Tag Archives: seeking-alpha

How To Find The Best Style Mutual Funds: Q4’15

Summary The large number of mutual funds hurts investors more than it helps as too many options become paralyzing. Performance of a mutual funds holdings are equal to the performance of a mutual fund. Our coverage of mutual funds leverages the diligence we do on each stock by rating mutual funds based on the aggregated ratings of their holdings. Finding the best mutual funds is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available? Don’t Trust Mutual Fund Labels There are at least 806 different Large Cap Value mutual funds and at least 5514 mutual funds across all styles. Do investors need 459+ choices on average per style? How different can the mutual funds be? Those 806 Large Cap Value mutual funds are very different. With anywhere from 15 to 735 holdings, many of these Large Cap Value mutual funds have drastically different portfolios, creating drastically different investment implications. The same is true for the mutual funds in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Blend ranks last. Details on the Best & Worst mutual funds in each style are here . A Recipe for Paralysis By Analysis We firmly believe mutual funds for a given style should not all be that different. We think the large number of Large Cap Value (or any other) style mutual funds hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many mutual funds. Analyzing mutual funds, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 735 stocks, and sometimes even more, for one mutual fund. Any investor worth his salt recognizes that analyzing the holdings of a mutual fund is critical to finding the best mutual fund. Figure 1 shows our top rated mutual fund for each style. Figure 1: The Best Mutual Fund in Each Style (click to enlarge) Sources: New Constructs, LLC and company filings How To Avoid “The Danger Within” Why do you need to know the holdings of mutual funds before you buy? You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the mutual fund’s performance will be bad. Don’t just take my word for it, see what Barron’s says on this matter. PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND If Only Investors Could Find Funds Rated by Their Holdings… The Calvert Social Investment Fund: Calvert Large Cap Core Portfolio (MUTF: CMIIX ) is the top-rated Large Cap Blend mutual fund and the overall top-rated fund of the 5514 style mutual funds that we cover. The mutual funds in Figure 1 all receive an Attractive-or-better rating. However, with so few assets in some, it is clear investors haven’t identified these quality funds. Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

Third Avenue Focused Credit’s Investor Freeze Re-Affirms Advantage Of Closed End Funds

Third Avenue Focused Credit shutting the gate on redemptions. A reminder that traditional open-end mutual funds can suffer “runs on the bank” if they hold illiquid assets during nervous market periods. Reminds us that closed end funds are the safer vehicle to hold high yield and other more illiquid asset classes. Third Avenue Focused Credit Fund ( TFCIX , TFCVX ) just dropped the bombshell that they are freezing the fund and barring investor withdrawals as it seeks an orderly liquidation. TFCIX, as a sort of “vulture fund,” operates at the lowest end of the high-yield bond spectrum, specializing in bankruptcies, turnarounds and other bottom-of-the-barrel opportunities. I had personally been quite enamored of the fund when it was launched in 2009 as a vehicle to take advantage of post-crash credit market bargains. In that sense I saw it as a vehicle for retail investors to get in on the opportunities typically only available to hedge fund and other institutional investors. The fund’s “Achilles Heel” turned out to be its status as a traditional “open end” mutual fund, where investors could liquidate their positions on a daily basis. In fact, in recent years it was the only open-end mutual fund I had continued to hold, feeling personally more comfortable with closed end funds where, if other investors want to bail out, they have to sell their fund on the open market, and cannot demand the funds’ portfolio managers cash them out at NAV by selling fund assets. That is a much safer vehicle for holding potentially illiquid assets, as high yielding assets like junk bonds, MLPs, BDCs, etc. have turned out to be recently. I started selling out my TFCIX a few months ago (as I explained in an article in early November), not because I was worried about the fund freezing its assets (I wasn’t that smart), but rather because I saw a unique opportunity, since it was an open-end fund offering cash back at full NAV value, to take advantage of that and put the funds back into the market via closed end funds at 10% discounts (or more.) So that’s what I did, completing my exit later in the month. By way of post mortem, I ran the numbers on my total investment in TFCIX over the past six years. I collected back 34% of the total investment in dividends over the holding period, about 8% per annum, accounting for the timing of the investment (i.e. it wasn’t all outstanding the entire period). Then I gave back about 25% of the total investment in capital loss. That means I only made about 9% in total on my money, spread over 6 years. An opportunity cost, for sure, and a waste of earning power, since if invested better it would have been earning 6-7%. But – fortunately – not a disaster. To me this reinforces: · The attractiveness of closed end funds as the vehicle of choice for holding high-yielding illiquid assets, since you have the option of sitting out periods of market volatility while clipping your coupons and waiting for the storm to pass; and · The advantages of holding high yielding assets (equity and fixed income) in general, as a hedge against market losses, since the cash flow acts as a buffer over time to offset market depreciation.

How To Think About M&A When It Comes To Your Portfolio

What do mergers and acquisitions have to do with your portfolio? A lot, says BlackRock’s Mark McKenna – especially in today’s market. It’s been a remarkable year for financial markets, highlighted by extreme volatility, severe weakness in commodities and a raging debate about interest rates, among other things. But there’s another ongoing market trend of great importance to investors, one that could offer substantial opportunity: M&A. Merger and acquisition activity has been on a torrid pace in 2015, on track to surpass 2007’s record levels. Through November, more than $4.5 trillion worth of mergers have been announced year-to-date, and the activity in the third quarter was the strongest on record for that period, according to Citi. The flurry of deals is a reflection primarily of three factors: low interest rates, robust corporate balance sheets and a global economy that remains sluggish. Low rates make funding acquisitions more affordable, and companies that have a difficult time growing their earnings when the economy is soft often look for attractive merger candidates to help spur their growth. Mergers, Acquisitions and Your Portfolio So how can investors take advantage of this trend? Well, for starters let’s quickly cover what not to do. Simply guessing at which companies might be takeover targets and buying as much stock as you can is not a good idea. Investors should never buy a stock based simply on a hunch that the company may someday be a buyout target. Instead, investors might consider employing what we call an “event-driven” strategy. Event-driven investing focuses on capturing the value gap created when companies undergo transformative events, or “catalysts.” The idea behind the strategy is to invest in a company undergoing a material change that is expected to impact shareholder value. We define catalysts as either “hard” or “soft.” A hard catalyst, such as an announced merger, tends to have a defined outcome, which creates a more predictable return. A soft catalyst, perhaps a company undergoing a senior management change, can have a range of outcomes. One advantage of these investments is that, because they are focused on company-specific developments and not broader market events, they are less correlated with day-to-day market movements. By extension, such event-driven strategies have the potential to generate positive returns regardless of overall market moves. (click to enlarge) From my perspective, the record M&A activity that we’ve seen this year has created the most attractive opportunity we’ve seen in the last 10 years, with merger spread investments near all-time high rates of returns. When compared to other yield asset classes, including high yield bonds, Real Estate Investment Trusts (REITs) and even many illiquid yield investments, merger spreads may offer higher returns with much less duration risk. As a result, merger investments can potentially provide investors equity-like returns with volatility usually associated with stocks, according to data from Bloomberg and Hedge Fund Research Inc. With the stock market both volatile and near all-time highs, and fixed income yields hovering near historic lows, investors should consider different ways to diversify their portfolios. Event-driven strategies are one way to do that, offering not only the potential for positive returns in both up and down markets, but also potentially reducing portfolio risk. Mark McKenna is Global Head of Event-Driven equity and a Managing Director at BlackRock. This post originally appeared on the BlackRock Blog.