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Market Neutral Funds: Best And Worst Of December

Market neutral mutual funds and ETFs returned an average of -0.06% in December and -0.10% for the entire year of 2015. The combined category’s annualized three-year returns stood at +1.01% through December 31, with 4.16% annualized volatility (“standard deviation”) and a 0.09 Sharpe ratio. The funds, which are designed to move irrespective of the broad stock and bond markets, have done their job in terms of their three-year beta relative to the Barclays U.S. Aggregate Bond Index, which stood at 0.04, and generated 0.98% alpha over that time. Click to enlarge Best Performers in December The three best-performing market neutral mutual funds in December were: BTAL, which initially launched in September 2011, returned +3.35% in December, making it the top-performing ’40 Act market-neutral fund for the month. For the year, however, BTAL gained just 0.15%, and for the three-year period ending December 31, its annualized returns stood at -2.10%. Its three-year beta of 1.04 means it had a high correlation to the Barclays U.S. Aggregate Bond Index. However, its -2.75% alpha was put you behind the index, and its above-average volatility (8.63% three-year standard deviation) resulted in a -0.15 three-year Sharpe ratio. FXMAX ranked second among market neutral funds in December, with monthly gains of 2.93%. But over the one- and three-year periods ending December 31, the fund’s returns were unattractive at -7.72% and -4.42% (annualized), respectively. Its three-year beta (0.46) and standard deviation (5.41%) were better than BTAL’s, but its three-year alpha (-5.07%) and Sharpe ratio (-0.82) were worse. Finally, the popular MNA ETF ranked third in December, with returns of +2.41%. In 2015, the ETF gained 1.45%, easily beating its peers. Its three-year annualized returns of +4.36% were comprised entirely of alpha (4.62%) relative to the Barclays U.S. Aggregate Bond Index, since the fund did its job by producing a three-year beta of 0.00 on the nose. MNA’s three-year standard deviation of 3.65% was by far the lowest of any fund reviewed this month, and its three-year Sharpe ratio of 1.27 towered above the competition. Worst Performers in December The three worst-performing market neutral mutual funds in December were: TFSMX was December’s worst performer among market neutral mutual funds and ETFs, returning -3.78% and dropping its returns for the full year into negative territory at -2.96%. The fund launched in 2004 and returned an annualized 0.83% for the three years ending December 31, with a fair 0.24 beta, 0.55% alpha, and 4.96% volatility. Its three-year Sharpe ratio stood at 0.18 as of year’s end. QuantShares’ SIZ and MOM both ranked in the bottom three, somewhat offsetting the firm’s first-place finish with BTAL. But while SIZ and MOM posted respectively disappointing one-month returns of -2.95% and -2.50% in December, MOM’s annual gains of 17.42% in 2015 made it the clear standout of the six funds reviewed this month. Indeed, MOM’s three-year annualized returns of 4.19% were only slightly bested by the more-famed MNA, but on the negative side, its 1.14 three-year beta may be less than appealing to investors looking to diversify away from fixed income. By this basis SIZ, which returned an annualized -5.07% for the three years ending December 31, looked better with its 0.13 three-year beta. SIZ and MOM had respective three-year alphas of -5.26% and +2.46%, with respecitve volatility of 6.25% and 8.45%, resulting in Sharpe ratios of -0.81 for SIZ and 0.48 for MOM. Past performance does not necessarily predict future results. Jason Seagraves and Meili Zeng contributed to this article.

Gundlach: Buy Closed-End Bond Funds And Mortgage REITs

It seems that bond king Jeffrey Gundlach and I are reading from the same playbook. In the Barron’s Roundtable (registration required), he made his case for deeply-discounted closed-end bond funds and mortgage REITs. I’ve been bullish on both for over a year… and I’ve taken my lumps for it. But the values are there, and I’m collecting outsized payouts while I wait. Some of Gundlach’s comments are worth passing on: A portion of the credit market has a safety cushion large enough to absorb another 200- or 300-basis-point widening in junk-bond spreads versus Treasuries. I’m referring to closed-end bond funds, which trade on the New York Stock Exchange. Closed-ends are one of the best plays on the Fed not raising interest rates… Closed-end funds are leveraged, and investors have been afraid to own them because they fear that the Fed has launched a tightening cycle. Also, based on daily data going back 20 years, they have traded at a 2% discount, on average, to net asset value. Recently, however, the sector traded at a 10% to 12% discount to NAV. It has traded at such a steep discount only 5% of the time. In the past 20 years, the discount has been wider than that only during the financial crisis in 2008-’09… If history is any guide, discounts would widen further only in a 2008-type scenario, which is possible, although doubtful so soon after the prior crisis. Under current circumstances, you have about two percentage points of downside, and 10 points of upside to return to the historical discount. That makes a basket of closed-ends attractive. If you bought a junk-bond-oriented closed-end trading at a 12% discount to NAV, some of the bonds would be trading at a 15% discount. This isn’t a bad idea, but I prefer Brookfield Total Return (HTR). It is trading just as poorly as some other closed-ends, but is vastly safer. Gundlach’s firm, DoubleLine, is far too big to buy closed-end funds in any meaningful size. He’d end up single-handedly moving the market. But for individual investors, these may be the best option available these days. As Gundlach puts it, “If the S&P rises 10%, closed-ends could return 20%. If the stock market falls 30%, a decline is already priced into these funds. I look at closed-end funds as a good place to put your risk money.” I agree. Given the yawning discounts among closed-end bond funds, we have that all-important margin of safety in this space. Moving on, Gundlach had some interesting things to say about mortgage REITs: Fears that the Fed will raise rates significantly are overblown. This brings me to Annaly Capital Management (NYSE: NLY ), one of the largest mortgage REITs [real-estate investment trust]. It has an $8 billion market cap and has been trading at a 25% discount to book value for some time… It is selling for $9.41. A few years back, it sold for $18. These sorts of stocks have step-function moves. They don’t move by a few percent; they go from $18 to $12 and from $12 to $9, and if the yield curve is inverted, and they have to cut their dividends, things get really bad. But a discount of 30% to book value is the widest ever for Annaly, and historically very wide for a mortgage REIT. Annaly is paying a dividend of 30 cents per quarter. It yields 12.75%. The environment for Annaly has improved… At today’s discount, a lot of bad things are priced in. If the Fed doesn’t raise interest rates much, the stock should go higher. I’m not currently long Annaly. Rather than bet on a single mortgage REIT, I opted to buy a broader basket via an ETF. But my rationale was much the same. Across the sector, you have quality names trading at enormous discounts to their underlying portfolio values. The sector is worth more dead than alive. The rationale move here would be for mortgage REITs to plow the proceeds from maturing and prepaid mortgage securities into buying back their own stock. An m-REIT yielding 10% and trading at 80 cents on the dollar is going to deliver a better return than the mortgage securities they’re currently buying. Annaly, for one, has done exactly that, announcing over the summer that they intended to buy back about $1 billion in shares . At today’s prices, that amounts to about 12% of Annaly’s market cap. Expect more of their peers to follow suit. Disclaimer : This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

50 Real Estate Companies Increased Their Dividends By More Than 10% In 2015

Despite the modest pressure on REIT stocks in 2015 amid concerns regarding potentially higher interest rates, investors put $1.7 billion of fresh money into REIT ETFs, according to SSGA data. S&P Capital IQ thinks one of the appeals of a diversified approach to investing in REITS is their different asset class categories to mitigate risk in any one area of real estate and high cash flows to support dividends. During 2015, a wide array of REITs increased their dividends. The outlook for continued dividend increases in 2016 looks favorable to S&P Capital IQ aided by strong fundamentals. According to SNL Financial, 140 North American real estate companies, 118 of those based in the U.S., boosted their dividend last year, two more than did in 2014. Indeed, 50 of these companies hiked dividends by 10% of higher and in certain cases, the growth was much stronger . According to Christopher Hudgins of SNL, the largest increase last year was Ashford Hospitality Prime (NYSE: AHP ). The small-cap hotel and resort REIT doubled its dividend in June 2015 and ended the year with a $0.40 per share annual dividend (3.8% current yield). While such dividend growth should be providing some downside protection, AHP shares have been particularly volatile in recent months. Jake Mooney of SNL noted in early January that a significant investor in AHP called for a sale of the company in light of its discount to net asset value. But some investors in large-cap REITs also received double-digit increases to cash payments last year. For example, Public Storage (NYSE: PSA ), a specialized REIT, raised its dividend 21% in April 2015; PSA has a $43 billion market capitalization that grew during 2015 as the shares rose. PSA ended the year with a $6.80 per share annual dividend (2.7% yield). S&P Capital IQ noted that third quarter 2015 (latest available) occupancy rate at 95% and rent-per-square-foot growth was ahead of its peers. Funds from operation (FFO) are projected to rise 9% in 2016 according to S&P Capital IQ, providing ample room for a dividend increase. Another large-cap REIT with double-digit dividend growth is Prologis (NYSE: PLD ). In April 2015, the industrial REIT raised its dividend 11% to a $1.60 per share annual dividend (3.9% yield). S&P Capital IQ estimate 2015 FFO per share of $2.21 expanding 9.5% to $2.42 in 2016, driven by strong rate increases and the benefits of industrial property owner KTR Capital Partners transaction. S&P Capital IQ has a buy recommendation on PLD and sees the deal providing increased exposure to high quality e-commerce tenants. Despite net inflows during 2015, investors did not treat all REIT ETFs equally. Vanguard REIT Index (NYSEARCA: VNQ ), the largest ETF within the investment style with $27 billion, gathered $1.1 billion of fresh money according to etf.com data. Not that far behind with $674 million in inflows was Schwab US REIT (NYSEARCA: SCHH ), even though the ETF had a smaller $1.9 billion asset base. In contrast, iShares US Real Estate (NYSEARCA: IYR ) had $1.0 billion in outflows and now has $4.6 billion in assets. Meanwhile, Simon Property Group (NYSE: SPG ) raised its dividend 3% in 2015. S&P Capital IQ has a Buy recommendation on these shares and forecasts FFO to increase 8% in 2016 driven by improving retailer demand. With a 0.43% expense ratio IYR was at least three times more expensive than VNQ and SCHH. However, with 3.9% dividend yields, IYR and VNQ both had higher income appeal than SCHH’s 2.5% yield. We think investors seeking dividend income should look at IYR, SCHH and VNQ since they provide exposure to REITs that are positioned for future dividend growth. Additional disclosure: Please see disclosures http://t.co/AHwSBhyHHt