Tag Archives: cash

Is The Kinder Morgan Plunge An Opportunity To Buy Its ETFs?

While the collapse in oil price has battered the energy sector as a whole, pipeline operators have been the worst hit. This is because the oil rout has prompted the cash-strapped oil producers to cut their spending on projects that pipeline operators were relying on to fund investor payouts. The move has taken a huge toll on Kinder Morgan’s (NYSE: KMI ) balance sheet and dividend payout. Shares of KMI have been in a free-fall territory over the past five days, plunging nearly 30%. From a year-to-date look, Kinder Morgan has lost 60.8% of its value. The problems for Kinder Morgan started last Monday when it unveiled plans to increase its stake to 50% from 20% in a struggling natural gas pipeline company of America. The woes aggravated the next day when Moody’s Investors Service lowered the outlook for the company from stable to negative, raising concerns over the sustainability of a high dividend. Finally, the largest pipeline infrastructure company in the world slashed its dividend by 75% for the first time in its history to conserve cash. The company’s quarterly dividend is now 12.5 cents, a sharp fall from 51 cents. The new policy of reduced dividend will begin from the fourth quarter. The move negates the promise of increasing dividend by 6-10% for the next year that the company made on November 18. Since the majority of KMI’s stockholders are income-oriented, the action led to a huge decline in the share price. KMI’s shares tumbled 6.5% to a record low of $14.70 in after-market hours on Tuesday’s trading session. However, the dividend cut would be beneficial for the company in the long term as it will improve its financial position and help to maintain its investment grade status. Standard & Poor’s appreciated the move by reaffirming its stable outlook on the company. The agency believes that “the move will enable the company to continue to execute on its future growth plans and maintain a total net debt to EBITDA ratio around 5.5x for the next several years.” Additionally, Moody’s reversed its recent downgrade in outlook to stable from negative. As a result, the current slump in the stock could represent a great buying opportunity for long-term investors. This is especially true as the stock currently trades at a P/E ratio of 23, lower than the industry average of 25.6. In addition, the current yield is still impressive at 3.40% even with the massive dividend cut and the share price fall. Investors seeking to tap this opportunity could consider MLP ETFs having largest allocation to this oil and gas pipeline giant. Below we highlight four products in detail: Global X MLP & Energy Infrastructure ETF (NYSEARCA: MLPX ) This product follows the Solactive MLP & Energy Infrastructure Index and holds 39 stocks in its basket. Of these, Kinder Morgan takes the third spot with 7.4% of total assets. In terms of industrial exposure, about 84% of the portfolio is allocated to the oil and gas pipelines and distribution, while oil refining and marketing firms make up for 12% share. The fund has amassed $84.8 million in its asset base and charges 45 bps in annual fees. Volume is good at around 161,000 shares on average. MLPX was down 17.4% over the past five days. First Trust North American Energy Infrastructure ETF (NYSEARCA: EMLP ) This ETF is an actively managed fund designed to provide exposure to the securities headquartered or incorporated in the U.S. and Canada and engaged in the energy infrastructure sector. EMLP is one of the popular funds in this space with AUM of $827.5 million and average daily volume of 410,000 shares. Expense ratio came in at 0.95%. The product holds 66 securities, with Kinder Morgan occupying the second position in the basket at 5.8%. From a sector look, about half of the portfolio is allocated to pipelines while electric power companies round off the top two at 41.1%. The fund lost 9.6% in the past five days. Tortoise North American Pipeline Fund (NYSEARCA: TPYP ) This fund follows the Tortoise North American Pipeline Index, holding 101 securities in its basket. Oil & gas pipelines make up for 72% of assets followed by natural gas utilities at 17%. Here, Kinder Morgan occupies the fifth spot with a 4.9% share. The product recently debuted in the space and has accumulated $17.9 million in its asset base in six months. It trades in lower average daily volume of 13,000 shares while charges 70 bps in fees per year from investors. The ETF was down about 13% in the same period. ALPS Alerian Energy Infrastructure ETF (NYSEARCA: ENFR ) This fund tracks the Alerian Energy Infrastructure Index, holding 36 stocks in its basket. Of these, Kinder Morgan takes the thirteenth place with a 3.9% share. Oil and gas pipeline and the distribution sector dominates the fund’s return at 79%, while utilities, and oil refining and marketing take the remainder. The ETF is unpopular and illiquid having gained $10.5 million in total asset base. The fund trades in a paltry volume of 5,000 shares. It charges 65 bps in fees per year from investors and lost 13.6% in the past five days. Original Post

3 Mutual Funds To Defy 4-Week Outflows In The U.S.

Cash draining out from the pocket is always hard to accept. On that note, spare a thought for the U.S. stock and taxable-bond mutual funds that have witnessed outflows for four consecutive weeks. For the week ended Dec 2, U.S. stock and taxable-bond mutual funds saw outflows of $6.6 billion, according to Lipper data. Amid this, the 1-month category return of funds is equally dismal. While the U.S. stock and taxable-bond mutual funds are witnessing continuous outflows, stock ETFs attracted $3.8 billion in the week ended Dec 2. Some may believe that this sector might be in for a Santa Claus rally. However, mutual fund investors need not lose heart. Some low-cost mutual funds, each carrying a favorable Zacks Mutual Fund Rank, have emerged out of the weakness over the past four weeks, and are expected to continue their uptrend. Before we pick these funds, let’s look at the recent fund flows and key events. What’s Taking the Cash Out? The outflows from the U.S. stock and taxable-bond mutual funds started from the week ending Nov 11. For that week itself, taxable bond funds in the U.S. saw outflows of $3.7 billion. This was the worst outflow of taxable bond funds from the week ended Sep 30. U.S. stock funds recorded $1 billion of outflows in the week ended Nov 11, reversing the five-week run of inflows. Since then, the rate hike expectations primarily caused investors to pull money out of these mutual funds. To add to the confusion about the direction of the Fed’s policy, geopolitical concerns and mixed economic data further kept the cash from flowing in. Investors hunted for clues on the Fed’s policy move throughout November. The markets remained hopeful that the U.S. central bank may finally embark on a rate hike in December. Backing this belief were multiple comments from key Fed officials and the FOMC minutes. Last Friday, a strong U.S. jobs report affirmed chances of the Fed raising rates in two weeks. Markets were also exposed to certain geopolitical concerns. Multiple terrorist attacks in Paris, heightened violence in the Middle East, news of the shooting down of a Russian fighter jet near the border of Syria and concerns about China’s economic situation dampened investor sentiment. The 1-Month Performance The broader markets struggled over the past one month. The Dow Jones Industrial Average lost 1.9% over the last 4 weeks, while the Standard & Poor’s 500 (.INX) and Nasdaq Composite Index are down 1.7% and 1%, respectively. Among the 12 S&P industry groups, only three have positive one-month return. While Consumer Staples (NYSEARCA: XLP ) leads with a one-month gain of 2.58%, Real Estate (NYSEARCA: XLRE ) is up 2.57%. Utilities (NYSEARCA: XLU ) scored a 0.8% gain. In comparison, the one-month losses are significantly higher. Energy (NYSEARCA: XLE ) slumped 10.8%, followed by a 2.5% loss in Financial Services (NYSEARCA: XLFS ). Coming to the mutual funds category performances, Equity Precious Metals currently leads the one-month gains and is up 3.1%. All the other sectors in the green have sub 2% gain. Here too, the one-month losses are sufficiently higher. Energy Limited Partnership and Equity Energy categories have lost 19.8% and 9.8%, respectively. Below we present the best and worst performing mutual fund categories over the past one month: 1-Month Fund Category Performance (as of Dec 8) Best Gainers 1-M Total Return Worst Performers 1-M Total Return Equity Precious Metals 3.11 Energy Limited Partnership -19.78 Long Government 1.81 Equity Energy -9.75 Foreign Small/Mid Growth 1.64 Natural Resources -6.96 Bear Market 1.64 Commodities Broad Basket -5.11 Japan Stock 1.56 Latin America Stock -4.56 Source: Morningstar 3 Funds Beating the 4-week Gloom Remember it is always not true that fund inflows or outflows will decide the performance of the funds. In certain cases, there is more arts than science. Fund flows may be just a fraction of a factor to help a fund’s uptrend. Inflows may not translate into gains for mutual funds. Investors do not necessarily have to buy funds that are seeing strong inflows and vice versa. However, amid the declining trend in broader markets, it is often tough for individual funds to outperform. So those managing gains even in a tough environment are worth the appreciation. Below we highlight 3 funds that have thrived, each from the best three performing fund categories, over the trailing 4 weeks. These funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). 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 its likely future success. Equity Precious Metals American Century Quantitative Equity Funds Global Gold Fund A (MUTF: ACGGX ) seeks total return that is consistent with investments in companies related to mining, processing, fabricating or distributing gold or other precious metals across the world. ACGGX has gained 5.8% over the past 4 weeks. ACGGX carries a Zacks Mutual Fund Rank #2. However, ACGGX has lost 21.2% and 22.6% over year to date and the last 1 year, respectively. Annual expense ratio of 0.92% is lower than the category average of 1.43%. Long Government Vanguard Long-Term Treasury Fund Inv (MUTF: VUSTX ) invests a major portion of its assets in long-term bonds whose interest and principal payments are backed by the full faith and credit of the U.S. government. At least 65% of VUSTX’s assets will always be invested in U.S. Treasury securities. VUSTX has gained 2.3% over the past 4 weeks. VUSTX carries a Zacks Mutual Fund Rank #1. However, VUSTX has lost 0.8% year to date and gained just 2.9% over the last 1 year, respectively. Annual expense ratio of 0.20% is lower than the category average of 0.62%. Foreign Small/Mid Growth Oberweis International Opportunities Fund (MUTF: OBIOX ) seeks to maximize capital gains over the long term. Most of its assets are invested in companies located outside the U.S. OBIOX has gained 2.9% over the past 4 weeks. OBIOX carries a Zacks Mutual Fund Rank #1. OBIOX has jumped 14.7% year to date and gained 13.8% over the last 1-year period. The 3- and 5-year annualized returns are respectively 20.1% and 14.7%. Annual expense ratio of 1.60% is higher than the category average of 1.53%. Original Post

We Eat Dollar Weighted Returns – VII

Photo Credit: Fated Snowfox I intended on writing this at some point, but Dr. Wesley Gray (an acquaintance of mine, and whom I respect) beat me to the punch. As he said in his blog post at The Wall Street Journal’s The Experts blog: WESLEY GRAY: Imagine the following theoretical investment opportunity: Investors can invest in a fund that will beat the market by 5% a year over the next 10 years. Of course, there is the catch: The path to outperformance will involve a five-year stretch of poor relative performance. “No problem,” you might think-buy and hold and ignore the short-term noise. Easier said than done. Consider Ken Heebner, who ran the CGM Focus Fund, a diversified mutual fund that gained 18% annually, and was Morningstar Inc.’s highest performer of the decade ending in 2009 . The CGM Focus fund, in many respects, resembled the theoretical opportunity outlined above. But the story didn’t end there: The average investor in the fund lost 11% annually over the period. What happened? The massive divergence in the fund’s performance and what the typical fund investor actually earned can be explained by the “behavioral return gap.” The behavioral return gap works as follows: During periods of strong fund performance, investors pile in, but when fund performance is at its worst, short-sighted investors redeem in droves. Thus, despite a fund’s sound long-term process, the “dollar-weighted” returns, or returns actually achieved by investors in the fund, lag substantially. In other words, fund managers can deliver a great long-term strategy, but investors can still lose. That’s why I wanted to write this post. Ken Heebner is a really bright guy, and has the strength of his convictions, but his investors don’t in general have similar strength of convictions. As such, his investors buy high and sell low with his funds. The graph at the left is from the CGM Focus Fund, as far back as I could get the data at the SEC’s EDGAR database. The fund goes all the way back to late 1997, and had a tremendous start for which I can’t find the cash flow data. The column marked flows corresponds to a figure called “Change in net assets derived from capital share transactions” from the Statement of Changes in Net Assets in the annual and semi-annual reports. This is all public data, but somewhat difficult to aggregate. I do it by hand. I use annual cash flows for most of the calculation. For the buy and hold return, I got the data from Yahoo Finance, which got it from Morningstar. Note the pattern of cash flows is positive until the financial crisis, and negative thereafter. Also note that more has gone into the fund than has come out, and thus the average investor has lost money. The buy-and-hold investor has made money, what precious few were able to do that, much less rebalance. This would be an ideal fund to rebalance. Talented manager, will do well over time. Add money when he does badly, take money out when he does well. Would make a ton of sense. Why doesn’t it happen? Why doesn’t at least buy-and-hold happen? It doesn’t happen because there is an Asset-Liability mismatch. It doesn’t matter what the retail investors say their time horizon is, the truth is it is very short. If you underperform for less than a few years, they yank funds. The poetic justice is that they yank the funds just as the performance is about to turn. Practically, the time horizon of an average investor in mutual funds is inversely proportional to the volatility of the funds they invest in. It takes a certain amount of outperformance (whether relative or absolute) to get them in, and a certain amount of underperformance to get them out. The more volatile the fund, the more rapidly that happens. And Ken Heebner is so volatile that the only thing faster than his clients coming and going, is how rapidly he turns the portfolio over, which is once every 4-5 months. Pretty astounding I think. This highlights two main facts about retail investing that can’t be denied. Asset prices move a lot more than fundamentals, and Most investors chase performance These two factors lie behind most of the losses that retail investors suffer over the long run, not active management fees. Remember as well that passive investing does not protect retail investors from themselves. I have done the same analyses with passive portfolios – the results are the same, proportionate to volatility. I know buy-and-hold gets a bad rap, and it is not deserved. Take a few of my pieces from the past: If you are a retail investor, the best thing you can do is set an asset allocation between risky and safe assets. If you want a spit-in-the-wind estimate use 120 minus your age for the percentage in risky assets, and the rest in safe assets. Rebalance to those percentages yearly. If you do that, you will not get caught in the cycle of greed and panic, and you will benefit from the madness of strangers who get greedy and panic with abandon. (Why 120? End of the mortality table. Take it from an investment actuary. We’re the best-kept secret in the financial markets.) Okay, gotta close this off. This is not the last of this series. I will do more dollar-weighted returns. As far as retail investing goes, it is the most important issue. Period. Disclosure: None