Tag Archives: management

Pioneer ILS Interval Fund Assets Up 18% To $64.4m

U.S. mutual fund manager Pioneer Investments reports that total net assets for its interval style insurance-linked securities and reinsurance linked investment fund, the Pioneer ILS Interval Fund (MUTF: XILSX ), have grown 18% to $64.4m. Pioneer Investments has added just under $10m to the net asset total for its ILS Interval fund in the three months from May to end of July, reaching $64.4m by that date. When Artemis last reported on this fund, at the end of April 2015, Pioneer had reported $54.66m of assets managed . Pioneer Investments launched the ILS Interval fund in late 2014 and the strategy was its first dedicated ILS and reinsurance linked investments fund. Pioneer also invests in ILS assets within other multi-asset class mutual funds. Once again the increase is mostly due to additional capital inflows into Pioneer’s ILS Interval fund, resulting in the managers making new investment allocations and taking on new positions in the quarter. Allocations to securities by the fund, which invests in a mix of catastrophe bonds, reinsurance sidecar notes and other collateralized reinsurance quota share notes, reached $62.99m at 31st July, up from $54.590m at the 30th April. During the three-month period, Pioneer added new catastrophe bond positions in Alamo Re Ltd. (Series 2015-1) , Compass Re II Ltd. (Series 2015-1) , Ibis Re II Ltd. (Series 2013-1) and Sanders Re Ltd. (Series 2013-1) . The managers of the Pioneer ILS Interval Fund also added a number of private ILS transactions during the three months, including investments in the Arlington, Clarendon and Kingsbarn Kane SAC segregated account transactions and an investment in a Series 2015-2 transaction from reinsurer TransRe’s Pangaea Re sidecar-style SPI. The Interval ILS Fund’s largest single holding remains the Gullane Kane SAC segregated account transaction, a privately transformed reinsurance deal, as well as holdings in Munich Re’s Eden Re II sidecar, Brit’s Versutus , Swiss Re’s Sector Re and PartnerRe’s Lorenz Re . Pioneer continues to find steady growth opportunities for its interval ILS fund. Alongside the other investments that Pioneer makes in ILS and reinsurance linked investments, this dedicated interval fund will stand well-positioned to take advantage of attractive opportunities to raise and deploy more capital. Pioneer Investments has over $1.6 billion in ILS and reinsurance linked assets across the fund’s and strategies that allocate to re/insurance-linked investments. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Investing With Russian ETFs

Summary With the majority of ETF options holding energy companies, the market has become a tradable opportunity for those looking to profit from volatility. The mid-term outlook remains bleak, as economic and political deficiencies have suppressed business growth in the country. For longer-term investors, the current market may provide an opportunity to build holdings in an emerging market portfolio. With the recent decline in Russian markets due to the drop in the price of oil, many interested investors have considered gaining exposure to the country. From a fundamental perspective, the nation’s abundance of resources provides a positive picture in the long term. However, the pertinent question is how investors can gain this exposure while also protecting themselves from unwanted paperwork related to direct investment in the Moscow Stock Exchange (MICEX). In the current environment, the best solution are the Russian ETFs available on the market. ETFs have become a popular tool in the past few years for diversifying portfolios and protecting investors from market volatility. For those considering exposure to the emerging markets, ETFs have become almost a necessity in the current decade, as global rates continue to decline and result in increased market volatility. Russian ETFs protect an investor’s portfolio from the large fluctuations in the MICEX while also offering a passive investment style which ensures even investment in all major Russian industry players. Many Russian ETFs have underperformed in the last year, due to continued pressure from a commodity price perspective. This period of pricing pressure provides an opportunity for investors to take on risk and bet on a recovery in the market as the price of oil recovers. Russian ETFs are not for everyone and while they offer reduced volatility compared to the MICEX, the outflow of funds from Russian ETFs in the past few months has reduced liquidity. In addition, a majority of the Russian ETFs are heavily invested in oil majors, a market that has taken hits due to sanctions related to the Ukraine crisis. For this reason, finding an ETF that offers exposure to oil while also targeting other industries is much more beneficial from a medium-term perspective. In the following article, I will cover three popular Russian ETFs to determine whether the current investment products available offer any opportunities for interested investors. Current market As many investors may already know, Russia is among the top oil producers in the world, ranking eighth in global proved reserves with 80 billion barrels of oil (BBL). That said, the Russian economy has been highly leveraged to the price of oil for several decades, as 60% of the country’s export balance comes from oil and gas, which also contribute 30% of its GDP. It is frightening to see how unsustainable the business model has been for the country, as it has leveraged itself highly to the primary industry and to commodity prices. From a productivity perspective , the average Russian worker contributes $25.90 to Russia’s GDP, while a US worker adds around $67.40. The gap in productivity relates back to the systemic deficiencies in the country as the political environment has weakened the country’s incentive to engage in international trade. The nationalistic behavior seen across the many Russian political groups has not only been limiting to the current generation, but will also create future deficiencies, as the current economy has set a precedent that the future generation is set to follow. Vladimir Putin looks to continue his reign in the country as propaganda from the Kremlin continues to support his 86% approval rating. The future looks bleak for the economy, and I suggest investors look at the country as a tradable opportunity rather than an investment , due to the constant volatility in the MICEX. For investors who would consider exposure to Russia, using the price of oil as a lead indicator is the ideal way to trade the nation’s currency and any other leveraged investment products. Possible Investment Opportunities For interested investors, the top three ETFs available are the Market Vector Russia ETF Trust (NYSEARCA: RSX ), SPDR S&P Russia ETF (NYSEARCA: RBL ), and the iShares MSCI Russia Capped ETF New (NYSEARCA: ERUS ). This begs the question: Which option should investors choose, and at what time should these ETFs be implemented into their portfolio? In the following analysis, I will take a quick look at the holdings and relative stability of each equity to help investors determine how these investment product should be used. (click to enlarge) Table source: Author’s own work. Market Vectors Russia ETF Trust (click to enlarge) Source: Google Finance. Market Vectors Russia ETF Trust seeks to replicate as closely as possible the performance of the DAXglobal Russia Index (DXRPUS), a modified, market capitalization-weighted index consisting of publicly traded companies based in Russia. The product offers ideal exposure to the Russian market and should profit from an increase in the oil price as the economy sees a direct benefit from increased production. As previously stated, the oil and gas industries in Russia contribute 60% of the country’s export balance and make up 30% of the nation’s gross domestic product. With such an integral relationship between the commodity and economy, when comparing the ETF that follows the Russian economy, we can see that the decline in the price of oil has a significant effect on the performance of the equity. Therefore, for investors who would like to play oil volatility – or expect the price to recover to $100/barrel levels – the ETF should benefit greatly from the recovery and offer an easy way to profit from the recovery in the Russian economy, as output and trade increase relative to the price of oil. Looking at the respective ETF, the top three holdings are Magnit PJSC (8.14%), Surgutneftegas OJSC (7.89%), and LUKOIL PJSC (7.67%). Magnit is the leading food chain retailer in Russia with 10,728 stores as of June 30, 2015. The retailer’s infrastructure offers the company an expansive reach across the country. Twenty-nine specialized distribution centers allow the company to deliver to customers on a daily basis. Looking at the past year, the 30.3% increase in revenue signals how strong the company is in a recessionary environment. The company has shown incredible strength in the face of the recession, due to over 90% of products coming from domestic players — a strategy that protects the company from dangerous currency fluctuations seen in the past year. Currency translations have been a barrier that has limited the growth of many Russian-based multinationals. The fall of the Ruble, the nation’s currency, is primarily due to the drop in confidence related to the price of oil in addition to the fall in exports as sanctions continue to hit major trading partners. Surgutneftegas is an oil and gas producer with one of the largest refineries in Russia, Kirishinefteorgsintez. The company has not performed well in the last year, with net income declining by 3.93% as the price of oil continues to hit Russian producers hard. With costs declining, the company should be safe in the short to medium term, as the refinery business supports revenue. However, the price of oil needs to recover, as the company produces oil at around $60/barrel, an unprofitable level in the short term. Oil company LUKOIL is one of the largest oil and gas vertically integrated companies with the firm accounting for over 2% of global crude production and approximately 1% of proved global reserves. In the oil sector, the company is a behemoth, and should do incredibly well in the long term as it continues to monetize its large proved reserves throughout Russia. Looking at the domestic market, the company accounts for 16.4% of Russian crude production, while also contributing over 15.7% to total refined crude oil in the country. Unfortunately, with the decline in the price of oil and additional sanctions from several international economies, LUKOIL has been among the most affected, with revenues declining by 31% which translated to a 59% decrease in net income. In the current market, the company has attempted to hunker down and survive the downturn through reducing costs by 19% and increasing production by 5.2% to utilize well efficiency in the short term. While reserve efficiency and hedging strategies will protect the company temporarily, it is essential for the price of oil to recover in order to support enterprise profitability. Overall the company has not done well in the short term, and funds like RSX will need to wait a long time to recover capital losses. Looking at the Market Vector Russia ETF Trust, the equity offers an ideal way to play the Russian market with exposure to numerous large industry players. In my opinion, the company’s high exposure to Magnit will help the equity in the down-turn as the company is quite recession-proof from an earnings perspective. On the other hand, Surgutneftegas and LUKOIL offer exposure to the nation’s oil and gas industry which has underperformed. Anyone who is considering purchasing this ETF should be aware that the performance of oil is very important to show any strength, due to RSX’s 42.73% exposure to the energy industry. SPDR S&P Russia ETF (click to enlarge) Sourced: Google Finance. SPDR S&P Russia ETF seeks to provide investment results that correspond generally to the price and yield performance of the S&P Russia Capped BMI Index. The Index is a float-adjusted market cap index designed to define and measure the investable universe of publicly traded companies based in Russia. The Index component securities are a subset, based on region, of component securities included in the S&P Global BMI Equity Index. The ETF has declined by 34.39% YOY, primarily due to its high exposure to the energy market (49.39%), as the price of oil and gas have consistently underperformed in the past year. Looking at the ETF’s top three holdings, Public Joint-Stock Company Gazprom (15.44%), Oil company LUKOIL PJSC (13.41%), and Sberbank Russia OJSC (7.41%) make up the top exposure to the Russian economy. Looking at the ETF’s exposure from a sector-specific perspective, Energy (49.39%), Basic Materials (14.37%), and Financials (12.09%) make up majority of the fund. With such high exposure to the price of oil and the related positions of the fund’s portfolio, large amounts of capital has left the fund as its current market cap of $24.44 million USD signals the illiquid environment the product is facing. Compared to the Market Vector ETF, which has over $1.72 billion USD in the fund, the SPDR S&P Russia has been badly bruised in the current Russian downturn. While the fund will recover, the timeline is unknown at the moment, and I would use the current environment as a case to judge the strength of the fund. Significant money flows out of the SPDR ETF has shown that investors do not favor the equity as their first choice to gain exposure to the nation. Therefore, while I am sure that as oil prices recover in the following 3 years, liquidity will be injected into the fund and help fuel returns, the current downturn has illustrated how weak the fund is compared to other available options on the market. When investing in an ETF, the liquidity and size of the fund is extremely important to protect holdings. In addition, the fees that investors pay on a smaller fund versus a larger fund results in compensation for the portfolio manager to be higher, which attracts more experienced and successful investors. Looking at the price movement of the fund, the product has seen more volatility due to the fact that liquidity is much lower and any institutional buyers will move the price much more. Thus, I recommend that investors look for another option to gain exposure to the Russian market as this ETF has been severely weakened by the current downturn in the market and does not provide an option to avoid market volatility. iShares MSCI Russia Capped ETF (click to enlarge) Source: Google Finance. iShares MSCI Russia Capped ETF is a much newer product available for investors as it was released in early January of 2015. The equity was introduced in order for investors to play the Russian decline as the Ruble, the nation’s currency, continued to fall on the FX markets. As economic output declined and prices continued to drop in regards to the decline in oil, the ETF has taken a position in major industry players at fundamentally undervalued price points. For this reason when looking at the equity’s exposure from a sector perspective, the top three sectors are: Energy (53.75%), Basic Materials (14.28%), and Financials (14.01%). Looking at the overall objective and investment strategy, with a relatively stable fund size of $208.43 million USD, the equity has taken large positions in undervalued sector leaders in order to take advantage of the current downturn in Russia. Looking at the overall performance of the equity, the iShares MSCI Russia Capped ETF is the only one in its product class that has shown positive returns; YOY, the equity has increased by 8.88%. Looking at the ETF’s portfolio, the top three holdings are public joint-stock company Gazprom (17.50%), oil company LUKOIL PJSC (12.74%), and Magnit PJSC (7.42%). Magnit and LUKOIL were previously covered, so I will skip over these two companies and focus on the ETF’s top holding, Gazprom. The public joint-stock company is a globally recognized energy player with major business lines in exploration, production, transportation, storage processing, and sales of gas, oil, heat and electric power. The company holds the world’s largest natural gas reserves in addition to being the largest producer and exporter of liquefied natural gas in Russia. With such a strong position, the company’s domestic market share has reached 72% in the last year while global market share in the natural gas sector was around 12%. The size of the company illustrates the sheer strength and presence it has on the global natural gas sector, with reserves estimated at 36 trillion cubic meters, while oil and condensate reserves reached 3.3 billion tons. In addition to strong reserves, the company has the world’s largest gas transmission system capable of sending production over 170,000 kilometers. The strength of this network was seen in early 2015 when Ukraine were unable to pay Gazprom for its natural gas due to its limited cash reserves . The country and majority of Eastern Europe have become dependent on the company’s production which provides an ideal market position for Gazprom as operations continue to expand in the oil and natural gas sector. Looking at the YOY performance of the company, while sales have declined by 2%, the increased profitability of the company’s pipeline network in addition to positive currency translation as volumes in Europe increased resulted in a 29% jump in net income. In addition, the company has been focused on reducing its leverage in the past year as net debt has declined by 12% due to natural gas and oil operations continuing to expand. I believe that both Gazprom and LUKOIL will do well in the long run, as the fundamental stability of their proved reserves and established network across Eastern Europe should help the companies. For this reason ,when looking at the iShares MSCI Russia Capped ETF, I am confident that the current downturn will be beneficial for the new product, as positions have been opened at the bottom of the down cycle and should help the fund increase as the recovery begins. Looking at the overall ETF, while the 53.75% exposure to the energy sector remains quite worrisome in the current market, due to the product coming onto the market at the bottom of the investment cycle, I am confident that these new positions in major oil and gas leaders should increase profitability in the medium term. In Conclusion (click to enlarge) Source: Author’s own work. After analyzing these investment holdings and determining how each ETF could be used in an investment strategy, I would like to provide a final comparison in order to help first time investors choose the safest investment product. In the current market, the recent decline in the price of oil has rocked the Russian economy and increased recessionary pressures in a nation that produces over 30% of GDP from the oil industry. When approaching a nation like Russia, having a defensive strategy is extremely important in order to ensure that holdings can survive a volatile downturn like the one seen in the past year. The investment approach should not be shaped in avoiding a loss but rather surviving one. Compared to many other emerging markets, Russia has leveraged itself to the commodity trade greatly and this leads to a cyclical investment experience where long-term investors will add to positions in the downturn and profit off any increases in the price of oil or gas. Looking at the longer-term projection for oil, the following decade should see a recovery to the $100/barrel as demand should continue to increase in the long-term. The question investors should ask themselves is not if there will be a recovery, but when . Therefore, with that mentality, when selecting a Russian ETF, keeping in mind the longevity and downside protection of major positions in the fund is essential to choosing the right product. Taking a look at the overall performance in the past 6 months, all products performed relatively the same, with returns in the 4% to 6% decline range. Thus, investors should not base their assumptions on the short-term performance of each product. The products have been designed to diversify holdings while reducing risk against volatility through the timing of established positions, an investment goal that is achieved in the long term. (click to enlarge) Source: Author’s own work. After taking into account the short-term performance of all three products, and understanding the overall investment strategy adopted by these ETFs, I believe that the iShares MSCI Russia Capped ETF New offers the best opportunity for investors to gain exposure to the Russian market in the long-term. While the other products have been available to the market for a longer period of time, and have allowed investors to better judge their historical performance, the timing of the iShares product means that majority of the positions initiated in the fund have been at the bottom of the downturn. With the price of oil continuing to decline into the New Year, the start of 2015 marked one of the lowest points in the past four years in regards to the price of oil. This decline had triggered the collapse of the Ruble and eventual recession in the Russian economy as the equity and FX markets saw large outflows of money. That said, the iShares product came onto the market at this exact time, and looking at the type of holdings in the product’s portfolio, the ETF has over 53.75% exposure to the energy sector through beaten-down industry leaders. I expect that in the following decade, as the price recovers, while all three products have holdings in these major industry players, due to iShares’s timing on the market, I expect the recovery to be much more profitable for the product and its investors. Overall, while my suggestion may provide the safest and most profitable option among the three products listed, the current market is a time to build holdings in an emerging market portfolio. Whether a Russian ETF product is the way to go depends on the investor and his/her risk tolerance. In my opinion, with the political and economic uncertainty, implementing a Russian ETF into your investment strategy is a very tactical decision that ensures protection against further volatility in the market while also profiting from increased money flow.

How Can I Pick The Best Dividend ETF?

Summary Dividend ETFs are tools for building a better retirement. Finding the right exchange traded fund for an individual investor requires knowing how the investor wants to use the tool. Investors that want to dollar-cost average into the ETF will need to consider the impact of trading costs. When an investor is looking at the dividend yield, they need to calculate the yield across the entire portfolio. Investors should aim to have a healthy margin of safety to facilitate a buy-and-hold strategy. Many investors have recognized that they need to create a dividend portfolio with strong yields and low risks to protect their lifestyle in retirement. ETFs with strong dividend yields are the quickest way that investors can get access to a diversified group of high dividend companies that will provide a growing stream of income for them to live on without having to use up the principle. Drawing down the portfolio eventually leads to a death clock as investors are forced to wonder if they will outlive their money. Building a portfolio around a high-quality ETF is one way to prepare for a long and happy retirement. It Starts With You When you want to find the right dividend ETF, you need to recognize that you are looking for a financial tool. Remembering that the ETF is simply one tool will make it easier to find the best one for you. There are certain factors that will always be important, but the importance of each factor depends on the investor. Buying Strategy Are you making one lump purchase, or are you planning to dollar-cost average into the position over time? The answer is very important, because it determines which aspects of the investment will be most important in analyzing your long-term costs of owning the tool. If you intend to buy all of your shares this month with a large pile of cash, then trading commissions (generally under $10) will be largely irrelevant. On the other hand, if you are planning for a retirement in 20 years and intend to dollar-cost average into the ETF by buying once every week, every two weeks, or each month, trading commissions will be an important consideration. If you fall into the category of frequently making small purchases, then you will want to either prioritize ETFs you can trade for free from your current brokerage, or consider changing brokerages if necessary. Personally, I fall into this category. On average I make about three acquisitions a month through various accounts. I hardly ever sell a high-quality ETF, but I like to be able to make small purchases on a consistent basis. Expense Ratios The expense ratio is a very important factor for the long-term investor. If you follow the simple “buy and hold” strategy, which I endorse, the expense ratio can become a big deal when your holding period stretches from a few years to decades. If you are holding these funds in a taxable account, selling one ETF to buy a different one could incur capital gains taxes. Therefore, I prefer larger funds with a solid history of operating at low costs. In general, expense ratios less than 0.25% are reasonable, and ratios less than 0.13% are excellent. Net or Gross The net expense ratio is what investors actually give up from the fund each year. Some advisors will say that the net expense ratio is the only one that matters, but the gross expense ratio gives investors an idea of where expense ratios might go in the future. If you’re buying an ETF with a low net expense ratio and a high gross expense ratio, it would be better to have the fund in a tax advantaged account so you can change ETFs if the ratio changes significantly. Liquidity and Spreads If you’re going to buy shares in exchange traded fund, you should look into the liquidity and the spread. In general higher levels of liquidity and lower spreads will occur together. A large spread is like an increase in the trading commissions because it will increase your effective costs for each share you buy or sell. So long as the spread is regularly very small, weaker liquidity might not seem like a problem. If the investor is certain they will not need access to the principle at any point, then the weaker liquidity shouldn’t be too much of an issue. On the other hand, if you are not fully insured and might suddenly need access to a large amount of cash, it would be unwise to choose an ETF with poor liquidity. Dividend Yields and the Margin of Safety When you’re buying a dividend ETF, one of the first things you need to ask is whether the dividend yield is going to be sufficient for your needs. When an investor buys into the fund, they should be looking at the dividend yield on their entire portfolio. If the investor is wisely including treasury securities as part of their portfolio, they may have a weaker portfolio yield. Since the ETF will be a major source of income, investors may want to use it as a core piece of their portfolio and allocate between 25% and 60% of their wealth to the ETF. Therefore, they should look at the dividend yield on the ETF. However, simply looking at the number listed for “dividend yield” is insufficient. Investors should pull up the “dividend history”. When investors look at the dividend history, they should consider whether the fund pays monthly or quarterly. If the fund pays quarterly, do you feel comfortable managing your living expenses on a 3 month period rather than monthly? The next factor is looking at the dividends to determine if they have been cut on an annual basis at some point. If the fund has a long track record, investors can see how the fund performed during 2007. Remember that the goal of buying a high quality income ETF is being able to have a steady source of income without listening to the news. If dividends are cut during a recession, investors may be forced to “create dividends” by selling off shares. Under Modern Portfolio Theory selling shares is a perfectly acceptable way to generate extra dividends. Under Behavioral Portfolio Theory, the reality is that human psychology encourages the investor to sell off too many shares at the bottom of the correction. Margin of Safety When an investor is determining the yield they need from their investment to create a strong enough portfolio yield to cover their living expenses, they should ensure that there is a healthy margin of safety. Whether the dividend cut comes from the ETF or from other holdings in the portfolio, the investor needs enough income to know they can cover their expenses without being kept awake at night worrying about their portfolio. The more volatile the dividend history of the ETF, the larger the margin of safety should be. Investors using BDCs (Business Development Companies) or mREITs to strengthen their portfolio yield will need a larger margin of safety because those sectors have dramatically more dividend risk than a high quality dividend ETF.