Tag Archives: investment

Consider Adding Health Care To Your Winning Allocation: And The ETF To Do It

Summary Supplementing your core ETF portfolio with smart sector bets can lead to healthy returns. Powerful demographic and related trends make health care one such sector, and now may be a good time to get in. However, there are risks. A quality ETF can help to mitigate these. I share my suggestion as to the one you should choose. When building your ETF portfolio, it is good to start with the basics. In my previous work on Seeking Alpha, I have suggested a simple, yet powerful and globally-diversified portfolio based on just 3 ETFs . However, you may wish to enhance such a basic approach by supplementing it with ETFs targeted at certain sectors of the marketplace. REITs are one such possibility. In a follow-up article , I built a four-ETF variant of the base portfolio that includes REITS. For this article, however, let’s take a look at another sector in which you may want to make a targeted investment. I will also suggest that you use a specific ETF to do so. Why Health Care? Why Use an ETF? In my personal portfolio, I have chosen to add a targeted investment in the health care sector. Why? Please allow me to share just a couple of quick items I found when researching this topic. We have an aging population. Consider the following, from the Administration on Aging , part of the U.S. Department of Health and Human Services: The older population-persons 65 years or older-numbered 44.7 million in 2013 (the latest year for which data is available). They represented 14.1% of the U.S. population, about one in every seven Americans. By 2060, there will be about 98 million older persons, more than twice their number in 2013. People 65+ represented 14.1% of the population in the year 2013 but are expected to grow to be 21.7% of the population by 2040. Not surprisingly, with an aging population comes increased costs for health care. Consider two excerpts from a report on aging from the Centers For Disease Control : The increased number of persons aged > 65 years will potentially lead to increased health-care costs. The health-care cost per capita for persons aged > 65 years in the United States and other developed countries is three to five times greater than the cost for persons aged 65 years ($12,100), but other developed countries also spent substantial amounts per person aged > 65 years, ranging from approximately $3,600 in the United Kingdom to approximately $6,800 in Canada ( 13 ). However, the extent of spending increases will depend on other factors in addition to aging ( 12 ). The median age of the world’s population is increasing because of a decline in fertility and a 20-year increase in the average life span during the second half of the 20th century ( 1 ). These factors, combined with elevated fertility in many countries during the 2 decades after World War II (i.e., the “Baby Boom”), will result in increased numbers of persons aged > 65 years during 2010–2030 ( 2 ). Worldwide, the average life span is expected to extend another 10 years by 2050 ( 1 ). The growing number of older adults increases demands on the public health system and on medical and social services. Chronic diseases, which affect older adults disproportionately, contribute to disability, diminish quality of life, and increased health- and long-term-care costs. In summary, the reports reveal that, due to longer life spans, people often live longer with chronic disease. Sadly, factors such as obesity and diabetes, more and more common in our culture, also lead to greater need for medications and other health care support. Finally, technological advances are making possible the treatment of certain conditions that simply could not have been treated in the past Certainly, factors such as these bode well for the long-term outlook for health-care related products and services. At the same time, investment in the health care sector is not without its risks. For example, pharmaceutical companies must spend vast amounts on R&D to develop and bring new drugs to market. But getting a drug to market is no small task. To begin with, it is a real challenge to identify and develop new chemical compounds for such drugs. And even once a potential drug is developed, it must go through rigorous clinical trials before it is approved for sale to the public. Needless to say, not all drugs make it through this process. This is where the ability to use an ETF to invest in health care can be, well, good for your investment health. I will get into the specifics of our focus ETF as it relates to this matter in just a little bit. Why Now? I have been hoping to write an article on this topic for some time. Why did I choose to do so now? The impetus actually came from this news item right here on Seeking Alpha. I won’t bother recapping it; it is short and you can read it for yourself. But here is a picture that will make very evident what the quoted analyst was getting at. VHT data by YCharts The blue line represents the Vanguard Health Care ETF (NYSEARCA: VHT ), the focus of our article. The yellow line represents the broader S&P 500 index. As can be seen, there was a roughly 12% gap between the performance of this index and the S&P 500 just a little earlier this year. Due in large part to recent concerns having to do with the biotech sector, that YTD gap has narrowed to a mere 1.2%. As the quoted analyst suggests, this may offer a good opportunity to either enter, or add to your position in, this sector. The Power of VHT Earlier, I briefly touched on some of the risks involved in investing in the health care sector and suggested using an ETF to mitigate such risk. Simply put, this is because a well-chosen ETF will allow you to remain well diversified, thus lessening single-company risk. As alluded to earlier, in this article I chose to focus on the Vanguard Health Care ETF. This ETF is based on the MCSI US Investable Market Health Care 25/50 Index . Let’s start with a closer look at that index, in the below picture taken from the factsheet for the index. (click to enlarge) Here are a few things worthy of note: There are 349 constituents, or companies, in the index. The Top-10 holdings comprise some 44.96% of the overall index, and are mostly large-cap pharmaceutical companies. This is also reflected in the overall 36.58% weighting of pharmaceuticals in the index (see pie chart). However, this risk is somewhat balanced by the inclusion of McKesson Corp. (NYSE: MCK ) and similar companies involved in the distribution of health care products, and UnitedHealth Group (NYSE: UNH ) and similar companies involved in healthcare services. This diversifies your risk, as the pie chart shows, across various sub-industries within the overall health sector. If you look at the Portfolio and Management tab of the factsheet for VHT, you will notice that this ETF is extremely faithful in tracking this index. Vanguard supplements this with a rock-bottom expense ratio of .12%. The fund’s total net assets of $6.1 billion and average daily trading volume of $58.37 million mean that the fund is extremely liquid, leading to a low .07% trading spread (the average difference between “buy” and “sell” transactions). I would hope you hold this ETF for the long term, but the above figures will hold you in good stead should you need to trade. Finally, VHT carries a 1.45% distribution yield, which Vanguard recently shifted from being an annual distribution to a quarterly distribution, which I really love. Summary and Conclusion I believe health care is a great sector in which to make a targeted investment. In this article, I have recommended using an ETF to do so, and featured the Vanguard Health Care ETF as what I believe to be your best tool to do so. This excellent choice gives you tremendous diversity across the sector, coupled with a low expense ratio and great liquidity. Happy investing!

Central Fund Of Canada: Gold & Silver At A ~10% Discount

Summary Many investors seek to allocate part of their portfolios to precious metals, given the prevalence of “money printing” by central banks around the globe. The Central Fund of Canada is one vehicle that is likely to deliver alpha in addition to metals exposure. It’s currently trading at a 10%+ discount to NAV, with building activist involvement. Background on Closed-End Funds For those that want exposure to a particular sector or asset class, closed-end funds sometimes represent a cheaper vehicle than alternatives like ETFs and traditional mutual funds. This is because ETFs and conventional mutual funds frequently redeem/issue new shares to ensure that the price per share remains in line with the net asset value of the underlying holdings in the funds. This is not the case for closed-end funds. Rather, the share price of closed-end funds is driven by the market forces of supply and demand, which sometimes creates attractive opportunities to buy stakes at big discounts to NAV. This tends to happen when sentiment for the particular sector on which a closed-end fund focuses becomes negative, causing some investors to sell irrespective of price. This is currently occurring in few segments of the closed-end fund universe, including fixed income, emerging markets, and commodities. I previously wrote about one such opportunity to obtain federal tax exempt muni bond exposure at a 10%+ discount and another to buy Asian bond exposure at a 15%+ discount. Here, I’ll cover an opportunity to buy gold/silver exposure at a discount. Central Fund of Canada Overview The Central Fund of Canada (NYSEMKT: CEF ) was established in 1961 by Philip Spicer as a means of providing investors with a safer, more cost effective way of holding gold and silver than individual ownership. In particular, the fund’s mandate is to invest at least 90% of its net assets in gold and silver bullion (today this figure is 99%+), which is stored in the highest security rated treasury vaults at a Canadian chartered bank. Investors are able to avoid the transactions fees and sales taxes that can accompany direct individual ownership of bullion, though the fund does have an annual expense ratio of approximately 0.3%. As shown below, at many times in its history (particularly when precious metals prices were appreciating and sentiment was strong), investors were willing to pay a material premium to net asset value for shares in the fund. Likewise, at several times (when sentiment was weaker) shares have traded at a meaningful discount to NAV. Today, with precious metals having been in persistent decline for the past few years, the shares trade at a ~10.3% discount, which is near its highest historical level. (click to enlarge) Source: CEFConnect Portfolio Composition The fund provides ongoing updated figures for its NAV per share as well as the composition of its portfolio via its website . Currently, 61.4% of the portfolio is in gold bullion, 38.4% is in silver bullion, and 0.2% is in cash and other net assets. Source: CEF NAV Report What will Cause the Discount to Decline? If/when sentiment in the precious metals sector stabilizes, it’s reasonable to expect the discount to decline given the tendency for this to occur many times in the past, as shown above. In the meantime, there’s also another notable potential catalyst. One of the fund’s large shareholders, Sprott Asset Management (including other investors they represent), holds about 5% of outstanding shares and has recently been taking steps to compel the fund’s management to consider actions to narrow the discount (e.g., through offering investors the option of improved redemption terms). For instance, in June they requested that the fund hold a meeting among A share investors to discuss these issues, though management has resisted. Sprott took a similar activist stance with another Central managed fund, Central Gold Trust (NYSEMKT: GTU ), which has been gaining some traction such that this fund’s discount has declined to under 3%. It’s somewhat more difficult for Sprott to unlock shareholder value for the Central Fund of Canada for a couple of reasons. First, this fund is much larger than Central Gold Trust. More importantly, Central Fund of Canada has a dual share class structure that is highly advantageous to management. In particular, the fund has a very small number of voting shares that are majority owned by insiders, whereas the vast majority of outstanding (class A) shares are non-voting and owned by the public. This effectively enables management to retain control without requiring them to maintain a commensurate economic stake in the fund. However, it’s important to note that despite this dual share class structure, the Board still has a legal fiduciary duty to act in the interests of all shareholders. Given this duty, over time Sprott may be successful in its agenda (or management may preemptively take steps to reduce the discount to appease investors). But even in the highly negative scenario where they are completely unsuccessful, management makes no positive changes, and precious metals sentiment languishes further, investors’ downside is constrained due to the fact that since 1989, A share holders have had the option on a quarterly basis to require the company to redeem their shares at 80% of NAV. Conclusion A number of renowned investors (e.g., hedge fund managers Paul Singer and Ray Dalio) espouse the benefits of holding a portion of one’s portfolio in precious metals, particularly given widespread monetary easing around the globe. For those that follow this path, the Central Fund of Canada is a vehicle worth considering given its current large discount to NAV and potential catalysts for convergence. However, U.S. investors should be aware that this fund is considered a Passive Foreign Investment Company or “PFIC.” The tax rules surrounding PFICs are complex, and can subject investors to burdensome reporting requirements particularly if they own more than $25,000 in PFIC securities outside of a qualified/tax-exempt account.

Buffett And Munger – Secrets To Success That Are Not Talked About Enough

Summary Warren and Charlie Borrow with Pride. To be very successful you have to be intelligently different. Disciplined flexibility is a key advantage. Growing up in Nebraska it is no surprise that I was heavily influenced by Warren Buffett, Charlie Munger, and Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ). There is a lot to learn from the dynamic duo and there is a significant amount of material discussing their words of wisdom. However, there are a few things I have learned from them that are not as widely discussed as I think they should be or can be seen through a different lens. Borrow with Pride Years ago I used to follow an international telecom company called Millicom International. One of their common sayings was “Borrow with Pride” as they wanted employees to learn from and borrow ideas from one another. I had been borrowing with pride for many years before hearing this, but had never put it into those words. Now I have borrowed their saying as a motto in my life and am proud to Borrow with Price. Of course, Warren and Charlie figured this out years ago. It is widely known that Warren started off by borrowing many of the ideas of Benjamin Graham, then learned from Philip Fisher, and of course from Charlie Munger. For that matter, Charlie Munger’s lattice framework is based on borrowing (learning) ideas and concepts from others. Between Charlie and Warren there really have been few original ideas, but they have borrowed ideas from many people. Even looking at many of the companies Berkshire has purchased, both private and public companies, the ideas came from somebody else. For example, Lubrizol was David Sokol’s idea. The idea of borrowing with pride is really taking another angle on what we already know about Warren and Charlie. The reason why I look at it from this angle is because I know quite a number of very smart people that do not like to borrow ideas from others; they have to be original. At a firm I worked for one associate disliked the idea that I followed certain investors and looked into their holdings. He thought we should be original and find our own ideas through other means. There is nothing wrong with finding ideas that are original, but there is nothing wrong with borrowing either. What I think he missed is that the vast majority of frameworks we use are borrowed and the skills we have are learned from others. There is no shame in borrowing ideas from other smart people. Both Warren and Charlie have made a lot of money from borrowed ideas. Different, but Intelligent “If past history was all there was to the game, the richest people would be librarians.” – Warren Buffett To be extremely successful in investing you have to do something that is both different from the majority of investors, yet intelligent. While most of the ideas behind Berkshire Hathaway are borrowed they way they applied the concepts is original in many ways. This is a huge reason why they were and are successful. For centuries people had been investing insurance float, but Buffett and Munger used it differently. By being disciplined with the float they not only were able to obtain cheap leverage, which had a multiplier effect on their investment returns, but were actually paid to borrow money. The conglomerate structure has been around for centuries as well and Buffett and Munger both learned a lot from Henry Singleton who started Teledyne. However, Berkshire is different than Teledyne and was built to be an enduring company while Teledyne was eventually sold . Of course, if you do something different and it is not done intelligently than more likely than not it will be a failure, unless you get lucky. From Buffett and Munger I have learned to both borrow ideas/concepts and try to apply them in a different yet intelligent way. Apply it to yourself Let’s face it, you are not Warren Buffett or Charlie Munger and neither am I. If you try to completely imitate them you will find that you do not have the skills and attributes they do. However, each investor has their own talents and skills. Buffett and Munger talk about circle of competence and that should apply to both the types of companies you understand as well as the skills that you have. You need to know yourself, what skills you have, and strengths you can improve on to become a better investor. You don’t have to know everything as Warren said , “You only have to do a very few things right in your life so long as you don’t do too many things wrong.” Neither Warren or Charlie tried to be Benjamin Graham, Philip Fisher, or Henry Singleton but they did learn a lot from each of these men. What I have learned from Warren and Charlie is not to try to be them, but to learn from them and apply what I learn to myself. Flexible, Disciplined, Opportunistic Often people discuss the fact that Warren Buffett has changed his stripes over time from being more of a Graham net-net investor to a Fisher quality with growth investor. However, I see Buffett differently as I think he is quite flexible. After the financial crisis he invested in Bank of America Preferred Stock and Warrants. I wouldn’t call Bank of America a high-quality growth company. There was also the controversial derivative investments that have worked out well. In the book “Of Permanent Value” by Andrew Kilpatrick he mentions Buffett and Munger buying silver. When Berkshire Hathaway purchases 100% of a company you can bet that they think the company is a high-quality company. However, some of their partial investments have not been. Buffett and Munger are opportunistic; if they see an opportunity they will jump on it. Yet, they are disciplined in that they only invest in ideas they understand and expect to generate strong returns on. What I learned from Buffett and Munger is to be flexible to all the types of investments that I understand, but to be disciplined in my approach and wait for opportunities.