Tag Archives: green

Is Abenomics 2.0 Boosting Japan Mutual Funds?

In late September, Japanese Prime Minister Shinzo Abe had announced the second stage of his popular Abenomics plan. The “stage two” plan is aimed to resuscitate the Japanese economy. Among other things, the goal is to boost Japan’s gross domestic product by a significant 20% to $5 trillion by 2020. Following this, Japan Stock mutual funds have gained relatively well. In October, the sector gained 7.9% and in November Japan stock funds added 1.3%, which helped it to finish among the top gainers for the month. Morningstar data also shows that Japan Stock funds are leading one-month gains currently. Abe unveiled a new set of economic initiatives, which he dubbed as “Abenomics 2.0.” He promised to take Japan into a new era of prosperity. His proposals have, however, been met with both bouquets and brickbats. Some economists and market watchers have questioned the viability of the proposals. For instance, executives from leading business lobby termed Abe’s numerical targets as “outrageous” and “impossible.” During the first phase of Abenomics, Japan’s benchmark, Nikkei 225, had shown a significant uptrend. Though it is too early to predict whether the new targets are already having a positive impact, Nikkei 225 has gained 4.5% since Sept. 29. The focus once again shifts to Japan mutual funds, which were topping the charts earlier this year before stumbling in the third quarter. Japan’s economic situation is not as fragile as is widely believed. So, it’s not a bad idea to pick Japan mutual funds which are poised to benefit under existing conditions and will gain further as the economy continues to gather steam. Abenomics 2.0: The Three Arrows Abe outlined several new policy measures late last month, which he calls “Abenomics 2.0.” Abe spoke of new targets or his new “three arrows”: achieving a higher GDP over the next five years, providing support for child care and better social security. The last two are aimed at improving child rearing and care for the elderly for economically distressed families. Abe also aims to boost social security by offering care to the nearly 150,000 people who are slated to enter nursing homes. He also said that he would increase employment opportunities for the retired. Several prominent newspapers and economists have questioned where Abe will find the resources to fuel the last two initiatives. Has There Been A Positive Trend? Market watchers and economists have also pointed to the fact that several of Abe’s initial targets are still unfulfilled. Others question the efficacy of the first phase of Abenomics and have argued that only the monetary policy has proven to be effective. However, an assessment of the state of Japan’s economy by the Financial Times tells us a different story. The study has praised Abenomics’ record on improving corporate governance standards. The objective of these changes has been to increase return on equity and raise the number of independent directors. The ability to push through reforms in the agricultural sector has also been praised. Japan’s unemployment rate of 3.3% is much lower than several developed economies. Real monthly wages recorded their first yearly increase in July in more than two years. Additionally, the average wage increase for fiscal 2015 is 2.2%, the highest level achieved in 17 years. Japan Mutual Funds Japan Stock fund category had emerged as the best gainer in the first half of 2015. The market rout since then has dragged down major categories. However, Japan funds were less affected than its neighboring regions. Japan funds are up nearly 14% year to date, according to Morningstar. This is the best year-to-date gain so far among all fund categories. Banking on the optimism, investors interested in investing in Japan region may bet on the following three mutual funds. These funds carry either a carry a favorable Zacks Mutual Fund Ranks. The following funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance. The minimum initial investment is within $5,000. These funds are in the green over year to date and one-year periods. The three- and five-year annualized returns are also favorable. Fidelity Japan Smaller Companies Fund No Load (MUTF: FJSCX ) seeks capital appreciation over the long term. It invests most of its assets in Japanese securities or other instruments economically connected with Japan. FJSCX invests in securities of companies with market cap similar to those listed in Russell/Nomura Mid-Small Cap Index or the Japanese Association of Securities Dealers Automated Quotations (JASDAQ) Index. Fidelity Japan Smaller Companies currently carries a Zacks Mutual Fund Rank #1. FJSCX has gained 13.7% and 13.5% over year-to-date and one-year periods, respectively. The three- and five-year annualized returns are respectively 18.7% and 12%. Annual expense ratio of 1% is lower than the category average of 1.43%. T. Rowe Price Japan Fund No Load (MUTF: PRJPX ) invests a lion’s share of its assets in companies located in Japan. The fund invests in companies of all sizes and across Japanese industries. Managers use a bottom-up stock selection process while also being aware of industry outlooks. T. Rowe Price Japan currently carries a Zacks Mutual Fund Rank #1. PRJPX has gained 16% and 11.7% over year-to-date and one-year periods, respectively. The 3- and 5-year annualized returns are respectively 12.7% and 7.8%. Annual expense ratio of 1.05% is lower than the category average of 1.43%. Rydex Japan 2x Strategy Fund A (MUTF: RYJSX ) seeks to give returns that correspond to two times the performance of the fair value of the Nikkei 225 Stock Average. RYJSX invests in common stocks having market capital within the range of those listed in the index. RYJSX invests a lion’s share of its assets in securities that have the potential to return two times the performance of the underlying index. Rydex Japan 2x Strategy Fund Class A currently carries a Zacks Mutual Fund Rank #2. RYJSX has gained 20.3% and 11.8% over year-to-date and one-year periods, respectively. The three- and five-year annualized returns are respectively 20% and 6.8%. Annual expense ratio of 1.54% is lower than the category average of 2.03%. Original post

DMO Is The Best Of The Mortgage Bond Funds And It’s Bargain Priced

Summary DMO is a mortgage bond CEF that outclasses its competition and is well priced after a rough few months. I liked DMO in September. I like it more now. I liked DMO in September. I like it more today. When I last wrote about Western Asset Mortgage Defined Opp (NYSE: DMO ) I considered it to be the best of the mortgage-bond closed-end funds. It was selling at a small premium at the time, something I will generally avoid. But that premium was only 0.2%, so I decided to buy it anyway. It has been tracking down since, but that only makes me like it more. I’ve been watching it closely and am likely to add to my position before the end of the year. At the December 1 close, DMO had moved up smartly on the day (1.6%), but since that mid-September article, the fund is down -4.64% at market price and -2.55% at NAV. Why buy into a falling position? Let’s begin answering that question by having a look at how DMO compares to the entire fixed-income CEF category generally and mortgage-bond funds specifically. DMO vs. Its Categories This first chart shows total returns and distribution yields for DMO, along with median values for mortgage-bond CEFs (n=10) and all fixed-income CEFs (n=111). (click to enlarge) First thing to note here is that the past month and year have not been good to fixed-income CEFs across the board. This has been part of a broad trend for high-yield bonds. The large high-yield bond ETFs, iShares iBoxx $ High Yield Corporate Bond (NYSEARCA: HYG ) and SPDR Barclays High Yield Bond (NYSEARCA: JNK ), and the mortgage-bond ETF, iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ), are down comparable amounts. It doesn’t take intense scrutiny to see that DMO is beating its categories in all recent performance metrics. In the face of these numbers, I’m not terribly concerned about the dip since September. This is particularly evident if we turn our attention to NAV returns. Not that I like it, mind you, but I do not see it as cause for concern. Where everything else is negative, save REM’s meager 0.18% uptick for the past month, DMO’s NAV is solidly in the green. And NAV is what really counts in my view. But most of us look to a mortgage bond fund for income, not necessarily capital gains, right? DMO is yielding over 10% where the median mortgage-bond and fixed-income CEFs are paying 7.0% and 8.4%, respectively; and the high-yield bond ETFs are yielding near 6%. Only REM is paying more, but it is doing so with a consistent erosion of capital as we see in this price chart. (click to enlarge) Income investors will often give lip service to not caring about total return. If you’re investing in the likes of REM, I can see why you’d want to resort to that justification. You can, if you’re so inclined, look at REM in isolation in the total return chart and maybe feel okay about it. It has, after all, returned 35%, or would have done so had you been reinvesting dividends at no transaction costs. But look at that price chart above it. The 34% loss there is, in fact, a 34% loss of your capital if you invested in REM for current income five years ago. Sure, it’s been paying out a ton, but it’s been your own money in large measure, and you’ve had to pay taxes on it. If you had invested in DMO instead, you would have received 10% or so a year income plus your capital would have grown by 18%. Of course if you reinvested the distributions (again, assuming that magical chart-universe where there is no cost for doing so) you’d have more than three times what you would have had from the high-yield bonds or REM. So, as I said about UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA: MORL ) in September, you can get a better yield than DMO, but with DMO you get to keep your money. I’ll not go into MORL again, other than to note that there are a substantial number of Seeking Alpha income-seekers who will sing its praises, praises that are completely unjustified in my opinion. A more complete look at MORL is on my to-do list, so if you’re interested in my take on it, it should be on your screen soon. I hope I’ve at least begun to convince you that DMO is an outstanding performer in the mortgage-bond space. If you need more, there are additional comparative historical performance data (in particular comparisons to the other mortgage bond CEFs and MORL) in the September article to assist in your due diligence. Why do I like it more as of December 1? Well, I did like it even better the day before, but even with the December 1 gain, DMO is much more attractively priced than it was in September when my only hesitation was that it was priced at that small premium coming off an uncharacteristic discounted period. At that time, I thought the trend would continue and the premium would continue to grow, so I felt it was as good an entry as the fund was going to present for a while. Wrong, obviously; it’s even better now. Premium/Discount Dynamics DMO has moved from a small premium to a decent discount, a move accompanied by that modest decrease in NAV (-2.6%). Distribution yield is up 60bps from mid-September as a consequence. While -1.87% is not a particularly deep discount in the CEF universe, it is, in my view, excellent for a fund of this quality. And the discount is moving in the right direction, according to the Z-scores. (click to enlarge) Where the mortgage-bond and fixed-income categories are, despite their lackluster performances, less discounted than their means (positive Z-scores) over the past 3 and 6 months, DMO is solidly in the other direction. The current discount is almost 1½ standard deviations more negative than the three-month mean. As I noted, one does not expect a fund of this quality to be running a deep discount, so that -1.87% looks pretty good to me right now. If you accept that it is a high-quality fund, and you consider Z-scores to at least suggest a direction for mean reversion, DOM looks good here. Distribution Sustainability Finally, a word about the sustainability of the distribution. This is always a consideration in fixed-income CEFs. Many high yielders maintain their yields by returning investor capital. This cannot continue indefinitely and, all too often, such funds will be forced into making drastic distribution cuts that lead to sharp price drops. One indicator of distribution sustainability is UNII, Undistributed Net Investment Income. DOM reported UNII of $0.62/share at the end of September. Its distribution is $0.21/share monthly, so there is little indication of a problem on that front. Summary I continue to like DMO and think it remains one of the best income opportunities. It has faltered lately, but less so than its peers. It is paying an attractive distribution. And there is no indication that the distribution payment is at risk as the fund is holding a quarter’s distributions worth of UNII. I realize that there is a lot of uncertainty and anxiety regarding a changing interest-rate environment, but I do not see a truly disruptive change on the near horizon. I do not anticipate anything like a devastating blow from a 25 to 75 bps raise from the Fed over the next year, which is what I consider as most likely scenario. My one caution is that it is best accommodated in a tax-deferred account because, as with any bond fund, the distributions are ordinary income and receive no favorable tax treatment.

Mixed Views On Emerging Markets: Funds To Buy And Sell

There are mixed views on emerging markets now. According to a report from Bank of America Merrill Lynch, fund managers have mostly been pessimistic about emerging-market equities since 2001. On the other hand, some strategists at leading banks and financial companies believe that securities from emerging markets may have hit their lowest point. Amid the contradictory opinions, certain market experts are of the view that investors often invest in emerging market funds too late or they stay invested for too long. So, while buying certain favourably ranked emerging market funds at a discount now should be a prudent move, investors may also dump certain Sell-rated funds that their portfolio will not miss. The Pessimism According to Bank of America Merrill Lynch’s monthly survey, fund managers are the most underweight on emerging-market equities against developed-market equities since the survey began in 2001. While post 2009, fund managers’ relative positioning had jumped and stayed mostly in the green till 2013, the sentiment soured after that. In 2014, the sentiment dropped to a new low before rebounding in late 2014 and early 2015. However, the sentiment is the most pessimistic now. The bearish outlook is concentrated mostly on Asia. Investors are apprehensive about the slowdown in China’s economy while the U.S. central bank may hike rates. The International Monetary Fund (IMF) meeting on Nov 30 is also crucial. Investors fear further devaluation in the Chinese currency but not before IMF adds the yuan to its Special Drawing Rights basket of currencies. And if this happens, Bank of America strategists fear that the markets will move even lower. Goldman Sachs projects that yuan traded at offshore rate may weaken by 2.5% to 3% against the dollar in the next 2 months. Eventually, the devaluation of yuan may impact other emerging-market currencies, as they are often influenced by the monetary policies in the world’s second-largest economy, China. The Contrarian View Meanwhile, market watchers at a number of leading banks and financial institutions have said that they believe asset values for emerging markets have hit a rock bottom. In fact, the views come from the likes of Bank of America, Goldman Sachs and Barclays PLC. Following three continuous years of losses, markets and assets from developing nations are poised for a rebound. According to Morningstar, in the 12 months ended October, emerging-market stock funds traded in the US dropped an average 13.4%. A major indicator of valuations for emerging markets is the MSCI Emerging Markets Index, which is down 30% from the high achieved in 2011. The index is currently trading at approximately 12x its earnings estimates. Additionally, the index’s valuation is nearly three times lower than the S&P 500’s current figure. This is why analysts at Barclays believe that prices of emerging market securities are significantly lower than their intrinsic value. Over the six-month period since the last three American market tightening cycles began, global markets have gained an average 15%. Strategists are also hopeful that emerging markets might rebound in 2016. They say that it might not mirror the “roaring”2000s, but 2016 might be the year the emerging markets “find their feet”. 2 Emerging Market Funds to Buy As mentioned earlier, investors should not miss the buying opportunity. An uptrend in emerging economies brings good tidings for investment instruments from these countries. Many of them currently have reasonable valuations compared to their historical averages. Below we present 2 International Bond – Emerging Market mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. Fidelity New Markets Income (MUTF: FNMIX ) fund invests the lion’s share of its assets in emerging markets or makes other investments that are economically linked to emerging markets that have stock markets as defined by MSCI. These emerging market countries also may also be the ones with low- to middle-income as classified by the World Bank. FNMIX currently carries a Zacks Mutual Fund Rank #1. FSRPX has gained respectively 3.7% and 0.2% in the year-to-date and 1-year periods. The 3- and 5-year annualized returns are 1.2% and 5.4%, respectively. Annual expense ratio of 0.84% is lower than the category average of 1.16%. Goldman Sachs Emerging Market Debt A (MUTF: GSDAX ) predominantly invests in emerging market debt securities. These instruments may be issued by governments as well as corporate entities. To gain exposure to certain emerging economies, GSDAX may use structured securities or derivatives among others. GSDAX currently carries a Zacks Mutual Fund Rank #2. GSDAX has gained respectively 2.8% and 0.5% in the year-to-date and 1-year periods. The 3- and 5-year annualized returns are 1.5% and 5.1%, respectively. Annual expense ratio of 1.24% is higher than the category average of 1.16%. 2 Emerging Market Funds to Sell It is also important to not stay invested in certain underperforming funds. For investors not ready to bet on the emerging markets now or for investors who have lost plenty staying invested in some emerging market funds, below we present 2 funds that either carry a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell). Eaton Vance Emerging Markets Local Income A (MUTF: EEIAX ) gains exposure to the emerging economies by investing in securities and derivatives among other instruments. Bulk of EEIAX’s assets are invested in securities denominated in currencies of emerging market countries, fixed income instruments that are issued by emerging market entities, and in emerging-market denominated derivative instruments. EEIAX currently carries a Zacks Mutual Fund Rank #5. EEIAX has lost respectively 10.6% and 16.5% in the year-to-date and 1-year periods. The 3- and 5-year annualized returns are negative 7.2% and negative 2.5%, respectively. Annual expense ratio of 1.25% is higher than the category average of 1.16%. PIMCO Emerging Markets Currency A (MUTF: PLMAX ) invests most of its assets in currencies of emerging market countries or in fixed income instruments denominated by these currencies. PLMAX currently carries a Zacks Mutual Fund Rank #4. PLMAX has lost respectively 5.2% and 9.7% in the year-to-date and 1-year periods. The 3- and 5-year annualized returns are negative 4.7% and negative 2.4%, respectively. Annual expense ratio of 1.25% is lower than the category average of 1.58%. Original post