Tag Archives: investing

How To Think About M&A When It Comes To Your Portfolio

What do mergers and acquisitions have to do with your portfolio? A lot, says BlackRock’s Mark McKenna – especially in today’s market. It’s been a remarkable year for financial markets, highlighted by extreme volatility, severe weakness in commodities and a raging debate about interest rates, among other things. But there’s another ongoing market trend of great importance to investors, one that could offer substantial opportunity: M&A. Merger and acquisition activity has been on a torrid pace in 2015, on track to surpass 2007’s record levels. Through November, more than $4.5 trillion worth of mergers have been announced year-to-date, and the activity in the third quarter was the strongest on record for that period, according to Citi. The flurry of deals is a reflection primarily of three factors: low interest rates, robust corporate balance sheets and a global economy that remains sluggish. Low rates make funding acquisitions more affordable, and companies that have a difficult time growing their earnings when the economy is soft often look for attractive merger candidates to help spur their growth. Mergers, Acquisitions and Your Portfolio So how can investors take advantage of this trend? Well, for starters let’s quickly cover what not to do. Simply guessing at which companies might be takeover targets and buying as much stock as you can is not a good idea. Investors should never buy a stock based simply on a hunch that the company may someday be a buyout target. Instead, investors might consider employing what we call an “event-driven” strategy. Event-driven investing focuses on capturing the value gap created when companies undergo transformative events, or “catalysts.” The idea behind the strategy is to invest in a company undergoing a material change that is expected to impact shareholder value. We define catalysts as either “hard” or “soft.” A hard catalyst, such as an announced merger, tends to have a defined outcome, which creates a more predictable return. A soft catalyst, perhaps a company undergoing a senior management change, can have a range of outcomes. One advantage of these investments is that, because they are focused on company-specific developments and not broader market events, they are less correlated with day-to-day market movements. By extension, such event-driven strategies have the potential to generate positive returns regardless of overall market moves. (click to enlarge) From my perspective, the record M&A activity that we’ve seen this year has created the most attractive opportunity we’ve seen in the last 10 years, with merger spread investments near all-time high rates of returns. When compared to other yield asset classes, including high yield bonds, Real Estate Investment Trusts (REITs) and even many illiquid yield investments, merger spreads may offer higher returns with much less duration risk. As a result, merger investments can potentially provide investors equity-like returns with volatility usually associated with stocks, according to data from Bloomberg and Hedge Fund Research Inc. With the stock market both volatile and near all-time highs, and fixed income yields hovering near historic lows, investors should consider different ways to diversify their portfolios. Event-driven strategies are one way to do that, offering not only the potential for positive returns in both up and down markets, but also potentially reducing portfolio risk. Mark McKenna is Global Head of Event-Driven equity and a Managing Director at BlackRock. This post originally appeared on the BlackRock Blog.

Are You Ready To Invest Like Rothschild?

For many getting started, understanding how to invest can be a challenge. Knowing what to invest and where can seem daunting. For the very wealthy it is business as usual, and they have devised strategies and tactics to make sure their wealth can really work for them, but it is harder for smaller or new investors. According to Richard Dyson (2012), reporting for This Is Money , the very wealthy have focused on creating portfolios and organisations where generally they own a large share. However, in most cases, small investors were not aware that they could invest in these. However, in recent years, changes to regulations have been made such that these sorts of investments are more suitable for smaller investors as well. According to Dyson, one such company to invest in is RIT Capital Partners (“RIT”) ( OTCPK:RITPF ), in which the Rothschilds, an extremely rich family, has a large share. As explained: “Lord Rothschild and his family own 18% of what began in the early 1960s under the name of Rothschild Investment Trust.” It is cited that growth has been achieved to the position where RIT is now worth £1.8 billion, and the Rothschilds own £324 million of that. This has been extremely attractive as a proposition for investment to other private investors, especially as the investment has a superb record over a long history. The assets included are property and hedge funds, among others. History of Wealth The Rothschilds have been growing their wealth for a time span of more than 200 years, and they are considered one of the richest families of all time. Investor Network explains that the family originally made money from the Napoleonic Wars by supporting the side of the English in battling Napoleon. Rothschild was aware that the battle was lost for Napoleon, and he knew this ahead of other investors. This enabled him to purchase much of the stock market at a very favourable price, and when the news came out about Napoleon’s defeat, the market grew tremendously. In addition, the money lent was repaid, and overall, the family did really well out of the war. They continued to do well, and by 1825 they were in such a strong position that they were able to prop up the Bank of England when there was a financial crisis faced. Following this, the family invested in stocks and made shrewd investments and financial decisions that have led to the wealth accrued today. RIT Capital Partners is a good opportunity because small investors have gained significantly over the time it has been up and running. It is reported that the trust has delivered returns, on average, of 12.4 per cent per year. The approach taken is to make sure that investors’ capital is safeguarded as far as possible in the event of stock market crashes. This is beneficial in terms of risk, as there is lower exposure, but it is detrimental when the stock markets rise rapidly, and the investment will be likely to not perform as well as other opportunities in the markets at those times. Investing in RIT will help you invest like the Rothschilds. The cost of the fund is 1.25% per year. Experts say that it is a particularly good investment for pensions. Alternatively, you can learn from the way they operate. The family uses a multi-asset approach, which spreads the wealth across a range of different investments. This includes anything from gold, to shares in a range of high performing companies like eBay (NASDAQ: EBAY ), Walt Disney (NYSE: DIS ) and Samsung ( OTC:SSNLF ). It has also invested in gold, and it has funds that are focused on commodities, including BlackRock Gold and General and Baker Steel Precious Metals. In taking the approach that it does, it holds onto liquidity appropriately, and focuses on long-term benefits rather than short-term gains. Golden Rules of Contrarian Investing The approach taken by the Rothschilds is known as contrarian investing. Basically, those who follow this approach buy when there is bad news and sell when there is good news. It is thought that this is wise, because when there is good news on the stock market, investors are likely to pay a high price for it. On the other hand, when there is bad news, investors are more likely to get a good deal, as others are in fear of buying at those times. There are 5 golden rules of contrarian investing : When you read about it in the newspapers or see it on the news, it is already all over. Buy when everyone wants to sell, and sell when everyone wants to buy. No one sees a bubble when their income depends on it. Don’t take tips or advice, and don’t believe research notes. What is obvious to you is not obvious to others. Rationality and Risk Although it seems like extremely risky investment strategy, it is based on the principle of “rationality” . It might seem a bit contradictory, but it has a sense, as rationality is based on healthy evaluation of any financial decisions apart from current trends or experts’ advice. The latter, in turn, might be over-reliable, or under/overpriced. Not Contrarian Investment Strategy Contrarian Investment Strategy While efficient market hypotheses are based on stock prices reflecting the financial situation of industry, company or economy in question, the contrarians believe that the market can be beaten by keeping a rational investing viewpoint. They do it by being independent thinkers and controlling their optimistic and pessimistic feelings. To become a contrarian investor, you’ll need to go against the market trends, against the crowd and against social pressures. You’ll need to go for an optimism visible to yourself only. Uncertainty is a right time for investment for a contrarian investor, who will need to have a lot of patience as well as time for such a risky long-term strategy. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

5 Must-See Economic Charts Show Why Stocks May Stumble In 2016

On your mark. Get set. Terrible. How do we know the economy is slowing down rather than picking up? The treasury yield curve is flattening. Key credit spreads are widening. The manufacturing segment is contracting. Labor market conditions are moderating. And the consumer is spending less. Everyone has a guilty pleasure or three. Mine? I am addicted to Seth MacFarlane’s “Family Guy.” I cannot get enough of outrageously random references on everything from a pizza place’s version of a salad to writers plying their trade at Starbucks. Underneath it all are characters whose comments are outlandish and whose behaviors are impetuous or harebrained. This morning, a particular exchange in a Family Guy episode is stuck in my head. Peter Griffin is blackmailing his father-in-law about an extra-marital affair. As part of the extortion, Peter requires the father-in-law to produce a list of exceptional catch-phrases. (Peter wants his own catch-phrase attributable to him.) One of the catch-phrases that he admires is as inane as it is nonsensical. “On your mark. Get set. Terrible.” Why is this scene playing on a loop in my head right now? Perhaps it has to do with the Federal Reserve’s imminent directional shift with respect to borrowing costs. Or maybe it has to do with the current state of the economy. Or even more likely, the catch-phrase aptly describes what is likely to happen to risk assets when the Fed is hiking overnight lending rates into a decelerating economy. How do we know the economy is slowing down rather than picking up? The treasury yield curve is flattening. Key credit spreads are widening. The manufacturing segment is contracting. Labor market conditions are moderating. And the consumer is spending less. Let me start with the all-important yield curve. A steepening curve is indicative of a healthier economic backdrop whereas a flattening curve is indicative of weakness in an economy. Granted, a flattening curve by itself is not a death blow for an expansion. On the other hand, the less the difference between long maturities (e.g. 25 years, 30 years, etc.) and short maturities (e.g., 1 year, 2 years, 3 years, etc.), the less confidence the financial world has in the well-being of an expansion. Right now? Investors have less confidence in the well-being of the current expansion than they did when the Fed put plans in motion for its awe-inspiring QE3 stimulus back in 2012. Beyond the yield curve’s warning about the economy as well as riskier assets like stocks, we have the widening of 10-year treasuries and comparable corporate bonds. For example, six months ago, the Composite Corporate Bond Rate (CCBR) was at 3.85% and the 10-year Treasury was at 2.4%. Today, the spread has widened with the CCBR at 4.32% and the 10-year treasury at 2.22%. The jump in this credit spread from 1.45% to 2.10% – 65 basis points – is significant for just 6 months. There’s more. One can investigate the risk preferences of investors by comparing the lowest end of the investment grade corporate bond (Baa) spectrum as it compares with a comparable 10-year treasury. Not only has the spread moved nearly 100 basis points in the last year – from 2.2 percent to 3.2 percent – but the same move from 2% to above 3% in this spread preceded the last two recessions. Still not persuaded? Let’s take a look at one of the most consistent economic forecasting tools: The Institute For Supply Management’s Purchasing Managers’ Index (PMI). Economists tend to interpret PMI in two ways – on a single reading as well as over a time horizon. In essence, a percentage over 50 expresses manufacturing health and a percentage under 50 expresses a manufacturing recession. On an absolute basis, November PMI came in at 49.8. We are already in pretty bad shape. More troubling, however, is the persistent downtrend over the last 12 months. Keep in mind, the same type of downtrend preceded the real estate inspired Great Recession. What’s more, when the Fed acted to stimulate the U.S. economy in 2009 as well as 2012, PMI expanded handsomely. Based on what the manufacturing sector is telling us, does it make sense that the Fed is hell-bent on hiking overnight lending rates now? Wouldn’t it have been more “opportune” to do so immediately after QE3 ended in 2014? From my vantage point, the timing of the Fed’s directional shift is on the wrong side of history. Contraction in the manufacturing segment, the flattening of the treasury curve and the widening of credit spreads are signs of economic deceleration. Is it wishful thinking to place all of our hopes in the service sector basket? Probably not. Take a look at the state of retail sales. The last time that year-over-year retail sales looked this anemic, the Federal Reserve shocked and awed the country with its boldest ever stimulus program. In complete contrast, the Fed is gearing up to set a course for gradual tightening. If risk assets like stocks are going to power ahead to new 52-week record highs, they’re going to need that course to be as gradual as a snail crossing a 5-lane highway. (And the snail better hope it does not get crushed by a car as it attempts to cross!) Still not convinced that the economy is on shaky ground? Still think the Fed is invincible with respect to its policy wisdom? Then take a look at the Fed’s own Labor Market Conditions Index (LMCI). The model incorporates labor market conditions across 19 underlying indicators. Just this month, November’s reading came in at a less-than-promising 0.5. That was revised down from 2.2 in October. Equally troubling, there have been 12 negative revisions with only 6 positive revisions over the last year and a half. When the LMCI drops below zero, it is meant to be a warning to economists that labor market conditions are contracting. The current reading of 0.5, then, doesn’t exactly promote warm and fuzzy feelings with regard to claims that labor market is healthy. What’s more, each of the last five recessions were preceded by an LMCI reading below zero. With the current reading of 0.5, is the Fed is genuinely confident about the well-being of the labor market? Is the chatter about “nearing full employment” more of a smoke screen to distract others from discussing the Labor Market Conditions Index (LMCI) in greater detail? Why are voting members of the Fed’s Open Market Committee (FOMC) downplaying the fact that the percentage of working-aged individuals (25-54) in the labor force continues to evaporate? Millions of working-aged Americans (25-54) are not counted as part of the headline unemployment rate such that prospects for the prime working-aged demographic (25-54) haven’t been this grim since the early 1980s. The economy is fragile. If the economy were humming along, the treasury yield curve would be steepening, not flattening; if the backdrop were rosy, key credit spreads would be coming together, not widening. If the economy were firing on all cylinders, manufacturers would be growing their businesses, not making less stuff; households would be spending more each year, not increasing their savings and holding back on holiday purchases. Additionally, the percentage of working-aged individuals in the labor force (25-54) would be growing, not disappearing; labor market conditions via the LMCI would be vibrant, not wobbly. Now, if someone wants to make a case that the economy’s shakiness is irrelevant to the near-term or intermediate-term direction of stock prices, he/she might be able to argue it. However, history suggests otherwise. For one thing, a contraction in earnings (a.k.a. “earnings recession”) is already in effect. Earnings contraction typically portends weaker economic output as well as inferior total returns in the stock market. In fact, corporate earnings on the S&P 500 have declined 14% year-over-year – from $106 to $91. Even the Wall Street Journal/Birinyi Associates Forward P/E Ratio of 17.4 – a ratio that is 25% higher than the 35-year average Forward P/E of 13 – would require 33% earnings growth over the coming 12 months. Is this economy going to witness an industrial/energy revival as well as extraordinary demand for U.S exports to support 33% earnings growth over the next year? Not likely. Stocks will only be moving from overvalued to insanely overvalued. Second, there’s a remarkably strong link between profit margins and recessions. Not that long ago, Jonathan Glionna at Barclays’ noted the relationship between shrinking profit margins and recessions for the last seven business cycles, going back to 1973. He wrote: The results are not encouraging for the economy or the stock market. In every period except one, a 0.6% decline in margins in 12 months coincided with a recession. Already, profit margins have declined 60 basis points. Will stocks and the U.S. economy be more like 1985, then? Or will they be more like 1973-1974, 1981-1982, 1987, 1990, 2000-2002 and 2007-2009? For my moderate clients, I am maintaining an asset allocation that is less “risky” than normal. Whereas it might be appropriate for a moderate client to have 70% equity exposure across all stock types (e.g., large, small, foreign, emerging, etc.), we have 60% primarily dedicated to the large company space. Some of the ETFs that we own include the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), the iShares Russell 1000 Growth ETF (NYSEARCA: IWF ) and the Technology Select Sector SPDR ETF (NYSEARCA: XLK ). Similarly, it might typically be appropriate for a moderate client to own 30% across all income assets (e.g., investment grade bonds, convertibles, higher-yield, master limited partnerships, short maturity, long maturity, etc.). However, we have 25% primarily dedicated to investment grade bonds with intermediate maturities. Some of the ETFs that we own include the SPDR Nuveen Barclays Municipal Bond ETF (NYSEARCA: TFI ), the iShares Core Total U.S. Bond Market ETF (NYSEARCA: AGG ) and iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ). The remaining 15%? Cash and cash equivalents. In addition, if the economy worsens and market internals degenerate and stock valuations become obscene, I would make a tactical decision to raise cash levels. There’s only one way to acquire assets at lower prices. You’ve got to have the cash on hand to take advantage when the world seems to be falling apart. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.