the momentum is much needed to ensure profits for investors in this space. While much of the encouragement comes from fundamentals within the airline space, another key catalyst for the sector’s growth is the slumping oil price. Airline stocks will likely continue their bull run into 2016 as recently reinforced by the encouraging outlook provided by the International Air Transport Association (IATA). Separately, weakness in oil prices, which has lasted for well over a year now, is nothing short of a godsend for the airline space. Airline profits depend largely on fuel prices, which form nearly 30% of operating expenses and are also the major variable component in the industry. Operating expenses of airline companies have gone down considerably as fuel accounts for one of the major input costs for air carriers. Thus, it is time to focus on funds that have investments in the airline space. Please note that there is hardly any fund that focuses solely on airline stocks. However, the sector attracts heavy investments from many mutual funds that focus on the transportation sector. The funds we discuss may not carry a favorable Zacks Mutual Fund Rank at the moment, but an improving trend in the airline space demands attention on them. Airliners Fly High as Crude Hits Ground Stocks in the airline space soared following the Dec 4 decision by the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – to not curb output of crude. A blip came thereafter as Southwest Airlines (NYSE: LUV ) revealed a disappointing outlook with respect to its operating revenue per available seat miles (RASM) for the fourth quarter of 2015. Nonetheless, the low oil price environment makes airline stocks attractive. The drop in oil prices has reduced airline companies’ operating expenses significantly, thereby boosting the bottom line. OPEC’s decision not to curb output despite the slump in prices means that the oversupply will continue to haunt the energy space. This implies good times ahead for airline carriers. Weak oil prices have resulted in tremendous savings and improved bottom lines for carriers in the past quarters. The massive savings have certainly supported the financial health of carriers and prompted them to launch share buyback programs, hike dividend payments and significantly reduce their debt levels. Buoyed by their sound financial health, several carriers intend to invest heavily in upgrading overall facilities for better customer satisfaction. This is likely to result in greater travel demand, improved goodwill and eventually, a higher top line. Although it is true that most carriers struggled to post meaningful revenue growth in the third quarter of 2015 courtesy of a strong US dollar, their bottom lines benefited owing to low fuel costs. IATA’s Outlook Buoys Airliners Further The International Air Transport Association now expects profits in the aviation industry to touch $36.3 billion in 2016 with a net profit margin of 5.1%. IATA also projects profits of around $33 billion in 2015 with net profit margin of 4.6%, marking an improvement from the previous guidance of $29.3 billion, which was released in June 2015. Christmas holidays and summer vacations will contribute to traffic. IATA projects 6.7% and 6.9% growth in air traffic in 2015 and 2016, respectively, with load factor or percentage of seats filled by passengers pegged at 80.7%. IATA also believes that 3.8 billion passengers will travel in 2016. Moreover, increased fleet restructuring programs, retiring older and less efficient aircraft and new aircraft orders are anticipated to enhance the performance level of the company by trimming fuel and operating costs, and rendering a comfortable flying experience. Moreover, most carriers are focused on augmenting ancillary revenues by launching value-added services at affordable rates. Funds In Need of a Turnaround Although there is no airline-specific mutual fund category, the space represents a substantial portion of the transportation sector. Mutual funds from the transportation sector with significant focus on airliners are the ones to watch out for. Not all of them may be carrying a favorable rank right now, but the positives are much needed to turn the tide for them. Fidelity Select Transportation (MUTF: FSRFX ) seeks growth of capital. FSRFX invests the majority of its assets in common stocks of firms mostly involved in providing transportation services or ones that design, manufacture and sell transportation equipment. FSRFX is the only fund that carries a Zacks Mutual Fund Rank #2 (Buy). FSRFX has not been able to stay in the green in recent times, as its year to date and 1-year returns are -16.7% and -13.7%, respectively. The 3- and 5-year annualized returns are, however, respectively 19.2% and 11.8%. Annual expense ratio of 0.81% is lower than the category average of 1.14%. FSRFX carries no sales load. Among the top 10 holdings, FSRFX holds airline companies such as Southwest Airlines, American Airlines Group Inc (NASDAQ: AAL ) and Delta Air Lines Inc. (NYSE: DAL ). Rydex Transportation Fund Investor (MUTF: RYPIX ) invests a large chunk of its assets in domestically traded companies from the transportation sector and in other securities including futures contracts and options. RYPIX may allocate a notable portion of its assets in companies having market capitalization within the range of small to medium size. RYPIX may also invest in ADRs in order to gain exposure to non-US companies and may also invest in US government securities. RYPIX currently carries a Zacks Mutual Fund Rank #4 (Sell). The year to date and 1-year losses of RYPIX are 12.4% and 8.6%, respectively. The 3- and 5-year annualized gains are 19.4% and 11%, respectively. Annual expense ratio of 1.35% is higher than the category average of 1.14%. RYPIX carries no sales load. Among the top 10 holdings, RYPIX holds airline companies such as Delta Air Lines, Southwest Airlines and American Airlines Group. Fidelity Select Air Transportation Portfolio (MUTF: FSAIX ) seeks long-term capital growth. FSAIX invests the major portion of its assets in companies primarily engaged in providing air transport services all over the world. FSAIX focuses on acquiring common stocks of companies depending on factors such as financial strength and economic condition. FSAIX currently carries a Zacks Mutual Fund Rank #4 (Sell). The year to date and 1-year losses of FSAIX are 6.5% and 3.2%, respectively. The 3- and 5-year annualized gains are 23.1% and 15%, respectively. Annual expense ratio of 0.83% is lower than the category average of 1.14%. FSAIX carries no sales load. Among the top 10 holdings, FSAIX has airline companies such as Southwest Airlines, American Airlines Group, Delta Air Lines and Spirit AeroSystems Holdings (NYSE: SPR ), which is one of the largest independent suppliers of commercial airplane assemblies and components. Original Post

Long/Short Equity Funds: The Best And Worst Of November

After posting losses in September and gains in October, Morningstar’s long/short equity mutual fund category was flat for the month of November – but this doesn’t mean there weren’t standout funds. Indeed, one of the worst performers from October was able to bounce back into the top three for November. In this review of the category, we look not only at the one-month returns of the month’s best and worst funds, but also the composition of their three-year returns in terms of alpha and beta, as well as their three-year Sharpe ratios and standard deviations. A quick refresher: Beta refers to the risk level of a security relative to the market. A beta of 1.0 implies the same risk level as the market, while a beta of more than 1.0 means the security (or fund in this case) is riskier than the market. A beta of less than 1.0 implies a risk less than the market. Alpha is the amount of performance in excess of a security’s beta adjusted benchmark. Sharpe ratio is a measure of return (above the risk free rate) per unit of risk – the higher, the better. (click to enlarge) Top Performers in November The three best-performing long/short equity mutual funds in November were: For the second straight month, a Catalyst fund topped the list. But while October saw the Catalyst Hedged Insider Buying Fund (MUTF: STVIX ) lead all long/short equity mutual funds, in November it was the Catalyst Insider Long/Short Fund that led the pack at +7.21%. For the first eleven months of the year, CIAAX returned an even 2%, and its three-year return through November 30 stood at an annualized 4.42%. The fund had a negative alpha (-0.60) for the three-year period, with a three-year beta of 0.39, and a Sharpe ratio of 0.35. The Burnham Financial Long/Short Fund was November’s second-best-performing long/short equity mutual fund, with returns of +5.53%. While its gains lagged those of the Catalyst Insider fund, BURFX’s longer-term numbers are much more appealing: Its three-year return of 20.31%, and alpha of 11.98%, was accomplished with a relatively low level of volatility (9.17% standard deviation) and a beta of just less than half the market (0.45). The fund’s three-year Sharpe ratio of 2.07 is outstanding. Finally, the Turner Medical Sciences Long/Short Fund was the third-best long/short equity mutual fund to own in November, boasting returns of +5.36%. This was a turnaround for the Turner fund, which was the third-worst performer in October, with losses of 4.99%. Over the past three years, TMSCX has returned an annualized 14.61% with a beta of just 0.19. This has resulted in the fund’s alpha of 11.94% ranking just 4 basis points less than the Burnham fund above, despite a much lower 3-year annualized return. However, with it’s higher standard deviation over the period, the fund’s Sharpe ratio stood came it 0.93 for the three-year period, a bit less than half the Burnham fund’s Sharpe ratio. (click to enlarge) Worst Performers in November The three worst-performing long/short equity mutual funds in November were: The Philadelphia Investment Partners New Generation Fund, the month’s worst performer, lost more than the month’s top-performer gained, with a one-month return of -7.55%. Its dismal three-year returns of -5.45% can be broken down into a 0.80 beta and -17.54 alpha, resulting in a Sharpe ratio of -0.49 for the three years ending November 30. The Clinton Long Short Equity Fund hasn’t been around long enough to have three-year return data, but its one-month losses of 4.84% in November made it the second-worst long/short equity mutual fund to own that month. For the first eleven months of 2015, WKCIX lost 13.49% of its value. The Whitebox Tactical Opportunities Fund ( WBMIX ) was November’s third-worst long/short equity fund, with returns of -3.58%. For the first eleven months of 2015, WBMIX generated losses of 19.50%, and its three-year returns of -3.17% through November 30. The fund has a low 3-year beta of 0.13 and a -4.90 alpha. The fund’s three-year Sharpe ratio stood at -0.33 as of November 30. (click to enlarge) October’s Best and Worst: Follow-Up The Catalyst Hedged Insider Buying ( STVIX ), Tealeaf Long/Short Deep Value (MUTF: LEFIX ), and Giralda Manager (MUTF: GDAMX ) funds were October’s top three long/short equity mutual funds, with respective one-month returns of 10.71%, 9.05%, and 8.73%. In November, STVIX returned a category-matching 0.00%, while LEFIX and GDAMX posted respective one-month returns of 3.02% and 0.15%. October’s worst performers were the CMG Tactical Futures Strategy Fund (MUTF: SCOIX ) and the Highland Long/Short Healthcare Fund (MUTF: HHCAX ), which lost 6.74% and 5.54%. In November, those funds continued their losing ways with returns of -2.02% and -1.55%, respectively. Past Performance does not necessarily predict future results.

The Dynamics Of Liquidity And Investing

I’ve been getting questions recently about liquidity , specifically in the context of exchange traded funds ( ETFs ). Liquidity is a hot topic in financial markets these days, so let’s spend a little time going over it. First, we’ll explore what we mean by “liquidity” and then we’ll explain what it means when it comes to ETFs. Defining liquidity When I think about liquidity, I think about a transaction: I am able to buy or sell something at a known price. The more liquid an investment, the easier it is to buy and sell without affecting the asset’s price. More fully, liquidity has three main components: price, time and size. If an asset is liquid, I can trade it quickly, and I can trade a large amount of it, without moving its price. In reality, most investments involve trade-offs between these three components. Want to trade quickly? You may not be able to trade a large amount, or you may impact the price you are going to receive. Want to trade a large amount? Do it slowly, or be prepared to impact prices. A general rule of thumb for liquidity for most investments is that you can get two of the three attributes, but not all three at once. If we consider liquid assets, a large cap stock is a good example. Unless you are trading a significant number of shares, you can generally trade fairly quickly at a price that is close to what you see on the exchange. A home, on the other hand, is relatively illiquid; you can get an estimate on its price, but until a buyer signs on the dotted line and you have a check in hand, it’s unclear what you’ll actually get when selling your home. And it will generally take you a while to sell your home, no matter what its size. Liquidity and ETFs When it comes to a security like an ETF, I can see that it’s trading at a certain price, and I can generally buy or sell that ETF at a price that’s pretty close to the quoted price. I can generally trade fairly quickly, as long as my trade is not large compared to the security’s volume. A large ETF trade is in some ways similar to a large equity trade; I need to trade over time or risk impacting the price. Let’s take it a step further and look at bond ETFs. If you want to go out and buy a bond, you can’t just buy it on the open market via an exchange. Instead you would buy it over the counter, in a negotiated transaction with a broker. The price you would trade at is often unclear, and it can be difficult to trade a large amount, or trade quickly. In fact, some investors may find that individual bonds don’t have any of the three aforementioned features of liquidity. With a bond ETF, which is a basket of bonds traded on an exchange, you have much more price transparency. You can actually see the price at which a bond ETF is trading and have a sense of the price of a trade and how many shares might be available to trade at that price. As the bond ETF trades on an exchange, you can generally trade it with the same speed as an individual stock. The liquidity rule of thumb still applies to bond ETFs; it can be difficult to trade in large size, quickly and without impacting price, but overall, exchange trading liquidity can be greater than liquidity in underlying markets . And that is an improvement that all investors can benefit from. This post originally appeared on the BlackRock Blog.