Tag Archives: investment

VWO: Is Now The Time To Add Emerging Market Exposure To Your Retirement Portfolio?

Summary Investing for retirement can be as simple or as complex as you want to make it. One well diversified global ETF with a low expense ratio is a good start. Given the relative under-performance of emerging markets over the last five years, now might be a good time to add exposure to emerging market equities to your retirement portfolio. This article reviews VWO, an ETF that can be added to the core portion of most investors’ portfolios to increase exposure to emerging market equities. Simply Investing – Philosophy Keep investing simple, consistent, diversified and low cost and you will significantly increase your chance of success. One well diversified global ETF with a low expense ratio is all that is required for many people starting to invest in equities, and an ETF that meets these criteria is the Vanguard Total World Stock ETF (NYSEARCA: VT ). As an investor’s experience, time dedicated to investing activities and desired risk, increases, many investors add ETFs to the core of their portfolio to gain exposure to new areas or increase exposure to areas that the investor believes will outperform. The next step for many investors is to allocate a percentage of their portfolio to “edge” positions, which offer additional risk and opportunity. Vanguard FTSE Emerging Market ETF (NYSEARCA: VWO ) This article reviews VWO, an ETF that can be added effectively to the core portion of most investors’ portfolios to increase exposure to emerging market equities. VWO – Investment Synopsis VWO’s objective is to closely track the return of the FTSE Emerging Markets All Cap China A Transition Index. VWO invests in stocks of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa. VWO has high potential for growth, but also high risk. VWO is only appropriate for long-term goals and a small proportion of an investor’s retirement portfolio. VWO performance compared to the S&P 500 (click to enlarge) Source: Yahoo Finance (12/7/2015) As the chart above shows, the S&P 500 has significantly outperformed VWO over the last five years. There are a number of reasons for this including the relative strength of the U.S. economy and the U.S. dollar compared to emerging market economies and currencies. While the out-performance of the U.S. market may continue for some time, after such an extreme period of under-performance by emerging market stocks, now might be a good time to start building or add to a core position in emerging market stocks in anticipation that this under-performance will, at some point, at least partially reverse itself. VWO -Equity Characteristics Source: Vanguard (as of 10/31/2015) As the table above indicates, VWO is well diversified, holding 2,560 stocks. The median market cap is large at $14.9 billion. VWO’s current price/earnings ratio at 16.0 is high compared to historical levels but quite a bit lower than that of the U.S. market as emerging markets have underperformed the U.S. market for several years, as shown in the previous chart. VWO – Top 10 Holdings Source: Vanguard (as of 10/31/2015) VWO’s top ten holdings are very large companies and at 18.1% of total net assets, make up a fairly large proportion of the total holdings. VWO – Country Diversification Source: Vanguard (as of 10/31/2015) Chinese and Taiwanese companies together make up 42.5% of the holdings of VWO. Some investors may not want to concentrate their emerging market exposure in these two countries. Expenses and dividend yield VWO’s expense ratio is 0.15%, this is well below the average expense ratio of similar funds at 1.53%. Given the relatively high price of the global equity markets today and particularly the U.S. markets, it is likely that future returns, at least for U.S. markets, may be lower than those recently experienced. In this environment, it is important that the core of your portfolio is allocated to funds with low expense ratios like VWO. VWO’s forward looking dividend yield is 3.23% based on the last four quarters distributions. Vanguard Emerging Markets Stock Index Fund and ETF moves to transition index One further consideration for potential investors in VWO is that on November 2, 2015, VWO began tracking a new FTSE transition index that over time will build exposure to small-capitalization stocks and China A-shares. The transition index will be used for approximately one year to reduce the costs associated with trading large amounts of securities in a short period. The fund will sell large-cap and mid-cap stocks on a monthly basis while proportionally adding exposure in China A-shares and small-cap ex China A-shares based on each security’s weight in the index. At the end of the transition period, the fund will begin tracking the FTSE Emerging Markets All Cap China A Inclusion Index. Given this recent change and we are in the midst of a transition period, VWO may not be an appropriate investment for all investors looking for emerging market exposure. Other Emerging Market ETFs Above is a list of the top 10 emerging market ETFs, listed by assets under management (AUM). For those that want to do further research, additional detail on these ETFs is available on Seeking Alpha’s ETF Hub. Conclusion Your chance of long term investment success increases significantly by keeping your investing simple, consistent and well diversified. Most investors would benefit by building a core position in a well diversified global ETF with a low expense ratio like Vanguard Total World Stock ETF . After establishing this core position, well diversified, low cost, emerging market ETFs like VWO can increase your exposure to emerging markets for those investors looking to do so.

Hidden Champions As A Source Of Wide Moat Investment Opportunities

Summary Hidden champions are market leaders in specific niches that are off the radar of most investors. U.S. hidden champions include companies like Columbus McKinnon, the domestic market leader in material handling products; and Gaming Partners International Corporation, the world’s largest seller of casino chips. Asian hidden champions hold even greater promise than their U.S. counterparts, due to their relative obscurity and longer growth runways. Background On Hidden Champions A hidden champion is defined as a market leader either globally or in any specific continent in terms of market share, with sales under $4 billion, and operating out of the public limelight. The term “hidden champions” was first coined by Professor Hermann Simon, chairman of Simon-Kucher & Partners Strategy & Marketing Consultants, in his 1996 international best-seller of the same name. He went to published an updated version of his book in 2009 titled “Hidden Champions of the 21st Century, Success Strategies of Unknown World Market Leaders.” In a 2010-2011 survey done in German-speaking countries, Professor Hermann Simon was voted the most influential management thinker after the late Peter Drucker. Hidden champions are potential sources of wide moat investment ideas, since both high market share and high Return on Invested Capital (NASDAQ: ROIC ) are indicators of sustainable competitive advantages. However, while it is possible to screen for high ROIC stocks, hidden champions boasting high market shares require significant digging by investors on their own. Examples Of Hidden Champions I have written extensively about hidden champions in several Seeking Alpha articles. They include companies such as Columbus McKinnon (NASDAQ: CMCO ), PGT, Inc. (NASDAQ: PGTI ), Gaming Partners International Corporation (NASDAQ: GPIC ), Knowles Corporation (NYSE: KN ), EnerNOC, Inc. (NASDAQ: ENOC ) and Generac Holdings (NYSE: GNRC ) among others. I will elaborate in greater detail about the moats and growth runways of three of these stocks below. Columbus McKinnon holds the largest domestic market share (46%) in material handling products, representing 74% of its fiscal 2014 U.S. sales. Its largest product category comprises hoists, trolleys and components. Columbus McKinnon benefits from high customer switching costs, since its material handling products improve efficiency, enhance productivity and maximize profitability for its client, but yet cost a fraction of their customers’ total product costs (80% of its revenues are generated from products that are sold at under $5,000 per unit). Also, stealing market share from competitors is not Columbus McKinnon’s only growth avenue, since its largest installed base of hoists in North America allows it to cross-sell complementary and new products to its existing customers and benefit from after-market sales for replacement units and components and repair parts. Gaming Partners International Corporation is the global market leader in casino currency and boasts approximately 90% market share of the casino chip, plaque, and jeton sales in Macau. Given that casino operators place a strong emphasis on the quality of casino currency and the need to minimize the threat of counterfeit gaming chips, they are likely to stick with trusted players like Gaming Partners International Corporation. There is a razor-and-blade model at play here, as Gaming Partners International Corporation can cross-sell ancillary products and consumables like playing cards, table layouts, dice, and table accessories as an integrated supplier of casino table gaming equipment. PGT has approximately 70% market share of impact resistant window and door market in Florida. PGT’s moat is derived from the strength of its WinGuard branded products, which are now synonymous with quality, built upon a three-decade long track record of zero reported impact failures. Its growth drivers are the strength of the Florida housing market and the increase in penetration rates of impact resistant window and door market in Florida. Moats Of Hidden Champions While individual hidden champions might have their respective competitive advantages and diverse moats, a recurring theme is what Morningstar terms as the efficient scale moat. Hidden champions typically have significant market share in a niche where the market is sufficiently small, making it uneconomical for new entrants to compete. So what can potentially narrow or even destroy an efficient scale moat for hidden champions? If either the niche market experiences faster growth, or larger ancillary market segments experience slower growth, it might attract new competitors like bees to honey. Customer preferences and switching costs could also change, leading to greater ease of grabbing market share from the incumbent hidden champions. Growth Potential Of Hidden Champions Growth is another interesting topic for hidden champions. Most hidden champions will find it difficult to grow significantly by gaining market share from competitors, since they are usually already the outright market leader. Similarly, the organic growth prospects for the niche market tend to be modest (which deters new entrants). On the other hand, moving to ancillary market segment tends to expose them to competition from larger players and entrenched incumbents in other markets. As a result, hidden champions possessing either pricing power or the ability to cross-sell complementary products under a razor & blade model are favored. Asian Hidden Champions There are no shortcuts to identifying hidden champions. I seek hidden champions by starting with the As in a list of sub-$1 billion market capitalization stocks and paying attention to details on market share and unique niches based on the industries they operate in. My own experience is that Asian-listed hidden champions tend to have a higher probability of remaining off the radar of most investors. Firstly, Asian stocks in general have a lower concentration of stocks enjoying sell-side analyst coverage, due to the relatively lower market capitalizations and liquidity of a wider spectrum of companies listed on Asian stock exchanges. Secondly, since certain Asian companies neither report their financial results in English nor feature themselves in English media, a great proportion of international investors are unable to access these names. On the flip side, it is precisely because Asian hidden champions are relatively more “hidden,” their potential for outsized investment gains will be higher. More importantly, as these Asian companies are smaller, lie at an earlier stage of their corporate lifecycles and are still working hard at penetrating the broader yet fragmented pan-Asian market, their growth runways are also longer. This compares favorably with most other U.S. hidden champions already in the mature stage of their corporate lifecycles with limited growth drivers. As a special bonus for my subscribers, they will get access to the names of five (5) Asian-listed hidden champions in a separate bonus watchlist article. My December 2015 Stock Idea meant exclusively for subscribers also happens to be an Asian hidden champion with leading domestic market shares in certain money handling equipment. Note: Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service get full access to the list of wide moat investment candidates and value traps, which include “Magic Formula” stocks, wide moat compounders, hidden champions and high quality businesses, that I have profiled.

China’s Hostility To Foreign Business Needs To End

Doing business in China is extremely risky. Things can change, literally, on a whim. President Xi Jinping has to navigate multiple crosscurrents when dealing with foreign business, and underlings have their own political concerns. Investors must be wary of over-investing in a country where their investment could degrade overnight. OSI Group is a regrettable example. Trumped-up charges led to workers held without trial and massive economic damage to the company. Ever since Chinese President Xi Jinping took over, foreign businesses have been rightfully complaining at the hostility Xi has shown them. For much of the past two years, Xi has been pushing his agenda for reform, revitalization, and restructuring. In the process, however, foreign businesses have been subjected to harassment, fines, bureaucracy, and in some cases, outright fabrication of criminal activity. Meanwhile, state-owned enterprises receive government favoritism, and things like intellectual property rights are being dismissed, or adhered to on an ad-hoc basis. The American Chamber of Commerce in China reports that 60% of foreign businesses feel unwelcome, up from 40% last year. The result has been ever-declining foreign investment in China. For example, investment fell 17% in July and 14% in August, year-over-year. Here’s a brief list of some incidents, and then we’ll look at reasons and consequences. Earlier this year, GlaxoSmithKline (NYSE: GSK ) was hit with a $489 million fine for alleged bribery, in a trial held behind closed doors. Earlier this year, Qualcomm (NASDAQ: QCOM ) paid a $975 million fine to settle an allegation that the company had charged “unfair” and “excessively high” royalties for the use of its smartphone technology. Part of the settlement included a reduced royalty calculation that, to one analyst, seemed to be totally arbitrary. Microsoft (NASDAQ: MSFT ) had its China offices raided last year as regulators allege breaches of anti-monopoly laws. Then, without warning, the government banned Microsoft’s Windows 8 operating system from government computers because it was allegedly filled with spyware. The company has been in data privacy dust-ups with China for awhile, but the pettiness and hostility of China towards Microsoft, whose revenue from the country is negligible, illustrates how out of control this issue has become. Yet the most egregious story comes from Illinois-based OSI Group, which should make anyone fume. In July 2014, two employees of the Shanghai government-owned Dragon TV applied for jobs at Husi Foods, the Chinese subsidiary of OSI Group. These “investigative reporters” were hired, but clearly under false pretenses . These reporters strapped on hidden cameras, and one filmed another intentionally dropping meat on the floor. This “shocking evidence” was magically leaked back to Dragon TV, which then aired a trumped-up “exposé”. The fiction grabbed attention of the government, which raided the plant on July 20, 2014, and later arrested six employees of Husi Foods. Subsequently, the Shanghai Food and Drug Administration (SFDA) claimed that Husi sold expired and repackaged meat to its customers. That kind of reputation damage led to lost sales, the loss of KFC (NYSE: YUM ) and McDonald’s (NYSE: MCD ) as clients, and have cost OSI Group hundreds of jobs and hundreds of millions of dollars . Emboldening state-owned media to manufacture evidence serves nobody. According to Professor Joshua Eisenman in testimony before the U.S.-China Economic and Security Review Commission, “In some cases, like that of meat distributor OSI International in Shanghai, entrenched domestic interest and local authorities appear to have made it far more difficult for foreigners to do business in China by clamping down on their operations and employing innovative discriminatory tactics to restrict their ability to conduct business.” No kidding. So what’s going on? Why is China engaging in such antagonism with foreign businesses? One of my sources that does business in China boils things down. Xi has to walk several tightropes. On the one hand, China needs Western intellectual, business, and technological assets to support its own developing tech industry. Paired with this is America’s need to access China’s massive population that has access to the internet – as many as 750 million people. Xi may have been maneuvering for negotiating position. By setting fires that he can also put out, he puts himself in the position of extracting concessions from America, both political and economic – such as killing retaliatory sanctions for its cyber attacks on our federal agencies. Xi also needs to be seen as protectionist, both to the Communist Party and to the general population. China comes first, the West comes second. He must create a delicate balance of carrots and sticks, so that the Chinese reap the benefits of outside investment without sacrificing the competitiveness of Chinese companies. Does this sound like China is focused too much on the macro issues? They are…and they aren’t. According to one source of mine who regularly does business in China, the issues are cultural and political. “The Chinese look at the larger picture, whereas Americans are more discrete in their perspective. Whatever incident occurs, there’s always something behind it that it totally opaque. Sometimes you are being sent a signal. Sometimes you’ve unintentionally offended someone. You cannot pinpoint the specifics of what actually happened. You never know when you are being made an example of, or for what reason, or if you just stepped over some invisible line. It may not even be about you at all, because there are multiple layers and crosscurrents constantly at play.” He provides an example. “Suppose you plan to release a movie in China, and it has a scene where dentists are being made fun of. Six months from now, the International Dentist Conference will be held in Beijing. So the person in charge of policing content pulls out the dentist joke because he doesn’t want to get blamed if the dentist joke offends someone.” Unfortunately, this all comes at the expense of basic human rights. It also comes at the expense of China’s own economic health. Meanwhile, monthly outflows from China have grown from $5 billion to $100 billion, according to the International Business Times . The government has tried to keep the money in-country by monkeying with currency exchanges rules and limits. The AP reports that GDP growth is slowing in the second-largest economy, growing by 6.9% in Q3, the slowest since the financial crisis. Growth in factory output fell to 5.7% in September from 6.1% in August. The government has had to cut interest rates five times. The situation is so bad that it isn’t only foreign investment that’s pulling out. Ever wonder why Chinese firm Dalian Wanda Group purchased the AMC Theatre chain? Or why Shuanghui International spent $7 billion to purchase Smithfield foods? Or any of the other massive deals that have occurred ? Or why, talking about real estate with an agent in Montenegro, so many Chinese are buying land there? So Chinese businessmen can get their money the heck out of China. The future is in China’s own hands, but until it reconciles itself with the fact that the West is going to help it grow, and drops politics from its agenda, it’s going to continue to scare business away. As for investors, I would be extremely cautious about investing in companies that derive significant revenue from China. It’s one thing to understand risks that are quantifiable and invest with an eye towards those risks. With China, however, you may as well invest in a war-torn third-world country where the government might nationalize assets at any time. As my source says, “Your contracts with the government are always at the risk of being broken with two simple words: ‘things changed'” China’s behavior has not only made setbacks to any given company a possibility, but a completely random one. As we’ve already seen, if Xi wakes up one morning and decides to hassle a business whose stock you own, that stock could crater. I would avoid all ETFs that invest heavily in China, ETFs that weight China more than 5% of a portfolio, and any company that derives more than 5% of revenue from China. Yes, that eliminates some big names from your portfolio. However, as a risk-averse, long-term diversified portfolio advocate, why expose to risk you don’t need?