Tag Archives: discovery

4 Mutual Funds Rookies To Outperform Older Peers

According to the research paper “Scale and Skill in Active Management” by professors Robert Stambaugh and Luke Taylor, younger actively managed mutual funds outperform the older ones in a defined time frame. The path-breaking study, published last year in the Journal of Financial Economics, also indicated that returns of funds decline as they grow older. The professors cited an increase in the size of active management industry and the entry of new competitors as the main reasons behind their findings. Taylor said, “If there are more people fishing in the same pond, that’s going to make it harder for any individual person to catch a fish.” Actively managed funds tend to invest in securities that are believed to be undervalued relative to their fundamentals and try to outperform broader indexes. In order to pursue this objective, asset management companies seek to employ active managers who utilize their forecasting power and judgement to decide on buying, selling or holding securities. As a result, portfolio compositions of these funds are believed to vary according to market conditions. This makes the study an interesting reference when the performance of the younger funds is compared to the older ones. It will be interesting to see which category helps investors to achieve their objectives. Younger Versus Older Funds Out of the mutual funds we studied, funds that were incepted on or after 2010 have been considered as younger funds and those incepted on or before 2005 have been categorized as the older ones. In order to analyze the performances of younger mutual funds compared to the older ones, we have selected the top 100 funds from each category on the basis of their performance since inception. While the load-adjusted average total return of 100 younger funds since their inceptions outpaced the same average of the top 100 older funds, the former also outperformed their older peers in recent years. Load-adjusted average total return since inception of the top younger funds came in at 18% against 13.5% of the top older funds. Moreover, the younger category registered an average total return of 17.7% in the last three-year period compared to 16.4% gain witnessed by the older ones. Last year too, when most of the mutual funds found it difficult to finish in the positive territory, the top younger funds managed to post an average gain of 4.4%, clearly outpacing the average return of only 2% registered by the top older ones. Before concluding that the younger funds may prove to be more profitable than the older funds, as the facts indicate above, let’s have a look at some of the arguments given by professors Robert Stambaugh and Luke Taylor in their paper. Arguments in Favor Both Stambaugh and Taylor identified younger managers’ improving skills and ability to use advanced technology for forecasting as the main reasons for the outperformance of younger active funds. They argued that with gaining popularity of mutual funds over the years, level and quality of training has increased over time. Betterment of training helped new fund managers to gain exposure to higher education, advanced technology and research tools, which in turn had a positive impact on the performance. To quote Taylor, “New funds entering the industry have more skill … possibly because of better education or a better grasp on technology.” Moreover, younger active funds that come with new strategies, never explored earlier, may attract more investor attention than the older funds. Separately, Taylor identified that the performance of a fund tends to decline with time as the industry size increases. With time, the number of competitors and size of individual funds are bound to grow. With increasing size, trading volume of the funds also tend to rise, which weighs on a fund’s performance. In order to improve performance, the fund manager needs to increase exposure to undervalued stocks. This involves identifying stocks which are incorrectly priced relative to their intrinsic value and picking potential sellers of the same. This will force the fund to offer a higher price for the stock if it is to be purchased immediately. Otherwise, the fund may wait for a longer period of time, which may result in the loss of some of the incentives of undervalued stocks. 4 Young Mutual Funds To Consider Based on these facts, we present four mutual funds that were incepted in 2010 or later and carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We believe these funds will outperform their peers in the next few years. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify the 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. Along with impressive returns since their inceptions, these funds also have encouraging one- and three-year total returns (as of December 31, 2015). The minimum initial investment is within $5,000. These funds also have a low expense ratio and no sales load. Fidelity Series Real Estate Equity Fund (MUTF: FREDX ) seeks high income and capital appreciation. FREDX invests the majority of its assets in companies associated with the real estate industry across the world. The fund is expected to provide a higher return than that of the S&P 500 Index. FREDX was incepted in October 20, 2011. Since its inception, this Zacks Rank #1 (Strong Buy) fund has returned 12.7% and gained 3.6% and 12.7% over the past one- and three-year periods, respectively. FREDX has an annual expense ratio of 0.74%, significantly lower than the category average of 1.29%. It has no minimum initial investment. MFS International New Discovery Fund Retirement (MUTF: MIDLX ) invests in non-US equity securities, which also include equity securities of companies located in emerging nations. MIDLX invests in securities such as common stocks, preferred stocks and REITs. It invests in securities of companies that are believed to have impressive growth prospects. The fund may allocate a significant portion of its assets in a specific country or region. It was incepted in June 1, 2012. Since its inception, this Zacks Rank #1 fund has returned 9.2% and gained 2.9% and 6.3% over the past one- and three-year periods, respectively. MIDLX has an annual expense ratio of 0.95%, below the category average of 1.53%. It has no minimum initial investment. Thornburg International Value Fund Retirement (MUTF: TGIRX ) seeks growth of capital over the long run. It primarily focuses on acquiring securities of foreign companies and depository receipts. Though TGIRX invests in securities of companies located in both developed and developing nations, it invests a larger share of its assets in securities from developed markets compared to those from the developing markets. The fund was incepted in May 1, 2012. Since its inception, this Zacks Rank #2 (Buy) fund has returned 9% and gained 6.8% and 5.4% over the past one- and three-year periods, respectively. TGIRX has an annual expense ratio of 0.74%, lower than the category average of 1.34%. It has no minimum initial investment. Strategic Advisers Growth Fund (MUTF: FSGFX ) generally invests in Fidelity Funds and non-affiliated funds that take part in Fidelity’s FundsNetwork. FSGFX also invests in non-affiliated ETFs. It invests in large-cap companies having market capitalization within the universe of the Russell 1000 Growth Index. FSGFX was incepted in June 2, 2010. Since its inception, this Zacks Rank #2 fund has returned 16% and gained 5.1% and 16.7% over the past one- and three-year periods, respectively. FSGFX has an annual expense ratio of 0.31%, below the category average of 1.18%. It has no minimum initial investment. Original post

Most Factor Anomalies Are Not Persistent

Smart-beta indices are constructed to exploit “anomalies” that reward exposure to risk factors beyond what would be expected as “necessary compensation” under the Capital Asset Pricing Model (“CAPM”). Of course, any factor that results in nominal outperformance must be considered on a risk-adjusted basis, since taking on higher risk should engender a greater reward – and investment researchers at S&P Dow Jones Indices think at least some factor “anomalies” aren’t anomalies at all, but just rewards for greater-than-understood risk-taking. Even still, among the remaining anomalies, the researchers think many are “disappearing,” “statistical,” or “attenuated” – and only a few are truly “persistent.” Writing on behalf of S&P Dow Jones, academic Hamish Preston and S&P Dow Jones Index Investment Strategy professionals Tim Edwards and Craig Lazzara express these views in an October 2015 research paper titled ” The Persistence of Smart Beta .” Disappearing Anomalies Disappearing anomalies don’t last. A great example shared by the paper’s authors is the so-called “Weekend Effect” that was popularized by Frank Cross in 1973. Mr. Cross discovered that if investors had bought stocks at their closing prices each Monday and sold them at their closing prices each Friday – avoiding the weekend and the Monday trading session – they would have dramatically outperformed a “buy and hold” strategy from 1950 to the time of his research. But then, almost immediately after the Weekend Effect became well known, the anomaly didn’t just disappear, it reversed. The Weekend Effect rebounded in 1984, only after another academic research paper called it into question – and then, when a paper called “The Reverse Weekend Effect” was published in 2000, the old Weekend Effect returned. As soon as investors gained knowledge of the Weekend Effect, it reversed. When knowledge of the reversal became widespread, the reversal reversed. Now, it’s taken as a given that the Weekend Effect was a coincidence – hence, it was a disappearing anomaly. Statistical Anomalies Perhaps a better approach is for investors to keep knowledge of anomalies they discover secret – that way, they may be less likely to disappear. This is what David Dolos did when he discovered that applying the price movements of the 1720 South Sea Bubble – second only to Tulip Mania in episodes of old-school irrational exuberance – to the Dow Jones Industrial Average inexplicably produced outsized returns. Mr. Dolos never told anyone about his discovery, and he reaped the rewards in anonymity until 2007, when the system broke down. Why? Well first off, David Dolos didn’t exist. The story is made up, and although the 1720 South Sea Bubble was real, the South Sea Bubble effect was data-mined into existence. As the paper’s authors note, modern computing power can easily produce “false positives” – i.e., anomalies that are purely statistical in nature. In order for an anomaly to be persistent, it must make logical sense. Attenuated Anomalies Momentum is one of the most popular factors. Academic research supports its outperformance, and the concept of momentum stocks – stocks that are going up – outperforming non-momentum stocks makes logical sense. The momentum anomaly is known to anyone who cares to know about it, and yet this knowledge hasn’t caused the anomaly to disappear – instead, it has reinforced it. The downside is that since investors have become aware of the momentum anomaly, its drawdowns have been bigger. This is what the S&P Dow Jones authors mean by an “attenuated anomaly.” In 1997, Mark Carhart published a study that showed adding momentum to the famous Fama-French three-factor model boosted returns. This caused more money to flow into momentum stocks, ultimately leading to bigger drawdowns during crashes. Persistent Anomalies Are there any truly persistent anomalies? The authors say there is at least one: Low volatility. But they conclude with a word of caution: “So far, the investment and attention directed toward low-volatility strategies has not been sufficient to temper their returns or attenuate their risk/return profile.” So far. As the well-known disclaimer goes: ” Past performance does not necessarily predict future results. ” For more information, download a pdf copy of the white paper. Jason Seagraves contributed to this article.

What’s Ailing Biotech?

Summary Concerns about profitability and valuations had already infected US biotechnology stock prices in September. Increased political and media attention on rising drug costs sent the sector deeper into a decline. Evan McCulloch shares his insights on the drug-cost debate, presidential candidate Hillary Clinton’s proposal, and the fallout on the biotech sector at large. Evan McCulloch Senior Vice President, Director of Research Franklin Equity Group® Portfolio Manager, Franklin Biotechnology Discovery Fund (MUTF: FBDIX ) ________________________________________________________ We have seen some turmoil in the biotech sector over the last few weeks. What’s been driving this volatility? There’s been some volatility in the equity market at large, which has resulted in investor skittishness overall and a hypersensitivity to potential fundamental concerns. Specifically for the biotechnology sector, however, the threat of heightened scrutiny of drug prices has reared its head again. It started with an article in The New York Times on September 20 about a small private company called Turing Pharmaceuticals 1 that raised the price of an anti-toxoplasmosis drug it had acquired by 5,000%. This is very unusual for an older drug, so it was a case the media latched on to. The article was followed by a tweet from Democratic presidential candidate Hillary Clinton, indicating she thought some drug prices were excessive and that she had a plan to reduce prescription drug costs. Clinton subsequently announced her plan, which proposed that Medicare leverage its buying power to negotiate directly with drug companies. After that, other politicians jumped on the bandwagon and railed against high drug prices. The House Committee on Oversight and Reform already had been seeking to subpoena documents relating to Valeant Pharmaceuticals’ 2 price increases earlier this year on a pair of cardiovascular drugs, and it then asked to subpoena Turing Pharmaceuticals about the price increase on its drug, which treats parasitic infections. It’s interesting to note that the pricing noise has been around for a while; there have been a series of press articles on the subject going back to July. President Obama has made periodic comments about high drug prices, and Senator Bernie Sanders, who also is vying for the Democratic presidential nomination, released a plan focused on pricing which generated renewed attention. So while this is an issue that bears watching, I think it’s a culmination of sector-specific concerns about drug pricing on top of some broader market issues that has caused recent volatility in share prices. So where could this all be going? Might it result in a reduction in drug prices, in your opinion? For better or for worse, in my view the answer is no. All Clinton did was articulate a plan; it is not legislation. The price of prescription drugs is a popular topic because most people in the United States think drug prices are high, and it’s an issue that resonates well with voters. Again, this is not legislation, and if it were, it would not likely be approved by a Republican-majority Congress. Given that the Republicans seem likely to retain their majority in the House of Representatives after the 2016 election, I don’t believe any legislation can pass until 2018 at the earliest. Even if Clinton’s plan, as we currently understand it, did ultimately pass, in my view the impact would be very manageable for the sector. Most notably, according to our estimates, any cut to drug prices inside the Medicare program would be far less than the recent 15%-20% stock correction in the sector might imply. However, we do expect more market-based reforms. This public shaming process that politicians are employing will likely cause companies to moderate price increases going forward and also empower insurance companies to drive toward higher rebates and more substitution of cheaper drugs. So, we do expect some growth moderation at the margin, but it will probably be imperceptible at a sector level. In the fund, we focus on investing in companies with drugs that deliver strong clinical value and have limited competition, which seeks to mitigate the impact of some of these initiatives. Moving on to the topic of patent protection, do you have any concerns about the exclusivity provisions offered in the Trans-Pacific Partnership ( TPP ), the proposed trade agreement between 12 Pacific Rim countries? No, I don’t have any concerns about it. The TPP proposes that drugs sold outside the United States get eight years of exclusivity. Patents currently don’t protect US drugs overseas. So, granted, eight years is lower than the current 12 years of exclusivity in the United States, but eight years should be compared to virtually no exclusivity right now, as many of the countries covered in that partnership do not honor intellectual property rights. So, this provision would protect pharmaceutical companies for eight years, which would actually be a positive for the sector, in our opinion. What do you think the media is either not covering or may be misreporting about the biotech sector that you think investors should know? The media has focused on gross price increases on drugs, and that is very different from actual price increases or net price increases. In most cases, price increases are moderated through rebates to the payers, but since that’s a negotiated price, the actual price being paid by insurance plans to the drug companies is not transparent to investors or the media. In most cases, when we see a price increase, we know only about one-third to two-thirds of that price increase is realized, so the actual price increases are much lower than what is being reported in the press right now. What is your current outlook for the biotechnology space? I think fundamentals in the biotechnology sector are as strong as ever. In our view, the sector’s new-product pipeline is full, and important new treatments are advancing for cancer, Alzheimer’s dementia, and a whole range of rare genetic diseases. In cancer treatment, interest is very high in using drugs that harness the immune system to fight tumors. A number of new drug discovery technologies, like gene therapy, RNAi (RNA interference) and antisense, allow companies to target rare genetic diseases that were previously untreatable with more traditional drug approaches. For drugs that make it through the clinical trials process, the US Food and Drug Administration is working cooperatively with the sector to bring new drugs to patients, and in most situations has approved drugs that have strong value propositions for patients. Until recently, investor concern was generally constrained to stock valuations, not fundamentals. Although concerns about drug pricing power have arisen, I don’t expect any major change. And with more attractive valuations following this recent correction, we think the outlook for the sector is very positive. To get insights from Franklin Templeton Investments delivered to your inbox, subscribe to the Beyond Bulls & Bears blog. For timely investing tidbits, follow us on Twitter @FTI_US and on LinkedIn . This information is intended for US residents only. Evan McCulloch’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. What Are the Risks? F ranklin Biotechnology Discovery Fund All investments involve risks, including possible loss of principal. The fund is a non-diversified fund that concentrates in a single sector, which involves risks such as patent considerations, product liability, government regulatory requirements, and regulatory approval for new drugs and medical products. Biotechnology companies often are small and/or relatively new. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term. The fund may also invest in foreign companies, which involve special risks, including currency fluctuations and political uncertainty. These and other risks are described more fully in the fund’s prospectus. Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN®/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. _________________________________________________________________ 1. As of 9/30/2015, Turing Pharmaceuticals was not a holding of Franklin Biotechnology Discovery Fund. Holdings are subject to change without notice. 2. As of 9/30/2015, Valeant Pharmaceuticals was not a holding of Franklin Biotechnology Discovery Fund. Holdings are subject to change without notice.