Tag Archives: capital-gains

Foreign Funds To Buy On Worst U.S. Funds Outflow Since ’93

Domestic equity-focused funds are facing a tougher time in terms of fund outflows than what they experienced during the financial crisis. According to Morningstar data, US-focused mutual funds and exchange traded funds have seen $78.8 billion worth of outflows in the first seven months of 2015. This is higher than any full-year outflows since 1993. Continued transfers from open-end mutual funds to collective investment trusts at Fidelity triggered much of the outflows. In contrast, investors have poured $179.2 billion in these seven months into funds focused on international equities. This is close to the full-year peak of $201.6 billion recorded in 2013. In response to this outflow, we will pick 3 top-ranked funds for investors interested in foreign mutual funds. Before doing so, let’s look into some other details. US versus International Markets International markets have attracted investors backed by the improving conditions. Greece debt negotiations had been a concern through most of 2015’s first half, but Europe as an investment destination had other attractions. The monetary stimulus plan, for example. China had a great bull bun before it hit a rough patch in June, though. Japan too has been profitable, and the country’s equity funds notched the best gains in first half of 2015. As of July 31, the Standard & Poor’s 500 (.INX) returned 2.2%. In contrast, MSCI EAFE Index had returned 6.5%. Morningstar notes that the consensus opined that the US is in late stages of bull market. Foreign country stocks are said to be cheaper on a fundamental level. Investors are aware of the US and Europe’s “different points in the economic cycle”, which is being revealed in the flows. The fund outflows in 2015 so far has been worse than that of the recession years. Since 2007, the US has witnessed outflows 6 times (including YTD 2015). International equity funds have witnessed outflows only once in 2008. Active versus Passive Fund Flow Inflows into passive funds failed to offset the outflows from the active US equity funds. In July alone, estimated net outflows from US equity funds in July increased to $14.3 billion from $8 billion in June. The active funds saw outflows of over $20 billion in July, while inflows of over $6 billion were recorded on the passive side. Over the last 1-year period, over $158 billion flowed out of active funds, while the passive funds added over $140 billion. Meanwhile, international equity funds saw inflows on both active and passive sides. Active and passive funds added over $3 billion and $18 billion, respectively. Category and Fund Family Performance The foreign large blend category has emerged as the best one. Inflows to this category were higher than those to the other top four categories, says Morningstar. Assets of foreign large blend funds are concentrated in Europe. Along with this, European stock also featured in the top 5 list. So, Europe did prove to be a favorable investment decision in July. As for the laggards, Large Growth , Large Value and Large Blend were the worst losers. These are almost all the representative categories of the US markets. Coming to the fund families, only 3 out of the 10 fund families under the study witnessed inflows on the active side in July. These are american funds SPDR State Street Global Advisors and J.P. Morgan. Meanwhile, Fidelity Investments witnessed the biggest outflows on the active side for both July and the last 1-year period. Again, much of Fidelity’s outflows indicated continued transfers from mutual funds to collective investment trusts. Fidelity witnessed outflows of over $10 billion in July and close to $19 billion over the last 1-year period. Fidelity Contrafund Fund No Load (MUTF: FCNTX ), Fidelity Growth Company Fund No Load (MUTF: FDGRX ) and Fidelity Low-Priced Stock Fund No Load (MUTF: FLPSX ) accounted for outflows of $2.36 billion, $2.1 billion and $1.46 billion in July. Franklin Templeton Investments was also a big loser for both periods, while Vanguard and T. Rowe Price witnessed outflows in July against inflows over the last 1-year period. If we look into 5 of the bottom-flowing active funds, 3 of them are from Fidelity. 3 Non-US Mutual Funds to Buy Morningstar notes that the fund flows indicate investors’ expectations for the future. So, investors looking to buy non-US Equity mutual funds should consider the following funds that either carry a Zacks Mutual Fund Rank #1 or Zacks Mutual Fund Rank #2. Matthews Japan Fund Investor (MUTF: MJFOX ) invests most of its assets in preferred and common stocks of firms located in Japan. The fund may invest in companies of all sizes, but the adviser expects them to be mid- to large-cap firms. MJFOX carries a Zacks Mutual Fund Rank #2. MJFOX has returned 22.9% so far this year, and its one-year return stands at 15.3%. The 3- and 5-year annualized returns are 18.1% and 14%, respectively. The fund carries an annual expense ratio of 1.03%, lower than the category average of 1.43%. MJFOX carries no sales load. Cambiar International Equity Fund Investor (MUTF: CAMIX ) invests a large chunk of its assets in equity securities of medium- to large-cap non-US companies. For greater liquidity and lesser custodial expenses, CAMIX buys American Depositary Receipt listings of foreign firms on the US exchanges instead of buying them on foreign exchanges. CAMIX carries a Zacks Mutual Fund Rank #1. It has returned 12.5% so far this year and its one-year return stands at 7.6%. The 3- and 5-year annualized returns are 12.1% and 10.3%, respectively. CAMIX carries an annual expense ratio of 1.09%, lower than the category average of 1.17%. The fund carries no sales load. Fidelity Overseas Fund No Load (MUTF: FOSFX ) seeks long-term capital growth. It invests a large portion of its assets in non-US securities. Management considers the size of the market in each country and region relative to the size of the world market as a whole. FOSFX invests primarily in common stocks. The fund offers dividends and capital gains annually in December. The Fidelity Overseas fund has returned 4.9% and 8.6% over the year-to-date and 1-year periods. The 3- and 5-year annualized returns are 16.7% and 16.3%. FOSFX, managed by Fidelity, carries an expense ratio of 1.04% as compared to a category average of 1.17%. FOSFX carries no sales load. Original Post

Source Capital: Not The Time To Buy In An Up And Down Year

SOR is struggling so far in 2015. But it’s been an up and down year when comparing the first and second quarters. And the narrower than average discount suggests now isn’t the time to jump aboard. Source Capital (NYSE: SOR ) is an old hand in the closed-end fund, or CEF, space, having been in business since 1968 . It’s long used a focused portfolio to opportunistically invest in small- and mid-cap companies with high returns on equity. That’s great, but a narrower discount than normal of late suggests new investors would be better off waiting here. Here’s what’s been going on. What a difference a quarter makes According to SOR , its net asset value return was 3.1% in the first quarter. That was below its Russell 2500 benchmark, which was up over 5%, but well ahead of the S&P 500, which was up less than 1% in the first quarter. So it’s no surprise that investors would be generally pleased with the closed-end fund, or CEF. Indeed, during the first quarter, the market price of the shares went up along with the NAV. However, something changed in the second quarter. SOR’s NAV fell 2%, worse than the 0.3% or so loss for the Russell 2500 and the around 0.3% gain in the S&P. But while the NAV has been falling, investors haven’t reacted by selling the shares. In fact, they’ve pretty much been holding the line. With that backdrop, SOR’s discount, which has recently been averaging around 9% but has a three-year average of about 10%, has narrowed. The discount is recently hovering around 7% or so-roughly in line with its 10-year average according to the Closed-End Fund Association . Long-term investors should probably tread carefully here since the shares are clearly not on sale. Those looking to play discounts and premiums, meanwhile, should also be on the sidelines. What’s been going wrong? Obviously losing positions outweighed winners in the second quarter . More specifically, retailers Signet Jewelers (NYSE: SIG ) and CarMax (NYSE: KMX ) have been sagging and that’s a big problem. These two are the second and third largest holdings in the fund, making up about 15% of assets. CarMax is down nearly 6% this year and Signet over 8%. With a concentrated portfolio, big bets are the norm. And that’s something that investors in SOR need to fully understand. For example O’Reilly Automotive (NASDAQ: ORLY ), a winner for the fund so far this year, makes up nearly 15% of assets. Taking that a step further, the top three holdings make up about 30% of the fund. For reference, the top 10 holdings account for around 60% of the fund. So you can see the impact O’Reilly, Signet, and CarMax will have on performance. With two of the three struggling, it’s no surprise that SOR’s NAV is only slightly ahead of where it started the year. Adding to the negatives, at the start of the second quarter two other struggling companies were in the top 10, Knight Transportation (NYSE: KNX ) and Heartland Express (NASDAQ: HTLD ). Only Knight remained a top 10 holding at the end of the second quarter at roughly 4% of assets. Knight is down around 18% so far this year and Heartland, the tenth largest holding at the end of the first quarter, is down about 20%-no wonder it fell out of the top 10 by the end of the second quarter. Once again, however, you can see that the focused approach comes with risks. And with the fund’s discount narrower than its recent history, now isn’t the time to jump aboard. That said, over time, SOR has rewarded investors for taking on added risks, so don’t write the fund off entirely. For example, over the trailing 15-year period through June, the fund’s annualized total return, which includes reinvested distributions, is nearly 11%. That’s ahead of its benchmark Russell 2500 by about two percentage points a year. And it’s over twice the annualized return of the S&P over the same span. So being selective and betting heavily on management’s best ideas has paid off over time. Just not in the second quarter… Keep it on your watch list If you are looking for a small and mid cap closed-end fund, SOR is one that should be on your watch list. Its expense ratio is around 0.8%, which is very reasonable for a CEF. Yes, that’s notably higher than straight index ETFs, but ETFs in the same space don’t usually have the same distribution history. For example, SOR’s yield is currently around 4.5%. The WisdomTree U.S. SmallCap Dividend Growth ETF (NASDAQ: DGRS ), meanwhile , has an expense ratio of around 0.4%, but yields about half as much even though it’s focused on dividend paying stocks. That said, capital gains account for almost the entire disbursement at SOR, so distributions will fluctuate over time and probably fall in difficult markets. Thus, this is more of a total return play than an income play. That doesn’t mean distribution focused investors should avoid SOR, just that this is an important fact to keep in mind when buying it. In the end, it was a tough second quarter and middling first six months for SOR. That doesn’t make it a bad fund, but it does highlight the risks inherent in the fund’s focused approach. Long-term investors should keep the fund in mind, but don’t bother jumping aboard now because the discount is slimmer than it has been in recent years. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Hold Off On VXUP And VXDN For Now

Summary VXUP and VXDN do not provide the “spot” VIX exposure as promised. VXUP and VXDN have had consistently high tracking errors. Distributions are not necessarily in cash and may be in the form of the opposing share. Volatility Products and VIX Exposure A variety of products have been developed over the years to mimic the performance of the VIX implied volatility index as well as possible. There are 3 distinct types of product available on VIX: VIX Futures – This provides indirect exposure to the movements in the index. There is a term structure in the VIX futures market. It is typically in contango. The implication of this is that long contract investors are paying a premium to contract sellers for portfolio insurance. The term structure will switch to backwardation when there are market sell-offs because VIX is mean reverting; this means that the VIX will drop and investors need to be compensated for the expected drop in the form of lower prices. It is important to note that the term structure will not be flat – this is akin to free insurance, and we all know there ain’t no such thing as a free lunch. VIX Options – This variety of call option performs excellent as portfolio insurance, because they capture the positive upside and are capped on the downside. It is likely that the option premium should reflect this, however, they are relatively illiquid. VIX-derived Exchange Traded Products – Products such as the iPath S&P 500 VIX Short-Term Futures ETN ( VXX) are ETFs based on VIX futures and therefore seek to mimic the futures market results. They are suitable for investors who are prevented by their mandates to invest in derivative products. However, it is worth noting that the significant issue with these products is that they necessarily lose out due to roll yield. A negative roll yield plagues markets in contango, where near futures are cheaper than further futures. The VIX futures market is generally in contango. These products should be held for short-term, tactical trades. Realized vs. Implied Volatility There is a significant body of literature on the subject and linkages between realized and implied volatility. Realized volatility is the actual average annualized volatility which occurred over a certain period. Implied volatility is the volatility that market expects to occur over a time period. Historically, implied volatility overestimates subsequent realized volatility. The implication is that there is a “volatility risk premium” in the options market – participants selling put options demanding more than fair value for the risk of providing portfolio insurance. What is the link between this and VIX? VIX is calculated from a wide range of option prices; it represents the market’s broad estimate of implied volatility. Thus, it also represents the market’s expectation of future volatility. This is why it is used as the “market fear gauge”. The value of VIX is driven most heavily by at-the-money put options on the S&P 500 Index. S&P 500 put options are a very simple manner in which to obtain portfolio insurance. One purchases the put option at the current level; if that market falls below that level, your portfolio drops as well, but you profit from the put option. Now, sellers of these options are effectively providing insurance to investors. How has volatility behaved over the last decade or so? The weeks where there were market drops of between 5% and 10% are tabulated below: Week Return VIX Performance 26 February 2007 – 5 March 2007 -5.19% 76.05% 8 August 2007 – 15 August 2007 -6.06% 42.98% 31 December 2007 – 8 January 2008 -5.32% 13.02% 14 January 2008 – 22 January 2008 -7.47% 35.41% 10 September 2008 – 17 September 2008 -6.14% 47.72% 22 September 2008 – 29 September 2008 -8.34% 38.02% 16 December 2008 – 23 December 2008 -5.48% -14.03% * 8 January 2009 – 15 January 2009 -7.25% 19.83% 27 February 2009 – 6 March 2009 -7.03% 6.43% 19 January 2010 – 26 January 2010 -5.05% 39.65% 30 April 2010 – 7 May 2010 -6.39% 85.71% 17 May 2010 – 24 May 2010 -5.57% 24.25% 25 June 2010 – 2 July 2010 -5.03% 5.57% 26 July 2011 – 2 August 2011 -5.85% 22.54% 15 August 2011 – 22 August 2011 -6.70% 33.17% 16 September 2011 – 23 September 2011 -6.54% 33.15% 26 September 2011 – 3 October 2011 -5.48% 16.48% 16 November 2011 – 23 November 2011 -6.07% 1.40% 8 October 2014 – 15 October 2014 -5.40% 73.73% *This is an outlier – VIX was coming off of its historical high. It has a mean reversion property. We can see that, for our narrowed down dataset, we can generally associate large VIX returns with relatively large market corrections. There is, however, no increasing/linear relationship here. This is probably due to mean-reversion property of the VIX itself. AccuShares VXUP and VXDN Recently released, the AccuShares Spot CBOE VIX Up Shares ETF ( VXUP) and the AccuShares Spot CBOE VIX Down Class Shares ETF ( VXDN) products seek to provide investors with a 1-month exposure to the pure VIX index. This is difficult because one cannot own a unit of volatility. Indeed, attempting to replicate the VIX index is a complex and costly exercise. How Does It Work? The total fund is effectively split into two separate funds that mirror one another. The “Up” and the “Down” fund. The assets in the fund are not related to volatility and are based entirely on U.S. treasury securities. The manner in which they achieve spot exposure is by simply offsetting the Up and Down shares against each other. Thus, the two move in the completely opposite direction. This means that they have created a zero-sum game and cannot lose. Only the investors can lose. If the VIX Index value is 30 or below as of a distribution date (which is basically a reset date) then a Daily Amount of 0.15% is subtracted from the Up fund and accrued to the Down fund. This works out to 4.5% monthly decay on being long volatility. You can think of this as a negative roll yield you would incur in the futures market. There are a variety of distributions which are paid to the investor and form the return. Regular Distribution – The intrinsic value of the Up and Down share match the percentage move of the VIX index over the 16th to 15th of every monthly cycle. Now, whichever fund wins, gets a distribution equal to the difference between its final value and the losing funds value. Then, the intrinsic value for both funds is set at the value of the losing fund. So the investor loses in capital gains what he gains over and above his return. The analysis of tax implications is a separate discussion. Special Distribution – The maximum gain in any month is capped at 90% to protect Down share investors from losing their entire investment. If any gains more than 75%, then there is a special distribution, which is simply an immediate distribution with the same rules as the regular distribution. Corrective Distribution – This occurs when the tracking error between intrinsic value and the market price is greater than 10% for 3 consecutive trading days. What happens is that the fund issues the equivalent number of the opposite shares to all investors, effectively resetting the fund values. For instance, say an investor hold 2 Down shares. After the corrective distribution, they will hold 2 Down shares and 2 Up shares. The value of each share is then also halved, ensuring that the investor is back at the intrinsic value they are entitled to. Does this imply that market prices should adjust back to intrinsic value after a Corrective Distribution? Not necessarily. The Issues It is claimed that the Authorized Participants will utilize arbitrage trades to keep the market prices in line with intrinsic value. The arbitrage trade is as follows: If market prices are higher than intrinsic value, purchase more primary shares from the ETF provider, and sell them in the market. The increased supply will reduce the market price and move prices in line. A similar argument holds for the reverse. Why will this not work? The futures market guarantees that there will always be a premium/discount for these shares, and this depends on the degree of contango in the market. It goes even further than this; the market price as of the 11th of June 2015 of the VXUP share is trading at a 12.95% premium to its intrinsic value, the contango between front-month and the closest back-month future is 11.72% (as of 11 June 2015). As an example of why this is so, think of a simple VIX futures market that is in contango (standard situation). This means that purchasing near-term futures are cheaper than longer-term futures. It also means that futures prices are above the spot price. VIX futures prices will converge toward the underlying index value at maturity. Consider the case where the VXUP share has intrinsic value equal to the VIX underlying value (this is a simplifying case) and it is trading in the secondary market at intrinsic value. If you purchased the share, and shorted the front-month future, you would make a positive amount right now (because the future is more expensive than spot). In the future, you would simply deliver the share you are holding that trades at intrinsic value (which is necessarily the VIX index value at that time). Thus, for no future loss and positive gain now, you have found an arbitrage opportunity. If market participants exploited this opportunity, they would bid up the price of VXUP to more than its intrinsic value, introducing the premium. And, this premium would equal the degree of contango. If one factors in the Daily Amount, it simply reduces the return on the VXUP share and reduces the premium the market impounds into the price of VXUP, by the exact Daily Amount. Thus, the Authorized Participants and the market are at odds. The sum of the premium and discount should sum to zero, however, will not disappear because AccuShares requires the shares to be created in pairs. Why are these premiums an issue? The primary issue around these premiums relates to the corrective distribution. Remember, a corrective distribution occurs if there has been a consistent premium of 10% for 3 consecutive days. The corrective distribution then does a stock split and issues the other share class. The issue is reinvestment fees that would be incurred from these distributions. One would end up with the opposite share to what is desired at the end of a period and this would then need to be sold at a discount to what you should get at intrinsic value, resulting in a loss. And brokerage fees. Conclusion The problem of tracking VIX returns is not a new one. Products such as VXX sap investor funds due to their negative roll yield. A variety of other structural issues limit their effectiveness. While VXUP would provide exposure to the VIX index, it does it at considerable cost (4.5% a month if the VIX is below 30) and risk (corrective distributions incurring trading costs). An additional risk in the product is that the prospectus does not guarantee regular distributions will be provided in cash – they may be issued in paired-share equivalents to maintain fund liquidity. From the prospectus: ” Regular and Special Distributions will ordinarily be made in the form of cash during the first six months of trading in the Fund’s shares. Thereafter, the Fund will pay all or any part of any Regular or Special Distribution in paired shares instead of cash where further cash distributions would adversely affect the liquidity of the market for the Fund’s shares or impact the Fund’s ability to meet minimum asset size Exchange listing standards. All payments made in paired shares shall be made in equal numbers of Up and Down Shares. To the extent a share distribution would result in the distribution of fractional shares, cash in an amount equal to the value of the fractional shares will be distributed rather than fractional shares. ” Waiting on the sidelines and seeing how the fund deals with corrective distributions and tracking errors is the best course of action at the moment. I would like to credit Vance Harwood’s blog post over at Six Figure Investing for aiding in the research of this instrument. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.