Tag Archives: management

VWELX: This 86 Year Old Fund Is Still An Ideal Choice For Retirement

Summary Vanguard Wellington is the first balanced fund in the U.S. having launched in 1929. The fund has ranked in the top 10% of its Morningstar peer group over the past 5-, 10- and 15-year periods. The fund has a beta of 0.65 compared to the S&P 500 while outperforming the index over the long term. Wellington held up remarkably well during the 2000 and 2008 bear markets. In a world where there are literally thousands of funds and ETFs available that cover almost every niche, sector and style available, sometimes it’s the most tried and true investment vehicles that still remain the best choices. In the case of the Vanguard Wellington Fund (MUTF: VWELX ), we’re talking about literally the oldest balanced mutual fund in the country. Launched all the way back in 1929, Wellington looks to maintain a balance of roughly two-thirds of assets in conservative large cap stocks and one-third of assets in a mix of high quality bonds. It’s this type of asset allocation that makes for an ideal core holding in many retirement portfolios. Historically, Wellington has provided exactly what retirement investors should be seeking – above average returns with below average risk. With a current beta of 0.65, you’d expect the fund to return about two-thirds of the SPDR S&P 500 Trust ETF’s (NYSEARCA: SPY ) return but over the past 20+ years that hasn’t been the case. VWELX Total Return Price data by YCharts Looking at the past 2+ decades of history is especially appropriate because it takes into account both bull and bear market environments. The fund has performed about how one would expect – outperforming the S&P 500 in a down market but trailing in an up market. The fund’s risk minimization strategy proved especially effective during the Nasdaq bubble providing a relatively steady market performance given the economic environment. While the chart above doesn’t illustrate Wellington’s performance during the financial crisis particularly well but you can see below how well the fund held up. VWELX Total Return Price data by YCharts While the S&P 500 dropped around 55% from its 2007 peak, Wellington was down about 35%. That’s roughly what you’d expect considering the fund’s 60/40 allocation but the fund’s long term performance has been exceptional. Over the last 10 years, the overall performance of Wellington and the S&P 500 has been almost identical. Using a more apples to apples comparison, Wellington has also outperformed the Vanguard Balanced Index Fund (MUTF: VBINX ) – a fund with a 60/40 stock and bond allocation – during the same 10 year period. Morningstar drops Wellington into the Moderate Target Risk bucket. While the fund has returned 8.2% per year since the fund’s inception, it has consistently ranked at the top of its peer group. Wellington ranks in the top 6% of its peer group over the past 5-year and 10-year periods and ranks in the top 4% in the past 15-year period. It’s this type of risk-managed performance history that retirement investors should be seeking out. Retirement income investors will also appreciate the fund’s 2.43% yield. The fund has a few dividend champions among its equity holdings and the bond holdings are almost entirely high quality corporate and Treasury securities ensuring that the fund’s dividend is secure and reliable. Conclusion I’m a firm believer that in the case of most retirement investors, simpler is better. Sophisticated investors may feel comfortable building a more complex portfolio using stock, sector ETFs, etc. but for those who want an all-in-one long term holding that they can just establish and forget about, it’s hard to imagine someone doing much better than Vanguard Wellington. The combination of strong long term performance, risk minimization and low costs make this an ideal core retirement holding even if it’s not as exciting as some of the newer niche products hitting the market today.

RSX Is My Top Pick For 2016

Summary The Market Vectors Russia fund is poised to have two factors pushing it up starting from next year, aside from the oil & gas recovery. It is looking increasingly likely that EU-Russia relations are set to normalize next year, given many positive signals given by EU officials. Russia’s other industries, such as defense, agriculture, IT have been growing at a strong pace, which should not be under-estimated going forward. I predicted last year that 2015 will be a good entry point to buy the Market Vectors Russia ETF (NYSEARCA: RSX ). There is a good chance that I may have been right and perhaps the bottom did occur at the end of 2014 at just under $14/share, given that it is currently at over $15/share. I myself did not buy, because I thought at the time that other investments related to energy were more attractive, such as Chevron (NYSE: CVX ), Suncor (NYSE: SU ) and Shell (NYSE: RDS.A ). I have been building up positions in those stocks, in the past few months, looking to hold for the next few years. Truth is that RSX is an investment which might more or less mirror the performance of those stocks, with the added twist of the geopolitical situation in the past few years. For instance, the bottom RSX made for this year in late August coincides with the ceasefire which took effect between the Ukrainian army and the ethnic Russian rebels in the East, starting from the first of September. This led to speculations that the EU sanctions against Russia will be lifted soon, which is what gave the fund a bit of a boost. EU sanctions. A lot does depend on those sanctions being lifted. After all, Russian companies do depend on being able to access the EU debt markets to a great extent for their financing needs. Some may have hoped that the sanctions will be lifted sooner, especially after EU president Junker made a pro-Russia reconciliation speech, where he suggested that Europe needs to start thinking about ending the confrontational relationship with its Eastern neighbor. Now it looks like the sanctions might last until next year, but more and more people are grumbling about it, therefore I think it will not be much longer before the sanctions end, unless things in Ukraine take a nasty turn back towards open conflict. Even if they do turn worse again, it may no longer be seen as Russia’s doing. Europe cannot afford this extra load of hardship given its already full plate. There is the almost decade of almost zero percent average yearly growth since 2008. There is the resulting social and economic tensions, including the continued threat of defaults in the Euro-zone, and the rise of the extremist parties due to dissatisfaction with the mainstream. Now, the migration crisis, which is the greatest challenge that the EU ever faced, is leading to an actual shutdown of one of Europe’s most important institutions, namely its Shengen agreement. Within this context, removing an important impediment from realizing increased trade and other economic exchanges with the EU’s third largest trading partner is an increasingly popular concept. Oil & gas prices. While normalizing relations with the European Union is an important factor which is likely to affect the RSX fund, there is nothing more important than achieving a higher price for Russia’s dominant export, namely oil & gas. As we can see, investor sentiment is increasingly turning bearish on oil prices for the near-term, with prices threatening to break towards $30/barrel. But we should remember that there is a very important fact which makes current prices far from viable, namely the fact that many current and future projects are not even close to reaching breakeven at current prices, in fact many projects which our future medium to long-term supplies depend on are not viable at anything short of $80-100/barrel. While we are currently seeing a surplus in supply, which is pushing prices ever lower due to heavy investment during the 2010-2014 $100/barrel price plateau period, as well as almost a decade of subdued global economic growth, which has dampened demand, we should not mistake this for something it is not. It is definitely not some sort of long-term fundamental shift. We are already seeing a drop in supplies from some of the most flexible projects, namely the U.S. shale patch, where it contributed to a 500,000/barrel production decline in the U.S. so far this year from the April production peak according to the EIA weekly report. We are also seeing it in Canada, where it seems production is in decline. (click to enlarge) Source: OPEC November report. In fact, if we compare quarterly data for the year, it seems global non-OPEC production may have peaked in the first quarter of this year and may already be down by about a million barrels per day. This means that we are clearly on a path of global production decline, even if some of the headline numbers such as the 2015 average, versus the 2014 average will not show it. Source: OPEC November report. In my personal opinion, in 2016 we will see a dramatic decline in production compared with 2015, while global demand is still increasing, even if it is at a relatively slow pace. Within this context, by this time next year, we will most likely be looking at oil prices that are significantly above current levels. Russia’s other industries. While there is no debating the fact that Russia’s oil & gas industry is by far the most important factor in determining Russia’s future, we should remember that we cannot treat Russia same way as we do Saudi Arabia. Yes, Russia’s economy is contracting this year due to the drop in oil & gas prices. But, if we look at other oil exporting countries such as Canada, it also entered recession this year, even though it is nowhere near as dependent on those exports as Russia is. Russia may be very dependent on oil & gas, but far less dependent compared with many other petro-states. Russia does in fact have a relatively diverse economy. There is the defense industry which has been doing alright in terms of exports growth for over a decade now. Russia’s defense industry employs three million people and in 2014 it exported $15 billion worth of products, which is a 50% increase compared with 2010. In agriculture, Russia has in fact been helped by its counter-sanctions against the EU and the U.S., which mainly focused on food import bans. Russia is still a major net food importer, but its situation seems to be steadily improving, with production last year growing in the double digit range. Grain exports are increasing, while domestic products are capturing a larger part of the domestic market. Even as Russia is in recession this year, the government has made it a priority to increase support for agriculture by 50 billion rubles. There are other industries which are seeing growth, such as in IT , with growth in software exports in the double digits range every year for the past half decade. Russia’s auto industry is increasingly looking at increasing exports, in part spurred by the weak ruble. In effect, we are seeing to a great extent a re-balancing of the economy which we cannot expect from other petro-states such as Saudi Arabia. In this respect, Russia is a lot closer to more economically diverse countries such as Canada or Brazil, due to its more diverse nature. It is this mis-perception in regards to Russia’s economic diversity which I think makes RSX a potentially interesting play which I am looking to potentially get into possibly early next year. In addition to my expectations of the oil market turning soon, there is also the positive trend we are seeing in a number of non-commodity related industries which could in conjunctions with the expected normalization of relations with the EU provide an extra boost to Russian assets in coming years. RSX main holdings explain why fund is doing much better compared with most energy major energy investments. If we are to look at the top holdings in the RSX fund , we see that energy is indeed the most crucial part in its current and future performance. Lukoil ( OTCPK:LUKOY ), and Gazprom ( OTCPK:OGZPY ) are of course significant holdings in the fund, with 7.93%, and 7.77% respectively. And as one might expect, these stocks are down significantly year to date. In fact, most of the energy related companies, which dominate the fund are down for the year, with only a few exceptions. At the same time, there are other stocks, which are not related to energy which are mainly up for the year, including the top holding of the fund, Sberbank ( OTCPK:SBRCY ), which is up over 50% so far this year and it makes up 9% of the fund. There is also the retail stock, X5 Retail Group, which is up almost 70% for the year, which is also contributing to the overall fund being up for the year. The reason why these non-energy related stocks are mainly doing alright is because as I pointed out already, many non-energy related sectors of the Russian economy are doing alright. Because of that, Russia’s unemployment rate did not increase significantly since it entered recession, which makes it less likely for companies such as Sberbank to suffer losses, due to a deterioration of the loans in its portfolio. In fact, the unemployment rate in Russia remains near the ten year low of 4.8% achieved a year ago. It only rose relatively modestly to 5.5% since then. Because of that, there is no significant uptick in loan defaults in Russia, which is benefiting holdings such as Sberbank. It is true that other funds such as the iShares MSCI Russia Capped ETF (NYSEARCA: ERUS ) may offer a more aggressive way to play the expected rebound in energy. It gives more weight to Gazprom, Lukoil and other energy stocks compared with RSX. At the same time however, the attractive aspect of the RSX is the fact that it is more balanced, with stocks not related to energy, which will still most likely do well when energy recovers, at the same time are not likely to suffer as much if the current depressed energy price environment will last longer than most of us expect. This concept seems to be already working as we can see, given that RSX, which is heavily tied to energy is up 5% year to date, while the S&P 500 is flat for the year. With downside risk relatively limited given that energy and the Russian economy are not likely to fall much further from here and the prospect of a Russian economic rebound, driven by a recovery in energy at some point relatively soon in my opinion, I think the RSX fund has the potential to be a very strong performer starting next year and most likely will go relatively strong for some years as energy will most likely outperform. Given the fact that the world needs to stop what is seemingly a start to oil production decline gripping the world, even if there will be an economic slowdown in coming years, RSX may in fact become a star performer as investors will pile into the few investments which will not be headed down. 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.

Is There A Merger Arbitrage Opportunity In Cleco?

Summary Cleco agreed to be acquired by a group of North American infrastructure investors led by Macquarie Infrastructure and Real Assets (MIRA). We believe the likelihood of the deal closing is high. The deal is expected to close in the first quarter of 2016. Shares look appealing with a weighted return profile of 22.87%. This article discusses the potential merger arbitrage opportunity in Cleco (NYSE: CNL ). On October 20, 2014, a group of North American infrastructure investors, led by Macquarie Infrastructure and Real Assets (MIRA) and British Columbia Investment Management Corporation (bcIMC) (Group), entered into a definitive agreement to acquire Cleco for $55.37 per share in cash. The deal is valued at $4.7 billion, which includes ~$1.3 billion of CNL’s debt. Cleco is a public utility company and owner of regulated electric utility Cleco Power LLC. It has served residents and businesses in Louisiana for almost 80 years. It owns 11 generating units with total capacity of 3,340 megawatts. This partnership will allow the company to operate as an independent and local business, which will help it stay focused on keeping its strong culture. Cleco is a well-run utility with a dearth of knowledge, experience, and expertise. It’s a very attractive infrastructure business, which just so happens to operate in a regulated, but stable industry. These attributes should help the company grow long term. Here’s what Bruce Williamson, Cleco’s chairman, president and CEO, had to day about the deal: “With this agreement, Cleco’s existing investors will receive an exceptional value for their shares to top off a superior total shareholder return of the past few years, and our customers and employees can expect us to retain our strong commitment to service and reliability. The board and management worked together in structuring this transaction to deliver a premium valuation to our public shareholders and ensure a continued local presence in the communities Cleco serves. This agreement is the right transaction for our shareholders, employees, retirees, and customers of all types. The new owners understand the value Cleco brings to the region and are committed to Cleco’s strategy as a safe, reliable electricity provider positioned to meet Louisiana’s long-term power needs.” So is there opportunity as a merger arbitrage candidate? Let’s dive in and find out. Despite the drop in commodity prices, this group led by Macquarie has very deep pockets. The new owners plan on refinancing Cleco’s debt at closing. The group of investors includes Macquarie, British Columbia Investment Management Corporation, and John Hancock Financial. We do not see a high probability of failure given the group’s strong capital position. The deal is said to close in Q1 of 2016 (three months); both sides appear to be excited about the deal and the synergies involved. Final stages of the state regulatory approval process have pushed the initial timeline back to Q1 2016. Initially, the deal was supposed to be finalized in Q4 2015, but utility deals always seem to take longer than expected. The Louisiana Public Service Commission (LPSC) stated that it was “recommending strong commitments” from the investor group. The investor group filed testimony with more than 70 commitments addressing concerns raised by the LPSC. The commitments appear to be more than adequate, and management expects the deal to go through in Q1 2016. Cleco is currently priced at ~14x FCF, which gives an implied yield of 7.26%. In addition, the company sports an EV/EBIT of 14.85. Although shares are not significantly undervalued at current levels, we would be surprised by a takeover either. However, the current commodity depression may hamper and potential bidders. There are many uncertainties around potential mergers, such as anti-trust approvals, multiple government reviews, changes in market conditions, shareholder approval, and due diligence. If the deal was not completed, we would expect prices to drop to the pre-deal price of $48.50, or a loss of $3.55. We give the deal a 95% chance of being complete based on the parties and terms of the buyout offer. If we look at the recent quote, the stock is trading at $52.05 per share, $3.32 below the announced cash offer of $55.37 per share by the investor Group. We calculate our expected return with the probability of a successful deal ($3.32 x .95 = $3.15). And we subtract that from our expected loss with the probability of that loss occurring (3.55 x .05 = $0.18). This is the expected weighted return, which gives us a potential return of 5.72%, or $2.98 per share. To calculate our annualized expected return, we divide that by the expected time of holding in years (three months = .25). This gives us an annualized expected return of 22.87%. Bottom Line The Cleco acquisition is an interesting deal. And we do not see a high probability of failure given the investor Group’s strong capital position. The regulatory interference concerns us some; however, it appears that the recent commitments from the investor Group may be more than adequate for a state regulatory approval. This appears to be an interesting opportunity at current levels with a potential 22.87% annualized return profile. The return appears to justify the risk in this case. Notable Shareholders: Abrams Capital Andromeda Capital Bryn Mawr Capital LMR Partners Adage Capital GAMCO Diamond Hill Capital Please share your thoughts in the comments section below, as I learn just as much from you as you do from me. It can be a time-consuming endeavor, but I answer all of your comments and questions myself. Your patience and understanding are greatly appreciated. Disclaimer: Merger-arb can be tempting for investors to use leverage to increase their annualized return on high probability events…Resist the urge! Many Wall Street firms conduct merger-arb as their main business and they will normally have 50 or more merger-arbitrage investments at any one time. They understand that if a couple of deals go bad, the winners will more than take care of the loses. Merger-arb can be a very crowded strategy at times. Similar to value investing, it can be cyclical and go in and out of favor over time. The key to merger-arb is to focus on the few deals that are highly probable (ideally ALL cash deals) with minimal regulatory hurdles and an acquirer with a great capital base. And if you’re new to merger-arb, watch a few deals play-out over various industries to get an understanding of the deals. If you do invest in merger-arb situations conduct proper due diligence and make sure to spread your risk appropriately. If you are so inclined to learn more about these types of special situation, I highly recommend Graham’s writing on arbitrage in his Security Analysis book.