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401(k) Fund Spotlight: Neuberger Berman Genesis

Summary The Genesis Fund has stayed true to its investment objective, despite financial information providers having trouble categorizing it. The Genesis Fund has consistently outperformed the Russell 2000 indexes over the longer term. The Genesis Fund has lagged its peers over the last five years. The Genesis Fund is clearly a superior small cap option for those who desire to maintain small cap exposure through a bear market. With a forward price to earnings multiple of 23, the “value” focus of the fund is questionable. Introduction I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article it is helpful to understand my approach to investing in 401(k)s . I strive to write these articles for the benefit of both the novice 401(k) investor and the professional asset allocator. Please comment if you have a question. I always try to give substantive responses. Neuberger Berman Genesis Fund The Genesis Fund has the following five share classes: 401(k) plan investors are most likely to encounter either the R6 shares or Trust shares. The R6 shares have the lowest expense ratio at .78, while the Trust shares are a bit higher at 1.10. For the sake of this article I will assume the Investor shares – NBGNX, which are no-load shares with a reasonable expense ratio of 1.01. These shares have a low minimum investment of $1,000 and are the most likely class for retail investors considering the fund outside of a 401(k) plan. Fund Style The Genesis Fund’s stated focus is that of high-quality, smaller capitalization (“cap”) company stocks that tend to lean more towards the value camp. Financial information companies have juggled their label of the fund’s investment objective to fit their “little boxes” and “cookie cutter categories”. Investors searching the websites of various information providers and online brokers will find this fund’s category ranging from small cap value to mid cap growth. Even with the median capitalization of its 145 holdings at $3.2 billion, the fund should not be considered a mid cap fund. Here is why … If an investment fund says they are long term investors in smaller capitalized companies that they believe present good values, then this is what should happen if they are successful. They should end up with companies worth $3 to $5 billion that they paid $1 to $2 billion for five to ten years ago. Another way of looking at this is that the fund should have low portfolio turnover and the largest holdings should be strong performers. My analysis reveals that this is what has been happening with the Genesis Fund. I went back to the Genesis Fund’s holding report from July 31, 2012 and compared it with its current holdings. There were a great deal of similar names. The fund’s average annual portfolio turnover of 17% over the last ten years also confirms this. There were several companies held in 2012-often in much smaller amounts-that now make up some of the fund’s top 10 holdings. The following chart reveals six of these that have been strong performers over the last five years: WST data by YCharts These six companies were West Pharmaceutical Services (NYSE: WST ), Zebra Technologies (NASDAQ: ZBRA ), Church & Dwight (NYSE: CHD ), Sensient Technologies (NYSE: SXT ), ICON Public Limited (NASDAQ: ICLR ), and Westinghouse Air Brake Technologies (NYSE: WAB ). If one must categorize the fund, I think small cap blend (or core) or really just plain small cap equity is the best option. The key takeaway for investors here is the assurance that the fund’s management has a strong track record of doing what they say they are going to do. This parallels with the fact that the fund’s lead managers, Judy Vale and Robert D’Alelio, have been at the helm for more than 16 years now. Performance History When it comes to evaluating the performance of the fund versus a benchmark, the Russell 2000 Index and the Russell 2000 Value Index are good options. This is also what Neuberger Berman uses. The fund should not be compared to mid cap indexes or mid cap funds. The following table shows how NBGNX has fared against these indexes: Annualized as of June 30, 2015 3-Year 5-Year 10-Year Inception (9/27/88) Genesis Fund – Investor Shares 15.0% 15.4% 9.2% 12.5% Russell 2000 Index 17.8% 17.1% 8.4% 9.9% Russell 2000 Value Index 15.5% 14.8% 6.9% 10.8% The further the historical horizon is extended, the greater the fund’s outperformance has been. Near term though, it has lagged the index. There are also a fair amount of small cap oriented funds that have handily outperformed NBGNX over the last five years. Using the Barrons Fund Screener , I compared it to other small cap funds with at least $1 billion in assets (the Genesis fund is very large with almost $12 billion in assets). The following chart provides a few examples of the retail shares of other funds that have done better over the last five years: GTSIX Total Return Price data by YCharts The four peer funds in this chart are Invesco Small Cap Growth – Investor shares (MUTF: GTSIX ), Hodges Small Cap – Retail shares (MUTF: HDPSX ), JPMorgan Small Cap Equity – Select shares (MUTF: VSEIX ), and Brown Capital Management Small Company – Investor shares (MUTF: BCSIX ). Note: Durable Under Fire Though It is important for novice investors to understand that most mutual funds are almost always fully invested. They tend to keep a blind eye toward macroeconomic developments and try to outperform in their little corner of the market. If a bear swipes the market they may not die, but they will most certainly be wounded. The Genesis Fund has an impressive history of outperformance during bear markets. The fund (institutional shares) has logged an annualized return of -18.4% in the last six major bear market periods (May to Aug 1998, Mar 2000 to Sep 2001, May to Sep 2002, Jul 2007 to Mar 2009, May to Aug 2010, and May to Sep 2011). This is an outperformance of at least 10% against all of the following related indexes and peer fund benchmarks: Russell 2000 Value -28.4% Russell 2000 -35.7% Small Value -29.1% Small Blend -31.5% Small Growth -38.2% Portfolio Positioning A 401(k) investor who wants exposure to small caps has good reason to choose the Genesis fund over a small cap index fund. However, in plans with multiple, active small cap options, there may be a better fund available. I am not a buy and hold (blindly) investor. When I have enough evidence of an approaching storm-every cycle has at least one-I get out of equity town. My current forecast calls for another two years of sideways action for the U.S. stock market from the levels we are at now. In 401(k) plans I am focused on large cap funds with high dividend yields to traverse this sideways market. I view the small cap fund/index arena as broadly overvalued. The Genesis Fund bears witness to this. Despite professing a value approach, the fund’s forward Price to Earnings (P/E) multiple as of June 30, 2015 was a whopping 23.1! Sorry, but I don’t call that value. The fund’s miniscule .33% dividend yield is also another kick to my idea of what makes up value. I cover several different small cap companies – a few of which I have written about on Seeking Alpha – that trade at substantially lower multiples and have much higher dividend payments. Conclusion The Genesis Fund is a good car to board, but only on the right train. For those who must always own a small cap fund, for whatever reason, the fund is a good option if you want a bit more protection for a potential bear market. For regular market environments, many 401(k) plan participants may likely have another small cap fund option available that has performed better in recent times. In any market environment, the fund is a better option than a small cap index. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to Americans within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

IDU: This Utility ETF Looks Just Fine, Until You Compare It To VPU

Summary IDU offers exposure to a great sector, utilities, which is excellent for portfolio diversification. The ETF had about 61 holdings, which is fine until you consider that VPU has 83 and the expense ratio is less than a third as high. The largest exposure is to electric utilities, but the breakdown within the utility sector would be better if “multi-utilities” were broken down by source of revenue. As I’m looking over the possible ETF exposures, I’d like to evaluate several options for utility exposure. Utilities are often poorly represented in ETFs and that trend can even occur in ETFs focused on high dividend yields. That can be a shame because utilities are a nice holding for many investors since they provide high yields, moderate levels of volatility when used in a diversified portfolio, and they allow investors to own the producer of a major personal expense. Of course, the expense I’m talking about is the utility bills. So long as the investor is human (a safe assumption?) they are likely to be purchasing the services of one utility company or another. Even if the investor decides to retire in an apartment that includes utilities in the rent, a long term increase in utility costs could drive up rents. Some people may opt to live off the grid with solar power and drink their water from a well, but I’d wager that is a very small portion of my audience. One of the funds that I’m considering is the iShares U.S. Utilities ETF (NYSEARCA: IDU ). Expense Ratio Investors are already paying for the utilities flowing into their house and the utility companies are paying for their own management and infrastructure. It would seem very unfortunate if investors had to add another layer of costs onto their investment by having a high expense ratio. Unfortunately, that high expense ratio is present in IDU as the ETF reports an expense ratio of .43%. No, I don’t care for that expense ratio one bit. For comparison, the Vanguard Utilities ETF (NYSEARCA: VPU ) has an expense ratio of .12%. Can you guess which one I’d rather be paying? It shouldn’t be hard. Largest Holdings The following chart shows the top 25 holdings of IDU and their respective portion of the portfolio. The total portfolio only holds 61 companies, so this is a very substantial portion of the holdings. For comparison, VPU had 83 holdings. The holdings list is fairly standard. In short, the top 10 holdings are the same as the top 10 holdings for VPU and the top 8 are in the same order for each ETF. This appears to be a fairly standard utility ETF. Within the Sector The following chart classifies the holdings based on which part of the utility sector they fall into: I find this chart to be much more interesting than the one that simply breaks it down by company because this method shows at a glance what those companies are producing. There is one weakness to the presentation though because “Multi-Utilities” is not very specific and it represents over 34% of the portfolio. It would be great if the individual companies could be broken down by the portion of their revenue coming from electric, gas, and water services. Then those percentages could be aggregated back to the portfolio level and it would give investors a better feel for how well they could match their ownership of the producers with their own individual bills. From an investment level, that isn’t really necessary but it would be interesting to do and it might encourage investors to save more. Designing an intelligent portfolio structure is very important, but being engaged and making the choice to fund that portfolio is also very important. The biggest weakness I see for many young workers today is a lack of engagement in investing. Using a “hands off” strategy with allocating a large amount of money to Vanguard target date funds is a fine investment strategy. I believe it would outperform many individual investors, but it still relies on having enough engagement to actually follow through with funding the account. Building the Portfolio This hypothetical portfolio has a moderately aggressive allocation for the middle aged investor. Only 30% of the total portfolio value is placed in bonds and a third of that bond allocation is given to high yield bonds. This portfolio is probably taking on more risk than would be appropriate for many retiring investors since the volatility on equity can be so high. However, the diversification within the portfolio is fairly solid. Long term treasuries work nicely with major market indexes and I’ve designed this hypothetical portfolio without putting in the allocation I normally would for REITs on the assumption that the hypothetical portfolio is not going to be tax exempt. Hopefully investors will be keeping at least a material portion of their investment portfolio in tax advantaged accounts. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. (click to enlarge) A quick rundown of the portfolio The two bond funds in the portfolio are the PIMCO 0-5 Year High Yield Corporate Bond Index ETF (NYSEARCA: HYS ) for high yield shorter term debt and the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) for longer term treasury debt. TLT should be useful for the highly negative correlation it provides relative to the equity positions. HYS on the other hand is attempting to produce more current income with less duration risk by taking on some credit risk. The Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) is used to make the portfolio overweight on consumer staples with a goal of providing more stability to the equity portion of the portfolio. is used to create a significant utility allocation for the portfolio to give it a higher dividend yield and help it produce more income. I find the utility sector often has some desirable risk characteristics that make it worth at least considering for an overweight representation in a portfolio. The iShares MSCI EAFE Small-Cap ETF (NYSEARCA: SCZ ) is used to provide some international diversification to the portfolio by giving it holdings in the foreign small-cap space. The core of the portfolio comes from simple exposure to the S&P 500 via the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), though I would suggest that investors creating a new portfolio and not tied into an ETF for that large domestic position should consider the alternative by Vanguard’s Vanguard S&P 500 ETF (NYSEARCA: VOO ) which offers similar holdings and a lower expense ratio. I have yet to see any good argument for not using or another very similar fund as the core of a portfolio. In this piece I’m using SPY because some investors with a very long history of selling SPY may not want to trigger the capital gains tax on selling the position and thus choose to continue holding SPY rather than the alternatives with lower expense ratios. Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. Despite TLT being fairly volatile and tying SPY for the second highest volatility in the portfolio, it actually produces a negative risk contribution because it has a negative correlation with most of the portfolio. It is important to recognize that the “risk” on an investment needs to be considered in the context of the entire portfolio. To make it easier to analyze how risky each holding would be in the context of the portfolio, I have most of these holdings weighted at a simple 10%. Because of TLT’s heavy negative correlation, it receives a weighting of 20% and as the core of the portfolio SPY was weighted as 50%. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio and with the S&P 500. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. Conclusion IDU is offering investors exposure to the utility sector which can deserve being slightly overweight in a portfolio. For ETF investors, it may be hard to get enough utility exposure without specifically buying utility ETFs. From the perspective of risk in the portfolio it looks desirable to include IDU. The fund has only limited correlation and moderate volatility which makes it a nice fit. However, the presence of VPU offering more diversification and significantly lower expense ratios makes the use of IDU questionable. If investors had few ETF options, I would consider IDU superior to having poor diversification. Since investors have a plethora of choices for broad market exposure and even a few decent options for utility sector exposure, I’d rather avoid IDU in favor of VPU. More diversification in the holdings combined with a much lower expense ratio would make it fairly difficult for IDU to outperform VPU over the next twenty years unless there was either a material change in the expense ratios or in the holdings. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Should You Invest In Microcap Stocks

Summary Investing in microcap stocks can be very lucrative. If you have the dedication and time to put into research, microcap investing may be for you. History has shown that a microcap investing strategy can outperform major indices. Why Do I Invest in Microcaps? When I first started investing, I was a full time college student also working full time in a meat department (> 40/week). Not only was I going to school full time and working full time, but I was engaged to my soon to be wife, running a few small business ventures, and reading voraciously (mainly books on finance/economics). Balancing all of these activities while having a social life really was not that easy. So when I started to get into investing, I really was not doing very heavy due diligence. The due diligence that I performed on a company mainly consisted of reading one year’s worth of 10-Ks and 10-Qs, looking/reading other investment research on a chosen stock, and maybe, just maybe writing a quick thesis on why I wanted to invest in that company. Compared to what I do now, my due diligence was pitiful. Since I did not have the time and energy to dig into a company, I pretty much bought into popular companies that everyone else on Wall Street was buying (Apple (NASDAQ: AAPL ), Waste Management (NYSE: WM ), National Oilwell Varco (NYSE: NOV ), Nordstrom (NYSE: JWN ), and Tempur Sealy International (NYSE: TPX )). I made okay returns and the dividends were nice, but the returns that I did make were not exceptional. As time passed, I ended up graduating from college, and getting married. I soon had a lot more time to research companies. I ended up buying a company called Independent Bank (NASDAQ: IBCP ), and within a few months, made > 50% return. That is when I started to realize the potential unfollowed microcap stocks had over large cap stocks. Check out what has happened to IBCP in the past three years. I do not work in a meat department anymore, I am not going to college, and I am not planning a wedding. What I do now is research and write about investing ideas full time. Since I now have the time to dig into companies that others tend to overlook, the microcap world of investing is perfect for me. I have always been the kind of person who does things the majority of individuals do not do (the white sheep/rebel). Investing in overlooked companies that the masses are not piling into is perfect for me. Note: Readers should know that I do not limit myself strictly to microcap stocks. If I see value in a large cap stock, I am not hesitant to take a position, if I see value and opportunity. In fact, a percentage of my portfolio is in a few large cap names (NOV, Ensco PLC (NYSE: ESV ) and Chicago Bridge & Iron (NYSE: CBI )). They are not huge positions and only make up a small percentage of my overall portfolio. As time passes there will be less of a dedication to my portfolio to names like these and more of a dedication to microcap stocks. I would not be surprised to see 100% of my portfolio dedicated to stocks with a sub $50mm market cap in the near future. The Types of Microcaps I Buy There are basically three different microcaps stocks that I buy for my portfolio. The first type, which to me is very interesting and really shows that the stock market is not efficient is the world of NCAV stocks. NCAV stocks are companies that are trading for less than their net current asset value. These stocks are very badly punished companies that look like they are pretty much headed for a bankruptcy. Despite the poor past performance of these companies, they have a proven statistical history of outperforming > 28% average return/year. If you are going to buy a NCAV stock, you must be an active investor. These companies are not buy and hold companies. You buy these companies to get one last puff on that cigar. You can make very good money buying and selling NCAV stocks, but you must be an active investor. Most investors do not like buying broken businesses, so NCAV investing is not for them. Overall, if you want to beat the market, buying and selling NCAV stocks, gives you a very good chance of making the former happen. Note: When Warren Buffett was young, buying and selling NCAV stocks is how he made tons of money. He has said that the years in which he was buying these kinds of companies were his best years ever as an investor. Another kind of microcap stock that I buy are low EV/EBITDA companies. It has been said that the EV/EBITDA ratio could be the single best ratio around. In the past 20 years , low EV/EBITDA stocks have returned 2,227%, which has destroyed the returns of the S&P 500. Now if you incorporate low EV/EBITDA ratios with microcap stocks, you can make a significant return. It has been proven that the smaller the company the better long-term results. Check out the picture below that goes to prove the former. I believe that incorporating the low EV/EBITDA ratio into a microcap strategy can be very rewarding in the long run. The final microcap investing strategy, that I have just started to incorporate in my research is a microcap stock that is growing at a very fast rate > 20%/year. If you can find a microcap stock that is growing at a double-digit rate, staying profitable, and has a very bright future, you may have the potential to invest in a multi-bagger. Take a look at a company called Zagg Inc. (NASDAQ: ZAGG ). Back in the day, you could have bought this company for 20% and are expected to continue. This company would be a great long-term holding at the right price. Command Center (OTCQB: CCNI ) Market Cap 39.05 M Cash 5.15 M Shares Outstanding 65.62 M Debt 1.24 M Revenues 93.50 M Insider Ownership 26.30% EBITDA 5.87 M FCF 7.5 M CCNI has gotten hammered lately since the company is indirectly tied to the energy industry. Despite the stock falling, the company has been able to grow its revenues, and it still remains profitable. Management is currently buying back shares and has plans to continue as well. I really like how this company is FCF positive and the simple business model of this company. CCNI’s EV/EBITDA is 5.26 and is significantly undervalued on a comp basis. These are just a few microcap stocks that I am currently following. As of right now, I hold SPRS and I am planning on taking a position in IWRGF as time permits me to do so. There are a ton of other microcap stocks that I watch and write on as well. I would really love to know what kind of microcap stocks you invest in or are watching. Message me if you have an idea. If it looks intriguing I may do research for you. Should you Invest in Microcaps? Microcap stocks are not for everyone. If you do not have time to dedicate to studying microcap investments, I would suggest not to invest in microcap stocks. I believe that you must be an active investor willing to dedicate tons of time to microcap stocks if you are interested in investing in them. Thus, investing in microcap stocks is not a passive pastime like buying ETFs or mutual funds. But if you are an active investor who loves to do in-depth research, microcap investing may be for you. I have provided a few Seeking Alpha authors below who are great microcap writers. If you are interested in microcaps, I suggest that you follow them. Good luck everybody and happy microcap investing. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long NOV, SPRS, ESV, CBI. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.