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Vanguard Capital Preservation Strategy: Effect Of Trade Day And Look-Back Period Length

Further analysis of the Vanguard Capital Preservation (VCP) tactical strategy is presented. The effects of trade day and look-back momentum period on performance and risk are shown. It is shown that the best trade days are end-of-month (EOM) and first day of the next month (EOM+1). Trading on other days reduces performance and increases risk. In a parametric study of look-back periods systematically varied from 10 trade days to 30 trade days, it is shown that the 21-day (one calendar month) look-back period is optimal. The final VCP strategy using a dual momentum approach and backtested to 1988 has a CAGR of 13.0%, a MaxDD of -5.8%, and a MAR of 2.2. This mutual fund strategy can be traded monthly (every 30 days) on the Vanguard platform without any costs. However, a strict schedule must be followed. Introduction to Vanguard Capital Preservation Strategy This article continues the analysis of the Vanguard Capital Preservation [VCP] strategy originally described here . The VCP strategy updates on a monthly schedule and uses a dual momentum approach. In this strategy, there are six Vanguard mutual funds in the basket of funds covering both equity and bond assets, and the two best (highest momentum) funds are selected at the end of each month. The relative strength momentum ranking is based on a one calendar month look-back period. Absolute momentum is used for risk control, i.e. the two funds with the highest relative strength momentum ranking must have returns greater than the money market asset in order to be actually selected. The out-of-market asset is VFIIX (although a money market asset can be used with little decrement in performance). The basket of funds is the following: Vanguard Convertible Securities Fund (MUTF: VCVSX ) Vanguard Health Care Fund (MUTF: VGHCX ) Vanguard High Yield Corporate Fund (MUTF: VWEHX ) Vanguard High Yield Tax-Exempt Fund (MUTF: VWAHX ) Vanguard GNMA Fund (MUTF: VFIIX ) Vanguard Intermediate Term Treasury Fund (MUTF: VFITX ) All of these funds have histories that date back to 1986 except VFITX that only goes back to 1991. To backtest to 1988, the Dreyfus U.S. Treasury Intermediate Fund (MUTF: DRGIX ) is substituted for VFITX. By backtesting to 1988, the strategy shows that it can successfully handle various market conditions including bull markets and bear markets. Please take note that a few of the funds presented in this article are slightly different than those described in the previous article. The other change is that the out-of-market asset is now VFIIX instead of a money market asset. These slight changes were made to improve the overall strategy. Any investor can take the parameters discussed above and insert them into Portfolio Visualizer [PV], a commercially-free backtest software program. PV will backtest the strategy to 1988, plus it will select what funds to select at the end of each month. Results of VCP Strategy The backtested results of the VCP strategy are shown below. The backtest results are produced by Portfolio Visualizer [PV]; the timespan is 1988 – present. Total Return: 1988 – 2015 (click to enlarge) Annual Returns: 1988 – 2015 (click to enlarge) Drawdowns: 1988 – 2015 (with S&P 500 included) (click to enlarge) Drawdowns: 1988 – 2015 (without S&P 500 included) (click to enlarge) Overall Summary: 1988 – 2015 (click to enlarge) It can be seen that the Compounded Annualized Growth Rate [CAGR] is 13.0%, the Standard Deviation [SD] is 6.7%, and the Maximum Drawdown (MaxDD) is -5.8%. This gives a MAR (CAGR/MaxDD) of 2.24. How these numbers compare to a buy & hold strategy (rebalanced annually) and the S&P 500 are presented in the table above. For the buy & hold strategy, the CAGR is 9.0%, the SD is 5.3%, and the MaxDD is -14.3%. This gives a MAR of 0.63. Thus, the tactical strategy is a significant upgrade to the buy & hold strategy. Likewise, the tactical strategy is significantly better that the S&P 500 that has a CAGR of 10.4%, a SD of 14.5%, a MaxDD of -51.0%, and a MAR of 0.20. There are no negative years for the VCP strategy; the worst year has a positive 1.9% return (in 2002). This compares with a worst year of negative 37.0% for the S&P 500 (in 2008) and a worst year of negative 10.3% (in 2008) for the buy & hold strategy. Further Assessment of VCP Strategy In this article, further analysis of the VCP strategy will be presented. In particular, the effect of trade day on backtest results will be assessed, as will the effect of look-back period length. Herbert Haynes has developed a backtester that can be used to study these effects. Haynes’ backtester using dual momentum was set up a little different that the dual momentum approach by PV. In particular, the absolute momentum part of the Haynes’ backtester is slightly different than PV’s absolute momentum test. Haynes followed the conventional absolute momentum technique by Gary Antonacci that uses pure cash or any other asset as the absolute momentum test, and then uses that same asset as the out-of-market asset. In PV, the absolute momentum test is always money market (i.e. 1-month T-Bill returns), and the out-of-market asset can be anything specified by the user. So for the VCP strategy using PV, the absolute momentum test was money market, and the out-of-market asset was VFIIX. For the Haynes’ backtester, the absolute momentum test was VFIIX, and the out-of-market asset was VFIIX. This slight variation between calculations did not cause any significant difference between PV results and Haynes’ backtester results for EOM calculations. First Parametric Study: Trade Day vs. Number of Assets Using the Haynes’ backtester, we first looked at the effect of trade day on performance and risk. For this parametric study, we independently varied the number of assets selected each month (1, 2, and 3) and the trade day. The trade day was varied between EOM-10 trade days and EOM+10 trade days. Heatmap results are shown below. They were skillfully created by Herbert Haynes. Heatmaps are presented for CAGR, MaxDD, and Sharpe Ratio. The colors range from red being worst to blue being best. So cold spots [blue] are desired for each variable. The numbers on the top of each heatmap (-10 to 10) correspond to the trade day. Zero (not actually specified) corresponds to the EOM. The number [-1] stands for EOM-1. The number [1] signified EOM+1. The numbers on the left (1 to 3) correspond to the number of assets selected each month in the VCP strategy. CAGR: Range = 8.5% [red] to 15.3% [blue] (click to enlarge) MaxDD: Range = -27.5% [red] to -6.8% [blue] (click to enlarge) Sharpe Ratio (CAGR/SD): Range = 0.85 [red] to 2.04 [blue] The heatmaps show that the best trading days center around EOM-1 to EOM+1. The optimal number of assets seems to be two when both CAGR and MaxDD are considered. Second Parametric Study: Trade Day vs. Look-back Length The number of assets was set to two, and another parametric was run on Haynes’ backtester. In this parametric study, trade day and look-back length were independently varied. The results are shown below in the form of heatmaps. Heatmaps are presented for CAGR, MaxDD, Volatility (Standard Deviation), and MAR (CAGR/MaxDD). The numbers on the top of each heatmap are the trade days as previously discussed, and the numbers to the left of each heatmap are the look-back trade days for the relative strength momentum. The look-back trade days range from 10 days to 30 days. CAGR: Range = 8.2% [red] to 14.1% [blue] (click to enlarge) MaxDD: Range = -27.3% [red] to -6.3% [blue] (click to enlarge) Volatility [SD]: Range = 6.3% [red] to 8.3% [blue] (click to enlarge) MAR [CAGR/MaxDD]: Range = 0.3 [red] to 2.1 [blue] (click to enlarge) For CAGR, an optimum band is seen going from the upper left corner to the lower right corner. Short look-back periods (11 to 14 days) combined with trading between EOM-8 to EOM-1 seem to be optimal and robust. But the MaxDD results show a different optimal window: look-back periods between 20 – 23 days and trade days between EOM and EOM+2. In terms of volatility, a vertical optimal band is seen that occurs between EOM and EOM+2. The MAR heatmap shows an optimal window between look-back periods of 20 days and 26 days, and trade days between EOM and EOM+2. Overall, the optimal window seems to be around one-month in look-back length, and EOM and EOM+1 in trade days. Conclusions The analysis presented in this article indicates that two assets should be selected in the VCP strategy (from a basket of six assets). The analysis also indicates that the VCP strategy should be traded at EOM or EOM+1. Trading on other days may significantly reduce returns and increase drawdown. The optimal momentum look-back period is one calendar month. Some Practical Issues After further study, it now seems that trading mutual funds on a monthly schedule can only be accomplished using the same family of mutual funds. When different families of funds are used in a monthly strategy, sell and buy trades cannot be executed on the same day. This prevents the execution of a monthly tactical strategy using mutual funds if funds from different families are used. This issue is circumvented when the basket of funds are all in the same family. Then you can sell and buy funds on the same day. That is why only Vanguard funds are used in the actual application of this strategy. This is important because Vanguard blocks the buying of a fund for 30 calendar days after the fund has been redeemed. But this 30-day trade restriction can be accommodated in a monthly schedule if the trade day moves around slightly between EOM and EOM+1. I have presented a trading schedule in my previous article that will satisfy the 30-day trading restriction. It must be followed rigorously, or the trade day will slip downstream. And, as shown, trading on days other than EOM or EOM+1 reduces return and increases risk. The only drawback in this application is that selections must sometimes be made before EOM data are available. In these cases, EOM-1 data must be used to make the selections, with the caveat that there will be some selections that differ from the EOM selections. Going back to 2007, it was seen that EOM-1 selections differed from EOM selections about 17% of the time (averaging 4 selections out of 24 selections each year). This percentage was rather constant over the years. It was also observed that the EOM-1 selections out-performed the EOM selections over the next month about half the time. This seemed to indicate that using EOM-1 data to determine selections is not overly problematic. It is rather easy to use EOM-1 data to come up with fund selections by using StockCharts.com. Using PerfCharts, the list of funds is inserted into the symbol box, and the number of days (that varies each month between 20 days and 24 days) is inserted into the slider box. Set the start date at EOM-1 of the preceding month and the end date at EOM-1 of the current month. The percent return is seen to the right in the resulting figure. As an example, the PerfCharts plot for December selections is shown below. The slider box has 21 days for this month. It can be seen that VCVSX and VWAHX are the selections. And please note that they are both greater than absolute momentum, i.e. zero percent return. (click to enlarge) We have also found another issue in using EOM PV selections that readers need to be aware of. Many investors will look at PV’s selections at EOM and trade accordingly on EOM+1. It turns out that the latest EOM dividend distributions for mutual funds are not usually included in the EOM data feed. This means the adjusted prices are not correct at EOM, and so the selections by PV at EOM may be in error because total returns do not include the latest dividend distribution. The correct adjusted price data are not provided to PV until a number of days after EOM. Thus, the backtest results are correct, but the selections at EOM may be in error using PV. The only way around this challenge is to calculate total returns yourself by using historical data from a data source such as Yahoo. The Yahoo data will also be in error because the dividend distribution at EOM will not be included. Thus, Yahoo adjusted price data must be modified so that the effect of the latest dividend distribution is included. This is very easy to do and could be automated by skilled Excel users.

The iShares MSCI Ireland Capped ETF: Ireland Revisited

Ireland is generating growth well in excess of its fellow Eurozone member states. Ireland employed a corporate ‘tax haven’ strategy, at 12.5%, in order to attract foreign investment. Many global, best in class companies now officially headquarter in Ireland. Ireland had been bestowed with the title “Celtic Tiger” and it has been well earned. During the worst of the EU recession years, 2008 through 2010, Ireland’s GDP contracted over 14% . Ireland, however, was not alone in its struggle to revive its economy. With few exception, advance economies around the globe were struggling; some on the very brink of complete economic collapse. In response, the Irish government jumped aboard the ‘austerity bandwagon’, raised taxes, reduced public sector spending and requested nearly $90 billion in bailout funds from the EU. The persistence has paid off. Over the past two years, the Celtic Tiger roared back with a vengeance. According to the European Commission , Ireland’s 2014 GDP growth was 5.2% with year over year inflation of 0.3% and debt to GDP of 107.5%. For 2015, it is expected that Ireland will have 6.0% growth with year over year inflation of 0.3% and a debt to GDP ratio of 99.8%. Over the past two years, unemployment has gone from 11.3% to 9.5%. The forecasts are equally impressive with 2016 GDP growth expected to be 4.5%, unemployment at 8.7% and debt at 95.4% of GDP. One of the cornerstones of Ireland’s recovery is the low corporate tax rate at 12.5%. Finance Minister Michael Noonan intends to reduce it again by half, to 6.25%. Recently, the pharmaceutical giant Pfizer (NYSE: PFE ) , acquired Ireland based Allegan in order to reestablish Pfizer’s corporate headquarters in Ireland and take advantage of the low tax rate. Spain’s pharmaceutical giant Grifols (NASDAQ: GRFS ) has also ‘taken the leap’. Ireland’s Knowledge Development Box , which includes the favorable tax rate, has attracted other global giants such as Medtronic (NYSE: MDT ) , Horizon Pharma (NASDAQ: HZNP ) , Endo (NASDAQ: ENDP ) , Pentair (NYSE: PNR ) and a host of others. The most recent data indicates that US companies now employ over 140,000 citizens of the Irish Republic. To be sure, all is not perfect with the Irish economy. Aside from those positive projections, the European Commission has made observations and recommendations which Ireland needs to address, including, “…High level of private and public debt …” as well as “…Financial sector vulnerabilities…” The European Commission has determined that these issues, among others, require “…decisive policy action and specific monitoring…” So it seems that, so far, the Irish economy has continued to outperform the rest of Europe, is aggressively pursuing major global corporations with its low corporate tax and R&D tax credit policy, however, the country still has concerning macroeconomic issues. So is it worth the risk to hold a piece of the Emerald Isle in your portfolio? If so, you’re limited in your choices. BlackRock ‘s (NYSE: BLK ) iShares portfolio has the best possible venue with its MSCI Ireland Capped ETF (NYSEARCA: EIRL ) . According to iShares, the fund is over 87% invested in Ireland, the rest in the UK, US and a wee bit in ‘other’. It’s important to note something here. The fund concentrates on the EU member: Republic of Ireland . Northern Ireland is a constituent part of the United Kingdom. Also, Northern Ireland’s Finance Minister has recently announced a ‘tax matching’ corporate tax rate reduction of 12.5% hoping to make that economic region of the United Kingdom a competitor for direct foreign investment. This bodes well for the fund since, as the pie chart below demonstrates, includes UK based company exposure . Data from iShares It’s also interesting to take note of the fund’s sector allocations. Interestingly, the heaviest allocation belongs to the Materials sector, which is usually very sensitive to the business cycle. This is followed by the more defensive Consumer Staples, then Financials and then Industrials. Healthcare and Consumer Discretionary middleweights follow. The observant investor may notice that many global pharmaceutical or healthcare companies have reestablished themselves in Ireland. It should be emphasized that as well as the 12.5% corporate tax credit, Ireland offers a 25% Research & Development tax credit ; R&D is a major expense for pharmaceutical companies. Data from iShares Before examining the individual fund holdings it’s a good idea, as always, to know a bit about the index the fund is tracking. In this case it’s the Morgan Stanley Capital International ” All Ireland Index “. The fund is a ‘Regulated Investment Company’ subject to an IRS ‘capping’ requirement so that .. .at the end of each quarter of a RIC’s tax year no more than 25% of the value of the RIC’s assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the fund should not exceed 50% of the fund’s total assets… The fund is small, even by single country focused fund standards, with only 24 holdings. The net assets totaling approximately $170,027,303.00 and has 4.2 million shares outstanding. The 3 month average daily volume is good for a small fund and more than adequate for a retail investor to enter or exit a position. (click to enlarge) The question then becomes, is there a proverbial “pot o’ gold” at the end of the rainbow? In order to answer that, it’s necessary to look a little deeper into the fund’s holdings. Materials 25.90% Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow Avg. 5 year Dividend Primary Business CRH Plc CRH 22.0086% $24.266 2.33% 35.58 17.74 3.45% Building Materials; global product distribution; minority ownership in Yatai Building Materials; 50% joint venture with My Home Ltd ., India Smurfit Kappa Group Plc. OTCPK:SMFTF 3.8954% $6.283 2.38% 19.69 8.64 NA Paper packaging products, container board, corrugated containers, etc. European, US and Central Americas Averages 12.95% $15.27 2.36% 27.635 13.19 *2.54% *Industry Average Data from Reuters, Yahoo! Finance Surprisingly, for such a large sector allocation, there are only two holdings and then almost 85% of that in just one company, CRH Plc. and maybe for good reason. CRH qualifies for an NYSE-ARCA listing. CRH does have global reach and services across the entire spectrum of building materials through two segments: Heavyside materials for major construction, Lightside materials for smaller projects. CRH is a good example of the type of cross-border reach of an Ireland based company. CRH has 18,400 employees in 44 US states in 1200 US locations. CRH is also established in Brazil and Canada, not to mention Europe. However, as well established and global as it is, building materials are still subject to business cycles. Consumer Staples 24.2233% Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow Avg. 5 Year Dividend Primary Business Kerry Group Plc OTCPK:KRYAF 12.3368% $13.804 0.62% 25.16 19.73 0.91% Ingredient and flavor products in food, beverage and Pharma. Primarily in the EU Glanbia Plc OTC:GLAPF 4.0275% $5.396 0.66% 31.96 22.52 1.11% Performance, nutritional, vitamin/mineral premixes; Dairy and non-dairy products C&C Group Plc OTCQX:CCGGY 3.8715% $1.31 3.16% **16.41 **12.83 2.16% Hard cider, beer, wine and soft drinks; over 15 brand; UK, EU, US and Canada, Asia, Australia Origin Enterprises Plc OTC:ORENF 2.9352% $0.972 2.87% 11.98 9.88 2.87% Agricultural products and agronomy services in UK, Poland, Romania, Ukraine Total Produce Plc OTC:TTPPF 0.5455% $0.482 1.78% 16.00 8.07 3.21% Fresh produce, flowers, vitamins, minerals, health foods in UK, Scandinavia, Poland, Czech Republic Fyffes Plc OTCPK:FYFFF 0.4448% $0.480 1.61% 11.03 8.85 3.30% Tropical produce distributer, warehouses in Florida, UK, Germany; holds 40% of Balmoral Land Holdings Donegal Investment Group DGICA 0.062% $0.060 2.81% 31.76 17.37 3.64% Farm and dairy supplies, seeds and products; Specialty dairy and vegetable products Averages 3.46% $3.21 1.93% 20.614 14.18 2.46% **Approximate Data from Reuters, Yahoo! Finance Again, it seems that about 50% of the Consumer Staples sector is weighted by one company, Kerry Group Plc . This company occupies a niche in consumer products, through food additives for taste and nutrition, including enzymes, probiotics, specialized proteins and ‘life staged nutrition’ products. Kerry Food Brands include popular European brand names such as Dairygold , Richmond , Wall’s and more. Lastly, Kerry’s agribusiness focuses on sustainability, dairy input products and feeds. Kerry Group distributes in over 140 countries. A quick glance at the entire table demonstrates that this is one of the stronger segments of the fund, with its focus on agriculture, nutritional additives and beverages. Financials 17.3355% Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow Avg. 5 Year Dividend Primary Business Bank of Ireland OTCPK:IREBY 10.0582% $12.042 *2.27% 12.50 10.98 *1.97% Retail financial services, foreign exchange and hedging products, life assurance Green REIT Plc OTCPK:GREEF 3.4012% $1.10 1.04% 6.57 *18.18 *3.07% REIT: primarily Irish commercial real estate investment company; office, industrial and retail space Hibernia Plc OTCPK:HIBRF 3.3854% $1.002 0.86% 6.79 *18.18 *2.92% REIT: Irish commercial real estate investment company, commercial and residential IFG Group Plc OTC:IFGPF 0.2662% $0.256 2.56% 98.37 *37.52 *1.91% Financial services management, insurance. Pensions, wealth mgmt., financial advisors FBD Holdings OTC:FBDHF 0.2245% $0.254 4.89% *18.51 *13.66 3.78% Insurance underwriting farm and non-farm business. Retail insurance, pension and investment mgmt. Averages 3.47% $2.93 *2.32% *28.548 *19.704 *2.73% *Indicates data was not available; industry average included for comparison Data from Reuters, YaHoo! and Multiple Sources It should be emphasized that the financial holdings are probably the most sensitive area in the fund. As noted above, the European Commission has voiced its concerns about public sector debt. Recently, the Irish Times reported Ireland’s ‘shadow banking’ debt amounted to approximately $2.36 billion. The shadow banking sector includes other entities such as investment funds. Irish banks will undergo an EU stress test in February. On the other hand, it’s also fair to note that the Irish banking sector has seen more difficult times and have survived through them all. Industrials 17.2922% Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow Avg. 5 Year Dividend Primary Business Kingspan Group Plc. OTC:KGSPF 4.7023% $4.637 0.72% 31.84 22.92 1.28% Energy usage reduction systems and solutions. Water recycling and renewable energy solutions Ryan Air Holdings RYAAY 4.687% $20.869 4.28% 13.76 10.00 *0.23% Well known and popular discount airline serving UK, Europe, Morocco Grafton Group Plc OTCPK:GROUY 4.0124% $1.07 1.68% 17.40 **31.37 *2.67% DIY home improvement and building materials and supplies; home and garden products Irish Continental Group OTC: IRCUF 3.7035% $1.027 2.03% 14.36 11.34 4.63% Maritime freight and passenger ferry services; High speed ferry services CPL Resources Plc OTCPK:CPGLF 0.187% $0.205 1.52% 15.80 15.19 1.66% Placement/Employment services; workforce mgmt., temps, contract, outplacement and training Averages 3.46% $5.56 2.05% 18.63 18.16 2.09% *Indicates data was not available; industry average included for comparison. **Approximated Data from Reuters, YaHoo! and Multiple Sources The Industrial holdings have a more evenly distributed weighting, the most notable one being the successful discount airline, Ryanair . Here in the states, companies such as Home Depot (NYSE: HD ) and Lowes (NYSE: LOW ) have proven themselves as less sensitive to the business cycle. Grafton is a similar company with 37 DIY retail stores in Ireland as well as 313 branches under different brand names in Great Britain and Europe. Grafton also manufactures building materials such as plastic piping and mortar mixes. Health Care 8.5191% Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow Avg. 5 year Dividend Primary Business UDG HealthCare Co Plc OTC:UDHCF 4.3235% $1.959 *0.84% 6.45 12.77 *1.01% Healthcare outsourcing services provider; supply chain services, event mgmt. UK, N America and Europe Icon Plc. ICLR 4.1956% $4.293 *0.48% 22.25 16.13 *0.51% Clinical trial services for pharmaceutical, biotech, medical device industry Averages 4.26% $3.13 *0.66% 14.35 14.45 0.76% *Data not available; Industry Average for comparison Data from Reuters, YaHoo! and Multiple Sources What might be the deciding factor for owning the fund is the Health Care sector. Presently, the fund holds two equally weighted companies. However, as noted above, the aggressive corporate tax rate and R&D tax credit have attracted global Health Care companies to reestablish corporate headquarters in Ireland . Any complicated legal issues aside, these companies, Pfizer, Medtronic, Horizon Pharma and Grifols are perfectly good candidates for the fund. In general, as long as the ‘Knowledge Development Box’ policy continues to attract global leaders, it’s not too far-fetched to expect some kind of allocation of those newly established companies in the fund. It isn’t a given, but shouldn’t be ruled out. Discretionary, IT and Energy Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow 5 Year Dividend Growth Primary Business Paddy Power Plc. (Consumer Discretionary) OTC:PDYPF 6.1526% $5.581 1.44% 36.39 25.30 1.82% Consumer Discretionary: betting and gaming services and management; UK and Australia and global online access Datalex Plc (NYSE: IT ) OTC:DLEXF 0.2534% $0.236 0.91% 101.55 30.41 0.95% Travel industry digital solutions; e-business services and consulting San Leon Energy (Energy) OTCQX:SLGYY 0.0471% $0.016 NA NA NA Na Oil and gas exploration; N Celtic Sea, France, Poland, Carpathian Basin Data from Reuters, YaHoo! and Multiple Sources The smaller holdings consisting of one company each; Consumer Discretionary , IT and Energy comprise about 6.4% of the fund, and 95% of that weighted by Paddy Power . This is not the energy holding as the name might suggest, but rather a venue for sports betting including internet and live betting. The investor should make note that internet sports betting laws in the US are regulated state by state and Federal law enforcement is constantly monitoring for illegal offshore betting activities. That being said, online sports betting, and sports betting itself is wildly popular in Europe. Lastly, San Leon Energy is an independent oil and gas exploration company. It suffices to note that its weighting is a mere 0.0471% of the fund. All told and in spite of its shortcomings, the fund has proven itself over the past several years. However, the fund seems out-of-step with the new entrants in the Irish economy. This may be more of a result of the tracking index. MSCI’s Investable Market Methodology of the funds objectives and inclusions states that: …Each company and its securities (i.e., share classes) is classified in one and only one country, which allows for a distinctive sorting of each company by its respective country… …Securities may be represented by either a local listing or a foreign listing…The security’s foreign listing is traded on an eligible stock exchange.. ” It may be a technicality for the present, for the present, but it will be difficult to ignore the fact that many global, major league, publicly owned companies have established corporate headquarters in Ireland. However, even without the inclusion of the recently relocated companies, as long as the economy performs well, foreign investment on this scale is certain to be a driving factor for the economy and supportive of its weakest sectors. Hence the fund is likely to benefit either directly or indirectly from foreign capital investment. It should be noted that the fund’s expense ratio is a mere 4 basis points above the industry average .044%, and recently is trading at a discount to net asset value. The fund’s P/E is 21.90 and price to book multiple is 2.51. The annualized distribution yield is 2.39%; trailing 12 month yield at 1.56% and after expense (SEC) yield is 1.09%. Also, the fund has low volatility with a beta of only 0.80% of the market and is passively managed. Returns Comparison 1 Year 3 Years 5 Years Since 5/5/2009 Inception Total Return 14.22% 21.39% 16.23% 12.41% Share Price 15.77% 22.08% 16.67% 12.67% Index 15.24% 22.35% 16.71% 12.96% Data from Reuters, YaHoo! and Multiple Sources Generally, the fund has potential for capital appreciation, as it is now, however, with the potential of having the future inclusion of the global giants that now call Ireland home, the potential is even greater. Like any investment, it’s a rainbow to follow, but one that just might have a pot o’ gold at its end. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

The Risk Impact Of Valeant Pharmaceuticals Intl Inc On Sequoia Fund

The Risk Impact Of Valeant Pharmaceuticals Intl Inc (NYSE: VRX ) On Sequoia Fund by AlphaBetaWorks Insights “This is your fund on drugs” The Sequoia Fund’s (MUTF: SEQUX ) hefty sizing of Valeant Pharmaceuticals ( VRX ) dramatically changed the fund’s risk profile from historical norms. With the proper tools, allocators would have noticed this style drift back in Q2 2015 when Sequoia’s key factor exposures moved two to three times beyond historical averages. What’s more, allocators would have noticed a predicted volatility increase of 25% and a tracking-error increased 70%. Though this analysis would not have anticipated Valeant’s subsequent decline, it would have warned fund investors that Sequoia’s risk was out of the ordinary. Sequoia Fund’s Risk Profile Below is a chart of Sequoia’s major factor exposures , spanning a ten year history through June 2015: (click to enlarge) Sequoia Fund – Historical Factor Exposures (Note that this analysis and our model do not include Valeant’s recent heightened volatility: we are using the AlphaBetaWorks Statistical Equity Risk Model as of 8/31/15 and SEQUX’s positions as of 6/30/2015. In short, we are looking at the world prior to Valeant’s subsequent downside volatility.) Sequoia’s stock selection and allocation decisions result in certain factor bets such as market beta (“US and Canada”, above), other factors (Value, Size), and sectors (Consumer, Health). The red dots above represent factor exposures in a particular month, the red boxes represent two quartile deviations, and the diamonds denote current (i.e. 6/30/15) exposures. Several sectors/factors are circled for emphasis: they are current exposures as well as outliers versus history. More importantly, these outlying factor bets are the direct result of Sequoia’s large percentage ownership of Valeant. The Impact of Valeant on Sequoia Fund’s Factor Exposures We examined Sequoia Fund’s factor exposures with and without Valeant. We assumed that the pro forma Sequoia Fund without Valeant would have increased all other positions proportionally to make up for the void. For example, we increase Sequoia’s next-largest position in TJX Companies Inc. (NYSE: TJX ) from 7.3% to 10.9%, and so on for all longs for the pro forma non-Valeant Sequoia portfolio. Below is a chart comparing the most salient factor exposures of Sequoia Fund, with and without Valeant: (click to enlarge) Sequoia Fund – Factor Exposures With and Without Valeant Valeant has had a significant impact on Sequoia’s factor exposures. The factors with the highest delta are the same as those highlighted as outliers on the first chart above. This is significant in several ways. First, the large Valeant holding increases Sequoia Fund’s overall volatility by 25%. Second, Sequoia’s tracking error is increased by its Valeant holding by 70%. Sequoia Fund volatility estimates with and without Valeant are below: (click to enlarge) Sequoia Fund with Valeant – Absolute and Relative (to S&P 500) Estimated Risk (click to enlarge) Sequoia Fund without Valeant – Absolute and Relative (to S&P 500) Estimated Risk Valeant increases Sequoia’s overall predicted volatility (tracking error) by 26% (from 9.73% to 12.31%, annualized – gold boxes). Likewise, Valeant increases Sequoia’s tracking error by 69% (from 5.19% to 8.76% – brown boxes). Increases in both Absolute and Relative volatility are due to the incremental Residual Risk contribution of Sequoia’s large Valeant holding (graphically shown by the larger blue boxes in the “with VRX” charts, in contrast to smaller blue boxes in the “without VRX” charts). Conclusions In the end, this analysis is not about Sequoia or VRX. It is a single example of decisions that could have been avoided by a portfolio manager or questions that would have arisen to an allocator with the proper risk toolkit. Sequoia’s decision to make Valeant an outsized position did not go unnoticed from a risk standpoint. Increases in factor exposures of two to three times outside historical bounds were an early warning. The impact of this was increased predicted volatility – both on an absolute basis and relative to the S&P 500. A framework that warns of a fund taking large factor and idiosyncratic bets aids greatly in avoiding negative surprises. Disclosure : None.