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HEDJ Seeks To Provide EU Exposure While Hedged, Will It Continue To Outperform?

Summary With over $5 billion in assets, can it withstand the headwinds of a stronger dollar? With major firms that export from Europe in this ETF, is it a good place to invest as a hedged vehicle in 2015? We answer these questions and analyze one of the largest hedged Euro ETFs in the marketplace. The WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ) is a $5.5 billion fund that seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Europe Hedged Equity Index, with a symbol of (WTEHIP). According to WisdomTree, The underlying Index and Fund are designed to have higher returns than an equivalent non-currency hedged investment when the value of the U.S. dollar is increasing relative to the value of the euro, and lower returns when the U.S. dollar declines against the euro. The Fund will invest in stocks of European companies with significant revenue from exports. In terms of the criteria to determine what is significant revenue from exports, we reviewed the index selection process from WisdomTree. According to WisdomTree, the universe is composed of the largest-dividend paying companies from the WisdomTree DEFA Index (broad developed world ex-U.S.) that are traded in euros, with a minimum capitalization of $1 billion and at least 50% of revenues derived from outside Europe. The fund hedges its currency exposure by entering into one-month forward contracts and rebalancing at month-end. What we find very attractive is the revenue being derived elsewhere in the world for these euro region based firms and a hedge that is rebalanced every month. Currently, the fund has 126 holdings, plus 23 (22 short and 1 long) currency contracts, while the index has 129 holdings. In order to properly analyze this ETF, we analyzed the market cap of the components, style breakdown, the various country exposures, sector and industries, and credit risks. The market cap of the components is quite simplistic and represents the export nature of the companies in the ETF. HEDJ Market Capitalization Market Cap Weight Large 83.50% Mid 11.60% Small 4.100% Micro 0.80% The market cap is indicative of large export driven companies and would be a natural fit for an ETF of this magnitude. As we mentioned in our recent article on the SPDR Dow Jones REIT ETF (NYSEARCA: RWR ), Morningstar uses a slightly different weighting for their categories and breaks this ETF down as follows: Giant 59.11%, Large 29.34%, Medium 10.46%, and Small at 1.09%. It is interesting that there is over 11% in mid-cap firms that can fulfill the minimum capitalization and export requirement of the index and fund. In terms of style characteristics of the portfolio, it is also a rather simple breakdown as follows: HEDJ Style Style Weight Growth 44.60% Value 33.80% Blend 19.60% As noted, many of the large companies in the portfolio continue to have growth characteristics in spite of the sluggish and recessionary growth in the euro region. Combining them with the large value companies in the ETF, along with blended firms, produces an attractive style mix for this ETF. In terms of the currency exposure, it is 100% euro with no U.K. pound sterling or other eurozone currencies. One of our websites we use for data, xtf.com states that is it is 100% U.S. dollar and does not factor in any currency exposure. We will discuss this later in our analysis. In terms of the country exposure, it has quite an interesting mix as follows: HEDJ Country Exposure Country Weight Germany 25.82% France 25.41% Spain 18.71% Netherlands 9.21% Belgium 8.54% United Kingdom 5.54% Italy 1.11% Luxembourg 0.81% Austria 0.74% Switzerland 0.60% Portugal 0.34% United States 0.09% Ireland 0.08% With over 50% in Germany and France alone, and almost 19% in Spain, it is readily apparent that large manufacturers and well-known exporters are prevalent in the ETF. We will examine these holdings shortly. It is interesting, but not unexpected that there is little or no exposure to Eastern Europe or to extremely fragile economies such as Greece or Portugal. It is obvious that there is a dearth of companies in those countries that would qualify for the index and the ETF. In any event, it is euro denominated and hedged to mitigate exposure of a weakening euro/strengthening dollar. In terms of the sector exposure, we found it as expected, but informative. For information purposes here is the sector breakdown: HEDJ Sectors Sector Weight Consumer Staples 22.88% Industrials 18.42% Consumer Discretionary 17.89% Financials 12.13% Health Care 10.89% Telecommunication Services 5.84% Materials 5.59% Information Technology 4.82% Utilities 2.35% Energy 0.95% The sectors as noted, with over 71% in the top four indicates a strong consumer focus, along with industrials and financials. The luxury brands, European autos, and other consumer brands have maintained and grown significantly over the past five years thanks to the Asian and greater China region. Sales are expected to slow slightly, but remain strong into 2015. Financials will maintain their market share in spite of the numerous regulatory and legal issues over the past few years. Though not considered a diversified ETF, the remaining sectors are a welcome addition to the larger sector weights. In terms of the industry breakdown within the sector, we decided to analyze further the overall industry breakdown. For information purposes here is HEDJ’s industry breakdown: HEDJ Industry Exposure Industry Sector Weight Industry Sector Cont’d Weight Banks 9.66% Auto Components 1.23% Beverages 9.43% Health Care Providers & Services 0.95% Pharmaceuticals 9.35% Commercial Services & Suppliers 0.88% Automobiles 7.49% Construction Materials 0.82% Food Products 6.92% Energy Equipment & Services 0.62% Industrial Conglomerates 6.35% Household Products 0.55% Textiles,Apparel & Luxury Goods 6.20% Hotels, Restaurants & Leisure 0.52% Diversified Telecommunication Services 5.84% Health Care Equipment & Supplies 0.47% Chemicals 4.18% Metals & Mining 0.43% Machinery 3.57% Professional Services 0.41% Personal Products 3.19% Oil, Gas & Consumable Fuels 0.33% Food & Staples Retailing 2.79% Trading Companies & Distributors 0.24% Software 2.68% Containers & Packaging 0.16% Electrical Equipment 2.50% Leisure Products 0.14% Insurance 2.39% Gas Utilities 0.13% Aerospace & Defense 2.36% Biotechnology 0.12% Multi-Utilities 2.22% Household Durables 0.11% Media 2.20% Technology Hardware, Storage & Peripherals 0.11% Construction & Engineering 2.11% Electronic Equipment Instruments & Components 0.11% Semiconductors & Semiconductor Equipment 1.92% Thifts & Mortgage Finance 0.08% As noted above in our comments on sectors, the industry breakdown provides a clearer picture of the overall holdings. As we mentioned, in spite of the large broad base of industries here, this is not a diversified ETF. It does have a broad range of constituents in various industries that export products worldwide. The breakdown, unfortunately, would be considered too narrow in scope to be considered a “properly diversified” ETF. In any event, we do consider this “mix” of industries attractive for both institutional and retail investors. Before we review the all-important fees and returns, we analyzed the top 15 holdings. For information purposes here are the top 15 holdings, their underlying symbol, credit ratings and fund and index weight. Security Name Symbol Credit Ratings Fund/Index Weights Anheuser-Busch InBev NV BUD A2/A 6.67326%/6.68% Telefonica SA TEF Baa2/BBB 5.70949%/5.68% Banco Santander SA SAN Baa1/BBB+ 4.90776%/5.54% Banco Bilbao Vizcaya Argentaria SA BBVA Baa2/BBB 4.53209%/4.20% Unilever NV UN A1/A+ 4.50265%/4.57% Daimler AG OTCPK:DDAIY A3/A- 4.46096%/4.40% Sanofi-Aventis SA SNY A1/AA 4.25258%/4.33% Siemens AG OTCPK:SIEGY Aa3 /A+ 4.24605%/4.17% Bayer AG OTCPK:BAYRY A3/A- 3.46796%/3.49% L’Oreal SA OTCPK:LRLCY P1/A1+ 3.11318%/3.12% Bayerische Motoren Werke AG OTCPK:BAMXY A2/A+ 2.90227%/NA LVMH Moet Hennessy Louis Vuitton OTCPK:LVMUY NA/A+ 2.77273%/NA SAP AG SAP A2/A 2.29128%/NA E.ON SE OTCQX:EONGY A3/A- 2.17989%/NA Koninklijke Philips Electronic PHG A3/A- 1.97202%/NA The top 15 companies represent 57.984% of the ETF, while the remaining 111 constituents represent 42.015%. This is a very large concentration as compared to other ETFs we have analyzed. It is informative and indicates the large concentration of these major firms in the top 15. We are very comfortable with these major consumer and “household” names. With beverages, pharmaceutical, luxury brands, autos, cosmetics, etc., we have no issues whatsoever with this concentration. It is also indicative of the large institutional ownership of this ETF. We researched the credit ratings of the top 15 simply to verify what we surmised. That hypothesis was that the companies listed have strong balance sheets and have weathered the recession in Europe and the EU zone relatively unscathed thanks to their large export driven business model. It should be noted, that though the EU zone and Europe in general has sluggish growth (to put it mildly), there are consumers and businesses that are currently and continually purchasing, though at a significant reduced manner. One other note, the index components obviously don’t match exactly with the fund, represented in a current tracking error of .54%. We will touch upon the EU exposure, and a few opinions from others for 2015 shortly. Expenses, Returns and Recommendation Category HEDJ WTEHIP{Index} Expense Ratio .58% – Turnover Ratio (03/31/14) 28.00% – Distribution Yield Annual Dividend Yield 16.90% 2.17% 2.57% SEC 30 Day Yield 0.93{fund} 2.44%{Fidelity} – YTD Return(12/26/14)/(11/30/14) 2.89%/7.53% 3.12%/7.93% (estimates) 12 Month Return 3.81% 11.56% Share Beta/Holdings Beta .93/.60 .68 (compared to the MSCI EAFE index) With an inception date of December 31, 2009, the fund has an attractive track record since inception. Its expenses of .58% are near an industry average of .42%. WisdomTree states their returns as average annual since inception as well, which is 9.75% over the last year. We had a little difficulty in verifying the performance of the shares. After analyzing the numbers ourselves, we concurred with the figures provided by Morningstar and their analysis. In terms of the confusing dividend returns, as a quarterly dividend payer, the fund recently paid a distribution on December 26. This distribution included ordinary income and year-end short-term capital gains, along with long-term capital gains. This “bumped” the returns, hence the higher number reported by fidelity.com under the category of SEC 30-day yield. The distribution yield quoted by the fund takes into consideration the recent distribution paid by the fund. The difference in returns by the fund and the index are simply from the tracking errors, and overall structure of the fund and its slight hedging “haircut” that trims its returns. What is interesting to note is that net inflows over the past month have totaled over $1.37 billion, and short interest has declined 70.25%, which technically indicates a significant rally is pending. This is in spite of the ETF trading at a 1.01% premium to its NAV. What many institutional investors and economists are seeking is an ECB quantitative easing in 2015. Many have called for the ECB to move swiftly at their policy making meeting in January, especially with a deeper crises in Russia. With eurozone inflation running as low as 0.3%, there is concern of negative inflation persisting. We concur with noted columnists and economists who are calling for this easing. As such, HEDJ is poised for significant returns in 2015 as the large cap companies with strong balance sheets and established models will continue to flourish. Though we would not be surprised at the ECB waiting further before taking significant action, we do expect this ETF to outperform and continue to lead other hedged European ETFs. As such, we recommend a buy on this category leading ETF into 2015 and beyond. Additional disclosure: Data and additional information from wisdomtree.com, xtf.com,etfdb.com, morningstar.com, fidelity.com, moodys.com, standardandpoors.com, tdwaterhouse.ca, scmp.com, and our own analyis.

Parkit Enterprise Inc.: Pay Discount On Parking Assets, Get Asset Management With Significant Multi-Bagger Potential For Free

Summary Parkit is a rare opportunity to own a start-up asset manager that is likely to raise significant capital in 2015 to execute on their strategy. Parkit and ProPark combine to create a competitive advantage and have a track record of success which shall help raise capital. Management is extremely bullish and CEO has been buying on the open market extremely consistently at prices higher than today. Shares trade at a significant discount to NAV and investors get the asset management business for free. We see multi bagger potential. (Note: Parkit is also traded on the Canadian TSX Venture Exchange under the ticker PKT.V. Volume on the Canadian exchange is greater than on the OTCQB shares.) We are continuously looking for a business with quality economics run by incentivized managers and where the market is getting the risk/reward ratio very wrong. Strong downside protection is absolutely paramount as the upside will take care of itself with upcoming catalysts. To find such an opportunity in a frothy market such as today one must be willing to search through some obscure places. For 2015, we will be closely following a small parking garage owner based in Canada called Parkit Enterprise Inc. (OTCQX: PKTEF ). The company owns equity in two US off-airport parking garages and has been working on transitioning to becoming a fund manager that aggregates high quality income producing parking assets via a private equity platform. We think the market is serving up a very attractive opportunity as it is extremely rare for the investing public to have the ability to invest in an emerging asset manager. Most often those opportunities are only available to employees or private equity investors. Even rarer is that Parkit already has a track record, has operating assets and is cash flow positive. Currently trading at a discount to NAV on the company’s current owned parking assets, we think the low US$0.40s (mid CAD $0.40s) is a very cheap price to pay for Parkit and does not at all account for the upside potential as a fund manager of quality parking lots. We will be watching Parkit very closely as capital is raised for their first fund over the next few quarters. Management has significantly raised their guidance on funds they will be able to raise and if properly executed, this company is worth many multiples today’s price. History and Fund Manager A Long Time Coming In years past, Parkit was originally called Greenspace and previous management before 2012 did not have a coherent strategy. They helped greenfield the construction of the Canopy parking garage located right outside Denver International airport (completed in 2010), but they ran a bloated cost structure which ultimately almost led to the company going broke even as Canopy performed well. To help transition the company into a leading parking industry company, they brought on Rick Baxter as CEO, some other talented managers and a board of directors with the private equity experience to turn the ship around and execute on an asset manager strategy. Since 2012 when management changes occurred, the company has paid down debt, set the platform for the company’s new fund management strategy and did this while management did not pay themselves for a year and a half. Management decided to take the compensation that accrued to them and roll that over as equity into the company. Unwarranted Recent Price Dive You would expect the market to be reacting positively to Parkit’s turnaround and future prospects, which it did to some degree in April after the announcement of the Expresso acquisition; however, shares have been falling from a high of $0.70 in both the Canadian and US listed shares since October. We think that the market is overreacting to the combination of the oil sell off and the recent resignation of John LaGourgue, VP of Corporate Communications, who was extremely bullish on the company’s long-term prospects. We think that the oil price drop does not change the investment thesis and actually could increase drivers’ interest to travel and park in parking lots. Also, LaGourgue left for personal reasons and as a sign of interest in the company’s long-term prospects he continues to keep 85-90% of the shares and options in Parkit. Keep in mind, many of his shares were purchased on the open market and that he likely sold some shares to diversify his investments. Business Current And Going Forward (click to enlarge) (Source: Parkit Presentation) Parkit has been operating in the past and currently under the model to the left. Parkit owns an equity stake in the Canopy and Expresso garages alongside ProPark America and a few other outside investors. Parkit does not operate these assets, ProPark America provides those services as that is within their circle of competence. Previously Parkit did not bring too much to the relationship other than the capital to invest into Canopy, but that is changing drastically as the new strategy emerges. Parkit’s new strategy is to, to put it simply, set up and run a parking garage private equity fund not too different from an asset manager in structure. As seen in the chart above and to the right, Parkit has already set up a fund with ProPark to act as a platform to raise institutional money to then be used to aggregate parking assets that both Parkit and ProPark manage. Parkit and ProPark both are General Partners (50:50 split) and will receive hedge fund like management fees (0.5-1% of AUM), acquisition fees ( Additional disclosure: This article is meant for instructional purposes and not meant as a recommendation to buy or sell. We are human and can be wrong, especially with our forecasts, so it is extremely important to do your own homework. The only kind of intelligent investing is through your own due diligence. We own both PKTEF and PKT.V.

More Pain In Store For Greek Equities As Syriza Party Holds Firm On Anti-Austerity

Summary The Syriza party seems poised to win the general election scheduled for January 25th. Party leader Alexis Tsipras will not back away from seeking relief in austerity measures previously accepted. Should the country seek to leave the euro currency, it may be made an example for others that might follow. Expect to see the Global X FTSE Greek 20 ETF shares succumb to further pressure. In May of 2010, Greece accepted a bailout package. Then Finance Minister George Papaconstantinou described the deal as including, “tough austerity measures.” The Greek people understood why the deal had to be done, though. The country was on the precipice of Armageddon, with many bankers using the phrase “difficult but necessary.” Mr. Papaconstantinou would go on to say that Greece had a choice between destruction or saving the country and that, “we have chosen of course to save the country.” Today, the same warnings are being launched from all directions. Only this time, the people aren’t listening. Or, if they are, no longer believe them. The Greeks can now vote from experience, having lived for nearly five years with the austerity measures that Syriza, the political party currently leading in the polls, vehemently opposes. For them, more than enough time to discover they don’t care much for the taste of austerity; so much so that the country appears to be ready to explore what life is like outside of the euro. And if voters are anything like Anastasis Chrisopoulos, they probably don’t feel as if there is much to lose . When asked for his feelings on the original bailout, the 31-year-old Athens taxi driver said, “So what? Things will only get worse. We have reached a point where we’re trying to figure out how to survive just the next day, let alone the next 10 days, the next month, the next year.” But investors in Greek assets do have something at risk, and the market showed its disapproval of the country’s predicament by dropping the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) to within pennies of its 52-week low. If today’s -6.70% fall is an indication of future performance under a Syriza-led government, then prepare for more pain. Germany Says Austerity Is Working; The Greek People Disagree What we know is that, earlier today , the Greek parliament rejected Prime Minister Antonis Samaras’s nominee for president, and the country is now set to hold a general election on January 25th. Opinion polls point to victory for the Syriza party, which is set on eliminating the austerity terms accepted in exchange for a bailout package now valued near $300B. To hammer home this point, Syriza leader Alexis Tsipras said that , “In a few days the Samaras government, which pillaged the country, will belong to the past, as will the memoranda of austerity.” In response, German finance minister Wolfgang Schäuble indicated his position on the issue, stating that whoever assumed power must respect the agreements already in place and that, “the tough reforms are bearing fruit and there is no alternative to them.” To support this claim, the German’s can point to the fact that the Greek economy has returned to growth for the first time in six years, and that signs of a recovery are beginning to take hold. But the people will counter this argument not with numbers, but with experiences; their own experiences, which emphatically say that their lives have not improved during austerity’s reign. For all of the pain, unemployment for 3Q2014 came in at 25.5%, which is down from its peak of 28% in 2013 but almost twice as high as the number from 2010. (click to enlarge) More damning, though, is a statistic from the International Labor Organization that says the number of Greeks at risk of poverty has more than doubled in the last five years. The support for Syriza and frustration with austerity might be related to the lack of correlation with statistical growth and quality of living. What Does It All Mean I think the wheels are in motion and that Syriza will win the general election in January. While some believe Mr. Tsipras is only talking tough, I would disagree. He has softened his rhetoric a bit, but he and the party will not back away from demanding changes in austerity that are more than symbolic. However, the eurozone barely flinched at the news, which indicates that it may be quite comfortable with letting Greece forge its own path. For me, whether Greece is better or worse off in the euro over the long run is irrelevant to my investment thesis. I would be a seller of the Greece 20 ETF because I believe the shares will be pressured in the nearer term for a couple of reasons. For one, with the election of Syriza, there will be an extended period of uncertainly regardless of the path the country chooses. If Greece attempts to stay in the euro, it will have to meet the German’s somewhere further away than Mr. Tsipras’ current rhetoric places it. This negotiation would be intense and take some time. Conversely, if it decides to exit the euro, there will be an even longer period of uncertainty, with significantly more questions to answer. Secondly, and more importantly, Greece may be made an example for any other country thinking of following its path. There is talk that the fear in the eurozone isn’t of Greece leaving but rather that other countries may follow their lead. To alleviate this concern, game theory would suggest that interested parties attempt to make the transition difficult enough to give others pause. As cynical as this opinion may seem, I do believe it is a risk that must be accounted for. While it may seem tempting to buy Greek equities sitting at or near their 52-week lows, I would be a seller as I believe that uncertainly will persist through the January 25th elections, and the increasing risk of a euro exit will push shares further south.