Tag Archives: management

What I Bought And Sold In October

Summary I’m sharing my personal portfolio moves with investors. Over the last few days, I picked up a huge position in CYS Investments and funded it by liquidating my position in VNQI. I left my position in Renesola to grab the tax loss. Aside from buying CYS Investments, my investments were very late in September when I kept sending in new cash to buy up equity ETFs. I’m holding some cash outside the portfolio. If prices fall again, I’ll buy equity. If they don’t, I’ll pay down the mortgage. October has been a fairly easy month for generating positive returns. If an investor’s portfolio isn’t up relative to the start of the month, they should really be contemplating their investment strategy. With about a week left in the month, I thought it would be a good time to go over the changes I recently made in my portfolio. Most Recent Acquisition: CYS Investments (NYSE: CYS ) The most recent purchase for my portfolio was a large chunk of CYS Investments. This is a great mREIT and I’ve been looking for it to go on sale. I wish I had picked these shares up even earlier, but it took me quite a while to build the model I was using to establish movements in book value. If the model had been completed by the end of September, I think I would have tossed more cash into my portfolio and started grabbing up the shares. Avoiding Hindsight Bias Of course, it is easy to establish a hindsight bias and think we would have bought when the market was bottoming out. I try to watch for that kind of bias as I evaluate my own choices. When it came to buying with the market down, I transferred new cash in multiple times to buy up shares of some ETFs in late September. My major acquisitions late in September were the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) and the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ). When prices were falling hard and speculation about another recession was getting stronger, these were the ETFs I felt confident tossing more capital into. My Other mREIT The other mREIT in my portfolio is Dynex Capital (NYSE: DX ). Prior to their latest dividend, the low price on shares was about $6.41. On one day I put the floor in for the market with an order at $6.42. That order came back only partially filled, but the shares I got were a great bargain. I didn’t have the capital available to support the price again when it dipped down to $6.41. It did fall below $6.40 following the dividend, but it had just paid out a $.24 dividend so I still see the $6.41 and $6.42 opportunities as the best buys. Since I had the conviction to double down on my bet there, I feel confident I would have been able to pull the trigger on CYS Investments if I had the data available. Selling the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) This isn’t a bad fund. It offers a fairly unique exposure with a low expense ratio compared to other international equity REIT funds. Unfortunately it has a fairly high correlation with other international equity investments so I didn’t feel compelled to keep it. When I bring my international exposure back up, I’ll probably do it with acquisitions of SCHC and the Schwab International Equity ETF (NYSEARCA: SCHF ). I’m already long both of those securities and expect to buy more during the next 12 months. I am not remotely bearish on VNQI, but when I completed the analysis on CYS there was no way to make a big move without liquidating an existing position. I looked at my existing positions and decided which one I was most willing to sacrifice so I could make the play on CYS. VNQI came up as the top choice for me. It was a large enough position to give me the kind of capital I wanted for the trade and I had no problem with using SCHC and SCHF to get my international exposure back. If I had enough cash on hand to establish my position without selling VNQI, I would have kept the shares. Selling Renesola (NYSE: SOL ) Renesola is the crowning achievement in wealth destruction for my personal investments. It was a remarkably effective tool for destroying net worth and generating a tax loss shield. There is one thing about this investment that I absolutely love: It was in a taxable account. Most of my investing is done through tax advantaged accounts. When I started buying up more investments, I made it a priority to learn what account types would be available to me. Personal financial planners would be giddy at seeing the volume of options I was able to access. It isn’t just IRA accounts. I’ve added a solo 401K for myself and my wife was able to get a 401A, 403B, and 457B. I held onto the position in Renesola for years because I recognized that the value of the tax loss was more important than the value of the individual shares. That’s a pretty nasty gut punch huh? Since the value of the position was in the tax loss, I wanted to ensure that I could time the loss for a year when the benefits would be optimized. I’ll be reaping this tax loss for a while. Increased Cash I sold the VNQI and spent it all on CYS, but I’ve also got some dividend income in my accounts. That money is currently sitting idle. I’ll need to put that money to work. Since each account has a fairly small amount of cash the most likely way to invest it will be using the ETFs that are free to trade. Since my income substantially exceeds my expenses, I’ve also got more cash on hand outside of my investment accounts. I’m planning to use that cash to pay down the mortgage, but I’m hesitating for a bit because I want to maintain flexibility. If shares go back on sale like they were in late September, I’d feel compelled to put that cash into my investments accounts and buy up more ETFs. In addition to SCHC and SCHF, I’d look to buy up more SCHD if it went under $35 again or buy up some Schwab U.S. REIT ETF (NYSEARCA: SCHH ) if it was dipping back down around $37 again. Even though I already own positions in each of those ETFs, I’m happy to increase the positions if the values are highly compelling. My cash position in the investment portfolio is still fairly small, but it was only slightly above 0% at the end of September so it didn’t take much to increase it. I generally don’t consider cash in a “checking” or “savings” account as part of the portfolio. Interest Rate Expectations Some investors don’t like equity REITs in the current market because they know an increase in interest rates would push prices on equity REITs down. I agree with half of that assessment. A substantial increase in interest rates would probably push equity REIT prices down. However, I don’t foresee that happening. I don’t believe the Federal Reserve has the power it pretends to hold. Yes, they can push up short term rates and I think there could be a temporary increase in long term rates, but I’d be buying hard on the price drop. Europe has already seen quite a bit of negative interest rates. I don’t know if we are going there or not, but I do think the Federal Reserve will be completely unable to follow their target path for raising rates. Since I’m not buying into the increasing of rates, I’m happy to hold a heavy allocation to equity REITs and happy to buy more if the Federal Reserve attempts to raise rates. For the same rationale, I love the mREITs that are holding high quality assets that are substantially less susceptible to prepayments. That means either a portfolio of Agency RMBS with lower coupons (that is CYS) or AAA rated CMBS like Dynex Capital. Conclusion My best pickup of the last 30 days or so was shares of SCHD at $34.60. Those shares are now $39.30. When I pulled the trigger on putting in that limit order, I certainly felt some stress. I’m not big on selling shares in any investment unless I believe it is materially over-valued, so selling off the VNQI was a little painful but I wasn’t willing to miss out on the opportunity in CYS. Now you know which securities I’ve been buying and selling. What have you picked up over the last month?

Is The Russian Bear Out Of The Woods?

Summary The Russian economy is still depressed, but may have found its bottom. Valuations are reflecting a collapse, which is no longer realistic. First signs of returning investor appetite and technical picture brightens. For risk-prone investors, it may be the moment to add Russia in their portfolios through RSX and RSXJ. Shortly after the publication of my previous article on the Russian market, we witnessed nothing less than a crash on August 24. The Russian stock market, the leading Market Vectors Russia ETF (NYSEARCA: RSX ) and its small-cap family member the Market Vectors Russia Small-Cap ETF (NYSEARCA: RSXJ ) saw a sharp drop during that day but failed to hit new lows compared to the previous ones in December 2014 (more on the charts later on). Since that day, the Russian market recovered, like most other stock markets, also helped by a recovery in commodity prices. So, did the August 24 turbulence mark the end of the bear market in Russia and thus for the above-mentioned ETFs? Let’s take a look at the underlying fundamentals and the technical picture. Economy in dire state Compared to two months ago, the Russian economy did not change for the better. According to Russian Deputy Economy Minister Alexei Vedev, in September, Russia’s gross domestic product (GDP) dropped 3.8% compared to last year. He added that preliminary data points to a 4.3% drop in GDP during the third quarter. Prospects for economic growth remain suppressed too. The International Monetary Fund (IMF) expects GDP to decline 3.8% this year. Next year will see a flat development at best. More likely is a small contraction before the economy can return to rates close to 1.5% in the next years. Compared to the previous recession, during the financial crisis, a sharp recovery is less likely since commodity prices are now low for an extended period of time. In the words of IMF’s Russia representative Gabriel Di Bella (source Reuters): “What we had in 2009 were shocks that were more temporary in nature and what seems to be the case right now is that the shocks are… not very short term,” Di Bella said. “They’re shocks that are more persistent.” Recent underlying numbers are close to miserable. For instance, retail sales dropped 10.4% YoY vs. -9.3% expected, and capital investment declined 5.6%, although this was better than the -6.9% expected. Also, real wages figures were slightly better than expected, but -9.7% is still poor. Compared to the nominal wage growth of 4.5% in September, it’s clear where Russia’s main problem lies. Inflation still troubling The biggest challenge for Russia is the current high inflation and expectations that are unanchored. Consumer price inflation (CPI) came in at 15.7% in September, far from the Central Bank of Russia’s (CBR) long-term target of 4%. The CBR aims to return to a CPI rate of 4% by the end of 2017. But roughly 70% of the Russian population doubt the institution will succeed in bringing down inflation to that target and this group is growing in the recent months. On the other hand, the IMF’s Di Bella and some analysts do see a slowdown in inflation in the coming months, partly due to a base effect. The problem is that the CBR’s key policy rate stands at 11% and is too restrictive for the current shape of the economy. But with inflation rate this high, a cut in the next monetary policy meeting (October 30) is tricky. The IMF calls the CBR to hold rates during the next meeting, but analysts of ING expect cuts of 50 basis points during the next two meetings (source: Bloomberg). According to CBR Governor Elvira Nabiullina, cutting the level of capital requirements may be another option to spur additional lending to the economy. The banking sector is stable and Governor Nabiullina said the sector would see a profit of around RUB 100-200 billion (USD 1.5-3 billion) this year. Companies show encouraging numbers Sberbank ( OTCPK:SBRCY ), which is the 2nd largest holding of RSX, was able to show a 9M-2015 RAS net profit of RUB 144.4 billion (USD 2.2 billion), although this was 50% lower than last year. This was mainly due to a 16% drop in net interest income. Net fee and commission income rose 6%. For a better picture, we have to wait for the IFRS numbers. The retail sector shows numbers which seem in contrast to the dire state of the Russian economy. Despite the poor aforementioned retail sales, listed retail companies showed encouraging numbers. For instance, discounter Magnit, a top 5 holding of RSX, was able to increase its revenues 27.2% YoY to RUB 690.4 billion (USD 10.6 billion) during the first nine months of 2015. Net income rose 27.6% to RUB 43.2 billion (USD 0.7 billion) during the same period. Supermarket-chain X5 Retail Group, also included in RSX, reported that its Q3 revenues grew 28.6% YoY on the back of a 13.1% like-for-like revenue growth. But also net income showed a decent increase with a plus of 21% YoY. To remind ourselves, Russian companies are still heavily undervalued compared to peers from other emerging and developed markets. For instance, Magnit is trading at a price/earnings ratio of 12.7 (2015e) and X5 Retail trades at a P/E of 12.8 (2015e). The average P/E of RSX is 5.9 and lists at a price-to-book ratio of 0.8. Its smaller family member, RSXJ, quotes a P/E ratio of 7.5 and a P/B of slightly below 0.5! First signs of a reversal The low valuations accompanied by relatively healthy company fundamentals are luring a growing number of investors back to the Russian market. Earlier this week, retailer Lenta, known for its budget hypermarkets, successfully sold new shares and raised USD 150 million in capital. The company intends to use the proceeds from the share placement to speed up store openings and aims to open at least 40 new hypermarkets in 2016, a number upped from the previous planned 32. For 2017, the company seeks to open a similar number of stores, or even more. Bond investors are returning to Russia as well and seek new or additional exposure. However, this is not because of the sound macro-environment surrounding Russia, but more so due to initial fears of a collapse accompanied by a wave of defaults did not materialize. Many investors who cut their exposure reenter due to attractive valuations. According to Reuters, USD returns on Russian bonds yielded 12% thus far in 2015 and corporate bonds even 20%. The country saw net capital inflows in the third quarter. What does the trick is that Russia and its companies have very low debt levels. Therefore, a number of asset managers are willing to rotate part of their funds back into the country. Though, it should be said that emerging peers, such as Brazil, have a much bleaker outlook which helps the move (back) to Russia. Stock market may have found the bottom Investors should realize that most of the gains are made when moving in front of the curve. Waiting for the economic turnaround may be too conservative and one could miss out on the big move. When looking at the charts of the main ETFs for the Russian market, one for the large caps and one for the mid and small caps, we notice that despite the crash of global markets on August 24, new lows stayed off. This is an encouraging sign from a technical point of view. Not hitting a new low on the selling pressure during August 24 may indicate that the remaining supply can easily be picked up by demand at current levels. RSXJ had a rougher day but set a double bottom pattern. In the field of technical analysis, double bottoms are regarded as the best chart patterns (see also Thomas Bulkowski thepatternsite.com ). Both ETFs are close to their 200-day moving average but already crossed the 50-day moving average. However, a so-called ‘Golden Cross’ has yet to appear, although this mostly will occur after a strong rally. An investor waiting for that sign may miss a large chunk of the move. (click to enlarge) When comparing RSX with the MSCI Russia Index, we see something interesting. The RSX is able to outperform the MSCI Index, despite the annual fees of 0.6% (see chart below). The outperformance amounts to 5% during the last four years. This highlights why RSX is a solid instrument to play the Russian market. Unfortunately, during the measured period, a loss of 37% was recorded. Risks remain, but the brave may enter The Russian economy continues to struggle. The government may be forced to finance its budget deficit by taking USD 35 billion from the International Reserves, managed by the CBR. But that’s why these funds are created for, and with reserves totaling USD 377.3 billion (as at October 17), there’s ample room. Next to that, Russia’s debt-to-GDP is still at a very low 17%. Nonetheless, the government should proceed with reforms. Encouraging is that government officials acknowledge that the country cannot navigate on oil prices. Oil prices stabilizing at around USD 50 or even rising to USD 60-70 will not be enough for a full-scale recovery. Russia’s budget is based on an oil price of USD 50. The government seems to realize that more taxes is not the solution. It is finally considering to raise the retirement age, although this may be a highly unpopular measure. The country is also strengthening its ties with China and overtook Saudi Arabia as China’s main oil trading partner. Nevertheless, China is known to prefer balanced ‘market shares’ when looking at its oil imports, so the upper bound in China exports might be near. Additional government initiative could be the last stage before an economic recovery can take off. The Russian financial market is now valued at distressed levels. So from that point of view, there’s a lot needed to push valuations even lower. It may be time to (start to) add Russia in the portfolio. As described in my previous article on Russia, small- and mid-cap companies should be preferred in a recovery, which points to RSXJ. Investors should be advised that the order book of RSXJ can show large spreads and, therefore, investors should make sure to check the NAV on the site of the ETF provider to prevent paying too much when placing an order on the screen. In addition, shares of RSXJ have limited liquidity and total assets of RSXJ is only USD 40 million. RSX may, in that case, be a better option (1x spread and ample liquidity, assets of USD 2 billion). But either choice could show a lot of potential for the long term. If an investor is interested in the Russian market and comfortable with the country-specific risks, this might be the time to enter.

Stocks And Gold: A New Balanced Portfolio

High valuations and low rates make it necessary to build balanced portfolios. Gold can be a good diversifier for US stocks. Trend following approaches can add value. Leonardo Da Vinci is credited with stating that “simplicity is the ultimate sophistication.” Daniel Khaneman added credence to Da Vinci’s belief in his book, Thinking Fast and Slow . Khaneman pointed out that “complexity may work in the odd case, but more often than not it reduces validity.” In essence, Khaneman made the case that simpler is in fact better. The same is most likely true for investing. Despite the fact that our financial system is filled with complex financial products, and often chaotic feedback mechanisms, simple investment strategies tend to work better over the long run. For example, over the last decade, an investor would have been better served to buy a low cost S&P 500 index fund over investing in active managers. Over 80 percent of the active managers failed to outperform their respective benchmarks over that period. This is despite their large research teams, sophisticated investment strategies, and years of training. The simple process of buying an index fund and holding it over the ten year period would have been superior. Index funds are great, but buy and hold is hardly the optimal investment strategy. The macroeconomic environment, valuations, and the prevailing price trends should be considered. Simple, rules-based approaches can be used to adequately account for dynamic markets. The article, Value and Momentum: A Beautiful Combination , is a great example of using two simple, yet opposed systems, to formulate a sound overall investment methodology. The purpose of this paper is to explore a new twist on a balanced approach to investing through a simple system. Courtesy of Doug Short US stocks are severely overvalued by most measures that demonstrate historical accuracy. Chart 1 gives a pretty good summary of the overvalued state of stocks using several respected measures of market valuation. Thus, long-term investors should diversify their investment in the US equities market with other asset classes. The first thought that normally comes to mind is to diversify in different asset classes of equity. Many value investors would point to the undervalued emerging and international stocks suggesting that they may offer better future returns than the US stock market. The problem with this idea is that global stocks tend to be highly correlated with US markets during periods of stress. During the summer months of 2008, most stock market asset classes fell together. Correlations between different classes of equity moved towards one, signifying a lack of diversification and an increase in portfolio risk. Bonds are also typically referenced as a good diversifier when paired with equity investments. This is normally the case as bonds have a tendency to dampen the volatility of the overall portfolio over time. The problem with diversifying into bonds in a long-term portfolio is the fact that interest rates are historically low and we are thirty years into a bond bull market. At some point, in the next twenty years, one would expect interest rates to be higher than the current rates. That expectation could lead to poor returns for bonds, especially if all the monetary stimulus turns around to haunt us with inflation. Consequently, it made sense to us to scour other asset classes with historically low correlations to stocks but with the ability to protect a portfolio against inflation or rapidly rising interest rates. With the backdrop of accommodative central banks, record debt levels in developed nations, slow growth, and deflationary conditions, gold became the asset class of choice. Partly for the controversy, as investors hate and love the yellow metal. Our view of gold is primarily price related as we are quantitative investment managers. However, from a fundamental perspective, gold makes a lot of sense as a portfolio hedge. It is a currency in its basic form and hedges against the fall of other global currencies. Therefore, we decided to test out a new balanced investment approach where we diversified US stocks with gold. Since we do not believe that volatility is risk, we did not determine our weightings to stocks and gold through volatility targeting or risk budgeting approach. Living up to our heretic ways, we instead equally weighted the two asset classes and ran a comparison versus the S&P 500 from 1972 through 2014. The hypothetical results were as follows: (click to enlarge) Chart 2: Stocks vs. Stocks & Gold Clint Sorenson, CFA, CMT Data Courtesy of NYU Stern School of Business, Global Financial Data, Morningstar1 The two strategies did a good job growing the initial investment over the time period. Although, the drawdown was much less for the portfolio of 50 percent stocks and 50 percent gold. The S&P 500 fell more than 55 percent during the time period referenced above. The 50 percent stock and 50 percent gold portfolio fell a maximum of 31 percent. Growth was similar between the two strategies. $1 million invested in 1972 would have become over $72 million in the S&P 500 through 2014. The same amount put into the balanced portfolio would have turned into almost $59 million. Obviously, the S&P 500 would have been the overall winner in a competition of growth over this period of time. We decided to apply a simple trend following method to the balanced portfolio for further comparison. The rules are as follows: Measure each asset class (US Stocks and Gold) against their 8 month simple moving averages If the closing monthly price is above the moving average, the portion of the portfolio would be invested in the asset class (Buy Signal) If the closing monthly price is below the moving average then the portion of the portfolio would be invested in the 10 year US Treasury (Sell Signal) The following table embodies all possible portfolio allocations: Allocation Range Stocks (NYSEARCA: SPY ) 0-50% Gold (NYSEARCA: GLD ) 0-50% US Ten Year Treasury (NYSEARCA: IEF ) 0-100% Applying the simple buy and sell discipline to the balanced portfolio makes all the difference historically. Since 1972 $1 million invested in the trend following approach grows to over $286 million. This is significantly more than the S&P 500 or the static 50/50 (Stock/Gold) portfolio. Furthermore, the growth comes on the back of reduced drawdown. The maximum drawdown of the trend following portfolio is only slightly more than 18 percent. Applying the simple trend filter allows for enhanced return and reduced risk. Historically, it has made sense to rent bonds during periods where stocks and gold have entered negative trends. (click to enlarge) Chart 3: Trend approach to Gold and Stock portfolio Clint Sorenson, CFA, CMT Data Courtesy of NYU Stern School of Business, Global Financial Data, Morningstar2 It is our opinion that we are in the third equity market bubble in the past fifteen years. Historically high valuations, large amounts of public and private debt, unprecedented monetary support, and negative real interest rates have challenged the common approaches to portfolio construction. We hope we have demonstrated a way to simplify diversification using a portfolio of stocks and gold. A sound investment approach does not have to be complicated to generate attractive results. 1. For the 50/50 strategy of Stocks and Gold, we used index data through 2005 and then ETF data from 2006 through 2014. We used SPY to replicate the S&P 500 and GLD to replicate gold. 2. For the trend following strategy of Stocks and Gold, we used index data through 2005 and then ETF data from 2006 through 2014. We used SPY to replicate the S&P 500, GLD to replicate gold, and IEF to replicate the 10 year Treasury bond.