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Volatile Trading Week Produces Somewhat Muted U.S. Fund Flows

For the fund-flows week ended Wednesday, September 2 the U.S. equity markets experienced a roller coaster ride. The Dow Jones Industrial Average experienced four triple digit move days (two up and two down) to close the week with a gain of 0.4%. This volatility was spurred on by the continued fears about the economic slow-down in China (the down days) counter balanced by strong U.S. economic data (sharply revised upwards second quarter GDP numbers) and a bounce in oil prices. Underscoring the increased volatility in the market was the increase in the CBOE Volatility Index (VIX) which spiked at greater than 30. Any value above 20 for the VIX is a warning sign to investors that the market is ripe for wide shifts in momentum. This week’s fund flow results did not reflect the up and down nature of the trading as most of the data produced was a continuation of current trends. Breaking down this week’s fund flows information by macro groups (equity funds, taxable bond funds, municipal bonds and money market funds) and by fund type (mutual funds and ETFs) we saw that all of the mutual funds groups experienced net outflows. Taxable bond mutual funds (-$4.3 billion) suffered through their sixth straight week of negative flows. Within the taxable bond fund group investors took money out of Lipper’s High Yield Funds (-$714 million) and Loan Participation Funds (-$451 million) in what can be viewed as fight to safety in this time of uncertainty. Municipal bond mutual funds and equity mutual funds also extended their recent losing streaks with their second and third consecutive weeks of net outflows, respectively. Contradicting the other groups, money market funds did reverse their current trend with outflows of over $10 billion after four consecutive weeks of net inflows which totaled almost $50 billion. There was some positive news within the ETF universe as equity ETFs (+$4.8 billion) and taxable bond ETFs (+$4.3 billion) both were the beneficiaries of sizeable net inflows. For equity ETFs it was third net inflow in four weeks as SPDR S&P 500 ETF Trust (NYSEARCA: SPY ) paced the field by taking in $7.2 billion of net new money. The inflows into taxable bond ETFs marked their third consecutive week of positive results with almost $7.3 billion net inflows during the time period. (click to enlarge) Share this article with a colleague

401(k) Fund Spotlight: Dodge & Cox Stock Fund

Summary Dodge & Cox Stock Fund’s top holdings are a reflection of its nostalgic value approach. Dodge & Cox Stock Fund’s “long term” approach faces “near term” risks from technological disruptions. Dodge & Cox Stock Fund’s low yield is a major shortcoming for a large cap fund in the current market environment. I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article it is helpful to understand my approach to investing in 401(k)s . I strive to write these articles for the benefit of the novice and professional. Please comment if you have a question. I always try to give substantive responses. Dodge & Cox Stock Fund The Dodge & Cox Stock Fund (MUTF: DODGX ) is a large capitalization (“cap”) growth and income fund that tends to lean towards the value camp. It has only one share class, the simplicity of which is refreshing in this day and age. The fund is a giant. With $60 billion in assets, it is the second largest large cap value fund out there. The median market cap of the fund’s 64 holdings is $48 billion. I like the fact that, despite its size, the fund still remains relatively concentrated versus its benchmark, the S&P 500 index and its 500 holdings. It does stray a little overseas. 10% of the fund’s holdings are in dollar-denominated foreign stocks (as of June 30, 2015). DODGX is managed by the Dodge & Cox Investment Policy Committee , which has an average tenure of 27 years. These managers have consistently stayed true to their long term value approach. This is evidenced by the fund’s measly annual turnover of 17%. I do not particularly care for most of the fund’s largest holdings, but I at least give them credit for actually being stock pickers and not just index huggers. Interestingly, I think the fund’s ten largest holdings somewhat reflect the firm’s nostalgic approach. Here they are as of June 30, 2015: Ten Largest Holdings Fund Allocation Capital One Financial Corp (NYSE: COF ) 4.2% Wells Fargo & Co. (NYSE: WFC ) 4.0% Hewlett-Packard Co. (NYSE: HPQ ) 3.6% Microsoft Corp (NASDAQ: MSFT ) 3.6% Time Warner Cable, Inc. (NYSE: TWC ) 3.4% Time Warner, Inc. (NYSE: TWX ) 3.3% Novartis AG ( Switzerland ) (NYSE: NVS ) 3.2% Charles Schwab Corp (NYSE: SCHW ) 3.2% Bank of America Corp (NYSE: BAC ) 3.0% Comcast Corp (NASDAQ: CMCSA ) 2.7% DODGX has a lot riding on the future success of traditional media, computing, and finance. However, given the fund’s large cap value focus this is not a surprise. I am not an expert on these industries, but from a real world standpoint, I am skeptical. I am a 38 year old business owner who will never use a Microsoft product again and I would like an alternative to overpriced Comcast cable internet as soon as possible. My family also does not have cable television. The “long term” approach to these investments could become precarious, if they run into serious “near term” technological disruptions that younger generations will not hesitate to use. Where Are The Dividends? I find no compelling reason to choose DODGX over the standard, lower fee S&P 500 index fund offering available in most 401(k) plans. The fund’s .52% expense ratio is not overbearing, but I am dismayed by its paltry 1.30% dividend yield. Given the fund’s historical performance versus the S&P 500 index, I would rather just own the index with its higher 2.1% yield. According to a DODGX fund report , the 10-year annualized total return, as of July 31, 2015, was 6.94% versus 7.73% for the S&P 500 Index. The long term value approach of the fund has failed to shine over this longer period. Conclusion Based on my forecast for a lackluster stock market over the next 6 years, dividends will be a critical part of investor returns. If possible, 401(k) investors should consider bypassing DODGX for a higher yielding S&P 500 index fund. To me, high dividend yields and “value” tend to go hand and hand. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to Americans within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. 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.

Bright Future Secured As PPL Corp. Set To Grow EPS Moving Forward

Summary PPL’s complete focus on regulated operations will augur well for performance and stock price. Company’s U.S. regulated utilities are expected to enjoy healthy EPS growth of 8%-10% in the next five years. EPS growth is backed by attractive capital investment plan. Stock valuation will expand given strong regulated operations. PPL Corporation (NYSE: PPL ) is a suitable investment prospect for income investors seeking modest capital appreciation. The stock has an impressive yield of 4.8% and earnings for the company are expected to grow in a range of 4%-6% in future years, which will augur well for the stock valuation. PPL has been undertaking correct strategic decisions and has correctly directed its focus on regulated utility operations, which will fuel its future EPS growth. Furthermore, I think PPL’s transformation into a complete rate regulated electric utility company is favorable. The company plans to repatriate cash from U.K. operations, which will strengthen its cash flows and support growth investment and dividend growth. Moreover, the company has further de-risked the U.K. segment’s operations by reducing currency exposure through currency hedging. Moreover, the stock’s current valuation stays compelling in comparison to its industry. Correct Strategic Measures and Strong Growth Prospects Utility companies in the U.S. have been aggressively working to reduce their competitive business operations and increase regulated operations, as forward power prices have been volatile and weak. Increasing regulated operations will augur well for U.S. utility companies’ future performance as their revenues and cash flows will become more certain, which will lower business risk and result in stock valuation expansion. PPL has also recently completed the spinoff of its competitive operations, and the remaining business operations at the company make up a quality U.S. regulated growth story. In future, I think the stock valuation will expand because of the company’s improved risk profile. After the spinoff of the competitive operations and transition into a fully regulated utility, S&P upgraded the company’s credit rating to ‘A-‘ from ‘BBB’. Moving ahead, the company will continue to focus on its U.S. regulated operations, which will fuel its earnings growth. I think the company’s U.S. regulated utilities will enjoy EPS growth of almost 10% in the next five years, increasing to $1.34 in 2019 up from $0.90 in 2015, mainly driven by its attractive growth investments; PPL has a plan to make total capital investments of $18 billion in the next five years. The company expects its U.S. utilities to grow its earnings in a range of 8%-10% in the next five years. However, the company’s U.K.’s segment growth is expected to stay flat in the next five years, which will dampen the impressive U.S. growth; total EPS growth for the company is expected to be in a range of 4%-6% in future. Consistent with its initiatives to strengthen its consolidated growth, I think the company has rightly planned to repatriate $290 million of cash from the U.K. in 2015 and $300-$500 million in 2016-2017. The planned cash repatriation will allow the company to support its capital investments in future years and increase dividends. Moreover, in my opinion, the company has further de-risked the U.K. segment by lowering currency exposure through hedges. The company is now 100% hedged against the pound for 2015, 90% and 40% hedged for 2016 and 2017, respectively. Moreover, in order to meet carbon emission requirements, the company might opt to revive its shelved plan to construct a $900 million 700MW CCGT expansion at its Green River site. If the company decides to construct the plant, it could provide incremental EPS of $0.05-$0.07 annually, and will help PPL reduce carbon emissions and help meet 150-300MW of shortfall anticipated for the near future. As the company continues to make progress with its plans to focus on regulated operations, its performance has been improving. Given the company’s strong performance in the first two quarters of 2015, PPL has increased its EPS guidance from $2.05-$2.25 to $2.15-2.25 . In addition, given the increase in revenues and cash flows certainty because of complete focus on regulated operations, I think dividend growth for the company will stay strong, which will bode well for the stock price. PPL offers a yield of 4.7%. Separately, the stock’s current valuation stays compelling, as it is trading at a forward P/E of 13x, versus the industry forward P/E of 16x. Given the increased focus on regulated operations and strong earnings growth prospects, I think the stock valuation multiple will expand. Summation The company’s future growth prospects stay strong and it is on track to delivering a healthy performance in future years. The company’s complete focus on regulated operations will augur well for its performance and the stock price. Also, the company’s U.S. regulated utilities are expected to enjoy healthy EPS growth of 8%-10% in the next five years, backed by its attractive capital investment plan. Moreover, the stock valuations stay attractive, as it is trading at a forward P/E of 13x , in comparison to the industry forward P/E of 16x . Moving ahead, given the strong regulated operations, the stock valuation will expand. 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.