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401(k) Fund Spotlight: Templeton Global Bond

Summary Lead manager Michael Hasenstab is a contrarian who is not afraid to take concentrated positions in securities where he has a high degree of conviction. Templeton Global Bond has outperformed 99% of its global bond peers over the last 10 years. The fund is wisely avoiding the most dangerous areas out there for global bond investors – sharply higher yields and sovereign debt of Japan, Western Europe, and Southern Europe. Background I select funds on behalf of my investment advisory clients in many different defined contribution plans , namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most of this article is important to understand my approach to investing in 401(k)s. Here are my key principles: 1. I do not buy ‘index hugging’ active funds if a similar index is available. Index hugging funds are those that are overly diversified and their performance never strays far from the index. Index funds almost always have a lower fee so I prefer to just own the index and let the fee savings provide a performance tailwind over time. Lastly, index hugging active funds are generally managed by people who don’t really know how to invest. This may sound harsh, but it is true. They are institutional herd products. 2. When buying actively managed funds, I look for those who are willing to go against the institutional herd and follow their own independent investment approach. I do not mind the higher fee if they have an established track record and it is not necessary that they always beat the index. Sometimes investment positions take a bit longer to pan out than investors would like to see on their quarterly statements. I take comfort in putting money with a manager(s) who is not afraid to stray from the herd. 3. I do not care what Morningstar says. Templeton Global Bond Fund Templeton Global Bond has five different share classes: A (MUTF: TPINX ), Advisor (MUTF: TGBAX ), C (MUTF: TEGBX ), R (MUTF: FGBRX ), and R6 (MUTF: FBNRX ). The class A shares are often found in 401(k)s with the load waived (i.e., no up front sales charge) and a net expense ratio of .90%. This is a reasonable fee given all that this fund offers. With $65 billion of assets it is one of the largest global bond funds out there (in fact, it was the largest in a screen I ran on Fidelity’s website). Templeton Global Bond is relatively free to roam in the bond world wherever it wants. The fund typically invests the majority of its assets in investment grade government bonds from anywhere in the world. It also regularly invests in various currency instruments and derivatives. The fund tends to focus on sovereign debt and not corporate debt. It may invest up to 25% of its assets in below investment grade debt and all of its assets in developing (or emerging) market debt. The fund’s lead manager, Michael Hasenstab, is well known within the investment industry, appearing regularly in publications such as Barrons . He has gained a reputation as a contrarian with a willingness to take concentrated positions on specific bonds that he has a high degree of conviction in. This has generally worked out well, except for a large position in Ukraine government debt that has cost the fund several billion dollars. (About 2% of the fund is currently invested in Ukraine.) In a January 2013 interview with the Financial Times , he warned that it was time to get out of “safe” government debt. His call was right on. The 10-Year Treasury Yield subsequently soared a few months later during the so-called “taper tantrum,” as shown on the following chart (note: bond prices fall when interest rates rise): ^TNX data by YCharts Excellent Performance Track Record Over the last 3-Year, 5-Year, and 10-Year periods (as of December 31, 2014), Templeton Global Bond has crushed both the benchmark and its peer group. The following table shows this: 3-Year Return 5-Year Return 10-Year Return Templeton Global Bond – Class A (without sales charge) 6.3% 5.8% 7.4% Citigroup World Government Bond Index -1.0% 1.7% 3.1% Lipper International Income Funds Average 2.1% 2.9% 4.0% As far as performance goes, there is little to complain about. The fund has consistently shown is value relative to its peers. Portfolio Positioning The makeup of the current portfolio is always the most important thing I look at when evaluating a fund. Currently, given the dynamics of my forecast , my general view on the global bond market is as follows: Completely avoid the sovereign bonds of Japan and Western Europe denominated in Yen and Euro. Completely avoid local currency emerging market bonds (non-U.S. dollar denominated) except for Russia (I expect oil prices to spike soon). U.S. and Pound Sterling government debt with very short maturities is okay. Selective U.S. dollar denominated emerging market bonds are okay, especially debt of corporations with U.S. dollar revenues and local currency expenses. Duration should be short though. Cash positions should be sizeable to take advantage of potential price dislocations created by a lack of market liquidity. (Fund cash positions should also be high to meet shareholder redemptions without having to sell quality bonds at low prices.) How does Templeton Global Bond stack up in light of my outlook? Notably, as of July 31, 2015, the fund has an average duration of only .07 years and an average weighted maturity of only 2.49 years. With a duration of .07, rates could theoretically rise 300% and the fund would only fall by .21%. (Duration measures the exposure of a fund to interest rate fluctuations.) Hasenstab clearly has the fund positioned exceptionally well for a rising rate environment. However, the trade-off here is a low yield. The fund’s 30-day standardized yield is only 2.18%. The distribution yield is higher at 3.04% (calculated by taking the standard monthly distribution of .03 x 12 divided by the current NAV price). Given the near-term danger of a sharp rate rise, I think the low yield is worth accepting. I like the fact that 79% of the fund’s currency exposure is in the U.S. dollar (as of June 30, 2015), which is more than twice that of the comparable index. I especially like the fact that, through derivative exposure, the fund has a 24% net short position in the Japanese Yen and a 36% net short position in the Euro. I am expecting the Yen to outright crash and this fund is well positioned for it. As of June 30, 2015, the fund’s largest sovereign debt holdings are as follows: South Korea – 14% Mexico – 9% Malaysia – 7% Poland – 7% Hungary – 7% Brazil – 5% Singapore – 4% Indonesia – 4% Currently, the fund also holds some smaller positions in the debt of the Philippines, India, Sri Lanka, Serbia, and Slovenia. These 13 countries are pretty much it. Sovereign wise, there is nothing here that is overly concerning to me given that the duration of the fund is so low. I like the fact that the managers have taken highly concentrated positions in the countries they feel have the strongest economic fundamentals. Hasenstab is clearly an investor and not an index hugger. This fund is by-and-large safe from the disaster awaiting holders of Japanese, Western European, and Southern European government debt. In fact, countries with strong fundamentals could see an influx of capital seeking safety as it flees these developed markets. Lastly, the fund is 28% in cash. This gives it ample room to meet client redemptions during a crisis and the flexibility to pounce on higher yielding debt when rates rise. Conclusion I think now is a good time to hold this fund if it is available in an employer-provided 401(k) plan. The hits to the fund from holding Ukraine government debt are behind it. Most notably, the fund is clearing avoiding the most dangerous risks to global bond investors. When it comes to the potential for a fixed income fund to deliver decent returns in the current market environment, Templeton Global Bond is an oasis in the midst of a desert. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to American’s within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source Capital: Not The Time To Buy In An Up And Down Year

SOR is struggling so far in 2015. But it’s been an up and down year when comparing the first and second quarters. And the narrower than average discount suggests now isn’t the time to jump aboard. Source Capital (NYSE: SOR ) is an old hand in the closed-end fund, or CEF, space, having been in business since 1968 . It’s long used a focused portfolio to opportunistically invest in small- and mid-cap companies with high returns on equity. That’s great, but a narrower discount than normal of late suggests new investors would be better off waiting here. Here’s what’s been going on. What a difference a quarter makes According to SOR , its net asset value return was 3.1% in the first quarter. That was below its Russell 2500 benchmark, which was up over 5%, but well ahead of the S&P 500, which was up less than 1% in the first quarter. So it’s no surprise that investors would be generally pleased with the closed-end fund, or CEF. Indeed, during the first quarter, the market price of the shares went up along with the NAV. However, something changed in the second quarter. SOR’s NAV fell 2%, worse than the 0.3% or so loss for the Russell 2500 and the around 0.3% gain in the S&P. But while the NAV has been falling, investors haven’t reacted by selling the shares. In fact, they’ve pretty much been holding the line. With that backdrop, SOR’s discount, which has recently been averaging around 9% but has a three-year average of about 10%, has narrowed. The discount is recently hovering around 7% or so-roughly in line with its 10-year average according to the Closed-End Fund Association . Long-term investors should probably tread carefully here since the shares are clearly not on sale. Those looking to play discounts and premiums, meanwhile, should also be on the sidelines. What’s been going wrong? Obviously losing positions outweighed winners in the second quarter . More specifically, retailers Signet Jewelers (NYSE: SIG ) and CarMax (NYSE: KMX ) have been sagging and that’s a big problem. These two are the second and third largest holdings in the fund, making up about 15% of assets. CarMax is down nearly 6% this year and Signet over 8%. With a concentrated portfolio, big bets are the norm. And that’s something that investors in SOR need to fully understand. For example O’Reilly Automotive (NASDAQ: ORLY ), a winner for the fund so far this year, makes up nearly 15% of assets. Taking that a step further, the top three holdings make up about 30% of the fund. For reference, the top 10 holdings account for around 60% of the fund. So you can see the impact O’Reilly, Signet, and CarMax will have on performance. With two of the three struggling, it’s no surprise that SOR’s NAV is only slightly ahead of where it started the year. Adding to the negatives, at the start of the second quarter two other struggling companies were in the top 10, Knight Transportation (NYSE: KNX ) and Heartland Express (NASDAQ: HTLD ). Only Knight remained a top 10 holding at the end of the second quarter at roughly 4% of assets. Knight is down around 18% so far this year and Heartland, the tenth largest holding at the end of the first quarter, is down about 20%-no wonder it fell out of the top 10 by the end of the second quarter. Once again, however, you can see that the focused approach comes with risks. And with the fund’s discount narrower than its recent history, now isn’t the time to jump aboard. That said, over time, SOR has rewarded investors for taking on added risks, so don’t write the fund off entirely. For example, over the trailing 15-year period through June, the fund’s annualized total return, which includes reinvested distributions, is nearly 11%. That’s ahead of its benchmark Russell 2500 by about two percentage points a year. And it’s over twice the annualized return of the S&P over the same span. So being selective and betting heavily on management’s best ideas has paid off over time. Just not in the second quarter… Keep it on your watch list If you are looking for a small and mid cap closed-end fund, SOR is one that should be on your watch list. Its expense ratio is around 0.8%, which is very reasonable for a CEF. Yes, that’s notably higher than straight index ETFs, but ETFs in the same space don’t usually have the same distribution history. For example, SOR’s yield is currently around 4.5%. The WisdomTree U.S. SmallCap Dividend Growth ETF (NASDAQ: DGRS ), meanwhile , has an expense ratio of around 0.4%, but yields about half as much even though it’s focused on dividend paying stocks. That said, capital gains account for almost the entire disbursement at SOR, so distributions will fluctuate over time and probably fall in difficult markets. Thus, this is more of a total return play than an income play. That doesn’t mean distribution focused investors should avoid SOR, just that this is an important fact to keep in mind when buying it. In the end, it was a tough second quarter and middling first six months for SOR. That doesn’t make it a bad fund, but it does highlight the risks inherent in the fund’s focused approach. Long-term investors should keep the fund in mind, but don’t bother jumping aboard now because the discount is slimmer than it has been in recent years. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Vietnam Holding: Nearly Triple The Return Of The VN Index

Summary Vietnam Holdings Ltd. had a 1 Year Return of 23.25%, which is substantially higher than the VN Index gain of 8.88%. A further increase in the fund’s price is highly likely for the following reasons: low valuation, recovery of multiple industries, and irrational drops in stock prices that will recover. Vietnam Holdings Ltd. is the best option for investors to gain exposure to Vietnam through US Exchanges. In a previous article , I mentioned the opportunities of investing in Vietnam, and how the Market Vectors Vietnam ETF (NYSEARCA: VNM ) was not the best means to profit off of the growth in Vietnam. When an investment fund is unable to outperform the index and has a negative return in a country with substantial growth, skepticism is befitting. The Market Vectors Vietnam ETF has had a 1 year return of -6.82% , while VN index has had a return of 8.88% . While the most successful funds are generally not listed on US Exchanges, Vietnam Holding Ltd.(OTC: VNMHF ) is a superior alternative that has outperformed the VN Index. Investors, who are bullish on Vietnam and want to trade on US Exchanges, should consider this fund as the most appropriate vehicle. Vietnam Holdings Ltd. is a closed end investment holding company in Vietnam that is listed on the US OTC market. The advantages of this fund include more attractive valuation, consistently higher returns, and its investment in two companies fully held by foreign investors. Performance Comparison Market Vectors Vietnam ETF Vietnam Holdings Ltd. P/E Ratio 15 5.33 Number of companies held with full foreign ownership None 2 1 year return -8.53% 23.25% 3 year return 2.68% 19.4% 5 Year Return -3.70% 14.7% ROE 12% 24.35% Vietnam Holding Ltd. has a very strong portfolio, with extreme low valuation, and more than double the ROE of the top listed equity holdings of the Market Vectors Vietnam ETF. Moreover, the fund’s financial performance has been excellent, particularly in the past year with a return of 23.25% . The current low valuation, coupled with specific companies that demonstrate high potential, will attribute to future success. Its success is mostly attributed to very recent successful performance in the past year, and the growth appears to be in the initial stages. The portfolio is holistically very strong, while I would say that the greatest potential will result from the performance of DHG Pharmaceutical, Petrovietnam Drilling and Well Services, Vinamilk, and Hoa Phat Group. Hoa Phat Group Hoa Phat Group is the most undervalued company, as its share prices have dropped substantially over the past months. The company is currently rated as one of the top 50 best listed companies in Vietnam Forbes and No. 7 for enterprises with the largest turnover. The company has the largest market share for steel production and steel pipe segments, with approximately 18% and 19.8%, respectively . The stock’s price has been constantly declining, although the sharp decline in the middle of May represents an adjustment of stock price due to the issuance of dividends and bonus stocks. I am currently holding Hoa Phat Group at a 9.15% loss, after investing initially in late April and buying down after this drop. Financial performance of the company has been consistent, with strong growth in net income, net revenue, and ROE since 2012. Moreover, Net Income increased by 37% in the 1st quarter of 2015. An increase in steel prices is projected for the future, which will result in recovery of the stock’s price. Vinamilk and DHG Pharmaceutical JSC Although it does not represent a large portion of the fund’s portfolio, the holding of Vinamilk and DHG Pharmaceutical JSC is very strategic, as these companies are fully held by foreign investors. Vinamilk is one of the most sought after companies by foreign investors, as many foreign investors are willing to pay a premium of up to 20% for shares of this company. The slight decline in net income in 2014, coupled with valuation that is not relatively attractive for Vietnam, has not been enough to deter investment away from this company; considerable growth is ahead for the company and its share price will surely increase. Its key position in the dairy market in Vietnam is crucial, as the industry is expected to grow by 9% up to 2020 . DHG Pharmaceutical is another very strategic holding of this portfolio, with average valuation for Vietnam and consistent growth. The company’s EPS is projected to grow by 34% in 2015 , making a rebound in its stock price extremely likely. These two holdings can be considered a major strength of this portfolio, although they only represent 13.7% of the fund’s portfolio. Moreover, there are certainly other companies fully held by foreign investors with better valuation and more potential for growth; some of these include Refrigeration Electrical Engineering Company, Military Commercial Joint Stock Bank, and FPT Corporation. The removal of the foreign ownership limitation in Vietnam, which will begin in some industries in September , will be extremely beneficial for this fund. Both companies are trading very near to their 52 week lows, and an increase in share price in the near future is highly likely, due to company’s valuation, projected growth, and prestige of being fully held by foreign investors. Petrovietnam Drilling and Well Services Petrovietnam Drilling and Well Services is another holding that is extremely undervalued and holding this company will be beneficial, as a rebound in price is inevitable. The sharp drop in price has been very irrational, resulting from the fear of the declining price of oil and some large investment funds selling holdings of this company. Despite the sharp drop in its share price, a large number of foreign investment funds are still keeping this company in their portfolio, in anticipation of a rebound in price. Beyond having extremely attractive valuation, the company has had consistent growth in net revenue since 2003 , even when oil prices fell below $40/barrel in 2009; net revenue increased by 9.9% and net income only fell by 9.5% in 2009. History has shown that the company is capable of continual growth, and its financial performance will not suffer if the price of oil plunges further. Currently trading at 53,000 dong, opportunity for a rebound is substantial as the company is extremely undervalued; the company’s share price dropped to its 52 week low at 42,800 dong earlier this year. General Strengths A large number of companies that this investment fund holds will have a significant increase in their share prices. This will result from a wide variety of factors, including: High value of companies fully held by foreign investors, and the removal of the foreign ownership limitation for some industries beginning in September . Adverse performance of industries, which are on track for recovery. Irrational drops in stock prices, which will be reconciled. A portfolio of companies with low valuation, that have demonstrated consistent financial performance. Favorable outlook for Vietnam stocks, as the VN Index was projected to increase to a seven year high to 655 : it is currently at 605.7 Conclusion I recommend Vietnam Holdings Ltd. as the best option for US investors wishing to invest in Vietnam. Moreover, investment into this fund should be a long-term endeavor, to ensure that investors profit off of the recovery of all industries and the reconciliation of companies that are undervalued. For those wishing to venture further and explore options not listed on US Exchanges, the following investment funds are most suitable: PXP Vietnam Emerging Equity Fund, Asia Frontier Capital’s Vietnam Fund, Tundra Vietnam Fund, and PYN Elite Fund. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.