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4 Best-Rated Global Mutual Funds For Portfolio Diversification

Global mutual funds are excellent options for investors looking to widen exposure across countries. Central banks of major regions including the Eurozone, China and Japan opted for economic stimulus measures such as rate cuts and monetary easing to boost their respective economies. In this environment, these countries thus provide lucrative investment propositions. Meanwhile, the recent lift-off by the Fed indicated that the U.S. economy is on track to stable growth in the near term. Thus a portfolio having exposure to both domestic and foreign securities will likely help in reducing risk and enhancing returns. However, investors need to be careful while investing in these funds, given the heightened uncertainty. Below we share with you four top-rated global mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. To view the Zacks Rank and past performance of all global mutual funds, investors can click here to see the complete list of global funds . The Fidelity Worldwide Fund (MUTF: FWWFX ) seeks capital appreciation. FWWFX primarily focuses on acquiring common stocks issued throughout the globe across a wide range of regions. FWWFX considers factors including economic conditions and financial strength before investing in a company. The Fidelity Worldwide fund returned 4.6% over the past three months. As of October 2015, FWWFX held 321 issues, with 2.93% of its assets invested in Alphabet Inc Class A. The American Funds New Perspective Fund (MUTF: ANWPX ) invests in securities of companies throughout the globe in order to take advantage of changes in factors including international trade patterns and economic relationships. ANWPX primarily focuses on acquiring common stocks of companies that have impressive growth prospects. ANWPX may also invest in companies that are expected to pay out dividend in the future to generate income. The American Funds New Perspective A fund returned 6.9% over the past three-month period. ANWPX has an expense ratio of 0.75% compared with the category average of 1.28%. The Polaris Global Value Fund (MUTF: PGVFX ) seeks growth of capital. PGVFX utilizes a value-oriented approach to invest in common stocks of both U.S. and non-U.S. companies, which also include firms from emerging nations. PGVFX defines emerging or developing markets as those which are not listed in the MSCI World Index. The Polaris Global Value fund returned 5.4% over the past three months. Bernard Horn, Jr. is one of the fund managers of PGVFX since 1998. The Harding Loevner Global Equity Portfolio (MUTF: HLMGX ) invests the lion’s share of its assets in securities including common and preferred stocks of companies located in both U.S. and foreign lands. HLMGX allocates its assets to a minimum of 15 countries, including emerging nations. HLMGX may also invest in Depositary Receipts. The Harding Loevner Global Equity Advisor fund returned 7% over the past three-month period. HLMGX has an expense ratio of 1.20% compared with the category average of 1.28%. Link to the original post on Zacks.com

Low-Risk Tactical Strategies Using Volatility Targeting

Summary In this volatility targeting approach, the allocation between equity and bond assets is varied on a monthly basis based on a specified target volatility level. Low volatility is the goal. Two strategies are presented: 1) a moderate growth version and 2) a capital preservation version. 30 years of backtesting results are presented using mutual funds as proxies for ETFs. For the moderate growth version, backtests show a CAGR of 12.6%, a MaxDD of -7.4% (based on monthly returns), and a return-to-risk (CAGR/MaxDD) of 1.7. For the capital preservation version, CAGR = 10.2%, MaxDD = -4.9%, and return-to-risk (CAGR/MaxDD) = 2.1. In live trading, ETFs can be substituted for the mutual funds. Short-term backtesting results using ETFs are presented. I must admit I am somewhat of a novice at using volatility targeting in a tactical strategy. But recently, the commercially free Portfolio Visualizer [PV] added a new backtest tool to their arsenal, so I started studying volatility targeting and how it works. Volatility targeting as used by PV is a method to adjust monthly allocations of assets within a portfolio based on the volatility of the assets over the previous month(s). In this case, we are only looking at high volatility equities and very low volatility bonds. To maintain a constant level of volatility for the portfolio, when the volatility of the equity asset(s) increases, allocation to the bond asset(s) increases because the bond asset has low volatility. And when the volatility of the equity asset(s) decrease, allocation to the bond asset(s) decreases. In PV, you can specify a target volatility level for the portfolio. Since I wanted an overall low volatility strategy with moderate growth (greater than 12% compounded annualized growth rate), I mainly focused on very low volatility target levels. I ended up using a monthly lookback period on volatility to determine the asset allocations because monthly lookbacks produced the best overall results. I quickly came to realize that high-growth equity assets are desired for the equity holdings, and a low-risk (low volatility) bond asset is preferred for the bond fund. In order to assess the strategy, I used mutual funds that have backtest histories to 1985. This enabled backtesting to Jan 1986. In live trading, ETFs that mimic the funds can be used. I will show results using the mutual funds as well as the ETFs. The equity assets I selected were Vanguard Health Care Fund (MUTF: VGHCX ) and Berkshire Hathaway (NYSE: BRK.A ) stock. Either Vanguard Health Care ETF (NYSEARCA: VHT ) or Guggenheim – Rydex S&P Equal Weight Health Care ETF (NYSEARCA: RYH ) can be substituted for VGHCX in live trading. BRK.A is, of course, a long-standing diversified stock. These two equity assets were selected because of their high performance over the years. Of course, these equities had substantial drawdowns in bear markets, something we want to avoid in our strategy. But in volatility targeting, as I have found out, it is advantageous to use the best-performing equities, not just index-based equities. Of course, it is assumed that these equities will continue to perform well in the future as they have in the past 30 years, and that may or may not be the case. For the low-risk bond asset class, I used the GNMA bond class. The selection of the GNMA bond class was made after studying performance and risk using other bond classes such as money market, short-term Treasuries, long-term Treasuries, etc. The GNMA class turned out to be the best. I selected Vanguard GNMA Fund (MUTF: VFIIX ) for backtesting, so that the backtests could extend to Jan 1986. There are a number of options for ETFs that can be used in live trading, e.g. iShares Barclays MBS Fixed-Rate Bond ETF (NYSEARCA: MBB ). Moderate Growth Version (CAGR = 12.6%) A moderate growth version is considered first. VGHCX and BRK.A are the equities always held in a 66%/34% split; VFIIX is the bond asset; and the target volatility is 6%. The backtested results from 1986-2015 are shown below compared to a buy and hold strategy of the equities (rebalanced annually). (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) It can be seen that the compounded annualized growth rate [CAGR] is 12.6%, the maximum drawdown [MaxDD] is -7.4% (based on monthly returns), and the return-to-risk [MAR = CAGR/MaxDD] is 1.7. There are three years with essentially zero or very slightly negative returns: 1999, 2002 and 2008. The worst year (2008) had a -1.6% return. The monthly win rate is 74%. The percentage of VFIIX varies between 1% and 93% for any given month. The Vanguard Wellesley 60/40 Equity/Bond Fund (MUTF: VWINX ) is a good benchmark for this strategy. The overall performance and risk of VWINX are shown below. It can be seen that the CAGR is 9.1%, while the MaxDD is -18.9%. These performance and risk numbers are quite good for a buy and hold mutual fund, but the volatility targeting strategy produces higher CAGR and much lower MaxDD. VWINX Benchmark Results: 1986-2015 (click to enlarge) Capital Preservation Version (MAR = 2.1) For this version, the target volatility was set to a very low level of 3.5%. This volatility level produced the lowest MAR. The results using PV are shown below. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) It can be seen that the CAGR is 10.2%, the MaxDD is -4.9%, and the MAR is 2.1. Every year has a positive return; the worst year has a return of +0.4%. The monthly win rate is 75%. Limited Backtesting Using ETFs To show how this strategy would play out in live trading, I have substituted RYH for VGHCX and MBB for VFIIX. The second equity asset is BRK.A as before. Backtesting is limited to 2008 with these ETFs and the BRK.A stock. The backtest results are shown below. (click to enlarge) (click to enlarge) The ETF results can be compared with the mutual fund results from 2008 to 2015. The mutual fund results are shown below. (click to enlarge) (click to enlarge) It can be seen that the overall performance over these years is lower than seen over the past 30 years. The CAGR is 9.7% from 2008 to 2015 for the mutual funds and 9.3% for the ETFs. Although this performance in recent years is less than earlier performance, it is still deemed acceptable for most retired investors interested in preserving their nest egg while accumulating modest growth. The good quantitative agreement between mutual funds and ETFs between 2008 and 2015 provides some confidence that using ETFs is a viable option for this strategy. Overall Conclusions The tactical volatility targeting strategy I have presented has good potential to mitigate risk and still provides moderate growth in a retirement portfolio. The moderate growth version has a CAGR of 12.6% and a MaxDD of -7.4% in 30 years of backtesting. The capital preservation version has a CAGR of 10.2% and a MaxDD of -4.9% over this same timespan. The return-to-risk MAR using target volatility is much better than passive buy and hold approaches, especially in bear markets when large drawdowns may occur even in diversified portfolios.

Should You Stick With Duke Energy After A Rough Year?

Duke Energy has received the first two regulatory approvals to proceed with its acquisition of Piedmont. The annual average residential electricity sales will drop 0.5% in 2016, but the prices increase will offset the impact of unfavorable weather conditions. Duke Energy is trading at very reasonable valuation and offers a very attractive dividend yield of 4.58% at current levels. Duke Energy (NYSE: DUK ) has received the first two regulatory approvals to proceed with its acquisition of Piedmont Natural Gas (NYSE: PNY ). Now the approval of Piedmont’s shareholders and permission from the N.C. Utilities Commission is required to complete the transaction. So far the process has progressed smoothly, and Piedmont’s shareholders will meet on January 22, for that purpose. Duke Energy will become the largest gas utility in the state and N.C. Utilities Commission could raise concern over the dominance position, but the management expects to complete the transaction on time. Duke Energy, like most of the other utility stocks, underperformed during 2015 primarily due to uncertainty over interest rate hike. Now finally, Fed has raised the rate and would continue to hike steadily during 2016. The only downside of interest rate increase for Duke Energy is that incremental financial burden could restrict the earnings growth. In this scenario, the investor might be concern over the sustainability of future dividend payments. However, consistently growing regulated electric & gas operations and stout cash flow position will enable Duke Energy to bear the shock and continue to return cash to shareholders. So far this year, Duke Energy has delivered satisfactory performance despite very rough weather conditions. In the coming quarters, the outlook of unregulated utilities is likely to remain challenging primarily due to declining power and natural gas prices and soft electricity demand. On the contrary, regulated utilities will benefit from the supportive regulatory environment, resulting in steady operating earnings growth in 2016. While overall sector earnings are likely to grow 3.7% during, Moody’s (NYSE: MCO ) expects that regulated utilities will witness better operating earnings growth. Source: Factset Duke Energy’s regulated utilities segment recorded operating revenue of $17.09 billion, an increase of only $16 million year-over-year. The flat top-line was due to unfavorable weather during the first half of 2015, but the segment revenue increased 2.7% during the third quarter on the back of mid-single digit increase in electricity demand. Currently, the regulated electricity business is 91.3% of total revenue flowed by 6.4% nonregulated and 2.3% regulated natural gas. Going forward, the addition of approximately $1.4 billion annual sales from Piedmont will significantly increase the revenue contribution of Duke Energy’s existing regulate natural gas business. In the advantageous scenario, the aggressive acquisition of regulated assets will fuel the company’s earnings. (click to enlarge) Source: Company Presentation The commercial and industrial demand is steadily rising, but the mild weather is negatively impacting the demand for residential electricity. The Energy Information Administration (EIA) estimates that annual average retail residential sales will drop 0.5% in 2016, but electricity sales to the commercial and industrial sector will increase by 0.7% and 1.4%, respectively. Source: EIA Duke Energy may continue to witness flat residential usage per customers owing to stable demand and improving efficiency level, but an increase of 0.7% in residential electricity prices will support the growth during 2016. Moreover, the diversified customer base and the addition of new residential customer at a low single-digit, the company added 1.3% new customer over the past twelve months, will boost the top-line at a steady pace. On the other hand, the potential ease in currency headwind and divestiture of poor performing assets could also improve the revenue from international operations. Thus, the trickling down of revenue growth, solid gross margins, and a massive $10 billion investment in gas & electric infrastructure will enable Duke Energy to accelerate an average long-term earnings growth of 4% – 6%. Duke Energy pland to invest approximately $20 billion in new generations and infrastructure development between 2015 and 2019. So far, the company has spent $4.64 billion in CAPEX during 2015, while it generated $5.4 billion in operating cash flow with cash & cash equivalent of $1.37 billion cash. The cash flow position looks pretty healthy, which depict that the company would be able to manage CAPEX and dividend payments without any cut if the interest rate increases further. Duke Energy increases dividends each year, and it has paid the quarterly dividend for 89 consecutive years. Duke Energy is one of the high yield utility stocks and currently, it offers a yield of 4.58%, significantly higher than the average 3.90% yield of large-cap electric utilities in the U.S. Duke Energy has increased the dividend at a CAGR of approximately 2% between 2009 and 2014. Now, the company has recently boosted the increase rate to 4%. The management expressed the intention to increase the future dividend more in line with the long-run earnings growth, which is 4% – 6%. Though interest rate is a threat, the healthy balance sheet will enable the company to maintain the dividend growth. Source: Finviz The balance sheet of the company is very sound with total assets of $121 billion. In contrast, the company has a total debt of $40.2 billion. The debt would increase in 2016 owing to partial debt financing to complete the acquisition and additional debt from Piedmont. Despite the substantial debt, the company’s financial health is likely to remain rigorous as it invests in quality assets to generate growing cash flows, and its total debt to asset ratio, excluding goodwill, is only 0.38 times. Currently, the total debt to equity ratio of Duke Energy is 1.07 times, which seems quite high but is significantly lower than the large-cap electric utilities average and median of 1.38 times and 1.21 times, respectively. Moreover, the interest coverage ratio of 3.85 times depicts that Duke Energy is in a very comfortable position to cover the future interest expense while raising the dividend in line with the earnings growth. Duke Energy delights the investors by raising dividends, which are backed by consistently growing earnings. Unfortunately, Duke Energy is one of the stocks to lose double-digit value during 2015 primarily due to interest rate turmoil throughout the year. On the flip side, Duke Energy is now trading at very reasonable valuation, and its yield has increased due to a steep decline in share price. Duke Energy is currently trading at forward PE of 15.31x, which is slightly less than the utility sector forward PE of 15.5x. That said, Duke Energy is a very decent utility stock to hold for growing dividends and investors should not worry about the interest rate as it is already priced-in.