Tag Archives: nasdaq

Chickens And Eggs

Are you a chicken farmer, or an egg farmer? Chicken farmers raise chickens for their meat. Egg farmers raise chickens for what they lay. Investors who plan to sell their stocks to pay for college or to buy a second home are chicken farmers. Investors who hope to use the income from their investments are egg farmers. The financial press doesn’t understand egg farmers. Every day they report market prices and how they’ve changed. But they almost never report on dividends. This bias sometimes causes income-oriented egg-farmer investors to forget who they are and believe that they are chicken farmers. If they get confused, they may have a hard time reaching their goals. Prices are volatile. If you’re a chicken farmer, when you buy, and especially, when you sell, is extremely important. A chicken farmer needs to watch the market like a hawk. But if you’re an egg farmer, the most striking aspect of dividend payments is how boring they are. They just don’t jump around very much. Both kinds of portfolios need oversight, but managing a dividend stream is different. Risk doesn’t come from market swings, but from factors that endanger a company’s ability to earn profits and pay investors. Egg farmers like bear markets, especially bear markets that don’t threaten corporate revenues. When the market falls, investors can adjust their portfolios without taking gains and paying taxes. By contrast, chicken farmers hate it when prices fall. But chicken farmers love mergers and acquisitions. The buyer almost always has to pay a premium. But for egg farmers, takeovers just complicate things. Acquirers – especially serial acquirers – usually aren’t as generous with their dividends. Both approaches are valid, but they meet fundamentally different needs. So you never have to ask which comes first.

Health Care In Emerging Markets: A Compelling Investment Opportunity

Click to enlarge Many emerging market countries today are struggling to find a new growth model. Those that are reliant on commodity exports have been hit especially hard in the wake of China’s economic transition and a broader slowdown in the developed world that has weighed on commodity prices. Policy tightening in the U.S. has put additional pressure on developing markets that are heavily influenced by capital flows. Those with precarious fiscal positions, including trade/current account deficits and elevated foreign debt levels have been particularly affected. These dynamics, along with more than four years of economic growth and earnings deceleration, have led to increasingly negative investor sentiment about emerging markets. Meanwhile, valuations have generally become very attractive. Although we continue to wait for an inflection point in economic growth before becoming more bullish on emerging markets, select opportunities for discerning investors exist. We believe that certain investments in the health care sector offer attractive long-term investment opportunities. Health care services/products are underpenetrated in emerging market countries and total spending on health remains well below the levels seen in developed markets. Click to enlarge Relative to developed markets, out-of-pocket expenses as a percentage of total health expenditures are high. Generally, greater consumption of health care products and services occurs as out-of-pocket expenses fall. Click to enlarge Insurance products are also becoming more ubiquitous, and government expenditure on health as a percentage of total government spending is low. These factors in aggregate suggest that there is considerable scope for growth in emerging market health care spending as emerging economies move more in line with their developed market counterparts. Click to enlarge In addition to emerging markets having the scope to increase health care spending, developing economies have the benefit of rapidly rising levels of income and wealth, especially compared to developed markets. Empirical evidence shows a strong correlation between rising incomes and increased spending on health care, as medical care is one of the first areas in which individuals tend to increase spending as incomes grow. With wages and salaries expected to continue rising in emerging markets, consumers are slowly gaining access to services and products that were once out of reach. We believe that this trend will create myriad investment opportunities for years to come. Furthermore, we expect this investment theme to be more insulated from cyclical economic factors given the vital, essential nature of obtaining better health care. As an example, consumer health expenditure growth in many emerging markets remained robust throughout the Global Financial Crisis; 2008 – 2009 annual health spending per capita in Brazil, Russia, India, and China grew 11% on average. We believe the beneficiaries of this investment theme will be present across a number of different industries within the health care sector. These include insurance providers, pharmaceutical manufacturers, hospital owners/operators, medical equipment and supplies manufacturers/distributors, and other health care service/goods providers. Target companies do not need to be domiciled within emerging market countries to benefit from this theme provided a significant share of revenues and operating profits comes from developing markets. Despite the favorable structural backdrop for rapid growth in emerging market health care spending, it is important for investors to understand individual country dynamics and reforms that may aid or impede the consumption of health care. Investors should focus on fundamentally sound companies that have above average growth rates, attractive valuations, and are taking share at the expense of their competitors.

Passive Investing – I Doth Protest Too Much

One of my favorite blogs, The Monevator blog , did a brief write-up on my new paper this weekend . If you don’t read their website you’re missing out because they consistently post some of the best financial content around. Anyhow, they had a very fair and objective view of the paper and approach to portfolio construction. However, one point that I seem to lose a lot of people on is my discussion of active and passive investing. So, I wanted to take this space to clarify a bit. Financial commentary doesn’t have a uniform definition for passive investing. Googling the term brings up the several different results: Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio. – Wikipedia Passive investing is an investment strategy involving limited ongoing buying and selling actions. – Investopedia The first definition is vague because there are limitless numbers of market cap weighted indexes these days, some of which are not well diversified and not low fee. Additionally, why should passive indexing be limited to market cap weighted index? Is it really correct to say, for instance, a fund like MORT , with 23 REIT holdings, reflects passive investing better than say, the equal weight S&P 500 ETF? An “index” is a rather arbitrary construct in a world where there are now tens of thousands of different indexes. The second definition is equally vague since an investor can hold a handful of stocks in a buy and hold strategy and limit ongoing buying and selling. Clearly, we shouldn’t call that passive investing in the sense that a low fee indexer would advocate. The new technologies such as ETFs have really muddled the discussion here as there’s now an index of anything and everything. So, as Andrew Lo notes: “Benchmark algorithms for high-performance computing blurred the line between passive and active.”¹ Along the traditional low fee indexing thinking I am tempted to define passive indexing as any low fee, diversified & systematic indexing strategy. But that could include all sorts of tactical asset allocation strategies that have systematic allocations. I don’t think it’s appropriate to call a tactical asset allocation strategy “passive”. So we’re back to a very blurry area in this discussion. In order to clarify this discussion I arrived at the following simple distinction: Active Investing – an asset allocation strategy with high relative frictions that attempts to “beat the market” return on a risk adjusted basis. Passive Investing – an asset allocation strategy with low relative frictions that attempts to take the market return on a risk adjusted basis. This definition has its own problem because we have to define “the market”. Is “the market” the USA, global stocks, global bonds, etc.? I’d argue that “the market” is the Global Financial Asset Portfolio, the one true benchmark of all outstanding financial assets. Therefore, anyone who deviates from this portfolio is making active decisions that essentially claim “the market” portfolio is wrong for them. This would mean that the only true “passive” strategy is following the GFAP. Obviously, not everyone does that and in fact, probably no one does it perfectly so that would mean we’re all basically active. Some people are active in silly ways (like day traders) and others are active in smart ways (diversified inactive indexers). Of course, I am a full blown supporter of low fee, low activity indexing. So please don’t confuse this as an attack on “passive indexing”. And yes, I am admittedly being overly precise. I certainly doth protest too much as Monevator says. But I am really just trying to establish a cohesive language here because I see too many people these days claiming they’re “passive” when they’re really being quite active. The worst offenders of this language problem are high fee asset managers who sell “passive” strategies cloaked as low fee platforms. I find that dishonest and extremely harmful. A little bit of clarity in this discussion is helpful in my opinion. ¹ – What is an Index? Lo, Andrew.