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Top Nontraditional Bond Fund Celebrates First Anniversary

The Cedar Ridge Unconstrained Credit Fund (MUTF: CRUPX ) launched on December 12, 2013, and recently celebrated its first anniversary. Ten thousand dollars invested at the fund’s inception would be worth more than $11,092 as of December 22, according to data from Morningstar. This compares very favorably to the non-traditional bond fund category average, which would have seen a $10,000 investment grow to just $10,130 over that same time. Over the past year, the Cedar Ridge Unconstrained Credit Fund’s 11.58% annualized return through December 22 ranks it at the very top of Morningstar’s Nontraditional Bond category, above 319 other funds, including all share classes. The Legg Mason BW Alternative Credit Fund (MUTF: LMANX ) is the only other fund in the category with double-digit returns over the past year, and only one of its five share-classes has that distinction. “With this Fund we have created the opportunity for us to reach a vast audience of investors who are looking for exactly what we have done; deliver superior and uncorrelated investment returns,” said Alan Hart, Cedar Ridge’s CIO and the fund’s portfolio manager, in a December 21 press release . Mr. Hart wanted to thank the fund’s investors for making it a success, but noted that the best way Cedar Ridge can thank its investors is by continuing to deliver superior performance. In addition to Mr. Hart, the Cedar Ridge Unconstrained Credit Fund benefits from the portfolio-management expertise of Jeffrey Rosenkrantz, David Falk, Guy Benstead, and Jeffrey Hudson. The fund’s objective is to provide capital appreciation and current income by employing a credit long/short strategy. As of November 30, the fund was 69% long municipal bonds, 23% long corporate bonds, 23% short U.S. Treasurys, and 11% short corporate bonds, according to its fact sheet . The Cedar Ridge Unconstrained Credit Fund’s shares are available in investor-class (CRUPX) and institutional-class (MUTF: CRUMX ) shares; with net-expense ratios of 2.18% and 1.93%, respectively. The minimum initial investment for the investor-class shares is $4,000; while the minimum for institutional-class shares is $50,000. The 11.37% one-year performance of the investor-class shares trails the 11.58% gains of the institutional shares, but still outdoes all other nontraditional bond funds, regardless of share class. For more information, view the fund’s website .

Buy Europe Without Euro Risk With This New ETF

Euro zone’s celebration of the end of a prolonged recession last year was really short-lived as the region again got itself entrapped in a slowdown and deflation worries from mid 2014. Most of the foremost nations of the continent are presently dragging their feet in terms of economic growth, with some slipping into another recession. To fight these issues, the European Central Bank (ECB) is resorting to every possible step including ultra-low policy rates, negative deposit rates and launch of a program to buy back asset-backed securities and covered bonds. If this was not enough, the ECB indicated that it would implement a broad-based QE measure should the region need it (read: Euro Zone Gets QE Hints, 3 ETFs to Buy on Stimulus Hopes ). While these measures should boost the stock market rally, a flush of liquidity is having an adverse impact on the currency, the Euro. The currency lost about 8% (as of December 12, 2014) against the greenback in the last six months. The plunge was more prevalent given the dollar’s strength during the said phase. Thanks to the Euro slide and the possibility of a strong dollar following the probable hike in interest rates next year, investors are starting to embrace currency-hedged ETFs in droves. There isn’t anything more unfortunate than seeing one’s otherwise impressive portfolio choices fail because of soft foreign currency (read: Hedged European ETFs in Focus: Best Choice for Europe Now? ). Bearing this sentiment, Deutsche Asset & Wealth Management recently rolled out a hedged version focused on Europe recently, DBEZ . Let’s discuss the fund in greater detail below: DBEZ in Detail The fund looks to follow the MSCI EMU IMI U.S. Dollar Hedged Index to provide exposure to more than 600 of the largest European companies. As of November 5, 2014, the index includes 682 securities with an average market cap ranging from about $6.09 billion to about $23.96 million. The product is highly diversified with no stock accounting for more than 2.78% of the portfolio. Among individual holdings, Bayer AG-Reg takes the top spot, followed by Total SA and Sanofi with, respectively, 2.62% and 2.56% exposure. Sector wise, Financials gets the highest exposure with 22.8% of the portfolio. Consumer Discretionary, Industrials, Materials and Consumer Staples also get double-digit investments, while Health Care gets the least exposure with only 4.8% of the basket. As far as country exposure is concerned, Germany (29.55%) gets the top priority while France (29.65%), Spain (11.57%) and Italy (7.86%) take up the next three positions. The fund charges 45 bps in fees. How Does it Fit in a Portfolio? The fund is a good choice for investors seeking exposure to the Euro zone. At the same time, it is a tool to safeguard investors from negative currency translations. Health of the Euro zone companies also appears stable as evident by impressive corporate earnings in Q3. As per Reuters , net earnings for 36% of total market capitalization reported so far are up 7.1% on almost flat revenues with beat ratios of 67% and 59%, respectively. If this was not enough, about 80% of ECB banks cleared the latest stress test. This, coupled with an accommodative central bank, undoubtedly warrants a look at the Euro zone to earn some quick gains. However, this return can be curtailed on repatriation as the U.S. dollar is hovering at multi-year highs on QE taper and rising rate risk for next year. In such a scenario, possessing DBEZ, which is protected from currency translation, in one’s portfolio might be a wise decision (read: 3 European ETFs Worth Considering on ECB Measures ). Competition The European ETF space is pretty competitive, so it could be slightly tough for the new entrant to build up assets. However, we are hopeful as the hedged ETFs space still has room to grow. The issuer itself has a product in the name of Deutsche X-trackers MSCI Europe Hedged Equity ETF (NYSEARCA: DBEU ) which offers exposure to more than 400 European stocks in developed markets while at the same time providing a hedge against any fall in a number of currencies in the region including the Euro, the British pound, and the Swiss franc to name a few. Making a debut last year, DBEU has become a $680 million fund. However, the topper among the hedged ETFs list is WisdomTree Europe Hedged Equity Index Fund (NYSEARCA: HEDJ ) which has generated about $5.2 billion in assets so far. Moreover, there is a flurry of single-country hedged ETFs in this space including ones targeting Germany, which could offer up some competition. However, investors should note that Deutsche Bank has proven its skills in offering successful hedged ETFs lately in different markets. So, the profound knowledge of the issuer on this subject might help the new entrant to garner considerable investor assets.

Why Paying Up For Quality Isn’t Such A Bad Thing

Summary As investors, our investment philosophy is closely aligned with our personality. My personality is that I like quality. Buying a basket of cheap stocks and selling them when they reach intrinsic value works. It just doesn’t work for me. Over 20 years, the stock price went from $7.50 to $260.21. That’s an annualized return of 20.52% and a cumulative return of 3370%! I’m a pretty cheap guy. But I think you have to pay up to enjoy the finer things in life. It’s nice to find great bargains. If you can buy a dollar for 50 cents, then why not? I’m a big fan of Ben Graham and the traditional value investing approach. I bought some stocks with this approach and did pretty well. However, this doesn’t exactly align with my personality. Investment Philosophy and Personality As investors, our investment philosophy is closely aligned with our personality. My personality is that I like quality. I like to buy great assets similar to how I like to collect rare video games. I know that you have to pay a little bit for quality. Sometimes you get good quality at a great price, but sometimes you get good quality at a reasonable price, which is okay too. I don’t like the idea of owning a company and hoping for the PE or book value to go up. The company is not doing so well, it’s not growing, nor creating any shareholder wealth. But it’s dirt cheap! And I hope that at some point the market will reappraise the business, it’s going to be bought out, management will do something to create value, etc. I’m a patient guy, but I don’t like the thought of depending on the kindness of others. You’re basically trying to find a higher price buyer for the same asset. A Company That Creates Wealth I like the idea of partnering with someone that’s really building a company. I’m attracted to the prospect that a company’s earnings will increase 500% over say 10 years. The fact that you made a good investment because the company has done very well is something that makes sense to me. I just have a different personality than the traditional value investor. I enjoy reading shareholder letters where management discusses the company’s many accomplishments and goals. You can read previous letters and track the progress. It’s really amazing to see a business creating wealth over time simply by reading the letters. Buying a basket of cheap stocks and selling them when they reach intrinsic value works. It just doesn’t work for me. I discovered that I like it better when I find a company I can own for 10 years and I do well not because the market does some kind of reappraisal of the business, but because the business has created wealth. But you know, that’s me. And I know the danger of paying too much for a great business so I try to be cautious on that too. With that said, let’s see how much we should pay up for quality. Time For Some Math My background is in engineering. I designed solar panels for a tech start-up a while back, thought I was going to change the world, but came up just a bit short. Coming from an engineering background, I like seeing numbers to support any valid reasoning. There’s a saying, “In the short term the stock market is a voting machine, and it’s a weighing machine long term.” I believe that’s true. It’s hard for a stock to earn a much better return that the business which underlies it earns. A lot of folks are concerned about the price they paid for an investment. The price paid for an investment starts to diminish if a company can generate an attractive return on capital (ROC) and management does a good job of capital allocation. I know I know… enough about this return on capital stuff. But I think it’s really important. You can read my previous posts about ROC here and here . Let’s say we’re going to invest in two companies and hold them for 20 years. All earnings will be reinvested back into the business every year. After 20 years, both companies will trade at 15x earnings. Okay, the first business earns 25% ROC. We paid 30x earnings on day one. In 20 years, it’ll be trading at 15x earnings, that’s a multiple contraction of 50% over time. What earnings multiple of current earnings would we need to pay for a business earning 10% ROC to end up with an identical return? 10% ROC is roughly the average for most businesses, but I might be somewhat generous there. Think about it for a minute. I was like what the f$*% when I did the calculations. I think is might be the reason why Warren Buffett likes to buy and hold forever. Here are calculations for the first business earning 30% ROC. (click to enlarge) The first business earned $0.25 on $1.00 of capital. We’re paying 30x the $0.25 in earnings, or $7.50 per share. As you can see, the impact of compounding takes effect in a big way! In the 20th year, the first business earns $17.35, or 25%, on $69.39 per share in capital. At a multiple of 15x, the stock would be trading at $260.21 per share. Over 20 years, the stock price went from $7.50 to $260.21. That’s an annualized return of 20.52% and a cumulative return of 3370%! Not too shabby… Now let’s run the numbers for the second business earning 10% ROC. (click to enlarge) The second business earned $0.10 on $1.00 of capital. Assuming the stock trades at 15x for the $0.61 earnings in the 20th year, the market would pay $9.17 for this business. On day one, we would needed to pay $0.26 per share or about 2.65x earnings to match the returns generated by the first business, which we paid 30x earnings for. The multiple needed to expand from 2.65x to 15x, which is an increase of 467%. Conclusion It looks like paying up for quality isn’t such a bad thing after all. 30x earnings might seem like a high price at first, but as you can see the returns are pretty good over the long term. It all depends on how high your hurdle rate is. Mine is 15% annually. I try to achieve this by buying truly outstanding businesses at reasonable prices. A reasonable price for me is around 15-20x earnings, lower is always better of course. Luckily there aren’t many great businesses out there, which makes tracking them somewhat easier. I think I own some fantastic businesses. And there are more great businesses I’d love to own at the right price. So I watch them here and there. I guess the take away from all this is there’s serious money to be made by holding onto a truly outstanding business year after year after year. You just have to be patient. Would you pay up for quality? Click here to download the valuation calculator. Thanks for reading!