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Q1 2016 Style Ratings For ETFs And Mutual Funds

At the beginning of the first quarter of 2016, only the Large Cap Blend style earns an Attractive-or-better rating. Our style ratings are based on the aggregation of our fund ratings for every ETF and mutual fund in each style. Investors looking for style funds that hold quality stocks should look no further than the Large Cap Blend and Large Cap Value styles. These styles house the most Attractive-or-better rated funds. Figures 4 through 7 provide more details. The primary driver behind an Attractive fund rating is good portfolio management , or good stock picking, with low total annual costs . Attractive-or-better ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) cheap funds can dupe investors and (2) investors should invest only in funds with good stocks and low fees. See Figures 4 through 13 for a detailed breakdown of ratings distributions by style. Figure 1: Ratings For All Investment Styles Click to enlarge Source: New Constructs, LLC and company filings To earn an Attractive-or-better Predictive Rating, an ETF or mutual fund must have high-quality holdings and low costs. Only the top 30% of all ETFs and mutual funds earn our Attractive or better rating. The Vulcan Value Partners Fund (MUTF: VVPLX ) is the top rated Large Cap Blend fund. It gets our Very Attractive rating by allocating over 61% of its value to Attractive-or-better-rated stocks. Oracle Corporation (NYSE: ORCL ) has long been one of our favorite stocks held by VVPLX and earns a Very Attractive rating. Over the past decade, Oracle has grown after-tax profit ( NOPAT ) by 15% compounded annually. The company’s earns a top quintile 23% return on invested capital ( ROIC ). Oracle has grown into a cash machine, generating over $40.7 billion in free cash flow over the past five years. Unwarranted concerns about the company’s ability to adapt to new cloud technologies have created a great buying opportunity. At its current price of $37/share, ORCL earns a price-to-economic book value ( PEBV ) ratio of 0.9. This ratio means that the market expects Oracle’s NOPAT to permanently decline by 10% from current levels. If Oracle can instead grow NOPAT by just 5% compounded annually for the next decade , the stock is worth $57/share today – a 54% upside. Neuberger Berman Small Cap Growth (MUTF: NSNAX ) is the worst rated Small Cap Growth fund. It gets our Very Dangerous rating by allocating over 48% of its value to Dangerous-or-worse-rated stocks. Making matters worse, it charges investors total annual costs of 5.37%. Brunswick Corporation (NYSE: BC ) is one of our least favorite stocks held by NSNAX and earns a Dangerous rating. Over the past decade, Brunswick’s NOPAT has fallen by 1% compounded annually. Over the same time, the company’s ROIC has declined from 9% in 2004 to 8% over the trailing-twelve months. Despite the continued deterioration of the business, the stock remains overvalued. To justify its current price of $44/share, Brunswick must grow NOPAT by 10% compounded annually for the next 16 years . This expectation seems rather optimistic given Brunswick’s inability to grow profits over the prior decade. Figure 2 shows the distribution of our Predictive Ratings for all investment style ETFs and mutual funds. Figure 2: Distribution of ETFs & Mutual Funds (Assets and Count) by Predictive Rating Click to enlarge Source: New Constructs, LLC and company filings Figure 3 offers additional details on the quality of the investment style funds. Note that the average total annual cost of Very Dangerous funds is almost five times that of Very Attractive funds. Figure 3: Predictive Rating Distribution Stats Click to enlarge * Avg TAC = Weighted Average Total Annual Costs Source: New Constructs, LLC and company filings This table shows that only the best of the best funds get our Very Attractive Rating: they must hold good stocks AND have low costs. Investors deserve to have the best of both and we are here to give it to them. Ratings by Investment Style Figure 4 presents a mapping of Very Attractive funds by investment style. The chart shows the number of Very Attractive funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Attractive. Figure 4: Very Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 5 presents the data charted in Figure 4 Figure 5: Very Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 6 presents a mapping of Attractive funds by investment style. The chart shows the number of Attractive funds in each style and the percentage of assets allocated to Attractive-rated funds in each style. Figure 6: Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 7 presents the data charted in Figure 6. Figure 7: Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 8 presents a mapping of Neutral funds by investment style. The chart shows the number of Neutral funds in each investment style and the percentage of assets allocated to Neutral-rated funds in each style. Figure 8: Neutral ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 9 presents the data charted in Figure 8. Figure 9: Neutral ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 10 presents a mapping of Dangerous funds by fund style. The chart shows the number of Dangerous funds in each investment style and the percentage of assets allocated to Dangerous-rated funds in each style. The landscape of style ETFs and mutual funds is littered with Dangerous funds. Investors in Small Cap Value have put over 38% of their assets in Dangerous-rated funds. Figure 10: Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 11 presents the data charted in Figure 10. Figure 11: Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 12 presents a mapping of Very Dangerous funds by fund style. The chart shows the number of Very Dangerous funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Dangerous. Figure 12: Very Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 13 presents the data charted in Figure 12. Figure 13: Very Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Indonesia Slashes Rates Again: ETFs In Focus

Indonesia’s central bank cut its benchmark interest rate for the second time this year in its efforts to improve sluggish economic growth. Bank Indonesia (BI) slashed its benchmark interest rate by 25 basis points to 7%. BI had undertaken a similar sized cut in January after keeping rates unchanged for the last 10 months of 2015. The recent rate cut was largely expected as the majority of economists surveyed by Reuters had predicted that BI would cut the key rate by 25 basis points. In its efforts to ease the economy, BI not only lowered interest rates but also reduced the reserve requirement on rupiah deposits by 1 percentage point to 6.5%, effective from March 16. This move is expected to boost liquidity by more than $2.5 billion (34 trillion rupiah). These measures from the Indonesian central bank come closely on the heels of the U.S. Federal Reserve taking a dovish stance with hopes of further rate hikes fading. The Indonesian bank stated that its measures to ease monetary policy are aimed at achieving solid macroeconomic stability with reduced inflationary pressure against a backdrop of uncertain global markets. It further pointed out that it will continue to work with the government to control inflation, stimulate domestic economic growth and bring about structural reforms. The Indonesian president, Joko Widodo, popularly known as “Jokowi” has been quite vocal about his wish to see interest rates fall further to spur growth. As per a Bloomberg report, Indonesia’s economy expanded just 4.79% last year, the lowest since 2009. This year, with inflation under control, the overall sentiment is that the rates could be slashed further. In 2016, BI expects inflation to be around the mid-point of its target range of 3% to 5%. Apart from Indonesia, several other countries are also following the strategy of monetary easing, which generally comes in the form of an interest rate cut, to boost growth. Earlier this year, Bank of Japan’s (BOJ) move to impose a negative interest rate for the first time surprised the markets. The BOJ Governor Haruhiko even stated that there will be no limit to efforts for easing monetary policy. The central bank may further expand asset purchases if required. Other Asian countries including Taiwan and Bangladesh have cut rates. Meanwhile, the European Central Bank (ECB) has also hinted on further policy easing in its March 2016 meeting. Investor sentiment towards Indonesia has improved following its liberalization developments by easing restrictions on foreign investment in several industries including films, restaurants and healthcare earlier this month. Jokowi’s move to deregulate the traditionally protectionist economy should help in accelerating growth and making the Indonesian business environment more conducive for new investment. A Closer Look at 3 Indonesian ETFs In the light of these developments, we highlight three ETFs – the iShares MSCI Indonesia ETF (NYSEARCA: EIDO ) , the Market Vectors Indonesia Index ETF (NYSEARCA: IDX ) and the Market Vectors Indonesia Small-Cap ETF (NYSEARCA: IDXJ ) – that have gained 6.2%, 7.2% and 6.2%, respectively, in the last 10 days. All three have a Zacks ETF Rank of 3 or a ‘Hold’ rating with a High risk outlook. EIDO This is the most popular ETF tracking the Indonesian market with AUM of $344.3 million and average daily volume of almost 756,000 shares. The fund tracks the MSCI Indonesia Investable Market Index, holding 86 securities in its basket while charging 62 bps in annual fees from investors. The product is somewhat concentrated in both sectors and securities. The top five firms account for almost half of total assets, while from a sector point of view, financials dominates the fund’s assets with 38% share. The fund has a heavy tilt towards large-cap stocks at 84%. IDX This ETF follows the Market Vectors Indonesia Index, holding a basket of about 45 companies that are based or do most of their business in Indonesia. The product puts about 54.6% of total assets in the top 10 holdings, suggesting moderate concentration. Large caps are pretty prevalent, as these make up 83% of assets. With respect to sector holdings, financials again takes the largest share at 34.9%, followed by consumer staples (18%) and consumer discretionary (14.4%). The product has amassed $98.1 million in its asset base while it trades in volumes of around 89,000 shares. It charges 58 bps in fees per year from investors. IDXJ Unlike the other two, this is a small-cap centric fund. It is unpopular and less liquid having AUM of $5.3 million and average daily volume of about 2,000 shares. The fund tracks the Market Vectors Indonesia Small Cap Index and charges 61 bps in annual fees. Holding 29 stocks, the product does a decent job of spreading out as the top 10 securities hold about 62% weight. However, it is a bit concentrated from a sector outlook, as financials takes the top spot at 42.1% while industrials and energy round off the next two positions at 23% and 14.7%, respectively. Original Post