Tag Archives: capital-gains

4 Best-Rated Large-Cap Value Mutual Funds For Stable Return

Large-cap funds usually provide a safer option to risk-averse investors when compared to small-cap and mid-cap funds. These funds have exposure to large-cap stocks, with long-term performance history and more stability than what mid-cap or small-caps offer. Companies with market capitalization of more than $10 billion are generally considered large cap. However, due to their significant international exposure, large-cap companies might be affected by a global downturn. Meanwhile, investors looking for a bargain, i.e., stocks at a discount, are mostly interested in investing in value funds, which pick stocks that tend to trade at a price lower than their fundamentals (i.e. earnings, book value, Debt-Equity) and pay out dividends. Value stocks are expected to outperform the growth ones across all asset classes when considered on a long-term investment horizon and are less susceptible to trending markets. However, investors interested in choosing value funds for yield, should check the mutual fund yield as not all value funds comprise solely companies that primarily use their earnings to pay out dividends. Below, we share with you four top-rated, large-cap value mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. Vanguard US Value Fund Investor (MUTF: VUVLX ) seeks long-term capital growth and high income. VUVLX invests all of its assets in undervalued companies having low price/earnings (P/E) ratios. VUVLX focuses on acquiring stocks of large and mid-cap companies having impressive growth potential and favorable valuations. The Vanguard US Value Investor fund has a three-year annualized return of 14.7%. VUVLX has an expense ratio of 0.26% compared to the category average of 1.11%. JPMorgan Large Cap Value Fund A (MUTF: OLVAX ) invests a large portion of its assets in securities of large-cap companies that include common stocks, and debt and preferred stocks that can be converted to common stock. Large cap companies are those that have market capitalization equivalent to those listed in the Russell 1000 Value Index at the time of purchase. OLVAX offers dividends quarterly and capital gains annually. The JPMorgan Large Cap Value A fund has a three-year annualized return of 14.8%. Scott Blasdell is the fund manager and has managed OLVAX since 2013. MFS Value Fund A (MUTF: MEIAX ) seeks capital growth over the long run. MEIAX generally invests in equity securities including common stocks, securities of REITs and convertible securities. Though MEIAX primarily invests in value companies having large capitalization, it may also invest in small and mid-cap companies. The MFS Value A fund has a three-year annualized return of 13.7%. As of October 2015, MEIAX held 98 issues with 4.46% of its assets invested in JPMorgan Chase & Co. (NYSE: JPM ). Fidelity Large Cap Value Enhanced Index Fund (MUTF: FLVEX ) invests the majority of its assets in companies included in the Russell 1000 Value Index, which consists of large cap companies. FLVEX uses a quantitative analysis of factors including historical valuation, growth and profitability to select companies that are believed to provide more return than the index. FLVEX focuses on acquiring common stocks of companies across the world. The Fidelity Large Cap Value Enhanced Index fund has a three-year annualized return of 13.8%. FLVEX has an expense ratio of 0.45% compared to the category average of 1.11%. Original Post

DMO Is The Best Of The Mortgage Bond Funds And It’s Bargain Priced

Summary DMO is a mortgage bond CEF that outclasses its competition and is well priced after a rough few months. I liked DMO in September. I like it more now. I liked DMO in September. I like it more today. When I last wrote about Western Asset Mortgage Defined Opp (NYSE: DMO ) I considered it to be the best of the mortgage-bond closed-end funds. It was selling at a small premium at the time, something I will generally avoid. But that premium was only 0.2%, so I decided to buy it anyway. It has been tracking down since, but that only makes me like it more. I’ve been watching it closely and am likely to add to my position before the end of the year. At the December 1 close, DMO had moved up smartly on the day (1.6%), but since that mid-September article, the fund is down -4.64% at market price and -2.55% at NAV. Why buy into a falling position? Let’s begin answering that question by having a look at how DMO compares to the entire fixed-income CEF category generally and mortgage-bond funds specifically. DMO vs. Its Categories This first chart shows total returns and distribution yields for DMO, along with median values for mortgage-bond CEFs (n=10) and all fixed-income CEFs (n=111). (click to enlarge) First thing to note here is that the past month and year have not been good to fixed-income CEFs across the board. This has been part of a broad trend for high-yield bonds. The large high-yield bond ETFs, iShares iBoxx $ High Yield Corporate Bond (NYSEARCA: HYG ) and SPDR Barclays High Yield Bond (NYSEARCA: JNK ), and the mortgage-bond ETF, iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ), are down comparable amounts. It doesn’t take intense scrutiny to see that DMO is beating its categories in all recent performance metrics. In the face of these numbers, I’m not terribly concerned about the dip since September. This is particularly evident if we turn our attention to NAV returns. Not that I like it, mind you, but I do not see it as cause for concern. Where everything else is negative, save REM’s meager 0.18% uptick for the past month, DMO’s NAV is solidly in the green. And NAV is what really counts in my view. But most of us look to a mortgage bond fund for income, not necessarily capital gains, right? DMO is yielding over 10% where the median mortgage-bond and fixed-income CEFs are paying 7.0% and 8.4%, respectively; and the high-yield bond ETFs are yielding near 6%. Only REM is paying more, but it is doing so with a consistent erosion of capital as we see in this price chart. (click to enlarge) Income investors will often give lip service to not caring about total return. If you’re investing in the likes of REM, I can see why you’d want to resort to that justification. You can, if you’re so inclined, look at REM in isolation in the total return chart and maybe feel okay about it. It has, after all, returned 35%, or would have done so had you been reinvesting dividends at no transaction costs. But look at that price chart above it. The 34% loss there is, in fact, a 34% loss of your capital if you invested in REM for current income five years ago. Sure, it’s been paying out a ton, but it’s been your own money in large measure, and you’ve had to pay taxes on it. If you had invested in DMO instead, you would have received 10% or so a year income plus your capital would have grown by 18%. Of course if you reinvested the distributions (again, assuming that magical chart-universe where there is no cost for doing so) you’d have more than three times what you would have had from the high-yield bonds or REM. So, as I said about UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA: MORL ) in September, you can get a better yield than DMO, but with DMO you get to keep your money. I’ll not go into MORL again, other than to note that there are a substantial number of Seeking Alpha income-seekers who will sing its praises, praises that are completely unjustified in my opinion. A more complete look at MORL is on my to-do list, so if you’re interested in my take on it, it should be on your screen soon. I hope I’ve at least begun to convince you that DMO is an outstanding performer in the mortgage-bond space. If you need more, there are additional comparative historical performance data (in particular comparisons to the other mortgage bond CEFs and MORL) in the September article to assist in your due diligence. Why do I like it more as of December 1? Well, I did like it even better the day before, but even with the December 1 gain, DMO is much more attractively priced than it was in September when my only hesitation was that it was priced at that small premium coming off an uncharacteristic discounted period. At that time, I thought the trend would continue and the premium would continue to grow, so I felt it was as good an entry as the fund was going to present for a while. Wrong, obviously; it’s even better now. Premium/Discount Dynamics DMO has moved from a small premium to a decent discount, a move accompanied by that modest decrease in NAV (-2.6%). Distribution yield is up 60bps from mid-September as a consequence. While -1.87% is not a particularly deep discount in the CEF universe, it is, in my view, excellent for a fund of this quality. And the discount is moving in the right direction, according to the Z-scores. (click to enlarge) Where the mortgage-bond and fixed-income categories are, despite their lackluster performances, less discounted than their means (positive Z-scores) over the past 3 and 6 months, DMO is solidly in the other direction. The current discount is almost 1½ standard deviations more negative than the three-month mean. As I noted, one does not expect a fund of this quality to be running a deep discount, so that -1.87% looks pretty good to me right now. If you accept that it is a high-quality fund, and you consider Z-scores to at least suggest a direction for mean reversion, DOM looks good here. Distribution Sustainability Finally, a word about the sustainability of the distribution. This is always a consideration in fixed-income CEFs. Many high yielders maintain their yields by returning investor capital. This cannot continue indefinitely and, all too often, such funds will be forced into making drastic distribution cuts that lead to sharp price drops. One indicator of distribution sustainability is UNII, Undistributed Net Investment Income. DOM reported UNII of $0.62/share at the end of September. Its distribution is $0.21/share monthly, so there is little indication of a problem on that front. Summary I continue to like DMO and think it remains one of the best income opportunities. It has faltered lately, but less so than its peers. It is paying an attractive distribution. And there is no indication that the distribution payment is at risk as the fund is holding a quarter’s distributions worth of UNII. I realize that there is a lot of uncertainty and anxiety regarding a changing interest-rate environment, but I do not see a truly disruptive change on the near horizon. I do not anticipate anything like a devastating blow from a 25 to 75 bps raise from the Fed over the next year, which is what I consider as most likely scenario. My one caution is that it is best accommodated in a tax-deferred account because, as with any bond fund, the distributions are ordinary income and receive no favorable tax treatment.

Microcap Investing, The Ian Cassel Way

Note: This interview was published in the November 2015 issue of our premium newsletter, Value Investing Almanack . To gain instant access to more such interviews and other interesting stuff on value investing and business analysis, click here to subscribe now . Ian Cassel is the founder of MicroCapClub.com , which is an exclusive forum for experienced microcap investors focused on microcap companies (sub-$300m market cap) trading on the U.S. and Canadian markets. Ian has been investing in microcaps for 15 years and has been a full-time microcap investor since 2008. Ian looks to invest in great management teams running great businesses with a moat. He tries to invest in the best 5-6-7 companies he can find at all times. Ian founded MicroCapClub in 2011 to be a place for “real” and experienced investors in the microcap space to share ideas and learn from one another. When Ian isn’t researching stocks or administering MicroCapClub, you can find him reading, golfing, or shopping at Costco with his wife. Let’s now jump straight into the interview. Safal Niveshak (SN): Could you tell us a little about your background, how you got interested in investing and also about your wonderful blog microcabclub.com? Ian Cassel (IC): I’m 34 years old, married, and have a daughter. I live in the U.S. in Lancaster, Pennsylvania. Lancaster is a rural community mostly known for our Amish people . I am not Amish. I’m a full-time private microcap investor, which is a fancy way of saying I only invest my own capital (no family, friends, or clients) and only in small public companies called microcaps. I started investing in 1997. My parents had saved me approximately $25,000 for college. This was all I was getting, so they felt they should let me know before I started applying to Universities. At the same time, I was getting more interested in the stock market. I had met my parents’ financial advisor who was telling me about exciting technology companies. After much deliberation, I decided to go to a local less-expensive University so I could also work full time and pay for my tuition as I went. This way I could invest the full $25,000 in these exciting tech companies. I was going to get rich! In 1999, I went to Millersville University (Major: Economics), and worked full-time for a local financial advisor (I answered the phones). When the tech bubble burst in 2001, I lost 80% of my money; however, this wasn’t the biggest lesson that I learned. The financial advisor I worked for had over 1,100 clients, and when the tech bubble burst I literally heard from all them. ‘every day’ for months I would go into work, the phones would start ringing and clients would yell, scream, cry etc. I was a human punching bag. After a couple weeks I grew numb to their emotions. I also realized at that very moment I didn’t ever want to manage other people’s money. Investing is hard enough dealing with your own emotions let alone those that don’t have the mental/educational constructs. My goal was to become a full-time private investor. I just needed time to allow my capital base to snowball. In 2001-02, I started looking at smaller and smaller companies and ended up in the microcap space. I stumbled on a microcap company called XM Satellite radio in 2002. I tell the full story in detail here . Short version is I met with management, invested the little money I had left at $1.78/share, and in 14 months the stock went to $34/share. It was 99.99% luck, but my love affair with microcaps was born. From that point on, I started focusing on microcaps. Soon after, I started visiting microcap companies doing physical stock research. I felt microcaps were the best place to gain exclusive public information that could give me an edge. I graduated from Millersville University in 2003, and went right into an MBA program at Villanova University. When I wasn’t in class I was talking to management teams and other microcap investors. I learned by losing my money over and over again. I graduated from Villanova University in 2005 and started working for a firm that advised microcap companies. After six months I quit and started my own advisory firm. You can learn more about that experience here . Advising microcap management teams gave me first-hand experience on what management teams go through from an investor-capital markets perspective. I enjoyed advising, but the goal was to quit as soon as I had enough capital to be a full-time private investor. In late-2008, in the middle of the great recession, I quit advising and became a full-time private microcap investor. I now invest primarily in North American microcaps under $300 million market cap. There are approximately 11,000 microcap companies in North America, so there are plenty of rocks to turn over. Let me now talk a bit about MicroCapClub that was founded in 2011 and was formed to be an exclusive forum for experienced microcap investors to exchange ideas, collaborate on due diligence, and learn from each other. Our focus is quality over quantity in everything we do. We only have 140 members. Over the last four years, members have profiled 50+ companies that have doubled or more. Our goal is to find great companies early. Due to demand from those that don’t have the ability and/or time to apply, we are launching a subscription product offering later this year. We also recently announced the first MicroCap Leadership Summit, which will be focused on creating better investors and finding great companies early. I’m honoured to have Sanjay Bakshi, Paul Lountzis, Chris Mayer, and others speaking at our inaugural event. On our MicroCapClub Blog, myself, my partner Mike Schellinger and a few other experienced microcap investors post educational content on microcap investing. The goal with our blog is to inspire, motivate, and educate others on microcap investing. You can find me on Twitter . My mind tends to think in 140 characters. I enjoy saying more with less words and sharing my thoughts on life and investing. SN: What a wonderful story that was, Ian. Thank you so much for laying bare about yourself and your past. You are a microcap investor now. So, what’s your broad investment philosophy, and how has it evolved over the years? IC: Warren Buffett, Peter Lynch, Joel Greenblatt and many others started their careers investing in microcaps. Some of the best performing public companies ever, including: Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ), Wal-Mart (NYSE: WMT ), Amgen (NASDAQ: AMGN ), Netflix (NASDAQ: NFLX ), etc. started as small microcap companies. I’m sure you have many other examples of this in India, but the key to outsized returns is finding great companies early. If I could sum up my investment philosophy in one sentence, it would be – My goal is to own the smallest, most illiquid, least institutionally owned, best businesses I can find that are run by intelligent fanatics. I’m a long-only, quality focused, concentrated investor, investing in the best 4-5-6 companies I can find. I will hold my position as long as the management executes. I believe in deep qualitative analysis and constant maintenance due diligence so that I always know what I own. My edge is knowing my positions better than most. This gives me the conviction to hold multibaggers and the ability to see when the story changes so I can sell before the masses. The key to outsized returns is finding great companies early, when they are small companies. When you are evaluating small companies, often times they don’t have a long operating history (3 years or less). The best performing companies in North America over the last five years include companies like BioSyent ( OTCPK:BIOYF ) (170-bagger), Xpel ( OTC:XPLT ) (243-bagger), and Where Food Comes From ( OTCQB:WFCF ) (93-bagger). These companies are still microcaps today. Hindsight is 20/20 and it’s easy to think, “Yeah I would have bought these companies five years ago.” I highly doubt that. If you were to look at these three companies five years ago you wouldn’t have touched them. These companies were literally trading at a $1 million market caps with little fundamental value. Reading their financial reports gave you very little foresight into the future. They weren’t obvious. With many microcaps you have to place your bet before you have full conviction. Earlier in my investment career, I would buy a full position all at once. This works when the company works, but you can lose a lot of money if you are wrong. The biggest change in my strategy is I now prefer to buy a full position over time as my conviction grows and as management executes. My biggest winners were companies where I was constantly averaging up . SN: That’s a wonderful strategy indeed – averaging up on quality stocks as your conviction builds up. Anyways, talking about microcap investing, how are the dynamics here different from say midcap of smallcap investing? Also, what excites you and worries you most in being a microcap investor? IC: Illiquidity is a big driver of outsized returns. It just so happens that most small public companies are illiquid. The main reason for this is larger pools of capital, mainly institutions, can’t invest in small illiquid companies. Even for smaller institutions managing $10-50 million, it is problematic buying a meaningful position. Many small microcaps trade $5,000-10,000-20,000 of volume per day. In addition, taking a $500k, $1m, $2m, position in a company might not move the needle for an institution. Warren Buffett started investing in microcaps, but quickly grew out of the space and was forced to look at bigger companies. Now Buffett admits, he can really only look at the largest 200 companies in the world because it’s the only way to move the needle. The microcap space is always losing its best investors, as they have to invest in bigger companies. Larger, smarter, money can’t invest in microcaps and this creates inefficiency. Accessibility to management is what got me hooked on microcaps. You can’t access management of larger companies. Evaluating microcap management teams are important for two reasons. First, the smaller the company the more you should focus on management and qualitative analysis. CEOs of small microcap companies tend to wear a bunch of hats, so their influence is much greater than larger companies. Microcap investing is really entrepreneurial investing. So not only “can” you talk to management, but you really “need” to talk to management. I’m cautious in saying this because not every small investor should expect to be able to call up and talk to management. The point I’m making is on quarterly conferences calls, etc. take advantage of the opportunity to ask good questions. Second, when you meet with management you gain incredible insight into how the operator thinks and solves problem. I’m looking to invest for the long-term so I need to understand the long-term vision. I’m a concentrated investor in illiquid investments, so you can always find something to worry about. I don’t worry about illiquidity ; I just worry about being right. If I’m right the companies will become liquid. This is why it’s imperative you know your positions better than most. SN: That’s a wonderful insight Ian, i.e., worrying about being right. Thanks for sharing! Anyways, do you believe in the concept of ‘circle of competence’ given your focus on microcap investing where every company might look like a different industry altogether? If yes, how have you built it over the years? IC: Yes, I believe in staying within your circle of competence. From time to time I meander outside my circle of competence and the market teaches me a lesson. Investing is a lifelong education and its teacher is loss. Many of your readers remember what Tom Watson Sr., founder of IBM (NYSE: IBM ) said, “I’m no genius. I’m smart in spots – but I stay around those spots.” There are 11,000+ microcap companies that trade on the U.S./Canadian markets. I personally only look to initially invest in microcaps