Tag Archives: management

How To Pick An Emerging Market Fund

By Tim Maverick If there’s one truism I’ve found during my years in the investing field – which date back to the 1980s – it’s the fact that everything is cyclical. What runs hot will inevitably turn cold in a few years, and vice versa. This reality is beautifully illustrated in this following periodic table of asset class returns. The table appeared in The Wall Street Journal courtesy of Budros, Ruhlin & Roe in Columbus, Ohio. The firm’s advisors use it to explain to clients why diversification is necessary. It also reinforces my contrarian bent. For instance, I’m not at all interested in the red-hot biotech and tech industries right now. Instead, I’m looking at a sector everyone is avoiding like the plague… emerging markets . I’ve been investing in emerging markets since the 1980s. Today, I’d like to share some tips on how to pick the best emerging market funds – and, just as importantly, how to avoid the losers. Tip #1: DON’T Use an Index Fund Index funds seriously narrow your investing universe. That’s true here in the United States, as well, but it’s really bad in emerging markets. Data from the Institute of International Finance brings home my point. Only about $7.5 trillion of the $24.7 trillion universe of emerging market stocks is contained in the various indices run by J.P. Morgan (NYSE: JPM ), MSCI (NYSE: MSCI ), and others. The rest is simply ignored. I don’t know about you, but I don’t want to pretend that roughly 70% of emerging market stocks don’t exist. As I’ve said before, you don’t shop in just one aisle at the grocery store. Don’t do it in the stock market, either. Tip #2: Don’t Invest in Closet Indexers So now we’ve eliminated index funds. Next up is looking at the top 10 positions in any fund you’re considering. If you see the names of companies like Samsung Electronics Co. Ltd. ( OTC:SSNLF ) , Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM ) , and China Mobile Ltd. (NYSE: CHL ) , move on. The fund manager is a closet indexer. They’re only interested in matching the index by which they’re judged, rather than actually making money for the fund’s shareholders. Tip #3: Avoid Funds That Over-Invest in Two Sectors Finally, it’s important to look at the sector breakdown of a fund. In far too many cases, these funds are over-invested in just two sectors. If you see 50% or more invested into financials and technology, skip over this fund. This fund manager doesn’t understand emerging markets and may be confused into thinking that they’re investing in the U.S. market. Indeed, these two sectors are loved by U.S. fund managers, and that fascination is one reason I believe most emerging market funds have performed so badly. What to Look For Now that we know what to avoid, let’s figure out what we should be looking for in an emerging market fund. I’m a great believer that people are people, no matter where they live. And all people aspire to better their lives and those of their children. For me, that means investing in funds that emphasize the growing consumer class in developing economies. Look at China, for instance. It’s moving away from an industrial economy toward a consumer economy. Just as we no longer consider U.S. Steel Corp. (NYSE: X ) a bellwether for the U.S. economy, we probably shouldn’t count on industrials to perform that role in China much longer, either. And that means you don’t want to own the usual Chinese names. Instead, you want to own something like the South Korean cosmetics company AmorePacific Corp. ( OTC:AMPCF ) . Its sales and revenues are soaring thanks to Chinese demand, which is boosting its stock. Another option is a frontier market stock like Safaricom Ltd. ( OTC:SCOM ) , Kenya’s dominant telecom firm. Kenyans have the same mobile phone addiction as everyone else, and the safety valve is that it’s 40% owned by telecom giant Vodafone Group Plc (NASDAQ: VOD ) . In closing, stick with funds that emphasize the growth of consumerism in places like China. Companies like Apple Inc. (NASDAQ: AAPL ) are benefiting, and so will the myriad number of home-grown consumer companies in the emerging world. Link to the original post on Wall Street Daily

Vanguard Extend Duration Treasury ETF: Long Duration Could Be Great In December

Summary The Vanguard Extend Duration Treasury ETF gives investors exposure to the very long end of the yield curve. The yield is material but the price swings on long duration treasuries easily dominate the yield in determining annual returns. I won’t be surprised if the Fed hikes short term rates in December, but I don’t think they can continue to push up short term rates after that. If investors buy into the Federal Reserve’s picture, there could be some great sales on long duration treasuries. The Vanguard Extend Duration Treasury ETF (NYSEARCA: EDV ) is a solid option for exposure to treasuries. The ETF has an expense ratio of only .12%. As I’ve been searching for appealing bond funds, I’ve found some of my favorites are from Vanguard. Given my distaste for high expense ratios, it should be no surprise that the Vanguard products would be appealing. After looking through the portfolio, I think the holdings are fairly reasonable for an investor wanting to regularly keep part of their portfolio in a bond fund. Quick Introduction The Vanguard Extend Duration Treasury ETF is showing a yield to maturity of 3.0% and an average effective duration of 24.6 years. This isn’t an investment that investors should take lightly when it comes to interest rate risk. In my opinion the big reason to use such long duration securities is to reduce total portfolio volatility due to the negative correlation with the market or to make a play on long term yields falling and creating substantial capital gains. Maturities I grabbed another chart to show the effective maturity on the securities: That shouldn’t be surprising given that the effective duration of the fund was running almost 25 years. December The reason I’m looking to keep an eye on the very long duration securities in December is because of the Federal Reserve’s constant pressure to try to increase rates. If they actually get the short term rates higher there may be a shift up across the entire yield curve. The greatest price volatility would come from the long duration bonds. To avoid sensitivity to credit risk, I may opt to use treasuries rather than corporate securities. The Rate Issue The Federal Reserve has been talking for years about raising rates and they finally got some ammunition in November when the “jobs report” came out and indicated that unemployment levels were lower than expected and lower than the previous measurement. The Federal Reserve has an opening and they could use this opportunity to push interest rates higher. I think there is a fairly significant chance of that happening. The latest probability numbers from the CME Group, which uses the “Fed Funds Futures” to track implied probability, is shown below: (click to enlarge) We’re expecting around a 70% chance of short term rates getting a slight boost. I don’t believe that the Federal Reserve can continue to raise rates in the manner that they would like to, but I do think that an increase in short term rates finally happening could create a serious hit in the value of long term treasuries as investors start to buy into the idea that the United States will be creating higher interest rates on treasuries while most of the developed world is showing significantly lower rates. I wouldn’t be surprised if the Federal Reserve raises rates in December and sends bond prices falling. If that happens, I would consider it more likely that they would be forced to go back down on rates in 2016 rather than being able to raise them again later in the year. If short term rates went back down, I think it would be an admission of the difficulties of raising rates in this environment and the 30 year yields would fall. A falling 30 year yield would push prices on EDV materially higher. Conclusion This is a great treasury ETF with a low expense ratio and it should be on the “watch list” for investors going into December. If the Federal Reserve manages to raise rates and the 30 year yields rise (prices fall) materially, then I think it will become a fairly attractive option. I’ll be looking at long duration treasuries in December as a possible way to reduce my portfolio volatility and capture some significant gains if rates fall back down. Over the last year, EDV has had a negative correlation with the S&P 500. This wasn’t a slightly negative correlation either, this was -.41. This serves as potentially a useful hedge against my equity positions while giving me the potential to benefit from falling yields and rising prices if the Federal Reserve is unable to follow through on their plans to raise rates. My view on price movements is a significant chance of prices going lower into December followed by attractive buying opportunities to create capital gains in 2016.

The Forensic Accounting ETF: Where The Bodies Are Buried

Forensic accountant John Del Vecchio likes to joke that he knows “where the bodies are buried” in the financial statements. In his line of work, you have to. John is a professional short seller and the author of What’s Behind the Numbers , an excellent primer on short selling I reviewed two years ago. I call Del Vecchio the Horatio Caine of Wall Street. With single-minded purpose, he looks for the bad guys that are cooking the books and then brings their misdeeds to the light of day. Or more accurately, he looks for companies that are using aggressive accounting techniques to mask poor operating performance and then shorts them. Eventually, management runs out of ways to hide slowing performance, and when they do, the jig is up and the stock takes a tumble. This is where it gets interesting. If Del Vecchio’s sleuthing can effectively catch earnings manipulators in the act, then it only stands to reason that it can also be used to identify good companies with high quality earnings and conservative accounting. And that brings me to the WeatherStorm Forensic Account Long-Short ETF (NYSEARCA: FLAG ) , which has been recently revamped and is now based on a new proprietary index developed by Del Vecchio. “FLAG” is exactly what it sounds like. It’s an ETF that looks for accounting red flags, such as accelerated revenue recognition and manipulation of inventory and receivables numbers. But that’s only part of the story. FLAG’s strategy combines six distinct forensic accounting and valuation factors for scoring and ranking stocks. These factors cover: cash flow quality, revenue recognition, earnings quality, shareholder yield, earnings surprise and valuation. The FLAG ETF runs a 130/30 long/short portfolio, investing 130% of its capital in stocks that rate high for earnings quality based on Del Vecchio’s metrics and maintaining a 30% short position in stocks with low ratings. The net result is that you’re buying the highest-quality companies at reasonable prices… and you’re shorting the expensive junk. While still rare in mutual funds and ETFs designed for regular investors, long/short strategies have long been used by hedge fund managers. So in FLAG, you’re essentially getting a hedge-fund strategy in an ETF wrapper. Let’s take a look at FLAG’s portfolio. As of 9/30/2015, FLAG was long 132 companies and short 41. The average P/E and P/S ratios on the long positions were 15.62 and 0.79, respectively. The averages on the short portfolio were a much higher 27.61 and 1.85. So, FLAG is clearly practicing what it preaches by owning relatively cheap stocks and shorting expensive stocks. Breaking it down by sector, technology stocks make up the largest net long position at 19.0% of the portfolio. 23.7% of the long portfolio is invested in tech and -4.7% of the short portfolio. Financials also make up a large chunk of the portfolio with a net long position of 16.1% (19.1% long and -3.0% short). In looking at individual stocks, we see some household names. AT&T (NYSE: T ) , Molson Coors Brewing (NYSE: TAP ) , Coca-Cola Enterprises (NYSE: CCE ) and Intel (NASDAQ: INTC ) all make the top 10 long holdings. And on the other side, some of the largest short positions include Constellation Brands (NYSE: STZ ) , The Priceline Group (NASDAQ: PCLN ) , Chipotle Mexican Grill (NYSE: CMG ) and Netflix (NASDAQ: NFLX ) . FLAG doesn’t have a long enough trading history to draw firm conclusions about performance. But given its focus on quality and value, I would expect it to significantly outpace the long-only S&P 500 over time. Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Link to the original post here .