Tag Archives: zacks funds

Concentrated Mutual Funds: Leaving Too Much To Luck

Summary The International Monetary Fund had raised caution on US mutual funds with large positions in high-yielding bonds that are issued by risky companies in the country or in emerging economies. To tap the low-rate environment, many mutual funds had stacked up these high-risk securities. Investors must note that mutual funds with a concentrated portfolio offer plenty of risks. The International Monetary Fund had raised caution back in September on US mutual funds with large positions in high-yielding bonds that are issued by risky companies in the country or in emerging economies. To tap the low-rate environment, many mutual funds had stacked up these high-risk securities. What this also indicates is a risk of concentrated holdings. While we are well acquainted with the benefits of having a diversified portfolio, investors must also note that mutual funds with a concentrated portfolio offer plenty of risks. The latest example of a mutual fund fiasco due to a concentrated exposure takes us back to the Valeant Pharmaceuticals (NYSE: VRX ) stock, which has seen a freefall since after mid-September. Eventually, Sequoia Fund (MUTF: SEQUX ) that has nearly 30% of its assets invested in Valeant suffered a nosedive. While this is one example, data from Thomson Reuters’ Lipper show that 13 other US equity funds (having over $1 billion worth of assets) have over 10% exposure to a single stock. Valeant’s Loss Drags SEQUX Down Valeant’s stock nosedived after it increased the price of two drugs (Nitropress and Isuprel) in Sept. 2015. Since Sept. 18, Valeant has slumped nearly 70%. Better-than-expected third-quarter earnings failed to halt the plunge, as allegations of debatable transactions with specialty pharmacies surfaced. Investors questioned the accounting and business practices of Valeant, in particular its relationship with specialty pharmacies. Valeant had issued a press release defending the accusations on its financial reporting and operations. The company clarified in its statement that it does not draw sales benefit from any inventory held at these specialty pharmacies. Valeant emphasized that its revenue recognition policy and accounting plan are in compliance with the law. However, these efforts were wasted as Valeant shares continued to decline even after a presentation in favor of the company by Bill Ackman, Chief Executive of Pershing Square Capital Management. Incidentally, Ackman is also the third-largest shareholder at Valeant. The stock’s slump affected its investors and the largest mutual fund holder, Sequoia Fund, ended up as a big loser. Since Sept. 18, SEQUX has lost 25.3%. Recent events related to this perhaps highlight the risks of concentrated holdings or investing too much in one stock. In late October, Vinod Ahooja and Sharon Osberg , two of the five independent directors of Sequoia Fund, resigned from the board. Separately, the fund house had to post a letter on its website to defend its significant investment in Valeant. The letter stated, “We have been asked by clients and friends why we own such a company. In our view, Valeant is an aggressively managed business that may push boundaries, but operates within the law… We believe the company will learn from the current crisis the importance of reputation and transparency to all stakeholders, especially the shareholders.” Focused Funds and Risks Focused funds are ones that invest in a limited number of companies, rather than having a diversified portfolio. The advantage of a diversified portfolio is that losses from certain investment instruments can be offset by gains in others. So the risk is diversified. However, for the concentrated or focused funds, the fate solely rests on the direction that the limited numbers of stocks are taking – either north or southward. A counter argument here is that well-chosen stock picks that are surging can also translate into significant gains for mutual funds. However, does that terminate the risk of the stock stumbling on hurdle and slipping into the bear territory? A case in point is Putnam Equity Spectrum A (MUTF: PYSAX ), which has 20.3% exposure to Dish Network (NASDAQ: DISH ). While in 2014 Dish Network gained 26.4%, PYSAX registered gains of nearly 3%. However this year, DISH’s 11.7% year-to-date loss of 11.7% is in tune with the 10.5% loss slump in the Putnam Equity Spectrum A fund. At the end of last year, Fairholme Fund (MUTF: FAIRX ) had almost half of its assets invested in American International Group, Inc. (NYSE: AIG ). However, Fairholme has diluted the holding to 19.59%, while 19.16% of its assets are invested in Bank of America (NYSE: BAC ) and 10.9% in Sears Holdings (NASDAQ: SHLD ). Funds with Above 10% Exposure to Single Stocks Some market experts are of the opinion that the purpose of a mutual fund is questionable when it has over 10-15% exposure to a single stock. However, we do have some examples of funds having at least 10% exposure to a certain stock. To begin with, Blue Chip Investor (MUTF: BCIFX ) has 30.8% of its assets invested in Berkshire Hathaway Inc. (NYSE: BRK.A ). While Berkshire Hathaway is down 9.6% so far this year, BCIFX has lost 3.4%. As of Jun 30, the total issues in the stock holdings for this Zacks Mutual Fund Rank #4 (Sell) fund was 14. Fairholme Allocation (MUTF: FAAFX ) and Fidelity Select Computers Portfolio (MUTF: FDCPX ) also have at least 20% invested in a single stock. FAAFX has invested 23.3% in Sears Holdings, while FDCPX has a 20.6% exposure to Apple Inc. (NASDAQ: AAPL ). FDCPX has also invested 9.2% in EMC Corporation (NYSE: EMC ). Year to date, Fairholme Allocation has lost nearly 7% while SHLD is down 33.7% in the same period. FDCPX has slumped 10.1% year to date. While Apple is up 6.3%, EMC has slumped 15.4% year to date. FAAFX has just 9 issues in the stock holding, FDCPX has 30. Both FAAFX and FDCPX carry a Zacks Mutual Fund Rank #3 (Hold). Separately, Fidelity Select Telecommunications Port (MUTF: FSTCX ) and Putnam Global Technology A (MUTF: PGTAX ) are two funds that have at least 10% invested in two separate stocks. Moreover, total issues in these stock holdings are also fairly high. FSTCX has invested 24.4% and 15.4% in AT&T, Inc. (NYSE: T ) and Verizon Communications Inc. (NYSE: VZ ), respectively. In case of FSTCX, year-to-date losses of respectively 0.2% and 3% for AT&T and Verizon were in contrast to the 2.5% gain for the fund. Perhaps, having 50 total issues in stock holdings helped to mitigate the loss. For example, among other holdings T-Mobile US, Inc. (NASDAQ: TMUS ) and Telephone & Data Systems Inc. (NYSE: TDS ) have gained 38.5% and 14.1 and FSTCX has invested 4.5% and 2.7% in them, respectively. FSTCX carries a Zacks Mutual Fund Rank #1 (Strong Buy). Coming to PGTAX, it has 11.9% invested in Alphabet (NASDAQ: GOOGL ) and 10.6% invested in Apple. Year to date, PGTAX has jumped nearly 12%, riding on Google and Apple’s year-to-date gains of 43.2% and 6.3%, respectively. PGTAX holds a Zacks Mutual Fund Rank #2 (Buy). So, taking a call to either invest in or abstain from concentrated funds depends on investors’ investment objective as the element of risk stemming from the direction of the largest stock holding decides their fate. While investing in PGTAX and FSTCX has proved fortunate, SEQUX, BCIFX and FAAFX have not been too lucky. Original post

Is This The Worst Time For MLP ETF Investing?

The double whammy of the recent crash in crude oil price below $40 and the Fed’s hawkish stance on interest rate hike are causing mayhem in the master limited partnership (MLPs) business. MLPs are involved in the business of transportation and storage of oil and gas, and they are suffering even more than the oil producers from the downturn in the market. MLPs primarily benefit from an uptick in oil production. However, U.S. oil producers are resorting to a cutback in oil production in response to falling prices. Oil drilling companies have idled over half their rigs from last month. The latest data from Baker Hughes Inc. (NYSE: BHI ) revealed that rigs engaged in the exploration and production of oil and gas totaled 767 for the week ended November 13, 2015, a decline of 4 from the prior week’s count and the lowest level seen since April 2002. The nationwide rig count is still less than half the prior-year level of 1,928. Despite a marginal rise to 574 last week, the oil rig count continues to be on the low end of the five-year range and is significantly below the previous year’s level of 1,578. International Energy Agency (EIA) has also reduced U.S. production outlook for 2016 by 1% to 8.77 million barrels per day. Some might think that the oil price is hitting its bottom but in reality it might head further south. This is because EIA has indicated that the global supply glut could get even worse as global stockpiles have reached the record level of 3 billion barrels owing to abundant supply from the OPEC countries as well as Iraq and Russia. Secondly, a strengthening U.S. dollar supported by the possibility of an interest rate hike weakens the demand scenario for greenback-priced commodities such as crude. A rising interest rate environment would also adversely impact the performance of MLPs for a number of reasons. Firstly, higher interest rates lower the appeal for high-yielding stocks such as MLPs, which have historically offered around 5% in yields and hence attracted investors’ attention due to ultra-low interest rates. Secondly, MLPs heavily depend on external financing to run their operations as they distribute most of their income as dividends. As a result, a rise in interest rates would increase their financing costs, which in turn would diminish their ability to keep distribution payments at the existing level. The adverse developments in the oil and gas sector and the threat of a looming interest rate hike are heavily weighing on MLP stocks and ETFs and indicate the worst may not be over yet. Below we highlight three MLP-based ETFs that have witnessed double-digit fall so far this year and may continue to experience a downspin in the near future as well. Alerian MLP ETF (NYSEARCA: AMLP ) This is the most popular MLP ETF with AUM of $7.3 billion. It tracks the Alerian MLP Infrastructure Index, measuring the performance of 25 energy infrastructure MLPs. The fund’s top three holdings include Enterprise Products Partners LP (NYSE: EPD ), Magellan Midstream Partners LP (NYSE: MMP ) and Energy Transfer Partners LP (NYSE: ETP ), together accounting for 25.4% of assets. The ETF trades in a solid volume of 7.1 million shares per day and is very expensive with 5.43% in expense ratio. It offers a robust dividend yield of 9.3% and has lost around 27% in the year-to-date timeframe (as of November 18, 2015). Credit Suisse X-Links Cushing MLP Infrastructure ETN (NYSEARCA: MLPN ) MLPN follows the Cushing 30 MLP Index, measuring the performance of 30 mid-stream stocks in North America. The note is well distributed with its top 10 holdings comprising around 35% of the assets. It has an AUM of $505 million and exchanges roughly 192,000 shares in hand per day. MLPN charges 85 bps in annual fees and has a dividend yield of 6.8%. The note tumbled nearly 34% so far this year. iPath S&P MLP ETN (NYSEARCA: IMLP ) IMLP tracks the S&P MLP Index measuring the performance of MLP stocks that are classified in the GICS Energy Sector and GICS Gas Utilities Industry. Enterprise Products Partners, Energy Transfer Equity LP (NYSE: ETE ) and Energy Transfer Partners are the top three holdings in the fund with a combined exposure of nearly 35%. The product has amassed around $413 million in assets and trades in a moderate volume of roughly 97,000 shares per day. It charges 80 bps in investor fees and offers a dividend yield of 7%. IMLP shed 31.6% in the year-to-date timeframe. Original post .

Small-Cap Value ETFs: Key To Win In Post Lift-Off Era?

The U.S. economy will probably experience a shift in era by this year end, if economic conditions remain unchanged. With the Fed now overtly referring to December as the timeline for raising interest rates after a decade and putting global growth issues aside unlike its prior meetings, investors may now have to rush to alter their portfolio and make it in line with the looming Fed rate hike. Though much of the impending shock has been priced in at the current level, gyrations are still expected in the stock market post lift-off. Though the Fed affirmed that the rate hike trail would be slower, investors know that this will be the beginning of the end of the rock-bottom rates era. Naturally, they will be hunting for the right equity investing strategy. Notably, years of cheap money fueled the U.S. growth stocks as evident from the 106% jump by iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) in the last 10 years and its 75% surge in the last five years (as of November 18, 2015). But, value stocks underperformed, as indicated by iShares Russell 2000 Value ETF ‘s (NYSEARCA: IWN ) 45.3% gain in the last 10 years and about 44% rise in the last five years. Growth investing means buying those companies, which exhibit fast-growing earnings, indulge heavily in capital spending and are forecast to earn at an above-industry rate. This group of companies normally pays lesser dividend or no dividend and capital appreciation is the main motive. Quite understandably, this high-growth proposition requires more capital and lower interest rates to be executed. On the other hand, value strategy includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – compared with their current market prices. These stocks trade below their intrinsic value and are undervalued by the market. This pool of companies normally pays sounder dividends too. Thus, it is historically seen that value stocks perform better than growth stocks in a rising rate environment, mainly due to the difference in their modes of operation. Then, as per analysts , the right time to tap value is when the market reaches its zenith and retreats on overvaluation. For fear of a horrendous sell-off, investors seek safety, which value stocks normally offer unlike growth stocks. Since the market is likely to be wobbly, value stocks can predominate. Moreover, in the absence of cheap money inflows, investors are likely to look for cheaper stocks with great potential rather than the pricey and glamorous growth stocks. All in all, there is a high chance that value stocks will rule the U.S. markets over the next few months. The global investment management firm Pimco also expects this trend to be established in the coming future. Analysts noted that: “During the periods when the Fed was raising interest rates, the value stocks had an average return of 1.2% a month, or 14.4% a year, versus the growth index’s 0.7% a month, or 8.3% a year.” Now with the U.S. economy taking root, job reports showing strength and inflation staying decent, small-cap value stocks should be the best bets ahead. Small-cap stocks are the best measure of domestic economic recovery as these are less exposed to foreign lands. Moreover, terror attacks in several parts of the globe and international growth issues can also be stripped out via U.S. small-cap valued ETFs. Below we highlight three such ETFs, which could be in focus in the coming days. S&P Small Cap 600 Value Index Fund (NYSEARCA: IJS ) The fund looks to provide exposure to U.S. small-cap value stocks by tracking the S&P SmallCap 600 Value Index. The $3.14-billion fund holds a total of 468 small-cap stocks. The fund appears diversified as no stock accounts for more than 0.92% of the basket. Among the different sectors, Financials, Industrials and IT occupy the top three positions with 24.36%, 19.75% and 16.59% of weight, respectively. The fund charges a premium of 25 basis points annually. This Zacks Rank #3 (Hold) ETF was up 1.25% in the last one month (as of November 18, 2015). WisdomTree SmallCap Earnings Fund (NYSEARCA: EES ) For a slightly different approach to the small-cap market, investors may want to consider EES, as it follows earnings-generating companies in the small-cap universe of the U.S. stock market. Furthermore, the fund looks to weight by earnings, giving bigger weights to firms that earn more, irrespective of market capitalization. This results in a portfolio of roughly 950 securities. No stock accounts for more than 1.1% of the fund. Financials (27.34%), Industrials (18.48%), Consumer Discretionary (15.68%) and IT (12.24%) are the top four sectors of the fund. This $382-million fund charges 38 bps in fees. The fund has a Zacks ETF Rank #3 (Hold) while it was almost flat in the last one month. Vanguard Small-Cap Value ETF (NYSEARCA: VBR ) This fund provides exposure to the value segment of the U.S. small-cap market by tracking the CRSP US Small Cap Value Index. It holds a large basket of 843 stocks, which is widely spread across individual securities as none of these has more than 0.6% of assets. In terms of sector exposure, Financials dominates the portfolio at 30%, followed by Industrials (20.5%) and Consumer Services (12.2%). The ETF is quite popular with AUM of more than $5.68 billion. It is one of the low-cost choices in the small-cap space, charging 9 bps in fees per year from investors. The fund added about 0.6% in the last one month. VBR has a Zacks ETF Rank #3. Original post .