Tag Archives: europe

The Right International Dividend ETF Right Now

There have been a few international dividend ETFs that have stood firm, indicating that if investors decide to return to ex-US equities, these funds could become leaders. The WisdomTree International Hedged Dividend Growth Fund is up about two-thirds of a percent over the past three months. Bolstering the case for IHDG for the remainder of 2015 is the potential for the Bank of Japan to add to its already massive monetary stimulus program. By Todd Shriber, ETF Professor As international stocks, both developed and emerging markets, have flailed in recent months, the best that can be said of some international-dividend exchange-traded funds is that these funds have only been less bad than their counterparts that are not dedicated dividend ETFs. The good news is there have been a few international dividend ETFs that have stood firm, indicating that if investors decide to return to ex-U.S. equities in a big way, these funds could become leaders. Put the WisdomTree International Hedged Dividend Growth ETF (NYSEARCA: IHDG ) in the more positive group. The Fund And Her Index The WisdomTree International Hedged Dividend Growth Fund is up about two-thirds of a percent over the past three months. Not a jaw-dropping showing, but still solid when acknowledging the laggard performances turned in by an array of international equity ETFs. IHDG, which has needed just 19 months of trading to rake in over $495 million in assets under management, tracks the WisdomTree International Hedged Quality Dividend Growth Index ( WTIDGH ). That currency-hedged benchmark “is comprised of the top 300 companies from the WisdomTree DEFA Index with the best combined rank of growth and quality factors. The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets,” according to WisdomTree , the fifth-largest U.S. ETF issuer. Speaking of being solid, the WisdomTree International Hedged Quality Dividend Growth Index was WisdomTree’s second-best index during the third quarter. “The WisdomTree International Hedged Quality Dividend Growth Index (Int. Hedged Quality Dividend Growth) was the next best. It’s notable that this Index had an exposure of fewer than 50 basis points to the Energy sector, and it also mitigates exposure to movements of the U.S. dollar versus its underlying mix of 12 currencies,” said WisdomTree in a note out Wednesday . IHDG levers to investors to the theme of growing Japanese dividends. Previously stingy, but cash-rich, Japanese companies are boosting dividends and buybacks at a rapid pace by that country’s historically lethargic standards for shareholder rewards. Switzerland, perhaps the steadiest dividend growth market in continental Europe, is IHDG’s third-largest country. Combined, the U.K., Japan and Switzerland are 43.3 percent of the ETF’s weight. The Fund’s Advantage Though neither IHDG’s currency hedge nor its dividend growth emphasis should imply the ETF is immune from downturns in international markets, it is notable that the fund is up 5.2 percent year-to-date compared to a loss of almost 1.1 percent by the MSCI EAFE Index. Bolstering the case for IHDG for the remainder of 2015 is the potential for the Bank of Japan to add to its already massive monetary stimulus program. “We believe it is possible we will see coordinated action from the BOJ and the fiscal side in November and therefore think that Japan exposures should remain in focus-whether from a sector or broader-based approach,” said WisdomTree. Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

10 Best Mutual Funds For The Next Decade From 10 Investment Strategists

Summary Aging demographics, rising demand for less invasive ways to stay active or better address illnesses, emerging market growth of healthcare demands and real products are bullish for Fidelity Select Biotechnology. Parnassus Endeavor has outperformed the S&P 500 by 4.8% annually over the past 10 years. In addition to removing alcohol, tobacco, gambling, firearms and nuclear power from the portfolio. China’s P/E ratio is 8.7 times the next 12 month’s forecast earnings by analysts, which is below the past five years’ average, and a little more than half the U.S. Investors are understandably worried about their portfolios in light of the stock market selloff in August and September. But in the long run, a 10% or even 20% correction will be merely a blip on the screen. To help you focus on the long term, I asked a panel of investing strategists to share their mutual fund investing idea that they have conviction in for the next decade. 1. Fidelity Select Biotechnology Portfolio (MUTF: FBIOX ) By Jim Lowell Aging demographics, rising demand for less invasive ways to stay active or better address illnesses, emerging market growth of healthcare demands, real products, real earnings, and time-tested management are all part of my positive diagnosis for investing in biotechnology and healthcare stocks. For the aggressive growth investor, I recommend Fidelity Select Biotechnology. Priced to perfection and prone to price-related swoons, this sector remains one of my absolute long-term buy recommendations. After the recent price gouging biotech brouhaha, many blue-chip biotechs were being sold down as if they were in the same boat as the upstart Turing Pharmaceuticals, whose capitalist instincts ran away with its better nature, raising the price of a niche but necessary drug from $13.50 to $750 a dose. The CEO finally buckled to public relations pressure and announced that the company would lower the price of the drug in response to the outcry. Of course, Biogen-Idec (NASDAQ: BIIB ), Gilead (NASDAQ: GILD ) and others have diversified portfolios of efficacious biotech drugs and are a far cry from the Turing’s one-trick pony. There will be other blowups under the biotech tent, making it a natural place for proven active management to take center stage. As an individual investor, I’d be nervous about trying to time into this sector as well as pick a broad array of biotech stocks that could reduce near-term risks and enhance long-term return. By investing in FBIOX, I don’t have to worry about either, since manager Rajiv Kaul does that job for me. Currently, his top holdings are Gilead Sciences, Biogen, Alexion (NASDAQ: ALXN ), Celgene (NASDAQ: CELG ), Regeneron (NASDAQ: REGN ), Vertex Pharmaceuticals (NASDAQ: VRTX ), BioMarin Pharmaceutical (NASDAQ: BMRN ), Medivation (NASDAQ: MDVN ), and Incyte (NASDAQ: INCY ). FBIOX is up 13.8% year-to-date through September 23. For the defensive growth investor, I recommend the Fidelity Select Health Care Portfolio (MUTF: FSPHX ). Top-ranked manager Eddie Yoon invests in companies involved in the design, production, or sale of health care products and services, including, but not limited to: pharmaceutical, diagnostic, administrative, medical supply, and biotechnology companies. This sector represents 17% of U.S. GDP and covers thousands of stocks and experimental drugs. You can’t bring the acumen, informed insight and trade execution capacity and quality to this field, but Yoon can and does. He invests with an eye on the necessary demographic trends and stories of aging boomers needing a youth-inducing crutch as well as on the emerging market theme of new consumers demanding better healthcare. His current top holdings include Boston Scientific (NYSE: BSX ), Teva (NYSE: TEVA ), Abbvie (NYSE: ABBV ), McKesson (NYSE: MCK ), Vertex, UnitedHealth (NYSE: UNH ), Shire (NASDAQ: SHPG ), and Bristol-Myers Squibb (NYSE: BMY ). While sub-sectors like biotechnology have been blazing higher, there are other defensive sectors when higher alpha plays are being sold off. One stealth benefit: This is a globally diversified sector with this fund’s foreign investments typically making up one-third of its assets. Jim Lowell is editor of FidelityInvestor.com and chief investment officer at Adviser Investments with $3 billion under management in Newton, Mass. He owns both funds mentioned here. 2. Deutsche Bank Global Infrastructure Fund ( TOLSX ) By Jeremy S. Office, Ph.D., CFP, CIMA, ChFC, CRPC, MBA We believe one of the best opportunities for investors with more than a seven-year time horizon is global infrastructure. According to the World Economic Forum, global infrastructure demand is approximately $4 trillion annually with only $2.7 trillion invested each year. Global infrastructure remains underdeveloped, and existing structures are in their later stages of life. As government balance sheets near their tipping point, we believe this gap will open the doors for private investment opportunities that will further attract investors into the asset class. Also, the potential to hedge inflation by investing in companies with the ability to raise prices (high pricing power) may also be attractive if inflation begins to increase. At Maclendon, we use the Deutsche Bank’s Global Infrastructure Fund as a diversified way of investing in this vertical. Although the world may be slowing down economically, population growth and the need for updated infrastructure remain high. With the essential need of infrastructure within a society, the resiliency of cash flows, and the potential hedge against inflation, we believe this to be a compelling investment in a portfolio over the next 10 years. The current zero interest rate policy has diminishing value to stimulate the economy and eventually leads to asset bubbles that could jeopardize the entire experiment in the first place. Cutting interest rates and embarking on quantitative easing to stimulate the economy was necessary during the financial crisis, but we have made considerable progress since and believe a Fed rate hike in September was warranted. We understand the global implications of higher rates and how the Fed is attempting to accomplish a “Goldilocks” raise, not too much and not too soon, but believe at this point we need to move off zero at least for the reason of having the ability to lower them again if markets do show further signs of weakness. Right now the Fed has used all of their tools in its toolbox. If the economy cannot withstand a 0.25% hike in rates, we are in worse shape than previously thought. There is a misconception with retail investors that higher interest rates are bad for the economy, but when you are coming off zero that doesn’t hold true. Higher rates could stimulate the economy as banks are more inclined to lend, retirees are earning more on their fixed income, and would be homebuyers get off the sidelines to avoid higher mortgage rates. Jeremy S. Office, Ph.D., CFP, CIMA, ChFC, CRPC, MBA, is founder and principal of Maclendon Wealth Management in Delray Beach, Fla. with $140 million under management. 3. DFA Global Allocation 60/40 Portfolio (MUTF: DGSIX ) By Michael S. Brown CFA, CPA, CFP® Over the last six weeks, U.S. large-cap stocks have declined by 10%, erasing year-to-date gains. Times like these are healthy because they remind investors that the stock market’s attractive historical returns do not come without risk. Successful long-term investors understand that strong equity markets are inevitably followed by downturns, the timing and magnitude of which are impossible to predict. They specifically demonstrate discipline by avoiding the herd mentality and taking advantage of occasions when stocks are priced most competitively. Dowling & Yahnke aims to build highly diversified portfolios that align with client risk tolerance and long-term investment objectives. Combining this philosophy with a mandate to minimize costs, manage taxes and rebalance in a disciplined manner limits the scope of funds with which we place client assets. When recommending a solution for an investor with a moderate risk tolerance and long-term investment horizon, DFA’s Global Allocation 60/40 Portfolio is a great choice. While many all-in-one fund options exist, DGSIX delivers DFA’s unique investment approach in an efficient, low-cost package. The portfolio, which features a globally diversified fund-of-funds structure with built-in rebalancing, is designed to seek total returns consisting of capital appreciation and current income by investing 60% of assets in equity funds and 40% in fixed income funds. The funds included in the Global Allocation 60/40 Portfolio provide broad exposure to global markets, including more than 10,000 securities in more than 40 countries at a low net expense ratio of 0.29%. In addition to providing an allocation to inflation-protected securities, the equity components of DGSIX employ Dimensional’s applied core equity approach, emphasizing smaller cap, relatively low price, and higher profitability stocks to enhance expected returns. The fixed-income components complement the equity allocation, helping to optimize the tradeoff between dampening risk and maximizing expected return. Michael S. Brown CFA, CPA, CFP® is a partner at Dowling & Yahnke, LLC in San Diego, Calif. with $3 billion under management. 4. Parnassus Endeavor Fund (MUTF: PARWX ) By Michael Kramer Parnassus Endeavor is a $1.3 billion large-cap core mutual fund with a five-year annual return of 14.8% and a 10-year annual return of 11.2% through September 30, 2015. This fund has outperformed the S&P 500 by 4.8% annually over the past 10 years. In addition to removing alcohol, tobacco, gambling, firearms and nuclear power from the portfolio, it also seeks out sector leaders in areas such as community relations, labor standards, human rights, environmentally-friendly practices, and employee health, safety, diversity, and rights. Research has long indicated that ESG integration has a neutral-to-positive correlation to long-term financial performance. In volatile and uncertain markets, investors that view ESG factors as material to bottom-line performance understand that true long-term profitability is directly connected to adherence to best corporate practices around risk mitigation. This low-turnover fund overweights technology and financial services while emphasizing dividend-yielding positions and, at 39%, has twice the benchmark and category averages of mid-cap stocks. Top holdings include Altera (NASDAQ: ALTR ), Intel (NASDAQ: INTC ), Whole Foods Market (NASDAQ: WFM ), American Express (NYSE: AXP ), Applied Materials (NASDAQ: AMAT ), and IBM (NYSE: IBM ), representing 35% of the portfolio weight. This fund has been resilient in down-markets and strong in growth periods. During the 2008 downturn, for example, the fund was down 30%, while the S&P 500 lost 38% of its value, and in 2009 the fund was up 62%, while the S&P was up only 26%. Manager Jerome Dodson, who founded Parnassus Investments in 1984 and has managed this fund for 11 years, maintains a consistent and disciplined approach, which has helped this sustainable and responsible fund to earn 5 stars from Morningstar and place in the top 1% of all mutual funds for 10-year tax-adjusted return in its category. Michael Kramer is managing partner and director of social research at Natural Investments and co-author of The Resilient Investor: A Plan for Your Life, Not Just Your Money. 5. Federated Global Allocation Fund (MUTF: FSTBX ) By Stephen F. Auth, CFA Federated Global Allocation Fund is a diversified global balanced fund that can go anywhere and has sufficient flexibility to preserve capital in market corrections, while also being able to participate significantly in the secular bull that we believe we are in. It goes without saying: It’s been a rather messy time for stocks. The China fears that sparked this summer’s sell-off have been succeeded by handwringing over what the Fed sees that’s keeping it from liftoff. Don’t expect clarity anytime soon. No major upside surprises appear to be lurking on the economic calendar, and we are entering what historically has been an unsettling seasonal period. We see recent market volatility continuing for the next several weeks, with a likely retest of August’s lows, i.e., an S&P 500 that trades 3% to 5% below present levels. Over the longer term, however, we remain “stubbornly constructive” on equities. Secular bull markets such as we are in occasionally experience corrections that wash out the weak hands and set the stage for the next advance. This is what we are currently experiencing. The list of positive drivers off current levels is long and more in place than ever: Negative sentiment regarding stocks. Highly accommodative global monetary policies. Low global inflation. Low global yields. An expanding global economy despite headwinds from China. Corporate balance sheets and cash flows that remain very healthy. Valuations that are attractive and not expensive, price-to-earnings multiples are below 15 times expected 2016 S&P earnings of $130 to $135. We think this market will find new legs later this year into next and have not changed our 2,500 S&P target for 2016, implying close to a 30% upside from the present. With the market currently selling almost indiscriminately, we favor oversold stocks in such areas as domestic cyclical, consumer discretionary, financials, healthcare/biotech, even rate-sensitive utilities, and staples. We still think it’s too early to buy into energy and industrial and commodity names with big overseas exposure. People ask me, “What will be the catalyst?” My answer: When you have corrections like this, with babies being thrown out with the bathwater and companies with fantastic multi-year fundamentals like many of the health-care stocks being sold hard and indiscriminately by the ETF providers, you don’t need any of the positive catalysts listed above to spark a sustained rally. You just need a few things to get less worse, in particular news out of China. Once the market sniffs out this “less-worse” scenario, perhaps late in the fourth quarter, look out above. Stephen F. Auth, CFA is chief investment officer of equities at Federated Investors, Inc. Pittsburgh, Penn. with $349.7 billion under management. 6. Cognios Market Neutral Large-Cap Fund (MUTF: COGMX ) By Jonathan Angrist Investors should consider alternative mutual fund strategies as a diversification tool for their portfolios with a particular focus on those strategies that hedge market exposure. Market neutral equity is one of the few strategies that actually moves independently of the stock and bond markets, offering true diversification. Why is additional diversification necessary? We see the gulf between attractively valued companies with good long-term growth prospects and over-valued companies with challenging growth opportunities to be very wide, diminishing the potential for returns from traditional equity markets. Further, the current interest rate environment creates additional hurdles for traditional asset allocation. Rates will rise, and when they do increased rates are likely to impact both the equity and fixed income markets. This is likely to challenge traditional long-only strategies, but creates an opportunity for market neutral strategies. Due to the cyclicality of earnings, the Shiller cyclically-adjusted price-to-earnings ratio (NYSEARCA: CAPE ) is often used as a more accurate indicator of long-term earnings power than unadjusted earnings per share. As of August 31, 2015, this ratio stood at 25.84 times. Historically, when this ratio rises above 25.0 times, our research shows that the annualized return for the Standard & Poor’s 500 Index (S&P 500) is near zero for the following five years. Even with the continued economic expansion, we expect corporate profits to decline given that corporate profits as a share of gross domestic product are near all-time highs. As a result of continuing quantitative easing in Europe, on-going quantitative easing in Japan and slowing economic growth in China, earnings from foreign countries are also likely to decline due to the strengthening U.S. dollar. Conditions in the fixed income market are difficult as well. Many members of the Federal Open Market Committee have indicated that they would like to raise the federal funds rate by 0.25 percent before 2015 year-end. Barring further intervention long-term rates are also likely to rise. Long-term Treasury rates will continue to rise as China and commodity-dependent nations liquidate foreign currency reserves to stabilize their own currencies and plug national deficits. The potential for disappointing future performance of traditional asset classes and the increased market volatility, economic uncertainty and geopolitical turbulence that continues to persist highlights the need for a market neutral allocation in a well-balanced and diversified portfolio. Market neutral strategies offer the opportunity for returns that are independent of broad market and macro events. Jonathan Angrist is president and chief investment officer of Cognios Capital in Leawood, Kan. with $329 million under management. 7. AQR Risk Parity II MV Fund (MUTF: QRMIX ) By James F. Smigiel For many investors, a 10-year time horizon can be liberating in terms of the types of riskier investment opportunities that would not be viable over shorter time frames. There is a tendency among investors to view risk differently as holding periods lengthen. Specifically, the risk tolerance of the typical investor tends to increase as the period expands. Perhaps this stems from the fact that there are some statistical measures of risk that tend to decrease as the period increases. Whatever the reason, the investment community has not served these investors well, as there is still a surprising amount of controversy and confusion about the relationship between time and risk. SEI believes the facts are clear and investors should recognize that the range of potential outcomes, both positive and negative, will expand as time horizon increases. This is a natural result of returns compounding over time. In other words, the longer the time horizon, the greater amount of uncertainty. Given the above, SEI’s recommendation for the next 10 years would be a highly diversified investment that could be expected to perform relatively well in many potential economic and market scenarios. Specifically, we would suggest any of the so-called “Risk Parity” mutual funds including AQR Risk Parity II MV I or the SEI Multi-Asset Accumulation Fund (MUTF: SAAAX ). These funds and others like them provide investors with equal or near-equal exposures to multiple asset classes such as global equities, global bonds and global inflation-related assets (inflation-linked bonds, commodities). Unlike traditional balanced funds, however, these portfolios balance asset classes by risk contribution as opposed to a percentage of assets invested. Investing across asset classes via the amount of dollars invested can leave a portfolio highly concentrated in one exposure given the wide differences in asset class volatilities (i.e. equities can be more than twice as volatile as bonds). A portfolio that invests half of its dollars in stocks and half in bonds might appear diversified, but because stocks are so much riskier than bonds, nearly all of that portfolio’s risk would be contributed by stocks. Risk parity seeks to make all assets, even low-risk ones, “matter” at the overall portfolio level. An allocation approach that focuses on risk provides a truly diversified portfolio, which could be expected to perform well across a range of market and economic environments versus a more traditional, but concentrated, approach. Given the level of uncertainty that a ten-year horizon represents, we believe this choice provides the investor with the best chance of achieving a reasonable rate of return without accepting an undue amount of risk. James F. Smigiel is a managing director of Portfolio Strategies Group SEI Investment Management Unit at SEI at Oaks, Penn. with $262 billion under management. 8. Arrow Alternative Solutions Fund (MUTF: ASFNX ) By Joseph Barrato Over the next decade, we believe what is happening with the bond market may be just as relevant for investors as the direction of the stock market. Despite the Federal Reserve’s recent decision to keep interest rates unchanged, the world obviously anticipates rising rates in the future. This may mark the end to a declining rate environment that began in the 1980s. Although it’s true that we’ve experienced instances of rate hikes during the last few decades, we are now entering unchartered territory not seen by many of today’s investors. In the past when rates have increased, bond fund performance was cushioned by portfolio yields that were higher than prevailing market rates. We now have an environment where portfolio rates have slowly declined to the point where competitive yields are few and far between. Generating yield income is not the sole reason for holding bonds. Many portfolios are built to rely on fixed income as a core diversifier to offset the volatility of large equity exposure. As such, we expect to see a huge demand for non-traditional and alternative bond funds among investors who are looking either to replace or supplement their fixed income holdings with strategies that can deliver in rising and declining rate environments. The Arrow Alternative Solutions Fund is an example of a non-traditional bond fund that seeks capital appreciation with an emphasis on absolute returns and low volatility. Composed of three underlying fixed income strategies, the fund relies on quantitative analysis to optimize long/short/flat exposure to corporate high-yield bond markets, credit default markets, and long-term U.S. Treasury bond markets. As a result, the Arrow Alternative Solutions Fund has shown a low historical correlation to traditional equity and fixed income markets, and may also help to diversify an investment portfolio during various rate environments. As with any investment, investors should carefully consider risks with benefits. In this case, the Arrow Alternative Solutions Fund uses a combination of derivatives and fixed income securities to achieve its objective, which are subject to interest rate, credit, and inflation risks. Joseph Barrato, CEO and director of investment strategy at Arrow Funds in Laurel, Md. with $700 million under management. 9. Index Funds S&P 500 Equal Weight Fund (MUTF: INDEX ) By Michael G. Willis Having trouble beating the S&P 500 Index? Join the club, and it’s a large club. According to the most recent SPIVA report released by Standard & Poor’s, over 86% of large-cap fund managers could not beat it last year, and those numbers approach nearly 90% if you look at the past 5-year period. In March of 2014, Warren Buffett announced that his advice to his heirs is to put 90% of his estate in “a very low-cost S&P 500 index fund.” That’s a strong endorsement coming from arguably one of the best stock traders on the planet. So, what could be better than owning the S&P 500 Index for the next 10 years? Well, since the index is already in a class by itself, try beating the S&P 500 Index with a simple & logical version of itself! We believe one of the best-kept secrets on Wall Street is the S&P 500 Equal Weight Index. This index holds the same 500 companies with a minor twist: each of the 500 companies is held equally over time. Simple, right? This is in stark contrast to the market-cap version that uses a complex formula that winds up allocating over 50% of the portfolio to only 50 companies. It could be argued that the equal-weight version of the S&P 500 Index is the “pure” version of the index because it invests in each of the 500 companies equally, without bias. By definition, this makes it a better-diversified version of the index as it does not over-weight a select few. Incredibly, since its inception in 2003, this simple & logical version of the index has outperformed its “big brother” nine out of 12 years. Although many investors prefer index funds because of the lower costs, a key benefit of index investing is the peace of mind factor. Since no one knows the future, why second guess it or attempt to time it? An index portfolio manager’s read on current market conditions doesn’t matter, as their job is to track the index and ignore everything else. Index investors can also follow their lead here and attempt to ignore the daily “noise” on Wall Street and focus on their individual long-term goals. For 20 years, we were in the club that tried to beat the S&P 500 Index. Now this simple equal weight strategy might just have the best ticker on Wall Street: INDEX. Michael G. Willis is lead portfolio manager of The Index Group, Inc. in Colorado Springs, Colo.with $3 million under management. 10. Fidelity China Region Fund (MUTF: FHKCX ) By Kheim Do Investors have been bombarded by speculation that the Chinese economy probably already is sliding into a recession, and that it could pull the rest of the industrialized world down as well, especially at an awkward time when the U.S. Federal Reserve Board is contemplating raising interest rates. The increasing chatter of the scenario of a global recession in 2016 is a frightening one, especially when the world economy has barely started recovering from the recent financial crisis. According to some well-followed surveys of investor sentiment by global investment banks including Citigroup and Credit Suisse, the current mood is nearly as depressing as that prevailing in the dark days in the aftermath of the 2008 global financial crisis. The pricing of assets which are dependent on China’s economic growth have fallen significantly. For instance, oil prices and global emerging equity markets have fallen by 60% and 28% respectively over the past 12 months. The book of investment history suggests however that a savvy investor should act in a contrarian manner, when we are at extreme sentiment levels. In other words, the current high level of fear offers excellent long-term buying opportunities. Our global strategic policy group has regularly been monitoring and analyzing massive amounts of data, covering all the major economies around the world, ranging from weekly to 100-year data points. At the beginning of each year, a dedicated specialist team performs a detailed projection of the coming 10-year growth rate of gross domestic product in real, nominal (including inflation) and per capita terms. This, combined with the starting valuation tools, including price/earnings ratio and dividend yield, associated with each major asset class, constitutes the foundation of our 10-year total return forecasts of major bond, equity and currency markets. We are proud to report that our 10-year predictions of equity markets’ total returns made in 2004 for the decade ending 2014 turned out to be “deadly” accurate. Barings’ 10-year forecasts made at the beginning of this year suggests that the best equity market in the coming decade is China. Surprised? I expect so. As a market, China is unloved and current valuations of listed companies suggest an unduly pessimistic scenario of very little growth in nominal economic and corporate profit growth in the coming five to 10 years, while the reverse is true for the U.S. stock market, where high valuations discount a very rosy outlook. China’s price-to-earnings ratio is 8.7 times the next 12 month’s forecast earnings by broking analysts, which is significantly below the past five years’ average, and a little more than half of that of the U.S. equity market. Khiem Do is investment director at Baring Asset Management in Hong Kong with $38.7 billion under management.

Investing With Russian ETFs

Summary With the majority of ETF options holding energy companies, the market has become a tradable opportunity for those looking to profit from volatility. The mid-term outlook remains bleak, as economic and political deficiencies have suppressed business growth in the country. For longer-term investors, the current market may provide an opportunity to build holdings in an emerging market portfolio. With the recent decline in Russian markets due to the drop in the price of oil, many interested investors have considered gaining exposure to the country. From a fundamental perspective, the nation’s abundance of resources provides a positive picture in the long term. However, the pertinent question is how investors can gain this exposure while also protecting themselves from unwanted paperwork related to direct investment in the Moscow Stock Exchange (MICEX). In the current environment, the best solution are the Russian ETFs available on the market. ETFs have become a popular tool in the past few years for diversifying portfolios and protecting investors from market volatility. For those considering exposure to the emerging markets, ETFs have become almost a necessity in the current decade, as global rates continue to decline and result in increased market volatility. Russian ETFs protect an investor’s portfolio from the large fluctuations in the MICEX while also offering a passive investment style which ensures even investment in all major Russian industry players. Many Russian ETFs have underperformed in the last year, due to continued pressure from a commodity price perspective. This period of pricing pressure provides an opportunity for investors to take on risk and bet on a recovery in the market as the price of oil recovers. Russian ETFs are not for everyone and while they offer reduced volatility compared to the MICEX, the outflow of funds from Russian ETFs in the past few months has reduced liquidity. In addition, a majority of the Russian ETFs are heavily invested in oil majors, a market that has taken hits due to sanctions related to the Ukraine crisis. For this reason, finding an ETF that offers exposure to oil while also targeting other industries is much more beneficial from a medium-term perspective. In the following article, I will cover three popular Russian ETFs to determine whether the current investment products available offer any opportunities for interested investors. Current market As many investors may already know, Russia is among the top oil producers in the world, ranking eighth in global proved reserves with 80 billion barrels of oil (BBL). That said, the Russian economy has been highly leveraged to the price of oil for several decades, as 60% of the country’s export balance comes from oil and gas, which also contribute 30% of its GDP. It is frightening to see how unsustainable the business model has been for the country, as it has leveraged itself highly to the primary industry and to commodity prices. From a productivity perspective , the average Russian worker contributes $25.90 to Russia’s GDP, while a US worker adds around $67.40. The gap in productivity relates back to the systemic deficiencies in the country as the political environment has weakened the country’s incentive to engage in international trade. The nationalistic behavior seen across the many Russian political groups has not only been limiting to the current generation, but will also create future deficiencies, as the current economy has set a precedent that the future generation is set to follow. Vladimir Putin looks to continue his reign in the country as propaganda from the Kremlin continues to support his 86% approval rating. The future looks bleak for the economy, and I suggest investors look at the country as a tradable opportunity rather than an investment , due to the constant volatility in the MICEX. For investors who would consider exposure to Russia, using the price of oil as a lead indicator is the ideal way to trade the nation’s currency and any other leveraged investment products. Possible Investment Opportunities For interested investors, the top three ETFs available are the Market Vector Russia ETF Trust (NYSEARCA: RSX ), SPDR S&P Russia ETF (NYSEARCA: RBL ), and the iShares MSCI Russia Capped ETF New (NYSEARCA: ERUS ). This begs the question: Which option should investors choose, and at what time should these ETFs be implemented into their portfolio? In the following analysis, I will take a quick look at the holdings and relative stability of each equity to help investors determine how these investment product should be used. (click to enlarge) Table source: Author’s own work. Market Vectors Russia ETF Trust (click to enlarge) Source: Google Finance. Market Vectors Russia ETF Trust seeks to replicate as closely as possible the performance of the DAXglobal Russia Index (DXRPUS), a modified, market capitalization-weighted index consisting of publicly traded companies based in Russia. The product offers ideal exposure to the Russian market and should profit from an increase in the oil price as the economy sees a direct benefit from increased production. As previously stated, the oil and gas industries in Russia contribute 60% of the country’s export balance and make up 30% of the nation’s gross domestic product. With such an integral relationship between the commodity and economy, when comparing the ETF that follows the Russian economy, we can see that the decline in the price of oil has a significant effect on the performance of the equity. Therefore, for investors who would like to play oil volatility – or expect the price to recover to $100/barrel levels – the ETF should benefit greatly from the recovery and offer an easy way to profit from the recovery in the Russian economy, as output and trade increase relative to the price of oil. Looking at the respective ETF, the top three holdings are Magnit PJSC (8.14%), Surgutneftegas OJSC (7.89%), and LUKOIL PJSC (7.67%). Magnit is the leading food chain retailer in Russia with 10,728 stores as of June 30, 2015. The retailer’s infrastructure offers the company an expansive reach across the country. Twenty-nine specialized distribution centers allow the company to deliver to customers on a daily basis. Looking at the past year, the 30.3% increase in revenue signals how strong the company is in a recessionary environment. The company has shown incredible strength in the face of the recession, due to over 90% of products coming from domestic players — a strategy that protects the company from dangerous currency fluctuations seen in the past year. Currency translations have been a barrier that has limited the growth of many Russian-based multinationals. The fall of the Ruble, the nation’s currency, is primarily due to the drop in confidence related to the price of oil in addition to the fall in exports as sanctions continue to hit major trading partners. Surgutneftegas is an oil and gas producer with one of the largest refineries in Russia, Kirishinefteorgsintez. The company has not performed well in the last year, with net income declining by 3.93% as the price of oil continues to hit Russian producers hard. With costs declining, the company should be safe in the short to medium term, as the refinery business supports revenue. However, the price of oil needs to recover, as the company produces oil at around $60/barrel, an unprofitable level in the short term. Oil company LUKOIL is one of the largest oil and gas vertically integrated companies with the firm accounting for over 2% of global crude production and approximately 1% of proved global reserves. In the oil sector, the company is a behemoth, and should do incredibly well in the long term as it continues to monetize its large proved reserves throughout Russia. Looking at the domestic market, the company accounts for 16.4% of Russian crude production, while also contributing over 15.7% to total refined crude oil in the country. Unfortunately, with the decline in the price of oil and additional sanctions from several international economies, LUKOIL has been among the most affected, with revenues declining by 31% which translated to a 59% decrease in net income. In the current market, the company has attempted to hunker down and survive the downturn through reducing costs by 19% and increasing production by 5.2% to utilize well efficiency in the short term. While reserve efficiency and hedging strategies will protect the company temporarily, it is essential for the price of oil to recover in order to support enterprise profitability. Overall the company has not done well in the short term, and funds like RSX will need to wait a long time to recover capital losses. Looking at the Market Vector Russia ETF Trust, the equity offers an ideal way to play the Russian market with exposure to numerous large industry players. In my opinion, the company’s high exposure to Magnit will help the equity in the down-turn as the company is quite recession-proof from an earnings perspective. On the other hand, Surgutneftegas and LUKOIL offer exposure to the nation’s oil and gas industry which has underperformed. Anyone who is considering purchasing this ETF should be aware that the performance of oil is very important to show any strength, due to RSX’s 42.73% exposure to the energy industry. SPDR S&P Russia ETF (click to enlarge) Sourced: Google Finance. SPDR S&P Russia ETF seeks to provide investment results that correspond generally to the price and yield performance of the S&P Russia Capped BMI Index. The Index is a float-adjusted market cap index designed to define and measure the investable universe of publicly traded companies based in Russia. The Index component securities are a subset, based on region, of component securities included in the S&P Global BMI Equity Index. The ETF has declined by 34.39% YOY, primarily due to its high exposure to the energy market (49.39%), as the price of oil and gas have consistently underperformed in the past year. Looking at the ETF’s top three holdings, Public Joint-Stock Company Gazprom (15.44%), Oil company LUKOIL PJSC (13.41%), and Sberbank Russia OJSC (7.41%) make up the top exposure to the Russian economy. Looking at the ETF’s exposure from a sector-specific perspective, Energy (49.39%), Basic Materials (14.37%), and Financials (12.09%) make up majority of the fund. With such high exposure to the price of oil and the related positions of the fund’s portfolio, large amounts of capital has left the fund as its current market cap of $24.44 million USD signals the illiquid environment the product is facing. Compared to the Market Vector ETF, which has over $1.72 billion USD in the fund, the SPDR S&P Russia has been badly bruised in the current Russian downturn. While the fund will recover, the timeline is unknown at the moment, and I would use the current environment as a case to judge the strength of the fund. Significant money flows out of the SPDR ETF has shown that investors do not favor the equity as their first choice to gain exposure to the nation. Therefore, while I am sure that as oil prices recover in the following 3 years, liquidity will be injected into the fund and help fuel returns, the current downturn has illustrated how weak the fund is compared to other available options on the market. When investing in an ETF, the liquidity and size of the fund is extremely important to protect holdings. In addition, the fees that investors pay on a smaller fund versus a larger fund results in compensation for the portfolio manager to be higher, which attracts more experienced and successful investors. Looking at the price movement of the fund, the product has seen more volatility due to the fact that liquidity is much lower and any institutional buyers will move the price much more. Thus, I recommend that investors look for another option to gain exposure to the Russian market as this ETF has been severely weakened by the current downturn in the market and does not provide an option to avoid market volatility. iShares MSCI Russia Capped ETF (click to enlarge) Source: Google Finance. iShares MSCI Russia Capped ETF is a much newer product available for investors as it was released in early January of 2015. The equity was introduced in order for investors to play the Russian decline as the Ruble, the nation’s currency, continued to fall on the FX markets. As economic output declined and prices continued to drop in regards to the decline in oil, the ETF has taken a position in major industry players at fundamentally undervalued price points. For this reason when looking at the equity’s exposure from a sector perspective, the top three sectors are: Energy (53.75%), Basic Materials (14.28%), and Financials (14.01%). Looking at the overall objective and investment strategy, with a relatively stable fund size of $208.43 million USD, the equity has taken large positions in undervalued sector leaders in order to take advantage of the current downturn in Russia. Looking at the overall performance of the equity, the iShares MSCI Russia Capped ETF is the only one in its product class that has shown positive returns; YOY, the equity has increased by 8.88%. Looking at the ETF’s portfolio, the top three holdings are public joint-stock company Gazprom (17.50%), oil company LUKOIL PJSC (12.74%), and Magnit PJSC (7.42%). Magnit and LUKOIL were previously covered, so I will skip over these two companies and focus on the ETF’s top holding, Gazprom. The public joint-stock company is a globally recognized energy player with major business lines in exploration, production, transportation, storage processing, and sales of gas, oil, heat and electric power. The company holds the world’s largest natural gas reserves in addition to being the largest producer and exporter of liquefied natural gas in Russia. With such a strong position, the company’s domestic market share has reached 72% in the last year while global market share in the natural gas sector was around 12%. The size of the company illustrates the sheer strength and presence it has on the global natural gas sector, with reserves estimated at 36 trillion cubic meters, while oil and condensate reserves reached 3.3 billion tons. In addition to strong reserves, the company has the world’s largest gas transmission system capable of sending production over 170,000 kilometers. The strength of this network was seen in early 2015 when Ukraine were unable to pay Gazprom for its natural gas due to its limited cash reserves . The country and majority of Eastern Europe have become dependent on the company’s production which provides an ideal market position for Gazprom as operations continue to expand in the oil and natural gas sector. Looking at the YOY performance of the company, while sales have declined by 2%, the increased profitability of the company’s pipeline network in addition to positive currency translation as volumes in Europe increased resulted in a 29% jump in net income. In addition, the company has been focused on reducing its leverage in the past year as net debt has declined by 12% due to natural gas and oil operations continuing to expand. I believe that both Gazprom and LUKOIL will do well in the long run, as the fundamental stability of their proved reserves and established network across Eastern Europe should help the companies. For this reason ,when looking at the iShares MSCI Russia Capped ETF, I am confident that the current downturn will be beneficial for the new product, as positions have been opened at the bottom of the down cycle and should help the fund increase as the recovery begins. Looking at the overall ETF, while the 53.75% exposure to the energy sector remains quite worrisome in the current market, due to the product coming onto the market at the bottom of the investment cycle, I am confident that these new positions in major oil and gas leaders should increase profitability in the medium term. In Conclusion (click to enlarge) Source: Author’s own work. After analyzing these investment holdings and determining how each ETF could be used in an investment strategy, I would like to provide a final comparison in order to help first time investors choose the safest investment product. In the current market, the recent decline in the price of oil has rocked the Russian economy and increased recessionary pressures in a nation that produces over 30% of GDP from the oil industry. When approaching a nation like Russia, having a defensive strategy is extremely important in order to ensure that holdings can survive a volatile downturn like the one seen in the past year. The investment approach should not be shaped in avoiding a loss but rather surviving one. Compared to many other emerging markets, Russia has leveraged itself to the commodity trade greatly and this leads to a cyclical investment experience where long-term investors will add to positions in the downturn and profit off any increases in the price of oil or gas. Looking at the longer-term projection for oil, the following decade should see a recovery to the $100/barrel as demand should continue to increase in the long-term. The question investors should ask themselves is not if there will be a recovery, but when . Therefore, with that mentality, when selecting a Russian ETF, keeping in mind the longevity and downside protection of major positions in the fund is essential to choosing the right product. Taking a look at the overall performance in the past 6 months, all products performed relatively the same, with returns in the 4% to 6% decline range. Thus, investors should not base their assumptions on the short-term performance of each product. The products have been designed to diversify holdings while reducing risk against volatility through the timing of established positions, an investment goal that is achieved in the long term. (click to enlarge) Source: Author’s own work. After taking into account the short-term performance of all three products, and understanding the overall investment strategy adopted by these ETFs, I believe that the iShares MSCI Russia Capped ETF New offers the best opportunity for investors to gain exposure to the Russian market in the long-term. While the other products have been available to the market for a longer period of time, and have allowed investors to better judge their historical performance, the timing of the iShares product means that majority of the positions initiated in the fund have been at the bottom of the downturn. With the price of oil continuing to decline into the New Year, the start of 2015 marked one of the lowest points in the past four years in regards to the price of oil. This decline had triggered the collapse of the Ruble and eventual recession in the Russian economy as the equity and FX markets saw large outflows of money. That said, the iShares product came onto the market at this exact time, and looking at the type of holdings in the product’s portfolio, the ETF has over 53.75% exposure to the energy sector through beaten-down industry leaders. I expect that in the following decade, as the price recovers, while all three products have holdings in these major industry players, due to iShares’s timing on the market, I expect the recovery to be much more profitable for the product and its investors. Overall, while my suggestion may provide the safest and most profitable option among the three products listed, the current market is a time to build holdings in an emerging market portfolio. Whether a Russian ETF product is the way to go depends on the investor and his/her risk tolerance. In my opinion, with the political and economic uncertainty, implementing a Russian ETF into your investment strategy is a very tactical decision that ensures protection against further volatility in the market while also profiting from increased money flow.