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Reasons Asia Should Be The Focus Of Investors

Asia is a continent with huge potential and a multitude of growth opportunities in various industries. The tech industry in the region is growing at a fast pace, though it is not the only opportunity that can be found. There are many other rising industries, and they remain untapped at this day. One of the many reasons why investors should look more into Asia is because of the continent’s fast-developing high-tech environment. While everyone knows about the innovation coming out of Silicon Valley, companies from tech hubs such as Singapore , Hong Kong and Tokyo are under the radar of many investors and there are many stocks in Asia that are on the cutting edge, yet have a very attractive valuation. Mobile is becoming very big, with some markets’ growth predicted to be hugely reliant on it in the near future. A report from Forrester expects online spending in China to reach US$1 trillion in 4 years through the growing use of mobile apps. An environment where people will use more mobile devices with improved networks, increased application usage, and more e-commerce entails emerging opportunities for every type of business. Another reason Asia should be on any investor’s radar is because of its huge market size. The continent’s population is very large, with an estimated 4.3 billion people living in the Asia-Pacific region in 2014, according to the United Nations Economic and Social Commission for Asia . This represents 60% of the world’s population, not only entailing a huge pool of potential customers, but also for untapped talent that has yet to be discovered. A growing population along with an easier access and an evolving tech industry will enable more talent to grow in the field of engineering and design, adding to the Asian market’s performance. Opportunities in Asia are limitless with this large base of potential customers and promising future talents. There is still a lot of room for creativity, innovation and unique opportunities as most of Asia is not already in the mature stage that the United States and Western Europe is. The startup environment is growing at an incredible speed, making it a very inspiring place to conduct business in. According to CB Insights, Beijing, Tokyo, Shanghai and Bangalore figured in the top 6 cities in the world to grow the fastest in venture-capital deals and dollars last year. Indeed, deals increased by 165% between 2013 and 2014 in Beijing. India is the fastest growing startup ecosystem in the world according to a study conducted by the National Association of Software and Service Companies. India is launching nearly 800 startups per year. Furthermore, the major Asian cities are equipped with advanced and developed infrastructure. This facilitates the process of business creation, and enables rapid growth. Asia has received a lot of investment both in economic and social infrastructure, and improvements are already clearly visible. These investments also help to reduce barriers for trade. Entry of foreign businesses in Asia is easier and more opportunities are rising. For example, Japan now has less demanding requirements for foreigners to start their businesses in the country as they no longer need a permanent residence. A growing trend of economic liberalization, an untapped pool of consumers and talent, great infrastructure and a rapidly growing startup scene all bode well for Asia in the 21st century.

Adams Diversified Equity: A 6-Month Checkup

Recently renamed ADX turned in a good first half. Health care and consumer saw new additions. Overall, new management is proving solid so far. Adams Diversified Equity Fund (NYSE: ADX ), formerly known as Adams Express, is one of the oldest closed-end funds, or CEFs, around. That said, a management change in early 2013 meant the potential for big shifts at the fund — and a risk that performance might falter. So far, however, investors should be reasonably pleased with how CEO Mark Stoeckle has been running things. And the first half of 2015 bears that out. Things change… Adams changed its management at the start of 2013, which meant that 2013 was a transition year. Notably, portfolio turnover that year basically doubled compared to historical levels. That said, 2014 saw that number come back down to more-normal levels and that trend has continued so far in 2015. Performance-wise, the fund’s total return in 2013 wasn’t great on a relative basis. Based on net asset value, or NAV, and including reinvested distributions, the fund trailed that S&P by around 3.5 percentage points that year. That said, the fund’s return was 28% in 2013, which is a hard number to complain about. The next year, 2014, wasn’t as good on an absolute basis, but the fund closed the gap with the S&P, with ADX lagging the index by roughly half a percentage point. That’s a much better relative showing. And according to the fund, through the first six months of this year ADX’s return of 2.7% compared favorably to the S&P’s gain of 1.2%. Is this a harbinger of outperformance to come? Maybe, maybe not. As we all know, past returns don’t predict future results. But what it shows is that under new management, ADX hasn’t fallen off a cliff. That said, Stoeckle has only been operating Adams in a generally up market, so he still needs to be tested by a downturn. But investors should be reasonably pleased with the fund’s showing over the last two and half years or so that he’s been running things. New holdings With a fund like ADX, things aren’t usually all that exciting at the portfolio level. This is why the portfolio restructuring in 2013 that doubled the turnover rate was so notable. But with things back to normal, change at the fund is more incremental. For example , Stoeckle noted in the fund’s quarterly report that he added to the fund’s positions in Facebook and Comcast, and added new positions in Valeant and Edwards Lifesciences in health care and Kroger and Spectrum Brands in the consumer space. These aren’t huge shifts or changes, and keep with broader themes already present in the fund. Comcast, around 2.2% of assets at the midpoint of the year, is a top-10 holding, the others are not. That said, while the fund is fairly well diversified, there is one concerning holding — Apple. That stock, the fund’s largest holding, accounted for over 5% of assets at the end of June. That’s a fairly hefty exposure to one company and as the recent Apple sell-off attests, is worth keeping in the back of your mind. Still, at 5% of assets, an Apple sell-off would hurt the fund but alone shouldn’t be enough to cause major damage. The fund sold a number of holding in the period, too. The list includes Abbvie, General Mills, Hershey, Micron Technology, and Unilever. Several positions were trimmed, as well, including Aetna, Coca-Cola, Gilead Sciences, Intel, and Disney. Bouncing those names against the additions, you can see the big picture didn’t alter all that much. Looking at the fund from that greater distance, technology, finance, and health care were the three largest sectors at the end of June, making up roughly half the fund. The consumer sector was number four. Utilities, telecom, and basic materials pulled up the rear, representing the fund’s smallest sector weightings. Dividends and more So the first half was relatively uneventful for the fund. It performed well and aside from Apple, which has long been a large holding, there really weren’t any red flags. Moreover, the portfolio changes were largely shifting within the bigger picture. So mostly good news here. Adams also announced another dividend, of $0.05 a share. That’s relatively small, but keeps with the trend of three small quarterly payments and one larger one at the end of the year. The fund’s goal is to distribute 6% of assets on an annual basis. That’s a number that should interest income-oriented investors. There’s no expected change to that, according to Stoeckle. The way in which distributions are paid out, however, isn’t exactly desirable if you are trying to live off of your investment income. So you’ll have to take that into consideration here if you are buying for the distributions. Note, too, that annual distributions will go up and down based on performance since they are a set as a percentage of NAV, not a hard dollar figure. In addition, the fund bought 765,000 of its own shares in the first half at an average discount of just under 14%. That’s roughly where the discount sits today and in line with its average over the past three years. I’d say that’s a reasonable use of cash and helps to support the fund’s NAV over the long term. Remember, that the fund has been in existence since the Great Depression, so this is far from a fly-by-night operation. And as a stand-alone company, there’s no sponsor manipulating things. What you see is what you get at ADX and it’s looking to stay in business for years to come. So while stock buybacks are interesting, they should be seen in light of a longer-term picture — not necessarily as a way to shift market perceptions today. All of that said, ADX often gets chided for being a closet S&P index clone, which isn’t too far off the mark. However, for investors seeking income, the 6% yield target is much better than the yield on the S&P. True, the expense ratio of 0.65% is high relative to an S&P index, but some investors might be willing to make that trade-off. (Note that actual reported expenses this year will be higher because of one-time items related to the termination of a defined benefit retirement plan, which is likely a net positive for the company and its shareholders.) So, in the end, the first half was a good one for Adams. And while it isn’t a perfect investment, it’s a pretty good one if you are looking to outsource some of your investment load. It’s been around for a long, long time and looks like it will continue to be around for a long, long time to come. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

REM Compared To Equal Weighted mREIT Portfolios

Summary REM holds up better than I would have expected. Market capitalization weighting is easy, but may be less than ideal for reducing risk. REM is compared over a two-year period and a one-year period against hypothetical mREIT portfolios built at equal weights. When I was taking a look at the iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ), one of my thoughts was that the portfolio would be more attractive with a different weighting scheme. My views on that have changed some since Annaly Capital Management (NYSE: NLY ) reported an excellent second quarter and its new strategy sounds much better . However, I still wondered from a risk-adjusted viewpoint how different an ETF might look if it held the same holdings, but applied an equal weight methodology rather than using market cap weights. The Benefits of Market Capitalization Weighting The biggest advantage to using market capitalization is that it is remarkably easy. The fund establishes the volume of assets and the total market cap of each company. They spend on the shares accordingly, and if they were not trying to grow assets in the ETF (to generate more fees), they would simply leave that same structure in place. The only modifications to be made would be to adjust for the new shares issued and old shares repurchased. In general, this is a very simple kind of ETF to run. The Problem When using market cap weighting, if a company becomes relatively overvalued, it is also likely to have a higher weight in the portfolio. Unless the overvalued status is coinciding with repurchasing shares to shrink the market cap, the weighting will grow. That is unfortunate. It also means a portfolio may have substantially less diversification if some holdings grow large enough to dominate a large chunk of the portfolio. Equal Weighting My theory was that even though smaller companies will on average be more volatile (as demonstrated in the charts I will provide), the benefit of better diversification could cancel out those effects. Equal weighting is rarely going to be the ideal method, but it provides a simple alternative to market capitalization. Findings I originally built a spreadsheet to run an analysis of correlations and simulate different portfolios, but I find the tools at InvestSpy.com were faster than running it through my spreadsheets. Therefore, I simulated the portfolios using its website. REM has a total of 39 holdings, but I ran my first comparison using only 20 mREITs. The names included several of the largest from the REM portfolio and some that I cover that are not given material weights in the portfolio. The analysis was based on comparing the last 2 years of returns. REM 2 Years (click to enlarge) The primary factor that I’m looking at here is that the annualized volatility of the portfolio is 12% and the beta is .42. I’m focused on testing for risk rather than testing for historical returns since using historical returns would create an enormous bias into the test, as I could simply avoid selecting mREITs that have cratered when designing my comparable 20 mREIT portfolio. Equal Weighted 20 The next table is going to be dramatically larger because it is showing the numbers for each individual mREIT. (click to enlarge) This portfolio made of 20 mREITs with equal weights shows a lower annualized volatility at 11.2%; however, it also shows a beta that is slightly higher at .43. I would say that given the sample size (only 2 years), the beta comparison is within the margin of error. Some other factors jump out when we look at this as well. The stock that generated the highest risk contribution was CYS Investments (NYSE: CYS ). It was not the highest volatility, it was not the highest beta, and yet it contributed the most to the portfolio. It also had one of the best return percentages. On the other hand, Blackstone Mortgage Trust (NYSE: BXMT ) delivered in every way. The risk contribution was low and the annualized volatility was the lowest within the group. Despite that, it had a total return of 31.2%, which should remind readers that not all risk and return tradeoffs are created equally. Both the highest-risk contributor and the lowest-risk contributor were near the top of the chart in their total return over the last 2 years. One-Year Comparisons The following chart has REM’s performance over the last year: (click to enlarge) For comparison, this time I wanted to replicate a larger portfolio, so I am only excluding one security from the portfolio. That security has a very short history and thus is not viable for the statistics. It should be noted that I have cropped the following image to make it substantially shorter since the site struggles with displaying longer charts. (click to enlarge) In this second comparison, there are about 37 mREITs all under equal weighting, but the annualized volatility for the portfolio is within a margin of error. In the context of a year, .1% is not reliable. Interesting Notes When I shifted to using 37 mREITs for the one-year measure, I was expecting it to result in a larger reduction in volatility, but it did not. It would seem the volatility of those smaller mREITs was enough to outweigh the benefits of more diversification. Investing in ETFs is generally relying on diversification within moderately efficient markets to be worth the costs. For the mREIT investor that has the best information, I don’t think the diversification is adding any advantages. However, for the mREIT investor who just wants to set it and forget it, the REM portfolio has done remarkably well. Comparison of Holdings The following chart shows the top 10 holdings of REM: (click to enlarge) As you can see Annaly Capital Management and American Capital Agency Corp. (NASDAQ: AGNC ) dominate the portfolio and combine to be over 26% of the portfolio value. Conclusion The way REM designs the portfolio is not perfect in my opinion; however, it is still done well enough to offer investors some fairly substantial reduction in risk. The expense ratio is high for my tastes at .48%, but at least investors are receiving a fairly substantial reduction in volatility, and when compared to other weighting methods, such as going equal weight, REM has done fairly well. If you are curious about the risk factors for REM, you’ll want to see my last piece on the ETF . Next time I cover REM I’m going to establish comparisons to the portfolio I would create if I were aiming to produce an ETF full of mREITs. Scroll up to the top of the article and hit the follow button so you don’t miss it. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.