Tag Archives: seeking-alpha

SEC Enhancing Regulatory Monitoring Of Asset Managers

by Ron D’Vari The asset management industry is evolving rapidly and so are the regulatory environment and tools that govern and support it. The larger managers had thought they had received a reprieve by the Financial Stability Oversight Council’s decision not to designate individual asset management firms as Systemically Important Financial Institutions (SIFIs), but instead focusing its attention on potential risks within asset managers’ activities and products they offer. As a result, the giant asset managers are spared from Federal Reserve. In an apparent response to that, the SEC is increasing focus on the asset management industry. In a speech on December 11, SEC Chair Mary Jo White referenced new initiatives to address portfolio composition risks and operational risks of asset managers. Portfolio composition risks include liquidity and leverage risks of a fund’s holdings and operational risks encompassing inadequate or failed internal processes and systems. The heightened SEC monitoring will include expanded data reporting and enhanced controls on risks related to portfolio composition and liquidity management. A more comprehensive approach will be taken to monitor the risks associated with the increasingly complex nature of fund holdings and the use of derivatives. Additionally, the SEC will be looking into “transition planning” and stress testing, both market and operationally. Asset managers will be expected to safeguard against the impact on investors of a market stress event or when an investment adviser is no longer able to serve its clients. There has been a significant increase in the use of derivatives by funds in general. More and more, fund managers are using derivatives to adjust or obtain exposure to a market sector more efficiently. However, the risks of implied leveraged exposures and potential illiquidity in derivative instruments can be opaque or underestimated. As a result, management of liquidity and redemption and the use of derivatives in widely distributed mutual funds, ETFs and separately managed accounts are becoming key areas of focus by the SEC. The SEC staff will be watching for significant risks of inadequate controls in those areas, to the funds and their investors, as well as potential impact on the overall financial system. Asset managers will be required to manage risks of not being able to meet redemptions under stressful market scenarios. This means that not only the giant managers have to meet enhanced composition and liquidity regulatory requirements; the entire asset management industry needs to. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague

CROP Isn’t Growing Fast Enough, Even The Discount To NAV Will Not Attract Me

Summary I’m taking a look at CROP as a candidate for inclusion in my ETF portfolio. The expense ratio seems to be justified by not being market weighted, but the diversification within the fund is weak. The correlation to SPY is easily the most attractive characteristic, but it is combined with moderate volatility and very weak returns. I’m not assessing any tax impacts. Investors should check their own situation for tax exposure. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the IQ Global Agribusiness Small Cap ETF (NYSEARCA: CROP ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. What does CROP do? CROP attempts to track the total return (before fees and expenses) of the IQ Global Agribusiness Small Cap Index. According to the prospectus, the underlying index “is a rules based, modified capitalization weighted, float adjusted index.” I can appreciate having a weighting system other than simple market capitalization. Weighting by market cap is very easy; the ETF simply buys up the initial amount of shares in each fund and maintains the position. In this case, the ETF is not using a simple market cap weighting. In my opinion, that would justify a slightly higher expense ratio. CROP falls under the category of “Consumer Defensive.” Does CROP provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. I start with an ANOVA table: (click to enlarge) The correlation is excellent at 72%. I want to see low correlations on my investments. Extremely low levels of correlation are wonderful for establishing a more stable portfolio. I consider anything under 50% to be extremely low. However, for equity securities an extremely low correlation is frequently only found when there are substantial issues with trading volumes that may distort the statistics. Standard deviation of daily returns (dividend adjusted, measured since January 2012) The standard deviation is great. For CROP it is .8229%. For SPY, it is .7300% for the same period. SPY usually beats other ETFs in this regard. I like the low correlation and it could be enough to cover the higher standard deviation once we start looking at allocations within a portfolio. Liquidity looks mediocre Average trading volume is pretty low, a bit over 11,000. That isn’t low enough to eliminate it from my consideration, but it is a concern. I’m writing this while the market is open, and the current spread is .36%. That’s a big enough spread to pay attention to when putting in an order. Of course, spreads can change constantly, but investors here should make sure they are using limit orders to prevent crossing a large spread. Mixing it with SPY I also run comparisons on the standard deviation of daily returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume daily rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and CROP, the standard deviation of daily returns across the entire portfolio is .7208%. With 80% in SPY and 20% in CROP, the standard deviation of the portfolio would have been .7121%. If an investor wanted to use CROP as a supplement to their portfolio, the standard deviation across the portfolio with 95% in SPY and 5% in CROP would have been .7238%. Why I use standard deviation of daily returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Yield & Taxes The distribution yield is 1.63%. I like to see strong yields for retiring portfolios because I don’t want to touch the principal. By investing in ETFs I’m removing some of the human emotions, such as panic. Higher yields imply lower growth rates (without reinvestment) over the long term, but that is an acceptable trade off in my opinion. The weak yield makes me less excited about the portfolio from a retirement standpoint, but I have a long ways to go before I’m there. I’m not a CPA or CFP, so I’m not assessing any tax impacts. Expense Ratio The ETF is posting .75% for a gross expense ratio, and .75% for a net expense ratio. I want diversification, I want stability, and I don’t want to pay for them. The expense ratio on this fund is higher than I want to pay for equity securities, but having a better system than a simple market cap weighting provides some justification for the higher ratio. Market to NAV The ETF is at a .96% discount to NAV currently. Premiums or discounts to NAV can change very quickly so investors should check prior to putting in an order. Largest Holdings The diversification within the ETF is very weak. While the weighting method provided some justification for a higher expense ratio, the poor diversification within the holdings severely damages that justification. Rebalancing the fund may require some costs, but having fewer positions to rebalance reduces those costs. (click to enlarge) After looking at the diversification level within the ETF, I’m more critical of the expense ratio. Conclusion I’m currently screening a large volume of ETFs for my own portfolio. The portfolio I’m building is through Schwab, so I’m able to trade CROP with no commissions. I have a strong preference for researching ETFs that are free to trade in my account, so most of my research will be on ETFs that fall under the “ETF OneSource” program. For a correlation of 72% and more volatility than SPY, I would have expected the ETF to have more significant returns. I don’t believe in using past performance to predict future performance, but if an ETF shows moderate or higher correlation and weak performance, it makes me doubtful. During the time period I used (almost 3 years) SPY went up by over 66%. Crop went up by 14%. That isn’t terrible if the ETF is extremely low risk, but for something with even a moderate correlation to SPY it feels like pretty weak performance. I’m going to be knocking CROP off my list. Despite what initially appeared to be solid diversification benefits when combined with SPY, there have been no other positives outside of the discount to NAV. While I like buying an ETF at a discount to NAV, it needs to be an ETF that I actually want to own. 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. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.

GGN: Now Could Be A Good Time To Pick This High Yielder Up

Summary GGN invests in gold and natural resources, with an option overlay and the ability to use leverage. GGN’s is trading at an over 5% discount to its NAV, despite a history of trading at or above NAV. That could make now a good time to consider this relatively risky high yielder. GAMCO Global Gold, Natural Resources & Income Trust (NYSEMKT: GGN ) isn’t for the feint of heart. But if you can handle a little risk and have been looking for a way to add hard assets to your portfolio, now could be a good time to consider this closed-end fund, or CEF. And with an over 12% yield, paid monthly, you’ll be getting a nice income stream, too. Not your average bear GGN isn’t your run of the mill gold fund. This CEF’s portfolio is roughly 50% metals and mining stocks and 33% energy and energy services stocks. So roughly 80% of the fund is in sectors that have been, you could say, out of favor. Oil and related stocks have been the most recent market pariahs taking a toll on this CEF’s market price. However that doesn’t mean that you should avoid these assets. Hard assets and related industries can provide a valuable hiding place when markets are in turmoil or when inflation is rising quickly. They are often seen as a safe haven. It’s this diversification opportunity that leads investors to include some hard assets in their portfolios. So, the current malaise in mining and energy stocks can be looked at as a reason to avoid the sectors, or as a Blue Light Special opportunity for adding hard assets to your otherwise diversified portfolio-Just in case. But there’s more to GGN than just a focus on hard assets. It can also make use of leverage ( around 7% or so recently ) and an option overlay strategy. The primary goal of the fund is to provide investors with a high level of income, capital appreciation is a secondary goal. Thus, the fund writes options on the stocks it owns. And since volatility is the norm in the precious metals arena, there’s plenty of opportunity to take advantage of the options strategy to create income. Right now GGN pays $0.07 a share every month. That was recently cut from $0.09, a fact that should prepare you for income volatility here. However, even with that dividend cut, the CEF still pays a handsome yield of around 12%. Thus giving you high yield exposure to a broad asset class that could provide a safe haven if the markets tank. The leverage piece of the puzzle is more difficult to reconcile with the fund’s income objective. However, with rates historically low, GGN is taking advantage of an opportunity to access cheap debt. That’s a double edge sword, since leverage can enhance performance on the upside and exacerbate losses on the down side. There’s been more down than up lately, so it’s a good thing that leverage is pretty light at around 7%. This is a piece worth watching if you decide to step in here. That said, sister closed-end fund GAMCO Natural Resources, Gold & Income Trust (NYSE: GNT ) is another option if you want to avoid leverage, but it’s yield is a couple of percentage points lower. I’ll write about this CEF shortly. The real opportunity While owning an income producing security in out of favor industries is a good reason to be looking at GGN, it doesn’t get at the real opportunity right now. And that’s the discrepancy between GGN’s share price and its net asset value, or NAV. Historically, GGN has traded at or slightly above its NAV, with the Closed-end Fund Association pegging the average premium over the past five years at a little over 2%. But right now GGN is trading at discount of around 5% or so. The reason for this is likely two fold. First, investors have been selling off anything related to oil over the last six months or so as oil prices have fallen precipitously. That includes GGN. Second, year-end selling to lock in losses to offset gains elsewhere for tax purposes. GGN is a prime target for tax less selling since last year was a less than stellar one for the fund; the fund’s share price was down nearly 25% in 2014. (Total return, which includes distributions, was a loss of roughly 15%.) That’s not a guarantee that you’ll see a 7% price jump as 2015 progresses in addition to a 12% yield. But it does mean that GGN’s shares look like they are being put on an even deeper sale than the two sectors on which it is focused. So, if you want to own some hard assets “just in case,” now is a good time to take a look at GAMCO Global Gold, Natural Resources & Income Trust. That’s especially true if you have an income bent and prefer to outsource at least some of your investment activities.