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Material ETFs Up On Dow Chemical, DuPont Earnings Beat

We are in the middle of the earnings season, and the materials sector is seemingly tempering the overall Q3 growth picture after energy. This is especially true as total earnings from 60.9% of the sector’s total market capitalization reported so far are down 26.8% on 21% revenue decline. Despite the earnings weakness, the sector is showing impressive performance, having gained an average 1.76% (average price difference between a day before and after the earnings announcement of a stock), per the Zacks Earnings Trend . In particular, Dow Chemical (NYSE: DOW ) and DuPont (NYSE: DD ) led the rally in the sector as both companies beat on their earnings. However, revenues remained weak and missed our estimates. DOW Earnings in Focus The largest U.S. chemical maker continued its streak of earnings beat for the eight consecutive quarter. Earnings per share came in at 82 cents, easily trumping the Zacks Consensus Estimate of 68 cents and improving from 72 cents earned a year ago. Healthy earnings were credited to the incredible performance by the Performance Plastics segment due to lower cost of raw materials like oil and natural gas. Revenues dropped 16% year over year to $12.04 billion and missed our estimate of $12.25 billion. EBITDA margin expanded 370 bps to 20%, representing the best third-quarter margin since 2005 even as a strong dollar took a toll on revenues. The company remained committed to cost reduction and efficiency programs that are likely to boost margins and shareholders returns in the coming quarters. It is selectively spinning off or selling its underperforming assets and gradually shifting to high-growth markets such as construction, packaging and automotive. Dow Chemical raised its quarterly dividend by 10% to 46 cents, taking the annualized dividend to $1.84 per share, which is the highest in the company’s history. This new dividend is payable on January 29 to shareholders of record on December 31. Driven by a solid earnings beat, shares of Dow Chemical has risen 8.2% to date post its earnings announcement on October 22. DD Earnings in Focus While DuPont crushed our earnings estimate due to cost-reduction initiatives, revenues and profits tumbled on a strong dollar, a soft agriculture business and weakness in emerging markets. The world’s second-largest seed maker reported earnings per share of 13 cents, which beat the Zacks Consensus Estimate by 3 cents but deteriorated from 39 cents from the year-ago quarter. Total revenue slipped 17% year over year to $4.9 billion and fell short of our $5.2 billion estimate. Cost reductions from operational redesign contributed 10 cents to third-quarter earnings and are expected to add 40 cents per share to the full-year bottom line. The action will further save $1.3 billion in annual costs by 2016, a year ahead of the earlier expectation, and an additional $1.6 billion by 2017 end. With its cost-cutting initiatives, the chemicals and seed producer maintained its 2015 earnings per share guidance of roughly $2.75, which was below the Zacks Consensus Estimate of $2.93 at the time of earnings release. It expects currency headwinds to dilute full-year earnings by 72 cents per share. Following the earnings announcement on October 27, DD shares climbed nearly 5% over the past two days. ETFs in Focus Solid price performance of these two chemical titans has led to a rally in material ETFs that are heavily invested in these two stocks. Though these funds have an unfavorable Zacks ETF Rank of 4 or ‘Sell’ rating, they have gained over 3.5% in the past five days and are on investors’ radar for the weeks ahead: Materials Select Sector SPDR (NYSEARCA: XLB ) The most popular material ETF follows the Materials Select Sector Index. This fund manages about $2.1 billion in its asset base and trades in heavy volume of around 6.1 million. The ETF charges 14 bps in fees per year from investors. In total, the fund holds about 30 securities in its basket with DOW and DD taking the top two spots, with nearly 11% allocation each. In terms of industrial exposure, chemicals dominates the portfolio with three-fourth share while metals & mining and containers & packaging round off the top three positions. iShares U.S. Basic Materials ETF (NYSEARCA: IYM ) This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 54 stocks in its basket. The fund has AUM of $361 million and charges 43 bps in fees and expenses. Volume is good as it exchanges around 106,000 shares in hand a day. DOW and DD occupy the top two positions in the basket, with over 10% of assets each. The product is heavily skewed toward the chemical segment, as it makes up for more than three-fourths of the portfolio while steel, forestry & paper, metals & mining receive minor allocations. Vanguard Materials ETF (NYSEARCA: VAW ) This fund has amassed about $1 billion in its asset base and offers exposure to 121 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.12% in expense ratio while volume is moderate at 75,000 shares. Here, DOW and DD are the top two firms accounting for nearly 6% share each. Chemicals make up for nearly 70% of assets while container & packaging and steel also make a nice mix in the portfolio. Fidelity MSCI Materials Index ETF (NYSEARCA: FMAT ) This fund provides exposure to 122 materials stocks with AUM of $51.1 million. This is done by tracking the MSCI USA IMI Materials Index. Here too, DOW and DD are the top two firms with nearly 8% allocation. Chemicals accounts for 69.7% share while container & packaging, and metals & mining round off the top three spots with double-digit exposure each. The ETF has 0.12% in expense ratio while volume is moderate at 80,000 shares a day. Original Post

Risk Parity Investors Concerned About Performance

By DailyAlts Staff Risk parity strategies are designed to perform irrespective of general market conditions, but this doesn’t mean that they’ll always outperform – not even during a downturn. The global swoon that began when China devalued its currency in mid-August and picked up steam through the latter part of that month and into September left a lot of risk-based portfolios battered and bruised – and this isn’t what their risk-conscious investors had in mind. In fact, according to Chief Investment Officer’s 2015 Risk Parity survey , 42% of risk-parity investors are “quite” or “extremely” concerned about performance – no other concern, from use of leverage to peer risk to transparency – comes close. And as a result of these concerns, just 19% of respondents said they planned to increase their risk-parity allocations in the next 12 months, while 16% said they planned on decreasing their allocations. About the Survey Respondents CIO’s survey involved 93 risk-parity investors from the U.S. (74%), Europe (18%), Canada (4%), and other countries (5%). Forty-seven percent had assets of more than $15 billion, while 23% had assets between $5 and $15 billion, and 24% had between $1 and $5 billion. Small users – those with less than $1 billion in assets – accounted for just 5% of respondents. Corporate pension funds were a plurality of respondents at a 37% share, while public pension / sovereign wealth funds and endowment and foundations represented 17% and 10%, respectively. Thirty-five percent of respondents were categorized as “other.” Investor Concerns Only 13% of respondents said they were “not at all” concerned about risk-parity performance, while 21% said they were “extremely,” 21% “quite,” 23% “moderately,” and 23% “a little” concerned. By comparison 62% said they were “not at all” concerned about there being “no explicit bucket” to put risk parity in, 50% were “not at all” concerned with “the passive approach some vendors take,” and 47% were “not at all concerned” that there “are not enough viable manager offerings.” Zero percent of respondents said they were “extremely” concerned about peer risk – compared to 21% for performance. To say performance is the major concern of risk-parity investors is an understatement. Allocating to Risk Parity Fifty-three percent of respondents said they fund risk parity from their equities “bucket,” making it the most popular answer. Interestingly, 24% said they have a dedicated allocation to risk parity – up from just 18% the prior year. Nineteen percent said they funded risk parity from their alternatives bucket, which was down from 25% in 2014. The bigger the investor, the more likely they were to have a dedicated risk parity bucket: Among respondents with over $5 billion in assets, 29% had dedicated allocations; while only 14% of respondents in the $1 billion to $5 billion group and zero-percent of the sub-$1 billion group funded risk parity from a dedicated bucket. These smaller investors funded risk parity from their equity and fixed-income buckets by a ratio of two-to-one. A plurality of respondents said they used an absolute return benchmark, i.e. “T-bills +x%.” This response grew in popularity from 25% in 2014 to 37% in 2015 – while using the traditional “60/40” portfolio as a benchmark fell in popularity. Conclusion Some pundits seriously question whether risk parity may have helped bring down markets in August. According to CIO, the fact that the question is being taken seriously should “warm the hearts” of risk-parity investors, since the still-tiny strategy has successfully “seeped into the collective consciousness of Wall Street and the media that cover it.” In CIO’s view, risk parity is still too small to have caused much damage – but the increased awareness could be good for the strategy going forward.

Multi-Alternative Funds: The Best And Worst Of September

By DailyAlts Staff Multi-alternative mutual funds offer varying exposures to different alternative strategies, often managed by separate underlying managers. Thus, it’s not surprising that the category has fairly wide dispersion between its best- and worst-performing funds on a monthly basis: In September, the funds in Morningstar’s Multi-alternative category returned an average of -1.15%, slightly outperforming a 60%/40% blend of the S&P 500 Index and the Barclays U.S. Aggregate Bond Index, which returned -1.31% for the month. The top fund in the category returned +5.57%, while the worst performer posted a monthly return of -5.08% – a difference of more than 1,000 basis points. Top Performing Funds in September AQR boasted the top two multialternative funds in September: the AQR Style Premia Alternative Fund (MUTF: QSPIX ) and the AQR Multi-Strategy Alternative Fund (MUTF: ASAIX ). The funds posted respective one-month gains of 5.57% and 4.19%, easily surpassing the 1.84% gains of #3-ranked Cornerstone Advisors Public Alternative Fund (MUTF: CAALX ). The AQR funds also significantly outclass the Cornerstone fund in terms of assets under management (“AUM”), and returns over the past three, nine, and twelve months. AQR’s QSPIX and ASAIX had respective AUM of $1.3 billion and $2.2 billion as of October 19, compared to the Cornerstone fund’s healthy $474.4 million in assets. QSPIX’s returns over the past three, nine, and twelve months through September 30 were +7.30%, +5.78%, and +13.56%; while ASAIX posted returns of +6.64%, +6.97%, and +12.38% for the given periods. The Cornerstone fund, by contrast, returned +1.74% over the three months ending September 30, and +2.83 and +5.87%, respectively, for the nine- and twelve-month periods ending on that date. Worst Performing Funds in September One month doesn’t make a year as we will see with the bottom performers in September, but does highlight potential risks in particular funds and the need to have a longer-term view. The following multi-alternative mutual funds were the worst performers for the month: Catalyst’s Macro Strategy fund may have had a bad September, losing 5.08% and ranking at the rock bottom of the category, but over the first nine months of 2015, the fund returned an astounding +28.86%! That total is far better than any of the nine-month returns for September’s top-performing multi-alternative mutual funds. The fund’s returns over the three- and twelve-months ending September 30 were +3.18% and +26.22%, respectively. The Quaker Event-Arbitrage and AIP Dynamic Alpha Capture funds lost 4.94% and 4.70%, respectively, in September. Unlike the Catalyst Macro Strategy Fund, the Quaker and AIP Dynamic funds had negative returns for the three- and nine-month periods ending September 30. Conclusion Multi-alternative funds cover a lot of ground – you can tell by a quick glimpse at their names. Terms like “style premia,” “macro strategy,” and “event-arbitrage” would seem to describe different styles, and these funds do have different emphases – which is why their returns can vary by such wide amounts. Not only was there a 1,065-basis point disparity between the best and worst multi-alternative funds in September, but those same funds had a more than 23% differential in the other direction for the first nine months of the year. Clearly, investors interested in adding multi-alternative exposure to their portfolios can’t make their decision based on one month’s worth of returns – this is especially driven home by the immense gulf between the Catalyst fund’s one-month and one-year performance. But beyond merely looking at returns, prospective multi-alternative investors need to conduct deeper due diligence to ensure they understand the exposures they’re adding to their portfolios. With effective fund selection, multi-alternative investing should improve portfolio diversification, and this could contribute to improved risk-adjusted portfolio returns. Past performance does not necessarily predict future results.