Tag Archives: seeking-alpha

How Would Your Portfolio Do In A 50% Market Decline?

By Ron DeLegge Prudent investing in a reckless world has become a long-forgotten idea. And the 6-year run-up in U.S. stock prices (NYSEARCA: VOO ) has certainly been a contributing factor. After love, risk might be the most misunderstood and misinterpreted word in the English language. Today, people’s perverted sense of risk management is making sure they don’t miss the next big run in Netflix (NASDAQ: NFLX ) or Tesla (NASDAQ: TSLA ). Forgetting History People have let their guard down and are once again repeating the same mistakes investors in previous eras have made by underestimating the risk character of their investments. The only difference between now and previous bear markets like 2000-02 and 2007-09 is that everybody today is older and not necessarily wiser. As a result, I felt a certain obligation to help the investing public to have a multi-dimensional and complete view of their entire investment portfolio. But figuring out how to do it on just a single written page that anyone could understand took me years to develop. When I first introduced the idea of assigning a written grade to investors’ portfolios back in 2010, I had my doubts. Would people embrace my Portfolio Report Card concept? Would people send me their portfolio data for diagnosis? How would I fit their final grade onto just one page? Would my grading system be robust enough to work on all portfolios, regardless of the size and tax status? Would people be motivated to eliminate the weaknesses inside their portfolios identified by the Portfolio Report Card? A Crucial Grading Factor In case you didn’t know, risk is one of the most important grading categories of Ron DeLegge’s Portfolio Report Card grading system. And over the past year, I’ve diagnosed more portfolios than the typical investment advisor sees during their entire career. One of the most consistent patterns I’ve seen from the Portfolio Report Cards I’ve recently executed is that people are jacked up on risk because of overallocation to stocks (NASDAQ: QQQ ). Back on Aug. 18, 2004, Bridgewater Associates (run by billionaire Ray Dalio) made a similar observation and classified it as the “biggest investment mistake.” Bridgewater pointed out that over 80% of a typical investor’s risk is in stocks and that because of that overexposure, owning other asset classes like municipal bonds (NYSEARCA: MUB ), Treasuries (NYSEARCA: TLT ), and REITs (NYSEARCA: VNQ ) does little to balance out the portfolio’s risk profile. According to Bridgewater’s analysis, the overallocation to equities at the expense of other asset classes penalizes investors by roughly 3% in expected value, which could be used to cut risk. Put another way, Bridgewater’s original assessment of investors’ portfolios back in 2004 was true and it’s still true today. A Lazy Approach The fairyland idea that prudent risk management is simply a function of doing nothing during a dreadful bear market is popular but ignorant view. First, it incorrectly assumes that bear markets (NYSEARCA: SPXS ) will be short-lived. Second, it incorrectly assumes that bear markets will only happen during non-emergency moments or when we least need our money. More importantly, the do-nothing approach of “staying the course” badly misses in the biggest way because it erroneously assumes that Joe and Jane Investor have well-designed investment portfolios. My data shows quite the opposite; that Joe and Jane Investor have poorly constructed portfolios that are one-dimensional, under-diversified, and not the least bit equipped to deal with a severe market decline of 20% or more. Figure 3, which will be in my upcoming book, provides a sober look at the math of market losses. As you can see, if your portfolio suffers a 50% cut, you’ll need a 100% return just to get back to even. And since the velocity of bear markets happen faster compared to bull markets which tend to happen over a period of years, it often takes many years for an investor to recoup their losses – that’s if they ever recover at all. And that’s exactly why having a margin of safety within your portfolio is imperative. I am grateful to the many people – individual investors just like you – who have allowed me to analyze and grade their investment portfolios. I also want you to know that my Portfolio Report Card grading system just quietly passed a new milestone: over $100 million of investments have now been analyzed and graded. How would your portfolio do during a 50% market decline? Remember: Bear markets have happened in the past and will happen again in the future. And the time to find out if your investment portfolio is architecturally sound and read for the fire is before not after the market event. Original post Disclosure: No positions

Don’t Be An Investment Hero: Avoid The Temptation Of That Brazilian ETF

MSCI Brazil is down 75% in USD since 2008 which could spark some intrigue for contrarian investors. However, the equity market is still 300% higher than 2003. Given the poor economic picture, valuation levels that aren’t a screaming buy, optimistic analyst expectations for the future, and a very negative technical set-up, investors should be looking elsewhere. For the contrarian investor out there, it is always tempting to invest in downtrodden markets. Many times buying into an equity market that has been out of favor can be a profitability investment strategy. However, this type of strategy takes a lot of patience and time because picking the bottom in any market is extremely difficult. Cheap stocks can always get cheaper. A stock market that is off 75% from a recent high may seem like a screaming buy. But is it actually a screaming buy if that same market is still, amazingly, up over 300% over the past 13 years? Aren’t there plausible scenarios where this market could halve from current levels but that would still mean it is 200% higher over the past 13 years? This is the quandary facing investors who want Brazilian exposure. In USD terms, MSCI Brazil is now back to levels last seen in 2005. However, as we stated above, it is still 300% higher than the 2002 low even as it is 75% off the 2008 high. So is now an interesting time to invest in Brazil? While it feels like it can’t get worse, we believe investors shouldn’t try to be a hero in this market. (click to enlarge) The Brazilian economy is in shambles. Exports are in a free fall down 24% year-over-year. Industrial production is declining at the fastest year-over-year rate since 2009 and has had a negative year-over-year growth rate for 16 months. The unemployment rate has spiked to a five-year high while retail sales are declining at a pace last seen in 2003. Finally, even with excess capacity in the economy increasing and consumption slowing, Brazil is combating inflation as the CPI increased at 9.5% year-over-year rate in August. With this type of economic back drop its fairly easy to understand the pressure that Brazilian stocks have been under. What is harder to understand is how valuations have stayed so high. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) No matter which valuation level you look at, Brazil still isn’t cheap. The median price to cash flow level for the MSCI Brazil Index is still 8.58x. This is nearly 3x the trough level during the financial crisis. The median price to earnings ratio has fallen much more than price to cash flow, but it to remains well above 2008 lows. It currently stands at 13.84x which is only slightly below the average level since 2007. Where valuations are starting to look intriguing at least is when we look at median price to sales and median price to book ratios. The median prices to sales has dropped to just 1.11x which is the lowest level since 2009. The median price to book is at 1.59x which is on the low end of the last couple of years but still higher than in 2012 and 2008-2009. Overall, valuation levels still aren’t at levels to make it worthwhile for investors to take the plunge. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Given the economic backdrop, the outlook for Brazilian stocks remains surprisingly optimistic as analysts’ earnings expectations still seem out of step with the current situation. Over the past decade, Brazilian stocks have increased EPS by 12% annually. Currently, consensus EPS estimates for this year are very negative at -25.8%. However, analysts expect Brazil to be able to make up for this growth in the following three years by averaging a robust 20.3% growth rate from FY2-FY4. This seems like an incredibly high hurdle for Brazil to leap over even as these growth expectations start from a depressed level after this year. Finally, from a relative technical perspective the iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) remains firmly in a down trend relative to the MSCI All-Country Index. This ETF looks like it is years away from forming a base relative to the global equity market let a lone beginning to outperform. It recently broke down to a new four-year relative low. All in all, given the poor economic picture, valuation levels that aren’t a screaming buy, optimistic analyst expectations for the future, and a very negative technical set-up, investors should be better off allocating their scarce investment capital to more productive equity markets around the globe. The original posting of this article can be found here . All data was created by the author and sourced from Gavekal Capital, MSCI and FactSet. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Looking For Juicy Income? New EU Dividend ETF Is Here

European stocks may have been battered by the long-running Greek debt crisis, but when it comes to earning juicy dividends, they don’t turn down investors. If you look at both the MSCI Europe Index (which tracks large- and mid-cap companies across 15 developed markets in Europe) and the STOXX Europe 600 Index (a benchmark of small, midsize and large companies in Europe), dividend yield is handsome at 3.4% (as of August 31, 2015). This compares with a dividend yield of 2.1% paid by Standard & Poor’s 500 Index companies (as of September 17, 2015). There are mainly two good reasons for the European companies to pay fat dividends. Firstly, it is the weaker euro which helps ballooning up exports and therefore the companies’ top lines. Secondly, the European Central Bank’s €1.1 trillion ($1.2 trillion) or €60 billion-a-month quantitative easing program has instilled positive sentiment into the economy. At this juncture, investors should definitely take a look at the newly launched MSCI Europe Dividend Growers ETF (NYSEARCA: EUDV ) by ProShares. EUDV tracks the performance of the MSCI Europe Dividend Masters Index focusing on 51 MSCI Europe companies that have increased dividend payments each year for at least 10 consecutive years. The index contains a minimum of 25 stocks which are equally weighted. No single sector can compose more than 30% of the index and no single country may compose more than 50% of the index. The index has a dividend yield of 3.07%. Seadrill Ltd. (NYSE: SDRL ), BHP Billiton Plc (NYSE: BBL ) and Amec Foster Wheeler Plc ( OTC:AMCBF ) are the top three holdings in the fund with a share of 2.16%, 2.13% and 2.07%, respectively. The top 10 companies constitute 20.4% of the fund. As far as sector allocation is concerned, Industrials (19.54%), Healthcare (17.6%) and Consumer Staples (17.43%) make up the top three positions. Considering country-wise allocation, the fund is heavily biased toward U.K. with a 49.49% share while France and Switzerland occupy the second and third positions with 11.6% and 9.61% shares, respectively. The fund charges 55 bps in fees. How Does It Fit In A Portfolio? The fund provides a good opportunity for income-hungry investors willing to put capital in a market that is experiencing heightened manufacturing and trading activities. In August, the Markit Eurozone Manufacturing Purchasing Managers’ Index (“PMI”), which measures the performance of the manufacturing sector, came in at 52.3, which is a tad lower than 52.4 in July, but much higher than 50.7 last year. Meanwhile, Services PMI rose to 54.4 in the month from 54.0 in July. A PMI reading below 50.0 indicates sluggish activity, but a reading above that level indicates increasing activity. On the other hand, Eurozone’s trade surplus in July surged 48.1% to €31.4 billion ($35.5 billion) from €21.2 billion ($24 billion) a year ago, setting a new record. Exports went up 7% on a year-on-year basis while imports rose only 1% in the month on falling energy costs. In the first seven months of the year, exports also escalated 7% year over year while imports grew 2%, leading to a surplus of €146.5 billion ($165.8 billion) compared with a surplus of only €97.1 billion ($109.9 billion) in the period January-July 2014. Enhanced manufacturing and trading activities bode well for the companies paying hefty dividend to its stakeholders making this fund a lucrative option. ETF Competition Although ProShares specifically targets companies that have a good track record of year-over-year dividend growth, there are a couple of funds worth mentioning here that also track the high dividend-paying equity market in Europe. These are the WisdomTree Europe SmallCap Dividend ETF (NYSEARCA: DFE ) and the First Trust Dow Jones STOXX European Select Dividend 30 Index ETF (NYSEARCA: FDD ). DFE tracks the WisdomTree Europe SmallCap Dividend Index targeting the small-cap dividend-paying companies in Europe and manages a robust asset base of $1 billion. On the other hand, FDD with an AUM of roughly $178 million replicates the STOXX Europe Select Dividend 30 Index targeting high dividend-yielding companies across 18 European countries. Notably, the STOXX Europe Select Dividend 30 Index consists of companies from the STOXX Europe 600 Index having a positive five-year dividend-per-share growth. DFE and FDD are almost equally costly with expense ratios of 0.58% and 0.60%, respectively. However, on the yield front, FDD does a better job at 4.55% compared with DFE (2.68%). Link to the original publication on Zacks.com