Tag Archives: management

Aberdeen Asia-Pacific Income: Emerging Markets Bonds At A 17% Discount

Summary Example of one Asian baby thrown out with the bathwater by retail investors. Relatively safe portfolio of bonds, overseen by a reputable manager, with a yield in the high single digits. High potential for alpha through eventual compression of high-teens discount to NAV. Background on Closed-End Funds For those who 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 the case for several Asia-focused closed-end funds. I previously wrote about one such opportunity to obtain Chinese equity exposure at a 20%-plus discount. Here, I’ll cover another opportunity to buy debt exposure at a discount. Aberdeen Asia-Pacific Income Fund Overview The Aberdeen Asia-Pacific Income Fund (NYSEMKT: FAX ) was established in 1986 with an investment objective to seek current income through investment in Australian and Asian debt securities. Aberdeen is a reputable closed-end fund manager, which has conducted share buybacks through tender offers for several of their other funds (such as The India Fund, Inc, Aberdeen Chile Fund, Inc, and Aberdeen Greater China Fund, Inc) when they have traded at significant discounts to NAV. The fund currently pays a monthly dividend of 3.5 cents (equating to a ~9.3% yield), and its expense ratio is moderate at 1.09%, excluding interest expense and based on the fiscal year ending October 31, 2014. The fund makes moderate use of leverage, which stood at approximately 22% of gross assets at August 31, 2015. Leverage is of course a double edged sword and could magnify any gains or losses experienced by the underlying assets. As can be seen below, although the fund’s longer term returns have been reasonable, performance has suffered recently amidst general market turbulence in the sector. Source: Aberdeen Asia-Pacific Income Fund Performance Report This lackluster recent performance has spurred investor outflows that have caused FAX to now trade at a ~17% discount to NAV. As shown below, this has happened numerous times in the past when Asian market sentiment turned negative (e.g., 2008, 2000, 1998), but in all cases the discount eventually collapsed when sentiment stabilized. (click to enlarge) Source: CEFConnect Portfolio Composition Based on reported holdings at August 31, 2015, the FAX portfolio is composed of ~44% corporate bonds, ~53% sovereign and supranational bonds, and ~2.6% cash. The vast majority of the portfolio is made up of investment grade (BBB- or higher rated) bonds. To put this in a little perspective, the average annual historical default rate of bonds rated IG by S&P over the past few decades is well-under 0.5%. Source: Aberdeen Asia-Pacific Income Fund Fact Sheet The portfolio is diversified geographically as summarized below, though Australia, China, India and South Korea are the largest constituents. Source: Aberdeen Asia-Pacific Income Fund Fact Sheet Conclusion Due to the Aberdeen Asia-Pacific Income Fund’s current large discount to NAV, investors now have the ability to own a relatively safe portfolio of Asian bonds, overseen by a reputable manager, for ~83 cents on the dollar.

The WisdomTree Europe Dividend Growth ETF: Timing Is Everything

The fund is heavily weighted with best in class European companies. The fund is dividend weighted with a defensive bias. The poor performance seems to be a result of coming to market at the wrong time. Europe seems to have a split personality, at times somewhat fractious and recalcitrant and at other times cooperative and harmonious. The moribund Medieval Period was followed by a lively Renaissance. Centuries of religious wars were followed by an enlightened scientific revolution. In the 20th century, Europe engaged in decades of warfare not witnessed in all of human history. In the wake of that 20th century dark age, Europe determinedly embarked towards a second enlightenment. The basis for this hopeful new age is founded on equality, solidarity and prosperity, achieved through a unified economy. Europe has created an equitable, cooperative capitalism: carefully regulated and open. This new age has led to the creation of a sizable economy of well founded, well established global companies. An opportunity to participate in the potential growth of these companies may be had through the WisdomTree Europe Dividend Growth ETF (NYSEARCA: EUDG ). According to WisdomTree : … WisdomTree Europe Quality Dividend Growth Fund seeks to track the investment results of dividend-paying companies with growth characteristics in the European equity market … The tracking index is WisdomTree’s own proprietary index [DEFA]: … The Index is comprised of 300 companies from the eligible universe based on their combined ranking of growth and quality factors. The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets. Companies are weighted in the Index based on annual cash dividends paid. .. It seems that WisdomTree’s approach to dividend weighting results in a more conservative passive methodology than weighting by market price. An interesting description written by Mr. Jeremy D. Schwartz, titled “Dividends of a Dividend Approach ” , details the reasoning of the approach and the results. For example, it specifically takes into account, the importance of dividends in determining a stock’s price; the fact that dividends historically have provided the majority of the stock markets real return; dividends are an objective measure; dividends reflect management’s shareholder interest and lastly, the demand for income among baby boomers in retirement. The fund itself is a relative newcomer to the industry, incepted in May of 2014. If the fund is weighted by dividends and the quality of earnings, the top weightings should give a good indication of the risk to the investor. (click to enlarge) First it should be noted that the fund has about 200 holdings as of mid-October, however, just over 50% of the funds weighting is concentrated in its top holdings. There is something to point out in those top holdings. There seems to be a repetition of companies held. For example Roche Holdings ADRs on the OTC are assigned the symbol OTCQX:RHHBY . On the “Swiss-6” exchange, it’s ROG.VTX and on another Swiss exchange it’s Ro.SW. They all represent the same company and the same class of stock, hence Roche Holdings has a combined 8.31% weighting in the fund’s holdings. Similarly, Unilever is listed as UL on the NYSE, on the London exchange UNA, on the Amsterdam exchange as UNC as well as others. The point being that in the fund’s top holdings, Unilever holds a combined 3.98877% weighting and Roche 8.31% in the top fund’s holdings. By combining those ,means that the top 50% is really contained in the top 19 holdings, i.e., 9.5% of the fund. The top 50% of the fund is more heavily weighted in Consumer Staples, Health Care and Telecom Service than the entire fund. On the other hand, the top 50% is ‘lighter’ in Consumer Discretionary, Industrials, IT. Lastly the top half contains neither a Financial nor Material Sector allocation. It then appears that the more defensive sectors comprise the heaviest dividend weights. The more cyclical sectors are less weighted and more widely distributed among the fund’s 200 holdings. Below is a summary table of the top 50%, containing 19 companies with a relevant few metrics. Company Fund Weighting Yield Cash Flow Multiple Payout Ratio ROI/ROE Price/Earnings Price/Book Sector Roche [RHHBY] 8.31031% 3.06% 18.10 73.94% 20.07/48.00 23.37 10.96 Health Care British American Tobacco ( OTCPK:BTAFF ) 4.19366% 3.98% 14.71 46.50% 22.57/70.15 17.50 11.74 Consumer Non-Cyclical Anheuser-Busch (NYSE: BUD ) 4.02124% 3.11% 26.58 29.15% 10.25/19.29 19.38 3.77 Consumer Non-Cyclical Unilever [UL] 3.98877% 3.14% 17.37 41.40% 17.63/33.21 22.16 7.00 Consumer Non-Cyclical Novo Nordisk (NYSE: NVO ) 3.16913% 1.39% 21.09 41.30% 75.61/82.48 29.94 23.78 Health Care Bayer ( OTCPK:BAYRY ) 3.09927% 1.95% 14.14 53.35% 7.40/16.71 26.38 4.13 Health Care SAP (NYSE: SAP ) 2.35035% 1.79% 17.35 42.76% 11.82/16.66 23.46 3.47 IT Daimler ( OTCPK:DDAIF ) 2.32166% 3.41% 5.63 32.51% 6.82/17.81 9.62 1.98 Consumer Cyclical Diageo (NYSE: DEO ) 2.18663% 2.99% 15.88 59.43% 13.56/32.63 19.30 5.91 Consumer Non-Cyclical Telefonktiebolasget Ercsso [ERIC] 1.95709% 3.72% 13.59 109.29% 5.73/7.55 27.43 2.07 Telecom Service Inditex ( OTCPK:IDEXY ) 1.79386% 1.67% 26.14 29.56% 26.31/29.39 35.37 9.78 Consumer Cyclical Louis Vuitton ( OTCPK:LVMUY ) 1.73739% 1.92% 15.88 46.08% 9.29/12.71 24.76 3.02 Consumer Cyclical Hennes & Mauritz ( OTCPK:HNNMY ) 1.6948% 3.14% 16.43 *51.54% 41.57/44.71 23.82 9.98 Consumer Cyclical L’Oreal ( OTCPK:LRLCY ) 1.6825% 1.65% 23.28 *37.86% 11.80/12.90 31.27 3.99 Consumer Non-Cyclical Reckitt Benckiser ( OTCPK:RBGLY ) 1.66167% 2.14% 24.96 59.49% 16.66/24.90 28.23 6.90 Consumer Non-Cyclical ABB LTD (NYSE: ABB ) 1.62665% 3.12% 11.23 72.54% 9.54/15.73 16.94 2.90 Industrials Schneider Electric ( OTCPK:SBGSY ) 1.44748% 3.61% 11.19 *40.34% 6.20/9.03 17.64 1.50 Industrials Airbus Group ( OTCPK:EADSY ) 1.4196% 2.08% 9.04 *18.83% 5.61/32.83 16.54 7.94 Industrials Syngenta (NYSE: SYT ) 1.41046% 3.57% 14.77 *52.75% 10.39/15.68 20.92 3.42 Industrials Totals/Averages 50.07% 2.707368% 16.731 49.40% *estimated % of cash flow per share 17.30/28.55 22.84 22.84 The returns are anything but stellar, however, there’s an important reason for this. Returns 1 Month 3 Months 1 Year Since 5/7/2014 Inception WTEDG Index -2.87% -6.18% -6.28 -8.76 EUDG Fund -2.49% -6.56 -5.96 -9.21 The fund is not currency hedged. A comparison with the Euro vs the U.S. Dollar tells the story. (click to enlarge) The fund came to market precisely on the same day the Euro peaked in this time interval at $1.37 per Euro. From there it steadily trended lower to its current $1.12; just over an 18% decline. The fund closed its first day of trading at about $25.25. An 18.25% decline of the shares from that point works out to $20.64, just above its September 29 low of $20.05. Hence, when translated back to USD dollars, the value of the fund ‘shrank’ even though the top line companies continued to perform well. The currency translation is a very important point for the investor to keep in mind. When the European currencies weaken vs the U.S. Dollar, the NAV will decline, even if the companies in the fund are doing well . Hence, purchasing when the U.S. Dollar is strong is like purchasing the fund at a discount. Eventually, Europe will regain its economic footing and European currencies will appreciate against the U.S. Dollar, hence the potential for capital appreciation on a ‘dollar cost averaged’ investment. The same is true of European denominated dividends and distributions. The whole point of the matter is that for investors with risk capital, and the willingness to be patient while gradually accumulating a position knowing that the top 50% of the fund has an average yield of over 2.7% and the fund is defensively allocated, then it’s reasonable to assume that over a longer time horizon the future returns will outweigh current risk. The current poor returns are a matter of having a good idea, but extraordinarily bad timing.

Our Top Trades Review – October

Summary A review of our recent Top Trade Ideas. A snapshot of our Current Option Opportunities Portfolio. Several trade ideas that are still great opportunities for new trades. How interesting the markets have been! In our August Top Trade Review , I mentioned we were starting a new product – which began as the 5% Portfolio and was renamed the Options Opportunity Portfolio – which has been a huge success, now up 16.7% at the close of the second month: (click to enlarge) These are, for the most part, short-term trades, but we’ve been layering in some longer-term trade ideas – using our profits to invest in trades that will generate steady monthly gains over time, rather than only focusing on “quickies”. Our Top Trade Ideas generally tend to be longer-term trades, and we don’t have a portfolio that tracks them specifically. They are generally selected trades from the ones that we are adding to PSW’s Short-Term Portfolio or Long-Term Portfolio, and tend to be of the “set and forget” variety, while our OOP trades require a bit more active management. (click to enlarge) While 30 of our first 45 (66%) Top Trade ideas were winners, 4 of our 15 losers were Lumber Liquidators (NYSE: LL ) trade ideas – all of which are now coming back as LL pops back to $20! Hopefully it can break over $20 and we can put all that silliness behind us. Getting two out of three trades right is plenty to move the investing ball towards the goal line. Combine that with sensible portfolio management techniques (diversification, managing losses, hedging), and you’ll beat the S&P by a mile with no sweat. Generally, with our Top Trades, we’re simply picking stocks we feel are underpriced, and we’re using our various options techniques to give ourselves even better discounts and hedged entries – but these are patience plays that do take time to get going, though we did call for a cash-out of our winners in July, so August was kind of a fresh start. Without further ado, here’s the next month of trades for review – some are still good for new entries : (click to enlarge) On August 4th, we saw a news article that Windstream (NASDAQ: WIN ) won a contract for $450M to build out wireless services for the VA. As WIN was a company we had played in the past, this was a trigger for us to jump in with a new play, which was: In the STP, let’s go for 40 WIN Sept $5 calls for 0.50 ($2,000) and let’s do 10 in the $25KP ($500). As you can see, WIN popped nicely right off the bat and finished September 18th (expiration day) at $6.92, with the calls at $1.92 – up 284% . Well, they can’t all be long-term trades… 😉 (click to enlarge) August 11th was a double alert: In addition to a play on Terex (NYSE: TEX ), we also included a long oil Futures trade idea: You can still sell the TEX 2017 $23 puts for $3 and that’s net $19, which is very fair, even if the merger fails – I like that and you can add the $20 ($7.60) /25 ($4.30) bull call spread at $3.30 for net 0.30 on the $5 spread but that’s betting the merger does go through just to make another $1.70 – not really worth the risk. Our timing on that one was good, but then bad, as people first loved, then hated, the merger deal, and now they are warming up to it again. Nonetheless, since we were fairly conservative in our play, the short puts are still just $3.30 (down 10%) , and the additional spread I said was not worth the risk is now net $1.50, down 50%, and NOW it’s worth the risk! A much better trade that day was my Futures pick on oil (/CL) to go long at $43. We pretty much caught the dead bottom there and, as you can see, we popped all the way to $55 before the rally failed – up $12,000 per contract . Of course, we don’t just get in and ride them out – but if you are still in this trade back at $52.50 (up $9,500), it’s time to stop out, as we’re short again! August 24th was our next trade (we didn’t like anything enough in the prior week), and our trade idea that Monday was for our Stock of the Decade, Taser (NASDAQ: TASR ), as it fell back to the $20 line. We liked this one so much that not only was it a top trade, but it was the first long-term trade idea added to our Options Opportunity Portfolio as well: (click to enlarge) Buy 20 TASR 2017 $20 calls at $6.20 ($12,400) Sell 20 TASR 2017 $25 calls at $4.15 ($8,300) Sell 20 TASR 2017 $15 puts at $2.40 ($4,800) Our net on the spread was a $700 credit and, as you can see, this is another one we caught a nice bottom on. They are now back to testing the $25 level, which is all our very conservative target is looking for to make the full $10,700. At the moment, the net on the spread is $2,500, so already net $3,200 off our original $700 credit is up 457% in just over a month, and only just getting started! On August 26th, we got very busy indeed as we reviewed Goldman Sachs’ 25 most oversold stock list to see which ones we thought were playable. Our trade ideas were: (click to enlarge) Cheap food costs tip the scales for me on this one and sure, I don’t like paying 18.8 for a grocery store but I do like paying 12x earnings and that would be $22 and you can sell the 2017 $23 puts for $1.55 to net in at $21.45 (30% off) and we can play that with the $30 ($5.50)/$35 ($3.45) bull call spread at $2.05 to net into the $5 spread for 0.50. Margin on 10 short puts is a negligible $2,300 and I REALLY would like to own $46,000 worth of WFM at $23 so let’s do 20 of those in the LTP . Whole Foods (NASDAQ: WFM ) just took off and headed back to the $35 line, and the net on the spread has gone from $500 to $1,470, which is up $970 (194%) , but merely on trace to the full $5,000 we expect if it can get above $35 and hold it through January 2017. Good time to make a note that you don’t HAVE to make short-term trades to get great short-term returns on your cash. This trade was a very sensible entry on 8/24 and it’s only 10/10 and already we’re up 194% – that’s enough to satisfy all but the greediest of short-term trades yet we took no particular short-term risk because we are BEING THE HOUSE and selling more premium than we bought . (click to enlarge) 10 2017 $35 puts can be sold for $3.20 ($3,200) and $35 is already another 20% off and we can use that money to buy 10 of the $40 ($9.40)/50 ($5.50) bull call spreads for $3.90 for net 0.70 on the $10 spreads that are $4.77 in the money to start. I fully expect these to get cheaper and we’ll spend $4.50 more to roll down to the $30 calls (now $17) when and if we have the opportunity. For the LTP. Marathon Petroleum (NYSE: MPC ) was one we put our foot down on as it tested the $45 line. As we are supposed to do – we took advantage of the OPPORTUNITY to buy low, and we took up an option spread that would give us an entry even lower ($35.70 in this case) in our worst case. As it happens, we nailed the bottom, and already, this $700 spread is netting $3,300 for a $2,600 (371%) gain in just over 30 days. Again, you do not need to take big risks to make big rewards – even in the short run. (click to enlarge) Buy 10 April $40 puts for $2 ($2,000) Buy 10 April $50 calls for $4 ($4,000) Sell 10 Oct $50 calls for $1.55 ($1,550) Sell 10 Oct $45 puts for $2 ($2,000) This Lincoln National (NYSE: LNC ) spread was for our Butterfly Portfolio, and that’s one that needs managing. The long puts and calls are still net $4,900 (down $1,100), but the short puts and calls are down to $560 already (expire next Friday) for a $2,990 gain, and that’s an overall net gain of $1,890 (+77%) off our $2,450 investment in just over a month – not bad for a well-hedged Butterfly! The way our Butterfly plays work is we simply make our next target sale once the first one runs down so, for example, we expect LNC to be around $52.50 into the end of the year and the November options don’t pay well so we can sell the Jan $47 puts for $1.90 ($1,900) and the Jan $53.50 calls for $1.50 ($1,500) and drop another $3,400 in our pocket for the next 3 months. (click to enlarge) On September 2nd, we reiterated our long call on TASR (above) and added this one on Skyworks Solutions (NASDAQ: SWKS ): As we’re always looking for our monthly $4,000(ish) in the LTP, let’s sell 5 of the SWKS 2017 $60 puts for $7 ($3,500) as that’s certainly a stock we don’t mind owning way down from here. While that one got off to a good start, we’re right back where we started (a bit below), at $8.20 for a $1,200 (34%) loss . For the purpose of our LTP, we really do want to own the stock for net $53, so we don’t care what the PRICE (not value) of the option is at $79.60. But this is a patience play for sure. On September 4th, we reiterated our warning to cash out winning positions, and we reviewed all of our Portfolio Positions. As I’ve noted, we don’t have a Top Trade Portfolio, as these trades are mainly picks from other portfolio plays, but the same rules apple – mainly cash and well-hedged is our current position in all 4 of our Member Portfolios! (click to enlarge) Since we had plenty of cash, we were free to add more trades, and on September 9th, we added Yahoo (NASDAQ: YHOO ) with the following spread: Sell 10 2017 $30 puts for $3.80 ($3,800) Buy 10 2017 $25 calls for $8.50 ($8,500) Sell 10 2017 $38 calls for $2.20 ($2,200) YHOO is really only back to where it was on that day after a nasty dip, but once again our “Be the House” strategy pays off, and the net $2,500 entry is already at $3,240 for a $740 gain, which is only +29% – but that’s on a stock that’s gone nowhere in 30 days. Isn’t that a trading style that’s worth learning? (click to enlarge) Our second Top Trade on the 9th was for the only Chinese company we like, China Mobile (NYSE: CHL ), with the following trade idea: While we’re on the top of positions – CHL is up 0.86 today but still cheap at $60.22 and we can sell 5 2017 $50 puts for $3.90 and that drops $1,950 into the LTP and keeps our eye on it . That one has improved since we called it, though off the highs, as China is having a very rough ride (and we knew that, but we still like CHL down here). The $50 puts are now $3.83, or $1,915, on 5 contracts versus the $1,950 we collected, up a not very exciting $35 (2%) , but on track and still great for a new entry. Our other Top Trade ideas are too new to review, but clearly it was a good month, with 8 winners and just two losers (so far), both of which make even better entries now than they were when we called them. Our Option Opportunities Portfolio is a partnership with Seeking Alpha and you can sign up for that portfolio HERE , which aims to make $5,000 a month in a $100,000 portfolio using a variety of option trading strategies (the portfolio at the top of this page is through Friday after just 2 months). It’s similar to Top Trade Alerts but focuses on quicker opportunities that tend to require a bit more active involvement.