Tag Archives: management

EWI: 3 Coins In The Fountain

A long established fund, with consistent dividend returns. The fund is well off its highs attained before the financial crises of 2008. Italy, as part of the larger EU, offers investors the opportunity to grow with a recovering EU economy. Among the available legions of ETFs there are only two mostly Italian weighted at better than 94% and they are closely related funds. First, is the plain vanilla iShares MSCI Italy Capped ETF (NYSEARCA: EWI ) and the currency hedged version, the iShares Currency Hedged MSCI Italy ETF (NYSEARCA: HEWI ). The currency hedged fund HEWI, as its ticker symbol suggests, is identically the EWI fund with the addition of a U.S. Dollar vs Euro currency hedge. It should be noted that a currency hedge does its best to mitigate fluctuation in currency exchange. Just briefly, when the U.S. Dollar strengthens against the Euro, Euro denominated profits will seem to shrink when translated into U.S. Dollars even if Euro denominated profits remain unchanged. Conversely, when the Dollar weakens vs the Euro, Euro denominated profits will seem to grow, even if Euro denominated profits remain unchanged. A currency hedge is designed to ‘smooth out’ these fluctuations. However, there are costs associated with currency hedge, so an investor would a long term horizon may or may not fully benefit from a currency hedge. Hence, the choice of the hedged [HEWI] or unhedged [EWI] version is left to the discretion of the investor. The benchmark index is Morgan Stanley Capital International [MSCI] Italy 25/50 Index (NYSEARCA: USD ): The MSCI Italy 25/50 Index is designed to measure the performance of the large and mid-cap segments of the Italian market. It applies certain investment limits that are imposed on regulated investment companies, or RICs, under the current U.S. Internal Revenue Code. With 26 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Italy. The fund’s cap refers to U.S. IRS tax code in that: …at the end of each quarter of its tax year no more than 25% of the value of the RIC’s assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the fund should not exceed 50% of the fund’s total assets… Lastly, the MSCI cap methodology is designed to minimize turnover. (click to enlarge) ( Data From MSCI and BlackRock) The three heaviest weighted sectors are a little different. The fund weights the Energy Sector energy about 10.8% more than does the index; Financials about 4.41% lighter than the index and Utilities almost 13% heavier than the index. So the fund leans a little more defensively than does the index. In spite of the difference, the iShares Italy capped fund EWI seems to emulate the MSCI index rather well. iShares EWI vs the MSCI Index 1 Year 3 Year 5 Year 10 Year Inception MSCI Italy 25/50 Index -7.09% 7.97% -0.58% -2.83% 4.07% iShares Italy Capped EWI -7.23% 8.21% -0.59% -2.83% 4.16% (Data From BlackRock) As far as individual holdings, MSCI only list the top ten heaviest weighted holdings. A quick comparison reveals a slight difference from the fund. First, the top ten Index holdings represents 65.42% of the entire index, whereas the top ten holdings of EWI represents 68.74% of the fund’s holdings. As far as individual top ten holdings, the iShares fund carries three identical financials and Telecom Italia (NYSE: TI ) 3.6132% of the fund’s total holdings. On the other hand, the MSCI Index carries a fourth financial, Banca Monte Dei Paschi di Siena ( OTCPK:BMDPY ) 5.25%, of the index. The fund carries the bank also, but it accounts for only 2.096% of the total fund. Top ten comparison of MSCI Index vs iShares EWI Sector MSCI EWI Sector Consumer Discretionary LUXOTTICA GROUP (NYSE: LUX ): 4.66% LUXOTTICA GROUP: 4.58% Consumer Discretionary Consumer Discretionary FIAT CHRYSLER AUTOMOBILES NV (NYSE: FCAU ): 4.00% FIAT CHRYSLER AUTOMOBILES NV: 4.11% Consumer Discretionary Energy ENI (NYSE: ENI ): 11.00% ENI: 11.96% Energy Financials INTESA SANPAOLO ( OTCPK:ISNPY ): 12.13% INTESA SANPAOLO: 13.48% Financials Financials UNICREDIT ( OTC:UNCFY ): 7.57 UNICREDIT: 8.72% Financials Financials BANCA MONTE DEI PASCHI DI SIENA SP: 5.25% ASSICURAZIONI GENERALI: 4.53% Financials Financials ASSICURAZIONI GENERALI ( OTCPK:ARZGY ): 4.48% ATLANTIA: 4.56% Industrials Industrials ATLANTIA ( OTCPK:ATASY ): 4.43% TELECOM ITALIA: 3.61% Telecommunications Utilities ENEL ( OTCPK:ENLAY ): 7.73% ENEL: 8.93% Utilities Utilities SNAM ( OTCPK:SNMRY ): 4.00% SNAM: 4.26% Utilities Represents 65.42% of the Index Represents 68.74% of the Fund (Data from BlackRock and MSCI) It’s worth making note of the difference between those two top holdings. Banca Monte Dei Paschi di Siena provides corporate and consumer banking services, asset management, life insurance, pension funds and investment trust. The bank has a market cap of $5.3876 billion, has a negative EPS at -5.97 and does not pay a dividend. Lastly, the shares are rather volatile with a beta of 1.73 times the market. Telecom Italia’s primary businesses are landline and mobile telephone service, internet and internet protocol TV as well as the office product and IT provider, Olivetti , as a wholly owned subsidiary. Telecom Italia company is the leading company in its sector, with international operations in Brazil and Argentina in addition to domestic operations. Telecom Italia has a market cap of $19.87 billion, a P/E of 25.65 and a beta of 1.43 times the market, however, no dividend yield. (click to enlarge) Lastly, a few words about the Italian economy: Italy seems to have two economies: the northern, industrial economy as well as a lagging southern economy. The difference is notable. The entire economy grew at about 0.3% in 2015-Q1 with full year expectations of about 0.7%. The Eurozone economy, (EU19) as a whole, grew at 0.4% in Q1. The results were similar in Q2, with Italy growing at 0.2%, while the entire EU19 grew at 0.3%. However, according to the Economist , ” A Tale of Two Economies” , North and Central Italy grew at 2%, well ahead of the Eurozone as well as the entire EU, (EU28). To put it perspective: … Of the 943,000 Italians who became unemployed between 2007 and 2014, 70% were southerners… … Italy’s aggregate workforce contracted by 4% over that time; the south’s, by 10.7%… …Employment in the south is lower than in any country in the European Union, at 40%; in the north, it is 64%… In the North, per Capita GDP is about $35,500; in the south about $19,250. Unemployment in the North is 9.5%; in the south 20.7%. Public debt is approximately 133% of GDP. The economic obstacles in the south go beyond direct economic regions, including changing demographics. About 700,000 Italians migrated to the northern part of the country and skilled labor is in short supply in the south. Lastly, the southern region contains the islands Sardinia and Sicily where growth and recovery have been slower. Until recently, both islands have been weighed down by higher utility and transportation costs to and from the mainland. Their economies rely heavily on the Hospitality Industry. However, recent reforms and infrastructure upgrades have had very positive results. To put progressive reforms in perspective, Sicily now ranks as the 8th and Sardinia 13th of the fastest growing of the 20 regions in Italy. Sardinia is currently seeking tax haven status, and is currently free from custom duties; Sicily is developing Etna Valley, attracting electronics firms such as STMicroelectronics (NYSE: STM ) and Numonyx, a wholly owned subsidiary of Micron Technologies (NASDAQ: MU ). Key Facts Summary Net Assets Outstanding Shares Holdings x-cash or derivatives 20 Day Average Volume Expense Ratio (Industry Average 0.44%) Price/ Earnings Price/ Book Beta Annualized Yield iShares EWI Italy 25/50 Capped $1.1504 billion USD 79.5 million 26 494,696 0.48% 22.39 1.10 0.85 3.69% and 2.52% TTM (Data from BlackRock and MSCI) At first glance, an investor might shy away based on the Italian economy and to be sure, there is a risk. However, Italy is a key component state of the larger European Union. In other words, the Italian economy is not entirely left to its own devices and is subject to the rules and regulations governing its membership in the EU. True the EU has had some difficult years, but amazingly, has not only come out intact, but has even added a new member. Right now, Italy’s economy as an EU member will feel the effects of a global economic contraction. However, for those investors with patience, the potential for the Italy economy as a member of a fully recovered EU economy, may prove profitable in the long run.

Why I’m Reiterating Income Investors Buy Consolidated Edison Instead Of Southern Company

Summary Southern Company’s 4.8% dividend yield beats many of its sector peers. But that is mostly because of Southern’s declining stock price in 2015. Fundamentally, Southern is struggling. Its revenue and core earnings are declining, due to major cost overruns at its Kemper project. Meanwhile, ConEd allows investors to sleep well at night, which should be the main concern when buying utility stocks. As a result, I continue to favor ConEd over Southern. Income investors are likely drawn to Southern Company (NYSE: SO ) and its 4.8% dividend yield. But Southern has given investors a number of headaches over the past year related to its massive Kemper project. Repeated completion delays and cost overruns have negatively affected Southern’s earnings over the past year. This has caused Southern to underperform many of its peers like Consolidated Edison, Inc. (NYSE: ED ) so far this year. Even though Southern Company’s dividend yield beats ConEd’s, I think ConEd is the better utility stock to buy. ConEd’s 4% dividend yield slightly trails Southern’s yield, but that is only because Southern’s stock price has declined this year. Investors should think about total return, and not just dividend yield, when evaluating an investment opportunity. ConEd has much smoother earnings growth, while Southern’s earnings are unusually volatile, especially for a utility. For these reasons, I recommend income investors consider ConEd instead of Southern. Trouble Lurks On the surface, there doesn’t seem to be anything wrong with Southern. Earnings per share grew 1% last quarter , and 15% in the first six months of 2015, year over year. That looks quite strong at first glance. But there are a number of caveats that make Southern’s true underlying earnings much less impressive than they appear. First and foremost, Southern is benefiting from a very easy comparison. Last year’s quarterly results were heavily weighed down by huge charges against earnings, due to the Kemper project. This has made Southern’s 2015 earnings results show solid growth, but that is only because last year’s numbers were so badly depressed. If you strip out the excess charges throughout 2014, Southern’s adjusted earnings are actually down 4.4% through the first six months of 2015. Therefore, investors looking at the headline reported numbers only may get a distorted image of Southern. The fact that excess cost overruns at Kemper have moderated somewhat this year is not exactly cause for celebration. Southern’s operating revenue declined 6.5% over the first six months of 2015, year over year, which is a disturbing indicator of the company’s shaky underlying fundamentals. This is why Southern’s stock price is down 8% year-to-date. Plus, the forward-looking picture is cloudy at best. Southern now anticipates the Kemper project will not be placed into service until after April of 2016. This will result in $15 million in additional total costs. Moreover, the company expects to incur $25 million-$30 million in additional costs each month for deferring the start-up beyond March, and another $20 million per month in financing and operating costs. If that weren’t bad enough, because the project will be delayed beyond April 19, Southern would be required to return $234 million to the IRS, which is what the company had received in prior tax credits for the project. In its press release, Southern vowed that its customers will not foot the bill for the added costs. Since there are no free lunches, someone has to foot the bill, and that someone will be Southern and its shareholders. As a result, while things are “less bad” this year than last year, it appears there is more trouble in store for future quarters. Reiterating My Preference For Consolidated Edison Income investors may see Southern’s higher dividend yield and stop there. But dividend growth is a consideration as well, and if Southern’s revenue and core earnings continue to decline, the company may not be able to maintain dividend growth that meets inflation. Southern has paid a dividend for 271 consecutive quarters, dating back to 1948. For its part, ConEd is no dividend slouch. It has increased its dividend for 41 years in a row. This makes ConEd a Dividend Aristocrat, while Southern is not. More importantly, Southern is struggling to grow revenue and earnings consistently, and Kemper is only exacerbating the problem. Meanwhile, ConEd gives investors stable revenue and earnings growth, as the company has not had nearly as many operating issues as Southern. For example, ConEd grew EPS by 3% last year, and is off to another good start to the current year. ConEd’s core earnings per share are up 11% through the first six months of 2015, year over year. Going forward, investors should continue to enjoy stable earnings growth. The company expects full-year earnings to reach $3.90 per share-$4.05 per share. At the midpoint of its forecast, that would represent 6.5% earnings growth from 2014, which would be a very solid earnings growth rate for a utility. I last wrote about my preference for ConEd over Southern in this article , dated June 15. Since the day that article was published, ConEd has outperformed Southern by 10 percentage points. Given Southern’s inability to get things right at Kemper, and ConEd’s solid growth, I expect ConEd’s outperformance to continue. Disclaimer : This article represents the opinion of the author, who is not a licensed financial advisor. This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.

Be Careful Holding ETFs Long Term

Friday happy hour conversation in the Village reminds us why holding levered ETFs more than a day isn’t a good idea. Leveraged ETFs can suffer from disproportionate downside. Risks are added from levered ETFs taking on derivatives and exposure to debt markets.. Always consult your personal financial advisor before holding ETFs over the course of the long term. By Parke Shall Today we wanted to go over a topic that we were asked about on Friday at happy hour. Thom and I were having a conversation with someone who was talking about their portfolio to us. This person commented that they had been holding several leveraged ETFs over the course of months, and he did not understand why the moves that the ETFs were making did not seem congruent with the moves in the individual sectors that they represented. This brings us to a topic that we don’t think enough people know about or understand. Not all ETFs are created equal. Some ETFs are designed specifically to be held over the course of the long term. Good examples of these are ETFs like the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) or the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ), two different style unlevered ETFs that we have talked about in our last four or five articles. TLT tracks the yield on treasuries, and IBB is an unlevered ETF that tracks the biotech sector. Each sector has an ETF, or several ETFs, similar to IBB for biotech. We have heard a lot about IBB over the last month because biotech has crashed, so we’re using that as an example. ETFs like IBB are helpful in showing sector moves proportionate to the broader market, like you can see in the below chart. IBB data by YCharts TLT tracks 20 year treasuries and provides a dividend according to their yield. TLT joins a host of other ETFs, like the Vanguards High Dividend Yield ETF (NYSEARCA: VYM ) which are meant to and designed to be hold for the longer-term, and have minimal fees. They take a small management fee, but they can be good to hold for conservative investors over the course of long-term. Any type of ETF for bonds especially makes bond investing a little bit easier, as sometimes buying individual bonds can be too costly for retail investors. So let’s look at what makes leveraged ETFs difficult to hold for more than a day or two, and why they should not be traded over the course of weeks or months. A simple example is this. If you buy a $50 2x levered ETF that goes up 10% you’re going to see a return of 20%, and that ETF will be priced at $60. The next day, the ETF falls back from $60-$50, you would expect the underlying to be the same as it was prior to the first day. The problem is that the drop from 60 to 50 is only about a 17% drop, meaning the underlying would only need to fall about 8 1/2% for you to lose the same amount that you made when the market grew 10% in the day prior. This type of attrition makes these instruments difficult to hold over the course of weeks or months. This is why it is not uncommon to see splits of different natures, including reverse splits, take place in these instruments. Like the gentleman we were speaking to yesterday, one needs to be aware of the mechanics of how leveraged instruments work before making what we believe to be a terrible mistake in buying them and letting them sit in your portfolio unwatched. The same goes for ETNs (exchange traded notes) that have major risk to the debt that’s been issued by a bank (or other institution) that presents counterparty risk. Sometimes with ETFs or ETNs that have these characteristics, you wind up seeing charts like this. UWTI data by YCharts In addition a lot of levered instruments will rebalance or reset on a daily basis, meaning that if the markets are volatile and not moving in one set direction, you could wind up taking losses on a day where the sector or underlying appears neutral. Finally, one needs to realize that these type of instruments may achieve their leverage from utilizing derivatives like options and sometimes debt instruments. These types of risks are not suitable for those looking to buy and hold or those investing for the long term. Before picking up an ETF to hold for the long term, make sure to check with your personal financial advisor.