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The Sweet Spot Of Zero Leverage Equity?

Global economic momentum is modest at best, equities and bonds are overvalued, and while allocating your funds entirely to gold, cash and shorts is enticing, it isn’t possible for the majority of money managers. What are investors to do then? The ranking of creditors and equity in the capital structure suggest that high-grade corporate bonds – and sovereigns – is the optimal allocation. When the going gets tough, the equity is wiped out, but as creditor, you are at least assured a recovery on your investment – even if it may be a slim one. This time could be different, however. As an alternative, I propose equities with zero leverage. There aren’t many around, and those that do remain unlevered are looked upon with suspicion by the market. After all, if the CFO hasn’t jumped on the bandwagon and issued debt to finance dividends and buybacks, she must be an idiot. But if you believe – as I do – that corporate bonds is the new bubble, being overweight equities with no leverage isn’t a bad idea. These securities won’t be immune to a crisis, but they offer two key advantages. Firstly, they likely will decline less than their overlevered brethren, and the risk of a bankruptcy is smaller. If a repeat of 2008 really beckons, capital preservation may turn out to be the key metric of survival, no matter the drawdown. Secondly, buying equities with zero, or very low, leverage is also a free option. If we are wrong, and the debt finance buyback and dividend party goes on, a portfolio of equities with zero leverage eventually will join the party too. In all likelihood, that means excess returns for your stocks. Once leverage has increased, you can sell and go looking for another batch of firms with no leverage, primed to lever their balance sheet to hand out money to shareholders. We concede that this latter rationale partly is a contradiction. But we would rather buy firms with a clean balance sheet than the alternative of buying equities that have already maxed out their potential for debt-financed shareholder gifts. Confusing charts; no directional clarity Meanwhile, looking at the macro, strategy and technical charts has left me confused – a bit like Macro Man , I suppose. Macroeconomic leading indicators have stabilised based on the most recent data. The year-over-year rate in the U.S. and EZ headline indices have climbed marginally, and have risen strongly in China. In Japan, however, the message from the headline index is grim. Global money supply growth has turned up further, helped by the U.S. and China. It is particularly encouraging to see that M1 growth has accelerated slightly in the U.S. On the contrary, my short-term charts of the market are sending a very unclear message. In the U.S. put-call ratios point to further upside despite the recent rally, while the advance-decline ratio continues to roll over. My equity valuation scores point to a slow grind higher in coming months, before a sell-off takes over towards the end of the summer. On sovereign bonds I remain bearish.

Confused About Market Trend? Buy These Balanced Funds

A portfolio that offers a mix of both equity and fixed-income investments may be ideal for those who are confused about the market trend in the near future. With the first-quarter earnings season nearing its end and uncertainty over rate hike taking the front seat, investing in balanced mutual funds may prove profitable. Balanced mutual funds that invest 30-50% of their assets in equity securities have registered an average return of 2.2% in the year-to-date frame, the highest among the allocation mutual fund categories, according to Morningstar. Also, this was the best-performing segment among the allocation mutual fund categories over the past one month. So, favorably ranked mutual funds form the above-mentioned category may be lucrative investment propositions. June Hike in the Cards The minutes from the Fed’s policy meeting in April that released yesterday showed several Fed officials’ verdict of a hike next month if the U.S. economy continues to show signs of improvement. The minutes stated: “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor markets continued to strengthen, and inflation making progress toward the committee’s 2 percent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June.” Separately, San Francisco Fed President John Williams recently said that following continued moderate growth, two to three rate hikes this year “makes sense.” “The data” he added, “are lining up to make a good case for rate increases in the next few meetings, not just June.” Also, Atlanta Fed President Dennis Lockhart said that the recent “encouraging” inflation data showed a growth in U.S. economy. High-quality global journalism requires investment. He added that “if the data continue to be encouraging” he would “certainly entertain some policy move in June.” Though some of the Fed officials showed concerns over sluggish first-quarter growth and weak global growth conditions, most of pointed to “the steady improvement in the labor market as an indicator that the underlying pace of economic activity had likely not deteriorated.” The significant rise in possibilities of a raise in June led investors to doubt market movement. Oil Price Fluctuations Persist As the first-quarter earnings season is almost over, oil price movement and economic data are likely to set the market trend in coming days. Despite the recent rally, oil prices continued to witness fluctuations as major oil-producing nations failed to reach an agreement on production freeze. Russia’s Energy Minister Alexander Novak’s discouraging comments weighed down on oil prices. Novak recently said that as the global crude surplus remained at 1.5 million barrels per day (bpd), “(the outlook that the market won’t balance until the first half of 2017) is an optimistic forecast as oversupply persists.” However, the recent positive outlook from Goldman Sachs Group, Inc. gave a boost to oil prices. Goldman Sachs said that oil market encountered a deficit in crude output following production disruptions in Nigeria and Canada. Goldman also said that “the oil market has gone from nearing storage saturation to being in deficit much earlier than” it expected. The firm also projected that WTI crude may reach $50 per barrel in the second half of this year and register modest increases in 2017. Thus, uncertainty regarding crude price movement in the coming months also raised doubts over market movement in near future. 4 Balanced Funds to Buy In this scenario, we have highlighted four Balanced Mutual Funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) and allocate between 30% and 50% of their assets in equity securities. We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. Moreover, these funds have encouraging year-to-date, three-year and five-year annualized returns. The minimum initial investment is within $5,000. Also, these funds have a low expense ratio and carry no sales load. Vanguard Wellesley Income Fund Inv (MUTF: VWINX ) invests 60-65% of its assets in investment-grade debt securities issued by corporate, U.S. Treasury, and government agencies. The fund allocates the rest of its assets in common stocks of companies with a solid track record of dividend payments. VWINX has year-to-date, three-year and five-year annualized returns of 4.7%, 5.5% and 7.4%, respectively. Annual expense ratio of 0.23% is significantly lower than the category average of 0.80%. Berwyn Income Fund Inv (MUTF: BERIX ) invests in both equity and fixed-income securities. While the fund invests in fixed-income securities including debt securities of both the U.S. government and corporate entities, and mortgage-backed securities, it also invests in undervalued common stocks of companies that pay dividends. BERIX has year-to-date, three-year and five-year annualized returns of 3.6%, 3.6% and 5.2%, respectively. Annual expense ratio of 0.64% is significantly lower than the category average of 0.80%. American Century One Choice Portfolio Conservative Inv (MUTF: AOCIX ) allocates 45%, 49% and 6% in underlying funds, which in turn invest in stocks, bonds and cash equivalents, respectively. AOCIX has year-to-date, three-year and five-year annualized returns of 2.5%, 3.9% and 5.4%, respectively. Annual expense ratio is 0% compared to the category average of 0.80%. T. Rowe Price Retirement Balanced Fund Adv (MUTF: PARIX ) invests in both stock and bond funds of T. Rowe Price. PARIX created a diversified portfolio by investing 60% in underlying bond funds and the rest of the assets in underlying stock funds. The proportion of asset allocations is considered ideal for investors’ retirement years, according to T. Rowe Price. PARIX has year-to-date, three-year and five-year annualized returns of 2.5%, 2.7% and 4.2%, respectively. Annual expense ratio is 0.25% compared to the category average of 0.80%. 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Junk Bond ETF ANGL Soaring: Will Its Flight Last?

Heightened volatility is driving investors to safe havens, making 2016 the year of the bond market. While long-term bonds are the undisputed winners, the high yield corner has drawn attention over the past three-months on investors’ drive for higher yields and a rebound in oil price. In addition, high-yield spreads have tightened significantly from 8.64 on February 12 to 6.36 currently, as per the BofA Merrill Lynch US High Yield Option-Adjusted Spread , making junk bonds attractive. This suggests that investors are now demanding lower premium than comparable Treasury bonds to compensate for the risk. However, the risk of default is on the rise, dampening the appeal for junk bonds. This is because the resumption of the slide in commodity prices and renewed global growth concerns are weighing on companies’ profits and balance sheets yet again. As per Moody’s Investors Service, global junk bond defaults will accelerate to 5% by the end of November, up from the previous forecast of 4.6% one month ago, and 3.8% in March. Fitch Ratings expects high yield bond defaults to climb to 6% this year from 4.5% last year and touch the highest level since 2000 (read: Junk versus Investment Grade Corporate Bond ETFs ). Given the heightened credit risk and low rate environment, investors thronged the high yield quality fund – VanEck Vectors Fallen Angel High Yield Bond ETF (NYSEARCA: ANGL ) . The fund gained 12.3% in the year-to-date time frame, outperforming the broad bond fund (NYSEARCA: BND ) and junk bond fund (NYSEARCA: JNK ) by wide margins. ANGL in Focus This ETF seeks to track the performance of the BofA Merrill Lynch US Fallen Angel High Yield Index, which focuses on the ‘fallen angel’ bonds. Fallen angel bonds are high yield securities that were once investment grade but have fallen from grace and are now trading as junk bonds. This unique approach gives the portfolio 248 securities that are widely spread across them, with none holding more than 1.65% of assets. The fund has an effective duration of 5.67 years and year to maturity of 9.33. Additionally, the product mainly comprises BB and B rated corporates, which together make up for 85.3% of the asset base. Bonds from energy and material sectors occupy the top two positions with 25.2% and 22.1%, respectively, while financial and communications round off the top four with double-digit allocation (read: all the High Yield Bond ETFs here ). ANGL has amassed $158.7 million in its asset base while trades in moderate volume of 82,000 shares a day on average. It charges a relatively low fee of 40 bps per year from investors and yields 5.20% per annum. Behind The Success of ANGL The fallen angels strategy is immensely successful this year as the number of fallen angels has increased substantially on a series of debt downgrades among energy and material firms – the top two sectors of the ETF. In this regard, Moody’s snatched investment grade ratings from 51 companies and gave them the junk status at the end of the first quarter, up from eight in the fourth quarter and 45 for the whole of 2015. These downgrades have boosted the performance of the ETF as bond price generally rebounds after losing an investment grade rating. Additionally, the rebound in oil prices from the 12-year low reached in mid-February injects further strength into these bonds and the ETF. As a result, fallen angels bonds tend to have lower default rates than their more traditional junk bond counterparts, thus offering better risk-reward profiles. These have a history of outperformance in nine out of the last 12 calendar years, according to Market Vectors. Moreover, the outperformance of ANGL was spurred by its higher average credit quality as about three-fourths of the portfolio carry the upper end rating (BB) of the junk category, leaving just less than 4% to the risky CCC-rated and lower. Link to the original post on Zacks.com