Tag Archives: management

A Perfect Starting Portfolio For The Young, Long-Term Investor

Summary Of supermarkets and stock exchanges. Of what does the perfect starting portfolio consist? Personal recommendations. The other day I walked into a supermarket with a clear, self-given mandate to buy only three essentials: coffee, cottage cheese, and birthday-cake flavored oreos. While walking through the aisles, I couldn’t help but be enticed to buy all sorts of things for which I had no real need. It isn’t as though these things didn’t have merit or that I didn’t consider them worth the money, but it was simply the case that at the time those other items would have been superfluous to my goals. In like manner, there are thousands of companies that have exciting prospects. There are thousands of companies that could benefit from a trend that you see in the future, or whose products you know and love. If you’re like me, you don’t have enough money in your IRA to invest individually in all those companies, and there’s the rub (as Bill Shakespeare would say). I left the supermarket that evening, essentials in hand and head held high, because I knew what I wanted, and refrained from deviating from that. Walking out, I thought about how grocery shopping applied to building a portfolio, a similar situation in which we are continuously buffeted with advice and rhetoric. The purpose of this post is not to tell you what to buy. That went out the window when I showed how partial I am to cottage cheese and BCOs (try the latter and this will all make sense). What I do aim to accomplish, is to show how building the perfect portfolio starting out doesn’t have to be so difficult. All that is required is that you know what you want to achieve, and how to achieve it. In the last section, I will tied it all together with a ten-company portfolio that meets my goals for core holdings. What do I want, again??? Formulating a strategy for investing is easier said than done. There are many legitimate investment motifs that are frequently employed. I have been more inclined towards different ones over the past years: event-driven, dividend growth oriented, and macroeconomic trends to name a few. Perhaps it is just me being young, but I find it easy to lose the forest for the trees. What I have come to believe is that I need a core portfolio before I venture into themed investment. It is far too easy to lose patience and become distracted by a prospective investment without a core group of holdings. The purpose of long-term investment is to capitalize on compounding gains, and the thrill and corresponding quick gain from correctly interpreting an event or recognizing a short-term trend can’t match the long-term value of compound gains. The long-term value of a company lies in sustained growth of earnings. These considerations in mind, I set about to establish the characteristics of companies in the core portfolio I will be putting together piecemeal in the coming months. Like many others, I have been wary of high historical valuations caused by loose economic policy, as well as brewing global tumult in emerging markets. I do believe these are significant over-arching risks, but that is why a long-term portfolio is so attractive. Value for the long haul can subsist through economic downturns. What I look for in my retirement portfolio Word to the wise: In my opinion this should be ancillary to a 401K. I would much rather diversify within a 401K and leave this type of portfolio as a Roth IRA. Higher ceiling, but higher risk. To get to the crux of the matter, these are the characteristics I want to see of companies in my starting retirement portfolio, with a quick summary of what each means to me: Established American companies : I stick to what I know, which carries less risk. Another consideration is that investing in a foreign company will add currency considerations to earnings and dividends. Reasonably valued : I don’t want to buy something which has its future growth already paid for. As future earnings are of consummate importance, I will reference p/e for simplicity’s sake. Diversified through sectors : Using Morningstar’s 11 sectors , I seek to achieve business diversification. Combining communication services and utilities will give us a round 10 companies to own. Longevity (35 years) : Quite simply: I want the company to be still around (and growing) in 35 years. Well-managed : Concept and execution. The greatest ideas still need skillful execution to be profitable for long time frames. Prospects for continued growth : One has to try to look into the future, not just be stuck gazing into the rear view. Commitment to shareholders : Dividends help with compound gains. Buybacks can be beneficial. One company does neither and makes the list. I believe these expectations can lead to a well-rounded beginning portfolio that can be held for the long-term. Once you set expectations for yourself, I encourage you to dive in to the company’s financials, current and future projects, and the stated business model for each. Due diligence is crucial for the long-term investor. My perfect starting portfolio Without further ado, I will list out the portfolio I will be adding piecemeal into my Roth IRA, highlighted by sector for the sake of organization. The purpose of this article is not to spell out every aspect, positive or negative, of each company, but simply to spell out why it makes the cut over all the others. In-depth analysis regarding financial soundness, attractive valuation, and future prospects should be done by every individual investor; there are also articles on Seeking Alpha for every one of these companies to consider. Basic Materials: The Dow Chemical Company (NYSE: DOW ) My thought is that basic materials as a whole can be a tricky sector, whose performance is dependent largely upon the prices of underlying commodities. A company like Alcoa (NYSE: AA ) is at the mercy of aluminum for its performance. Chemicals are always in demand, and a company like Dow, which has been around since 1897, knows how to run a business. Via Yahoo! Finance: “It serves automotive, electronics and entertainment, healthcare and medical, and personal and home care goods markets.” Dow ticks all the boxes, and a 3.5%+ dividend doesn’t hurt, adding a margin of safety to a reputable company with lasting prospects. Consumer Cyclicals: The Walt Disney Company (NYSE: DIS ) My thought is that Disney is one of the best-managed companies out there. Not only have they been around for almost a century, they have shown an ageless quality stemming from changing with the times. Smart acquisitions like Marvel have paid for themselves. Diversification of the business into cruise lines, blockbuster movies, theme parks, and sports broadcasting and web presence (OTC: ESPN ), promise a growing business for decades. They are also aggressive in their dividend hikes because of all that cash flow. P/E is a little steep at 22, but the historical average is surprisingly higher at 26. Consumer Defensive: Service Corporation International (NYSE: SCI ) My thought is that SCI is in the most defensive industry there is: Deathcare. This industry will be bolstered for the next 15 years with a heightening mortality rate, as Baby Boomers reach more advanced age, so it doubles as a demographic trend pick. As for the company itself, it was recommended by Peter Lynch in the late 1980’s and his advice remains as relevant today as it was then. This will be the one pick you won’t find a lot about here on SA, but for further reading I would suggest my article here . Energy: Exxon Mobil (NYSE: XOM ) My thought is that Exxon is far and away the best-run energy company. The company has a AAA credit rating, which is better than the sovereign credit rating of the United States of America. My worries about the future of energy stop at the rock-solid financials and disciplined business approach of Exxon Mobil. The dividend isn’t the highest in the beaten-down energy sector, but they’ve raised it for 32 years straight, and that is through quite a few tumultuous times. Financial Services: Berkshire Hathaway Inc. (NYSE: BRK.B ) (NYSE: BRK.A ) My thought is that actually having little to do with Buffett. The sage octogenarian has a jaw-dropping track record, but his company’s earnings will continue long after he is no longer at the helm. This pick is sort of a cheat for the sector, since I see Berkshire’s strength in its diversity of businesses, not in a traditional financial services way. I myself work in the financial services industry, and I feel a lot of things are changing for the future. Insurance won’t be one of those things, and neither will railroads, Heinz, or a great number of other companies under the Berkshire umbrella. Healthcare: Johnson & Johnson (NYSE: JNJ ) My thought is that I don’t trust biotech. I couldn’t put any biotech in my 35-year timeframe, because R&D is so pivotal to earnings. The Johnson & Johnson brand, with its plethora of constituents, is dependent on people getting cuts, washing their babies, and getting sick with colds and headaches. They also have medical device and pharmaceutical segments, too, so they may not be a biotech, but they will have new products in their pipeline. In the fantasy football world one would say they have a high ceiling and a high floor, so I’m comfortable making them one of these top ten draft picks for my portfolio. Their dividend is about the most sure thing you can find in this life. Industrials: Honeywell International (NYSE: HON ) My thought is that industrials is a hard sector to reduce to one choice. GE, Boeing, and Lockheed Martin could just as easily make this list. I chose Honeywell because I think their prospects are so multi-faceted that to not have them in a portfolio is an oversight. I don’t even have room to talk about all of the segments that Honeywell operates in here, but their diversification, longevity, and integration with technologies that might become dominant very soon make them almost a sure-fire wonderful investment. You can read about why they would be the one dividend stock Adam Aloisi would own here . That’s quite a vote of confidence. Real Estate: Realty Income Corporation (NYSE: O ) My thought is that Realty Income has enough articles on Seeking Alpha that they should be paying the site. The “Monthly Dividend Company” is a darling of the site for good reason: their business model is airtight and low-risk. It is a little bit like a real estate mogul who owns properties, and renting them out, can sit back and collect the checks. Well Realty Income shares 90% of those checks with its shareholders, and has done so since 1994. They expand, but not over-aggressively, and their occupancy rate has never dipped under 96.6% for any year. They are likely the most shareholder-friendly company out there, as can be easily seen from their site . Technology: Alphabet Inc (NASDAQ: GOOGL ) My thought is that Alphabet beats out Apple Inc. as the tech stock to own for 35 years. They own information, and we are in the information age. They are the company everyone wants to work for, so they will (and do) attract the brightest talent. Owning a monopoly on information will allow Alphabet to really do whatever they want, which is a scary but lucrative proposition. They added a verb to the English language. They are also cash-heavy, but have the ideas and reputation to put that to good use for the future. They have only been public for 11 years : crazy to think about, but it’s still in its infancy. It has tremendous growth ahead. Telecom/Utilities: AT&T (NYSE: T ) My thought is that utilities are honestly quite dull and growth is mainly in the future. Within the telecom industry, however, AT&T beats out Verizon as my pseudo utility/telecom I want to own. They have rolled with the punches of technology and monopoly allegations, keeping a rock-solid dividend and growing through advertising and related acquisitions. The DirecTV (NASDAQ: DTV ) acquisition should boost the cash flows of this juggernaut, allowing the 5.5% dividend to keep growing. So there you have the ten companies I would recommend as the perfect starting portfolio for the young, long-term investor. I will reiterate: Do your due diligence. I may find some qualities more attractive in companies I want to own than you do. Personally, I will be buying these companies over the next few months. Looking forward to comments from everyone!

PIMCO High Income: Here Are A Few Examples Of Easy To Find Alternatives

PHK is still trading at a premium. It’s distribution is still high, even after a cut. There are other options, if you care to look. I may sound like something of a broken record on PIMCO High Income Fund (NYSE: PHK ), but I don’t think the worst is over yet for shareholders. At the very least, after the recent dividend cut, it’s worth questioning your commitment to the fund. Here’s why I’m still concerned and a few options to look at. It’s still risky So it might be easy to understand why I would be negative on a closed-end fund, or CEF, with a 60% premium, which PHK sported not too long ago. But why am I still negative after that premium has fallen so far and the dividend has been trimmed? For starters , the nearly 15% premium at which PHK currently trades is still pretty rich on an absolute basis, even though it’s much lower than it was before. Few CEFs trade that far above their net asset values, with most actually trading at a discount. Second, the fund has a distribution yield of around 18% relative to its net asset value, or NAV. (Based on market price the distribution yield is closer 16% because of the premium to NAV.) Think about that for a second. This is a bond fund, albeit an aggressive one, that has to send investors 18% of its assets each year in distributions. In order to do that it will need to generate a return of at least that much or it will be eating into net assets. A decade ago the NAV was over $14 a share, today it’s under $7 a share. To be fair, if you look at the fund’s total return, which includes reinvested distributions, it has done well overall. But if you have been living off of those distributions, the picture isn’t as sanguine. Add in the recent dividend cut and the warning signs aren’t just written on the wall, they have slapped investors in the face. At one point shareholders could hang their hat on the fact that the distribution hadn’t been cut, even during the deep 2007 to 2009 recession. But that’s just not true anymore. And with the payout still so large, you should be thinking about the possibility of more cuts to come. Alternatives So what should you look at? If you just love PIMCO and can’t imagine allowing any other asset manager the chance to run your bond money, there are plenty of alternatives for you to consider. In fact, if you love PIMCO and think PHK’s managers, Alfred Murata and Mohit Mittal, are geniuses, you still have plenty of options . The pair also run Income Strategy Fund (NYSE: PFL ), Income Strategy II Fund (NYSE: PFN ), Corporate & Income Strategy Fund (NYSE: PCN ) and Corporate & Income Opportunity Fund (NYSE: PTY ). These are all different funds, of course, but all four offer distribution yields of around 10% or so and all but one trades at a discount to NAV. PTY, the only one of the quartet at a premium, trades hands at roughly 2% above its net asset value. That’s a lot more reasonable than nearly 15%. And just so we’re on the same page, of the five closed-end funds mentioned so far, only PHK has cut its distribution recently. That’s no guarantee that the other four won’t or that PHK will cut again, but if I had to pick a fund to be concerned about, I’d go with the one that stands out the most… PHK. There are other PIMCO funds with different managers that you could look at, too, of course. But what if you weren’t married to PIMCO (or the two managers of PHK), you could look at funds from any number of reputable asset managers. If you don’t know where to begin, just head over to CEFA.com, the Closed End Fund Association’s free site. Go to the Advanced Search tool from the Fund Selector drop down in the navigation bar. Select “general bond funds” as your classification, which is where PHK lives, and there’s a whole list of options for your perusal. A couple of easy to find examples with good pedigrees: Eaton Vance Limited Duration Income Fund (NYSEMKT: EVV ) and BlackRock Multi-Sector Income Trust (NYSE: BIT ). Both trade at discounts to NAV and both have distribution yields in the 9% range – notable, but not frighteningly high. And BlackRock and Eaton Vance are names at least on par with PIMCO in the asset management business. The point isn’t to suggest that any of the alternatives I’ve thrown out are the perfect one for you or anyone else. My point is to show that there’s no need to be locked into PHK because finding similar funds isn’t hard. You will have to be willing to accept a lower yield. But based on PHK’s unusually high yield and the cut that’s already taken place, less income seems like it could be a real possibility even if you don’t look for an alternative. Hindsight is 20/20. The time to get out of PHK was when it was trading at a huge premium. If you didn’t jump ship then, so be it. Mistake made, now it’s time to learn from what took place. That’s even more true since PHK still trades at a notable premium and still has a frighteningly high distribution yield. My two cents is that it won’t hurt to consider some easily found alternatives.

Pacific Funds In Focus On Trans Pacific Partnership Deal

After hectic negotiations for half a decade, the contentious Trans Pacific Partnership (TPP) was secured by the U.S. and 11 other countries. This is the biggest trade agreement in history aimed at reducing tariffs and setting common trading standards for the 12 Pacific Rim nations, including the U.S., Canada, Japan, Australia, Brunei, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The agreement will thus widen the horizons of trade in the Pacific region. TPP will cut tariffs and create common standards for all 12 member countries. On first look, these measures look promising enough to boost the business environment of the Pacific or related countries. For example, the deal will create new opportunities for companies in Pacific regions while providing adequate protection for U.S. manufacturers. While it helps the companies and the stock performances, the funds should look to benefit too. However, the TPP is not without controversies and opposition. US Democratic presidential hopeful Hillary Clinton is against the trade deal and said the proposed pact does not address currency manipulation. The deal puts Pacific funds under the spotlight, which are hoping to rebound from the negative territory. The funds are favorably-ranked but the market concerns this year had dragged them to the red too. Positive impact of the TPP, which will lower trade barriers around the Pacific and boost export-heavy markets, will be a welcome factor for the Pacific mutual funds. A Look into TPP Deal Currently, TPP member nations represent about 40% of global GDP and 30% of global trade. The deal will open up trading avenues for key export products of Vietnam such as textile, garment, footwear, and seafood in broader market such as the U.S., Japan, and Canada due to their ultra low import tariffs. An argument in favor of the TPP deal is that it will expand U.S. exports and create higher-paying jobs. On the other hand though, there may be an outflow of American jobs to overseas economies. There is also uncertainty about why the exact wording of the TPP was kept relatively secret during negotiations. As the TPP reaches the Congress for approval, it will witness apprehensions from both parties. The Congress may thus take months to deliberate. Meanwhile, the public will also get a minimum of two months to review the content of the deal before Congress decides on its approval. Talking of apprehensions, presidential hopeful Hillary Clinton commented: I have been trying to learn as much as I can about the agreement…But I’m worried. I’m worried about currency manipulation not being part of the agreement. We’ve lost American jobs to the manipulations that countries, particularly in Asia, have engaged in. I’m worried the pharmaceutical companies may have gotten more benefits – and patients and consumers fewer. I think there are still a lot of unanswered questions. On a separate note, it was interesting to find out the absence of China. It is a prominent country in the Pacific Rim, but the second largest economy and the world’s largest exporter was not part of the proposed pact. Though some believe that China will join in later, but for now this is an opportunity for others to grab a share of China’s export market. 3 Pacific Mutual Funds to Buy Below we highlight three Pacific – Equity mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. Also, the funds have encouraging 3- and 5-year annualized returns. The minimum initial investment is within $5,000. The Guinness Atkinson Asia Pacific Dividend Builder Fund (MUTF: GAADX ) invests heavily in dividend generating equity securities issued by companies form the Asia Pacific region. Common and preferred stocks, related convertible securities, rights and warrants constitute GAADX’s major investments. Guinness Atkinson Asia Pacific Dividend carries a Zacks Mutual Fund Rank #2. Over 1-year period, GAADX has gained 4.3%. The respective 3- and 5-year annualized returns are 4.9% and 4.1%. GAADX carries no sales load. The Fidelity Pacific Basin Fund (MUTF: FPBFX ) seeks to achieve long-term capital appreciation by investing a major portion of its assets in securities of issuers located or are economically tied to Pacific Basin. FPBFX generally invests in common stocks of companies located across a wide range of Pacific Basin countries. Factors such as financial strength and economic condition are considered before investing in a company. Fidelity Pacific Basin carries a Zacks Mutual Fund Rank #1. Over 1-year period, FPBFX has gained 5.2%. The respective 3- and 5-year annualized returns are 11.3% and 7.6%. FPBFX carries no sales load, and annual expense ratio of 1.18% is lower than the category average of 1.33%. Wells Fargo Advantage Asia Pacific Fund (MUTF: SASPX ) seeks capital growth over the long run. SASPX allocates a lion’s share of its assets in equities of companies located in Asia Pacific Basin. SASPX emphasizes on factors including earnings growth, financial condition and management efficiency for selecting companies. SASPX may also invest in participation notes. Wells Fargo Advantage Asia Pacific Investor carries a Zacks Mutual Fund Rank #2. Over 1-year period, SASPX has gained 3.5%. The respective 3- and 5-year annualized returns are 8% and 5.2%. SASPX carries no sales load. Link to the original post on Zacks.com