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VTHRX: A Great Mutual Fund For The Investor Nearing Retirement

Summary The Vanguard Target Retirement 2030 Fund has a simple construction and a low expense ratio. Despite being a very simple portfolio, they have covered exposure to most of the important asset classes to reach the efficient frontier. This is quite simply one of the best constructed portfolios I’ve seen for a worker nearing retirement. Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Vanguard Target Retirement 2030 Fund Inv (MUTF: VTHRX ). What do funds like VTHRX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of VTHRX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of VTHRX. Expense Ratio The expense ratio of Vanguard Target Retirement 2030 Fund is .17%. That is higher than some of the underlying funds, but overall this is a very reasonable expense ratio for a fund that is creating an exceptionally efficient portfolio for investors and rebalancing it over time to reflect a reduced risk tolerance as investors get closer to retirement. In short, this is a very solid value for investors that don’t want to be constantly actively management their portfolio. This is the kind of portfolio I would want my wife to use if I died prematurely. That is a ringing endorsement of Vanguard’s high quality target date funds. Composition The fund is running almost 75% stocks to about 25% bonds, but over time the portfolio shifts to sell off stocks and hold more bonds as Vanguard assumes that investors nearing retirement will have a reduced risk tolerance. This portfolio strategy is the embodiment of what financial advisors seek to do for clients. Unfortunately Vanguard does not know the unique circumstances of every client, but for a .17% expense ratio they are doing a great job. Holdings / Composition The following chart demonstrates the holdings of the Vanguard Target Retirement 2030 Fund: (click to enlarge) This is a fairly simple portfolio. Only four total funds are included so the fund can gradually be shifted to more conservative allocations by making small decreases in equity weightings and increases in bond weightings. The Vanguard Total Stock Market Index Fund is the largest holding at 45% of the portfolio and it is also available as an ETF. The ETF version is the Vanguard Total Stock Market ETF (NYSEARCA: VTI ). To be fair, Vanguard has a great reputation for running funds but not for coming up with creative names. I have a significant position in VTI because it carries an extremely low expense ratio and offers excellent diversification across the U.S. economy. Volatility An investor may choose to use VTHRX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. Since the fund includes domestic and international exposure to both equity and bonds, that seems like a fair way to analyze it. (click to enlarge) When we look at the volatility on VTHRX, it is dramatically lower than the volatility on SPY. That shouldn’t be surprising since the portfolio has some very material bond positions. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. Investors may recognize that the max drawdown for this fund was not that much weaker than the max drawdown for the market overall. That is strongly related to this portfolio being designed for people that will retire in about 15 years from now or 23 years from the crash of 2007. It would be unwise for Vanguard to become too conservative. While the fund has underperformed the S&P 500 by a notable margin, it is worth noting that part of that underperformance has been tied to international markets doing quite poorly relative to the S&P 500 over the last several years. Over the longer horizon I think it would be absurd to expect the domestic markets to continue beating the international markets so thoroughly. When it comes down to it, VTHRX is doing a very solid job of providing risk adjusted returns for the passive investor. Conclusion VTHRX is a great mutual fund for investors looking for a simple “set it and forget it” option for their employer sponsored retirement accounts. It is ideally designed for investors planning to retire around 2030, but can also be used by younger employees with lower risk tolerances or older workers with higher risk tolerances.

Some Prefer Southern Company Over Wisconsin Energy: I Just Don’t Get It

Summary I recently published a follow- up article about Wisconsin Energy after the acquisition of Integrys. Several friends told me that I should prefer Southern Company over Wisconsin Energy. They claim that the superior yield is due to some short term hardships that will soon be over. I totally disagree, I believe Wisconsin Energy is by far a superior investment. I will now try to explain why. Introduction A week ago I wrote this article about Wisconsin Energy (NYSE: WEC ). In the article, I tried to analyze the company after the acquisition of Integrys (NYSE: TEG ). The article is really in favor of buying the shares of the company. Several friends told me after reading the article that I should prefer Southern Company (NYSE: SO ) over Wisconsin Energy. They claim that the superior dividend yield and the longer streak of dividend raises make it a superior investment for dividend growth investors. They believe that currently, the company suffers from short-term headwinds. I read a lot about Southern Company and I totally disagree. In this article, I will show the fundamentals and valuation of the company, and then show a comparison with Wisconsin Energy, that I believe will allow me to emphasize the superiority of Wisconsin Energy over Southern Company. Southern Company through its subsidiaries, Alabama Power Company, Georgia Power Company, Gulf Power Company and Mississippi Power Company, supplies electric service in the states of Alabama, Georgia, Florida, and Mississippi. Each of those subsidiaries is an operating public utility company. Additionally, Southern Company owns all of the common stock of Southern Power Company, which is also an operating public utility company, which constructs, acquires, owns, and manages generation assets and sells electricity at market-based rates in the wholesale market. Fundamentals Southern Company has terrible fundamentals, really, it is hard for me to describe it otherwise. The revenues for example grew from $13.554 in 2005 to $18.467 in 2014. This is CAGR of 3%, which might be reasonable if the income is growing at least at the same pace. Yes, it is a utility company which doesn’t show fast growth, but I still have higher expectations. SO Revenue (NYSE: TTM ) data by YCharts EPS growth is even worse, when thinking about the EPS growth together with inflation, well there is practically none. The EPS grew from $2.13 in 2005 to $2.18 in 2014. This is CAGR of 0.23%, which is practically no growth, and when taking inflation into consideration, it is practically declining. Let’s look now towards the future. The analysts’ estimates are for growth of 2.5%- 3% in EPS for the next 3- 5 years. Having said that, I am not happy with the EPS growth in the past and the future estimates. SO EPS Diluted (Annual) data by YCharts The dividend is another weak fundamental in my opinion. The annual payment grew from $1.49 in 2005 to $2.1 in 2014. That is CAGR of just 3.5%. As you read above, as EPS is flat, the dividend rose by expanding the payout ratio. This is not sustainable for the long run, and therefore it makes me worry about the ability of the company to show real growth. In 2014, the payout ratio was over 95%, and even for the estimate for 2015, the payout ratio will be over 75% which is high for utilities. Currently, the company yields just under 5%. I don’t think the yield is high enough to justify such slow growth. SO Dividend data by YCharts Usually I like it when companies reward shareholders by using big parts of the FCF for dividends and share repurchases. However, with such a high payout ratio, I didn’t expect Southern Company to buy its own shares. Yet, I figured out that not only that the number of shares didn’t decrease, it actually rose by over 22% over the past decade. I don’t mind being diluted when smart acquisitions are made like the acquisition of Integrys by Wisconsin, or by the purchases of new properties by Realty Income (NYSE: O ). In these cases the dilution is used to grow EPS and FFO. In this case, the dilution comes with low growth. Not my cup of tea. Valuation When I look at the valuation of Southern Company, I find a company that is valued cheaper than Wisconsin Energy. The difference in the valuation makes perfect sense as Wisconsin Energy is growing its EPS while Southern Company has stagnated. In my opinion, the difference isn’t big enough. I find Wisconsin Energy fairly valued for a company that will grow at around 6% every year. By looking at the forward P/E for this year and the year after, I can see that the gap is becoming smaller and smaller. As a long term investor, it is hard for me to justify purchasing Southern Company at the current valuation. SO PE Ratio ( TTM ) data by YCharts The lower valuation is not low enough for me to consider Southern Company at the moment. It might sound odd, but I find it overvalued when compared to other high yielding companies, with slower than average growth. Risks As I see Southern Company, there are two main risks to this investment. The first one is the lack of growth catalysts. The company is forecasted to grow its earnings by less than 3% annually over the next several years. This is very low even for a utility company, especially one that expanded its payout ratio so much. The company must find new ways to grow its income and revenues. The second risk is the still increasing expenses of the Kemper project in Mississippi. This project consumes more and more money, and it takes a big part of the cash flow as it increases the capex. In 2014 alone, the expenses on this project cost the company $0.83 per share. Southern Company will have to invest more money in order to finish it. Finishing it will indeed free some if its cash flow, but it will still not be able to serve as a real growth catalyst. Opportunities Southern Company still has several opportunities, but I find them pretty vague. Firstly, most major expenses on the Kemper project are behind us already. The necessary investment will now be much lower, and it will allow the company to use the money in a better way. Another opportunity is the fact that even when it suffers from headwinds, Southern Company still manages to show fair margins and fair return on equity. If the company will be able to find growth prospects, it will be able to utilize its efficient structure to create more income and more value to its shareholders. Comparison with Wisconsin Energy I will now sum the comparison between these companies. I believe that Wisconsin Energy has superior fundamentals when looking at the past decade and the next five years. Southern Company is valued cheaper, but not cheap enough to justify the lack of growth in the EPS. Wisconsin Energy, doesn’t suffer from huge expenses due to problematic projects such as Kemper in Mississippi. This kind of projects consume a lot of capital, and it will be hard for them to return the money invested. Wisconsin Energy has a lower debt burden. The debt to equity ratio is lower, and it gives Wisconsin Energy more flexibility. Southern company has more debt and a very high payout ratio. This is a combination that can be damaging to the company. It puts the dividend in an unpleasant place. Not only that, Wisconsin Energy is working on lowering its debt after the acquisition of Integrys. Southern Company on the other hand has higher margins and return on equity. This is a positive sign, which is not enough when the company can’t find growth prospects. Yet, to be fair, holding a more profitable company is always a plus. I am writing from my position as dividend growth investor, so it makes perfect sense that I will give Southern Company credit for the higher dividend yield. The dividend yield is much higher at almost 5% compared to the yield of over 3.5% that Wisconsin Energy has. If you look for income it is an important aspect. Conclusion I am certain that Wisconsin Energy can show superior returns for the near future. It has better fundamentals and growth opportunities, and I think that dividend growth investors should prefer it over Southern Company. In my opinion, it will also beat Southern Company in total returns even though the latter has higher dividend yield. I would only pick Southern Company if I were a retiree who is looking for income right here and right now.

Is It All Downhill For SLV?

Summary The silver market cooled down in recent weeks. The rise in U.S. treasury yields and stronger U.S. dollar dragged down the price of SLV. The low price of silver didn’t raise the physical demand for silver. The silver market cooled down as the market is slowly adjusting to a possible rate hike by the FOMC in December. The price of the iShares Silver Trust ETF (NYSEARCA: SLV ) dropped by more than 8% since the beginning of the month. The lower price has yet to ramp up the physical demand for silver. The upcoming minutes of the FOMC meeting could revise market expectations with respect to the Fed’s rate decision, which could impact SLV. Even though the recent NFP report was better than expected and led the market to revise up the odds of a hike – the implied probabilities for a December hike grew to 70%; it’s still not a done deal that the Fed will raise rates in December. These odds could come down if the next NFP report in early December disappoints and the growth rate in wages declines again to around 2.2%. And these chances still suggest the market isn’t fully convinced of a rate hike this year. As long as there is uncertainty, the price of SLV is likely to benefit from it. This week, the minutes of the FOMC will be published. Last time, the FOMC issued a hawkish statement, in which it mentioned December as a possible timing to raise interest rates. In recent weeks, the U.S. dollar resumed its upward trend, and medium-term and long-term U.S. treasury yields bounced back. And if the upcoming minutes of the FOMC meeting were to present a hawkish stance, after all occasionally the minutes are revised up to their release, this could further boost the U.S. dollar and treasury yields – trends that are likely to bring down SLV. Another report worth noticing is the U.S. CPI, which will be published on Tuesday. The U.S. core CPI reached 1.9% – close to the Fed’s lower bound inflation target. But the weakness in the energy market could also trickle into the core CPI, resulting in a possible decline in the coming months. If the core CPI were to fall back down to 1.8% or lower, this could reduce the odds of a rate hike and slightly reduce the downward pressure on SLV. But let’s not only dwell on the demand for silver for investment purposes. Has the low price of silver drove up the physical demand for silver? On this front, in the U.S., the leading country in importing silver, the market has also cooled down in the past several months, as indicated in the following chart: Source: Bloomberg and U.S. Mint During the past month and a half, sales of American Eagle Silver reached a monthly average of 3.9 million ounces – nearly 16% lower than in Q3 2015, but 2.3% higher year on year. The amount of silver sold doesn’t seem to be strongly correlated with the monthly changes in the price of silver – the linear correlation is only -0.17. So, even if the price of SLV is expected to come further down, it’s not likely to push the demand for silver in the U.S. much higher. The decline in the price of SLV was inevitable as the Fed moves closer towards raising rates. The recovery of the U.S. dollar and rise in long-term yields have also helped push back down the price of SLV and erased its gains from October. This week’s release of the minutes of the last FOMC meeting could raise the chances of a December rate hike, which could also result in another blow for SLV. In any case, the bearish sentiment for SLV isn’t likely to dissipate anytime soon. For more, please see: Is SLV about to change course?