Tag Archives: investment

Warren Buffett’s Stellar Record In Defying Economic Gravity

One of the more intriguing observations in Berkshire Hathaway’s new letter to shareholders is Warren Buffett’s reference to what I like to call economic gravity, a.k.a the law of large numbers. There are several ways to keep it at bay (maybe), but in the end it wins no matter what you do. Buffett and company, of course, have an extraordinary history of excelling where so many others have stumbled in this regard. But an unusually long run of success is taking its toll. As Buffett himself recognizes, gravity’s pull is increasing on Berkshire’s prospects. The observation inspires some brief ruminating on how to think about economic gravity generally in the realm of designing and managing investment portfolios. Let’s begin with the salient fact that deserves to precede any discussion of investing that ties in with Buffett, namely: he’s an anomaly in terms of his investment record. That’s something to cheer about if you’ve been a Berkshire shareholder over the last 50 years. But he’s managing expectations down these days: The bad news is that Berkshire’s long-term gains – measured by percentages, not by dollars – cannot be dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big. I think Berkshire will outperform the average American company, but our advantage, if any, won’t be great. Eventually – probably between ten and twenty years from now – Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings… Success ultimately plants the seeds of its own destruction… or mediocrity. Buffett, of course, has skirted this curse quite spectacularly through the decades, largely through an uncanny mix of raw talent and steely discipline. A handful of other investors have achieved something similar over long periods of time, but theirs is a tiny club and membership opportunities are limited in the extreme. Accordingly, the overwhelming majority of investment results fall within two standard deviations of the median performance for a relevant benchmark, and that’s not going to change… ever. We’re all fishing in the same pond. The critical differences that separate portfolios (and results) come down to two key factors: asset allocation and rebalancing. Buffett, of course, has opted for a fairly unique asset allocation, as reflected in the companies he’s purchased through the years. The list is a reflection of his talents as an analyst. It’s fair to say that he’s favored a degree of concentration, in large part due to his well-founded confidence in his capabilities to identify value. As for rebalancing, he largely shuns that aspect of portfolio management, which is a direct function of his confidence in security selection. It’s been a winning mix, in large part, due to talent. Concentrated bets with minimal rebalancing has been the basic strategy that’s kept economic gravity to a minimum at Berkshire through time. The results speak for themselves. But gravity- mediocre performance – wins in the end. The best-case scenario is minimizing its bite for a lengthy run, which surely describes Berkshire’s history. For mere mortals in the money game, however, gravity tends to weigh on results much sooner. The reason, of course, is a simple but extraordinarily powerful bit of wisdom attributed to Professor Bill Sharpe a la “The Arithmetic of Active Management” : Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. There is a finite amount of positive alpha (market-beating performance) and it’s financed exclusively by negative alpha. Buffett’s spectacular achievements over the past 50 years have come at the expense of countless losing investment strategies. But having beaten the grim reaper of financial results for so long, the game is getting harder, as it must. The key point is that mediocrity beckons for every investor… eventually. For some of us (very few of us!) the day of reckoning is far off, due to talent and perhaps even some luck. But for the vast majority of investors (professional and amateur) this is one of those rare instances in money management when the future’s quite clear. This outlook suggests that it may be best to embrace mediocrity from the start via index funds and focus on those aspects of portfolio design and management where the odds look a bit more encouraging for enhancing results a bit. Whereas Buffett favored concentration and minimizing rebalancing, the average investor should do the opposite. In short, hold a multi-asset class portfolio, keep the mix from going to extremes (i.e., periodic rebalancing), and use index funds to keep costs low. It’s the anti-Buffett strategy, which is exactly the wrong strategy if you’re Warren Buffett. Then again, if you wait long enough, perhaps this advice becomes relevant even for the Oracle of Omaha.

Gundlach’s DoubleLine Launches First ETF

By Alan Gula Pacific Investment Management Co. (PIMCO) is facing an investor confidence crisis. The storied bond firm experienced over $150 billion of mutual fund outflows in 2014. And PIMCO’s flagship Total Return Fund is now 54% smaller than it was at its peak in April 2013, when assets under management (AUM) reached $293 billion. The exodus intensified after the abrupt and unceremonious departure of Co-Founder Bill Gross in September 2014. But one firm has benefited greatly from the turmoil at PIMCO : DoubleLine Capital. Headed by Jeff Gundlach, DoubleLine saw its 13th consecutive month of net inflows in February, following a record monthly net inflow in January. With good reason, Gundlach is being hailed by many as the new “bond king.” And just last week, Gundlach’s DoubleLine launched its first exchange-traded fund (ETF), which will surely intrigue fee-conscious fixed-income investors. DoubleLine has partnered with ETF pioneer, State Street Global Advisors, to offer the SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ). DoubleLine’s lineup includes successful open-end mutual funds and closed-end funds, but this is its first ETF. The firm will actively manage TOTL, allocating capital among different fixed-income sectors using a top-down macroeconomic approach and selecting securities via bottom-up analysis. With 114 funds, the ranks of actively-managed ETFs are growing. However, with under $20 billion in aggregate AUM, it’s still a nascent area. PIMCO’s Total Return ETF (NYSEARCA: BOND ) is perhaps the most popular actively-managed bond ETF and has $2.5 billion in AUM. Although bond fund investors are typically long-term oriented and don’t necessarily need intra-day trading liquidity, ETFs often carry lower fees than their mutual fund counterparts. This is the case with TOTL, which has a net annual operating expense of 0.55%. This compares favorably to the investor share class of the DoubleLine Total Return Bond Fund N (MUTF: DLTNX ), which carries a fee of 0.73%. The institutional shares levy a 0.48% expense ratio, but you’ll have to pony up $100,000 to meet the minimum investment requirement. DoubleLine’s Total Return Bond Fund outperformed 91% of its peers in 2014, according to Bloomberg data. Like DoubleLine’s flagship fund, TOTL is an intermediate-term bond fund… but its mandate is a bit broader. Investments can include Treasuries, mortgage-backed securities (MBS), domestic and foreign investment-grade corporate bonds, foreign government bonds, including emerging markets, floating rate securities, etc. The fund will maintain at least 20% of its assets in MBS or securities with government guarantees, whereas DLTNX aims to maintain MBS exposure of 50% or greater. DoubleLine’s tactical ETF may invest up to 25% of its net assets in high-yield bonds. The fund will target a lower duration (interest rate risk) than that of the benchmark Barclays U.S. Aggregate Bond Index. Therefore, a rising interest rate environment (which is not my forecast, but is possible) should have a muted impact. DoubleLine’s first ETF, and its latest in an array of quality offerings, is an exciting development for both the firm itself and fixed-income investors looking for additional fund choices and lower fees. At its peak, PIMCO managed over $2 trillion. At the end of 2014, DoubleLine managed a much smaller, but quickly growing, $64 billion. Of course, performance, not size, should be used as a yardstick for greatness. And there’s no doubt in my mind that DoubleLine is already a giant in the industry. Original Post

Cleco (CNL) Bruce A. Williamson on Q4 2014 Results – Earnings Call Transcript

Cleco Corp. (NYSE: CNL ) Q4 2014 Earnings Call March 02, 2015 9:30 am ET Executives Robbyn Cooper – Manager, Investor and Public Relations Bruce A. Williamson – Chairman, President & Chief Executive Officer Thomas R. Miller – Senior Vice President and Chief Financial Officer Darren J. Olagues – President, Cleco Power LLC Analysts Paul T. Ridzon – KeyBanc Capital Markets, Inc. Brian J. Russo – Ladenburg Thalmann & Co., Inc. (Broker) Operator Welcome to the Cleco Corporation Fourth Quarter 2014 Earnings Call. My name is Laura, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Robbyn Cooper, Manager of Investor and Public Relations. Robbyn, you may begin. Robbyn Cooper – Manager, Investor and Public Relations Good morning, and welcome to Cleco Corporation’s 2014 fourth quarter and year-end earnings call. You can access this call and slide presentation live via the Internet from Cleco’s website at www.cleco.cominvestors. Telephone and Internet replays can be accessed through our website. The dial-in number for the telephone replay is 888-843-7419 if in the U.S., or 630-652-3042 if outside the U.S. The conference ID is 38458256. With me on the call today is Bruce Williamson, Chairman, President, and Chief Executive Officer of Cleco Corporation; and Tom Miller, Senior Vice President, Chief Financial Officer and Treasurer; along with other members of Cleco management. Before we begin, please keep in mind that during the conference call, we will make some forward-looking statements. These statements are subject to many risk and uncertainties. Actual results may differ materially from these contemplated in our forward-looking statements. Please refer to our cautionary note regarding forward-looking statements and risk factors in various reports filed with the U.S. Securities and Exchange Commission, including our 2014 Annual Report on Form 10-K and current reports on Form 8-K. In addition, please note that the date of this conference call is March 2, 2015, and any forward-looking statements that we may make today are based on assumptions as of this date. And with that, I will turn the call over to Bruce. Bruce A. Williamson – Chairman, President & Chief Executive Officer Thanks, Robbyn. Good morning and thank you for joining us. This morning, we’ll review the 2014 fourth quarter and full year results. Let’s start with the agenda for today’s call, which is on slide 3 of our presentation for those of you following along via the webcast. I’ll begin today’s call with an update on the merger transaction and a recap of 2014 accomplishments. Tom will then discuss fourth quarter and year-end financial results and I’ll finish up the call with a discussion of our objectives for 2015 and then we’ll move to Q&A. Please turn to slide 4. As discussed in our previous call last October, the company announced an agreement to be acquired by a group of North American-based long-term infrastructure investors led by Macquarie Infrastructure and Real Assets or MIRA and British Columbia Investment Management Corporation, also known as BCIMC. In February, we were pleased to receive notification that all four corporate governance and shareholder advisory firms had joined our board in recommending that both the merger-related votes be approved. Last Thursday, we held a meeting of our shareholders to vote on the proposals related to the merger. I’m pleased to report that our shareholders overwhelmingly approved the merger transaction. The merger proposal passed with a vote of more than 94% of votes cast, which is equal to approximately 77% of all shares outstanding. This overwhelming vote of confidence for management, the board of directors and the transaction shows that we structured a transaction that our shareholders see value in. We’ll now turn our focus towards the remaining regulatory approvals needed to close the transaction. On February 10, we filed our merger application with the Louisiana Public Service Commission and that filing can be found on our homepage. Independent consultants and legal counsel selected by the LPSC in December will help them review the application. The LPSC staff has begun the discovery phase of the review and, in the coming months, an administrative law judge will set a procedural schedule for the timetable for the application process. The remaining applications, including among others the Federal Energy Regulatory Commission or FERC, Hart-Scott-Rodino or HSR are expected to be filed later this month. In structuring the merger agreement, we work to ensure that Cleco will remain a Louisiana-based company with local operations and local management. We believe our proposed regulatory commitments address the LPSC’s concerns and represent our commitment to our employees, retirees, customers, and the communities we serve. We’re exceptionally pleased with the outcome of the shareholder vote and will continue to work through the approval process to obtain the remaining regulatory approvals. We still expect the transaction to close in the second half of 2015. I’ll now turn to slide 5 to recap 2014 accomplishments. In addition to announcing the strategic transaction, we also delivered on key regulatory and strategic initiatives. We produced another strong year and reported operational earnings of $2.74 per share, up $0.21 per share when compared to 2013, which puts us near the top-end of our earnings guidance range of $2.65 per share to $2.75 per share. Positive drivers for the year included higher revenues associated with the start of the wholesale contract with Dixie Electric Membership Corporation or DEMCO, a favorable multi-year settlement with taxing authorities and ongoing cost management efforts. These positive drivers helped to offset mild weather for the year, and the rate decrease and customer refund associated with our formula rate plan extension that began in July. Our strong financial position prompted us to raise the annual dividend on the company’s common stock to $1.60 per share, which represents a 10% increase. This marks the sixth dividend increase in the last 4.5 years. Finalizing the formula rate plan was perhaps the most important regulatory accomplishment. The rate plan extension, which went into effect July 1, extends our previous rate plan design by four years. The extension did reduce our target ROE to 10% from 10.7%, but it also retained some customer sharing provisions. Importantly, the extension finalized the rate treatment of the Coughlin Power Station, which we transferred to our regulated utility in March. And overall it reduced forward rates to customers by about $34 million annually, which is in large part due to cost management efforts of the last 3.5 years along with the reduction in target ROE and thereby reset our earnings downward to the guidance range that we issued in late 2014. Coughlin Power Station was the last remaining asset in our unregulated business. Following the completion of the transfer, our company is streamlined to focus on the regulated utility subsidiary. Coughlin is a combined cycle gas-fired unit and it increases the efficiency of the generation fleet and provides low-cost power for all retail and wholesale customers. Moving on, last year we were successful in negotiating a tax settlement with a state taxing authority. The settlement produced a benefit to earnings that was recorded in the third quarter of 2014 and the settlement is favorable for both the company and the state, and will provide clarity on future tax treatment of agreed-upon items. And with that, I’ll now turn the call over to Tom to discuss our fourth quarter and year-end financial results. Thomas R. Miller – Senior Vice President and Chief Financial Officer Thanks, Bruce. (7:24-7:29) of our fourth quarter operational results. GAAP earnings were $0.35 per share for the fourth quarter of 2014, a $0.06 decrease compared to the fourth quarter of 2013. Operational earnings for the quarter were $0.60 per diluted share, a $0.19 increase compared to the fourth quarter of 2013. Lower O&M related to outages at our generation facilities and a gain on the sale of property drove operational earnings for the quarter. Operational earnings exclude items associated with tax levelization expense, which was $0.05, and merger transaction cost, which were $0.20 in the fourth quarter. Looking from left to right on the operational reconciliation chart, Cleco Power’s non-fuel base revenue declined $0.09 per share from this time last year. Higher revenues primarily to a new wholesale customer increased earnings by $0.06 per share. A lower rate refund associated with site specific customers increased earnings by a $0.01. These increases were offset by $0.09 per share as a result of lower retail customer usage and milder weather. And the 2014 formula rate plan extension decreased revenue by $0.07 per share. Other expenses increased earnings by $0.21 per share due to $0.13 per share related to fewer planned outages at our generation facilities this past quarter compared to the fourth quarter last year; $0.06 per share related to a gain on the sale of property, $0.05 per share of lower taxes other than income and $0.03 per share related to lower depreciation and amortization expense. These increases were partially offset by $0.03 per share from the absence of the recovery of capacity expense related to the Coughlin tolling agreement, $0.02 per share related to higher capacity cost associated with wholesale contracts and $0.01 per share of higher miscellaneous expenses. Interest expense was lower and increased earnings by $0.03 per share. $0.02 were related to the absence of a surcredit customer giveback, which is now included in base rates as a result of the FRP extension, and $0.01 per share of lower miscellaneous charges. And finally, lower income taxes increased earnings by $0.04 per share due to $0.03 per share of miscellaneous tax items and $0.02 per share of tax expense to reflect the annual projected tax rate. This was partially offset by $0.01 per share due to lower tax credits. Now, please turn to slide 7 for a review of year end results. For 2014, GAAP earnings were $2.55 per diluted share, a $0.10 decrease compared to 2013. Operational earnings for 2014 were $2.74 per share, a $0.21 increase compared to 2013. As a reminder, operational earnings exclude non-operational items associated with $0.01 benefit from Acadia Unit 2 indemnifications, a $0.03 gain from insurance policies and $0.23 associated with the merger. Again, looking from left to right on the reconciliation chart, Cleco Power’s non-fuel base revenue was up $0.08 per share from this time last year. Higher revenues primarily from wholesale business growth including the contract with DEMCO increased the earnings by $0.35 per share. These increases were offset by a $0.22 decrease related to the one-time customer refund in September as part of the formula rate plan extension and $0.05 per share related to lower customer usage and mild weather for the year. Other revenue increased earnings by $0.03 per share due to transmission revenue as a result of joining MISO. Other expenses decreased earnings by $0.15 per share, primarily due to $0.18 per share from the absence of the recovery of capacity expense related to the Coughlin tolling agreement. As Bruce stated earlier in the call, Coughlin Power Station has now included base rates as part of the FRP extension. $0.04 per share related to higher depreciation and amortization expense, $0.04 per share related to higher capacity cost associated with wholesale contracts, and $0.02 per share related to higher planned outages at our generation facilities. These decreases were partially offset by $0.06 per share of lower taxes other than income, and lower taxes related to favorable settlement with taxing authorities. $0.06 per share related to the gain on the sale of property, and $0.01 per share, related to lower loss on disposal of assets related to the Coughlin outage. Interest expense was lower and increased earnings by $0.11 per share due to $0.06 per share from favorable settlements with taxing authorities, $0.04 related to the absence of a surcredit credit customer give back, and $0.01 per share of lower miscellaneous charges. AFUDC earnings – increased earnings by $0.02 per share due to MATS capital spend. And finally, lower income taxes increased earnings by $0.12 per share, primarily due to $0.18 per share of lower taxes due to favorable settlements with taxing authorities, and $0.02 per share of lower miscellaneous tax items. These benefits were partially offset by a $0.08 per share due to lower tax credit. I will now turn to slide 8 to discuss our 2015 earnings guidance. On last quarter’s earnings call, we issued our 2015 consolidated operational earnings guidance of $2.28 to $2.38 per diluted share. This earnings guidance is based on normal weather, reflects a full year of operations under the new FRP extension, assumes an effective tax rate of approximately 36%, and excludes adjustments related to life insurance policies and merger transaction cost. Cleco will continue to operate in the ordinary course of business until the merger closes. Prior to the closing of the transaction, Cleco’s ability to buy back stock or make tax-based investments without the consent of the new owners is generally limited to the ordinary course of business. Bruce will give some closing marks. Bruce A. Williamson – Chairman, President & Chief Executive Officer Thanks, Tom. Before going to Q&A, I want to take a few minutes to address our near-term strategic objectives and then we’ll take your questions. Our most important task for 2015 is obviously to finalize the regulatory and other approvals required to complete the merger transaction. As I stated earlier on the call, we anticipate a closing date in the second half of 2015. Over the last four years, our shareholders have received an exceptional return on their investment as shown by an approximate 90% total shareholder return, including the premium associated with the upcoming merger. Another way to think about the value of the transaction is when you apply 2015 earnings to the offered share price of $55.37, we’re trading CNL through the transaction at a PE multiple of approximately 23.8 times the midpoint of our 2015 operational earnings guidance, which is about 50% to 60% higher than where the electric utility industry trades today. Lastly, another way to think about it is our earnings or rate base which drives the earning power would need to be 50% to 60% higher than what it is today to realize enough earnings to support this price point. In summary, we achieved a very full valuation for our public shareholders and their support of the merger vote shows they understand this. Importantly, however, this transaction also benefits all of our stakeholders. Our new owners will ensure that Cleco remains to be locally managed and operated, and the transition for our customers and communities will be seamless. Our employees and retirees will retain the same pay and benefits and Cleco will remain dedicated to its core business of safe operations and reliable power and prompt customer service. And with that, we’ll open the call for questions. Question-and-Answer Session Operator And our first question comes from Paul Ridzon. Paul, your line is open. Paul T. Ridzon – KeyBanc Capital Markets, Inc. When do you expect the procedural schedule to be filed? I’m sorry, I missed that. Bruce A. Williamson – Chairman, President & Chief Executive Officer Paul, I’ll let Darren answer that one. Darren J. Olagues – President, Cleco Power LLC Paul, we have to get through the intervention period first, right, which ends on March the 10. Then we’ll proceed towards that as part of the next step. So I don’t have a specific answer for you right now, but I guess the next milestone, if you will, now that the application has been filed with the 30-day window for the interveners, is this March 10 date. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Okay. And then, is there some weather sensitivity at the industrial side? They were down I think 13% this quarter or is that just some planned outage or something? Bruce A. Williamson – Chairman, President & Chief Executive Officer One of our customers has a planned outage that brought down some of the industrial use, that is true. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Okay. Thank you. Operator And our next question comes from Brian Russo. Brian, your line is now open. Brian J. Russo – Ladenburg Thalmann & Co., Inc. (Broker) Hi. Good morning. Bruce A. Williamson – Chairman, President & Chief Executive Officer Hey, Brian. Brian J. Russo – Ladenburg Thalmann & Co., Inc. (Broker) Just curious on the independent consultant review of the merger agreement. Is there some sort of formal process there, meaning will that analysis be made public and/or be discussed in some sort of upcoming open meeting? Bruce A. Williamson – Chairman, President & Chief Executive Officer Darren? Darren J. Olagues – President, Cleco Power LLC Yeah. I mean, ultimately we – like our past practices, we hope to have a settlement proceed towards the commission ultimately for the vote. And in that, there is testimony that’s provided by the consultants in that, and so, the essence of their analysis will be reflected in that testimony. Brian J. Russo – Ladenburg Thalmann & Co., Inc. (Broker) Got it. Okay. Great. Thank you very much. Operator Okay. And I’m actually seeing no questions at this time. Bruce A. Williamson – Chairman, President & Chief Executive Officer Okay. Thank you for your questions this morning. As we close this investor call, I’d like to recognize the work of Sybil Montegut and Mallory Biegler who comprise our investor team. They were nominated as finalists by institutional investors to be an all American IR team, and it’s an honor to have them be named as finalists by the input and voting of our largest institutional investors. Obviously, if anyone has any questions after the call today, please give Mallory or Sybil a call. I’d also like to commend (19:38) and the rest of the safety department along with all of our employees for their continued focus on employee safety. We initiated a complete top to bottom rework of our safety program in late 2011 and they’ve continued to seek best practices over historic practices in all facets of safety, and today we’re firmly among the best performing utilities in terms of safety performance. We do not take this performance improvement lightly, however, and we want every employee to continue to focus in 2015 and strive for Target Zero. I also would like to end the day with just a final thanks for our shareholders to their resounding support for the strategic transaction with Macquarie and the BCIM led investor group. Thank you. Operator Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. 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