Tag Archives: month

U.S. Manufacturing Shows Signs Of Healing: 3 Mutual Fund Picks

By the end of last year, U.S. manufacturing was tottering on the verge of a recession, after the collapse in commodity prices and a stronger dollar took a toll on American factories. However, based on encouraging readings on factory activity in March, it seems that manufacturing is on a resurgence. Philadelphia, New York and Richmond Fed manufacturing reports were impressive for this month. Markit’s flash manufacturing PMI also ticked up in March, while the ISM manufacturing index had already shown signs of a turnaround last month. A rise in new orders for U.S. factory goods in January points toward an easing in manufacturing slump. For now, even though there is volatility in the oil price movement, it has recovered considerably from its mid-February record low. Moreover, the Fed’s dovish stance in its two-day policy meeting last week has weakened the dollar considerably. In this scenario, it will be prudent to invest in mutual funds that focus on the industrial sector. The Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) had gained 4.3% on a year-to-date basis, the second-highest among all the S&P 500 sectors. Factory Activity Positive in March Manufacturing activity in the Philadelphia area turned positive in March for the first time in seven months. The Philadelphia Fed manufacturing index advanced to 12.4 in March from a negative 2.8 in February. Any reading above zero shows that industrial activity is improving. Separately, new orders and shipments rose significantly. Factory activity in the New York region also expanded this month for the first time since last July. The Empire State manufacturing index rose to 0.6 in March from minus 16.6 in February. While new orders and shipments increased, more manufacturers expect business conditions in the region to improve further in the next six months. A measure of manufacturing activity in the lower U.S. Atlantic region too rose in March. The Richmond Manufacturing Index jumped to 22 this month, its highest level in almost six years. The index had been at a negative 4 in February. The index covers manufacturing activity in the District of Columbia, Maryland, Virginia, North Carolina, South Carolina and most of West Virginia. Flash PMI Ticks Up, ISM Turns Around Markit’s flash manufacturing PMI came in at 51.4 in March. The PMI showed that manufacturing activity picked up this month from February’s 28-month low of 51. Output and new business volumes moved up at a slightly faster pace compared to February. This reading followed the Institute for Supply Management’s (ISM) reading on manufacturing activity in February. The ISM manufacturing index increased to 49.5, above January’s reading of 48.2. This indicated that fewer manufacturers had cut back on activities in February than in January. Any reading above 50 shows expansion. Add to this a robust surge in factory orders in January, and it becomes even clearer that the manufacturing sector is coming out of troubled waters. The Commerce Department had reported that new orders for U.S. factory orders rebounded 1.6% in January from a drop of 2.9% in December. New orders increased the most in seven months in January. Factory orders rose broadly in January, with orders for transportation equipment soaring 11.4%. Orders for on-defense capital goods excluding aircraft, which indicates business confidence and spending plans, gained 3.4%. Inventory levels, on the other hand, dropped for the seventh straight month, indicating factories were progressing steadily on reducing inventory glut. Buy The 3 Best-Performing Industrial Mutual Funds It looks like the worst of U.S. manufacturing is coming to an end as recent reports on manufacturing activity in core factory hubs such as Philadelphia, New York and Richmond turn out to be promising. An uptick in Markit’s flash manufacturing PMI in March makes us believe that factory activities in the U.S. will improve. In fact, when it comes to the ISM manufacturing index, RBC Capital Markets’ Chief U.S. economist, Tom Porcelli, expects the index to climb above the 50 mark in April. He believes the negative impact of low oil prices and strong dollar will fade. Moreover, record factory orders data in January also show a release from the slump. Banking on this optimism, investors may bet on three industrial mutual funds that not only boast strong fundamentals, but have also given solid returns over a long period of time. These funds possess a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive year-to-date and 5-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio. Fidelity Select Industrials Portfolio No Load (MUTF: FCYIX ) invests the majority of its assets in securities of companies primarily involved in the research, development, manufacture, distribution, supply or sale of industrial products, services or equipment. The fund’s year-to-date and 5-year annualized returns are 2.9% and 10.1%, respectively. It carries a Zacks Mutual Fund Rank #2, and the annual expense ratio of 0.78% is lower than the category average of 1.33%. Fidelity Select Industrial Equipment Portfolio No Load (MUTF: FSCGX ) invests a major portion of its assets in securities of companies principally engaged in the manufacture, distribution or servicing of products and equipment for the industrial sector. The fund’s year-to-date and 5-year annualized returns are 2.9% and 8.3%, respectively. FSCGX carries a Zacks Mutual Fund Rank #1, and its annual expense ratio of 0.77% is lower than the category average of 1.33%. Putnam Global Industrial Fund A (MUTF: PGIAX ) invests a large portion of its assets in securities of companies in the industrial products, services or equipment industries. Even though it invests in large and mid-sized companies worldwide, around 80% of its investments are in the U.S. PGIAX’s year-to-date and 5-year annualized returns are 2.2% and 8.8%, respectively. The fund carries a Zacks Mutual Fund Rank #1, and its annual expense ratio of 1.27% is lower than the category average of 1.33%. Original Post

The Dynamic Duo Of Risk Factors: Part I

The value and momentum factors have earned high praise in recent years as complementary sources of risk premia for designing and managing equity portfolios. AQR’s widely cited paper “Value and Momentum Everywhere” a few years back helped popularize the idea, pointing to applications in equities and beyond. There’s no shortage of support from the wider world of investment management. Earlier this week, for instance, Jack Vogel at Alpha Architect outlined “Why Investors Should Combine Value and Momentum.” Not surprisingly, there are several investment funds focused on the strategy, including the recently launched Cambria Value and Momentum ETF ( VAMO ). The rationale for a value-momentum mix can be summarized by reviewing the historical results. Consider rolling five-year annualized returns (a time window used in AQR’s paper), which captures a fair amount of mean reversion. The chart below hints at the possibilities from a portfolio-design perspective. Using the risk premia numbers via Professor Ken French’s data library suggests that value and momentum do in fact exhibit a fair amount zigging when the other factor’s zagging. The correlation between the two sets of rolling 5-year returns since the early 1930s is moderately negative – roughly -0.24 (based on monthly returns). That tells us that no one will confuse one risk premium for the other. But how does correlation stack up over shorter periods? From a practical perspective, the results over, say, five years offer more insight into the potential for tapping into the value-momentum dynamic. As the next chart shows, the relationship is far from static. Indeed, the rolling five-year correlations ebb and flow through time by more than a trivial degree. The implication: a dynamic system for managing risk with these factors may be superior to buying and holding. Sometimes, and perhaps for several years at a stretch, these two risk factors generate similar returns. During those times, you’ll probably read stories proclaiming the “Death of Diversification For Value and Momentum Strategies.” But if history’s a guide, the tight correlation will only be temporary. There’s nothing magical about rolling five-year windows, of course. A serious research project would review multiple rolling periods by running the numbers through a battery of risk analytics. But the preliminary, if inconclusive, profile above implies that looking at the equity market (and other asset classes) through a value-momentum prism has intriguing possibilities. One question that comes to mind: How does a value-momentum strategy fare as a buy-and-hold proposition (with naïve year-end rebalancing) vs. a tactical asset allocation application? How much improvement, if any, should we expect with a dynamic system? In an upcoming post, I’ll explore this question with a back-test and review the results by adjusting for risk. Several researchers have already run similar tests and produced encouraging results. Let’s see if we can replicate the data. The literature suggests that’s likely. But the devil’s in the details. There are several ways to define “value” and “momentum” and there’s a rainbow of possibilities for implementing tactical strategies. Therein lies the potential for success… or failure. But it’s always best to start with a simple model. If there’s truly an opportunity for enhancing a buy-and-hold version of a value-momentum strategy, the evidence should be clear in a basic tactical model.

Bracketology – An Investing Lesson From The NCAA

“Bracketology,” a term coined by ESPN, is the study of the annual NCAA college basketball tournament. Interestingly the art or science of filling out an NCAA tournament bracket also provides insight into how investors select investment assets. Before explaining, we present you with a question: When filling out an NCAA bracket do you A) start by picking the expected national champion and work backward or B) analyze each matchup, and pick winners starting at the earliest rounds, working toward the championship game? In A, one has a pre-determined idea for which team is the best in the country and disregards the path that team must take to become champions. Those using B’s methodology look at each game and consider the participants, compare their respective records, their strengths of schedule, demonstrated strengths and weaknesses, record against common opponents and even how travel and geography could affect performance. In a methodical, rigorous evaluation, the result is a conclusion about which team can win 6 consecutive games and become the national champion. Outcome vs Process Outcome-based investors start with an expected outcome, typically based on prior results, and select assets accordingly. How many times do we hear the gurus of Wall Street preach that stocks return 7% on average and therefore a well-diversified portfolio should expect the same thing this year? Many investors take the bait and few question the rather simple approach that drives the expected outcome and ultimately the investment selection process. Process-based investing, on the other hand, is a tactic to better determine how assets should perform. The method may be based on macroeconomic expectations, technical analysis or a bottom-up assessment of individual companies to name a few. Process investors do not just assume that yesterday’s winners will be tomorrow’s winners nor do they diversify just for the sake of diversification. They create a procedure to help them forecast which assets are likely to provide the best risk/reward prospects and deploy capital opportunistically. “The past is no guarantee of future results” is a common investment disclaimer. However, it is this same outcome-based methodology that many investment managers use to allocate their assets. Process driven investors employ thoughtful analysis to determine what investments should perform the best. Potential outcomes are the ending point of their analysis not the starting point of their work. A or B? So, why would people use a less rigorous process in investing than the one they use in filling out their NCAA tournament brackets? Starting at the final game and selecting a national champion, is similar to identifying a return goal of, for example, 10%. How that goal is achieved is subordinated to the idea that one will achieve it. In such an outcome based approach, decision making is predicated on an expected result. Considering each of the 67 possible match-ups in the NCAA tournament to ultimately determine the winner applies a process-oriented approach. Each decision is based on the evaluation of comparative strengths and weaknesses between teams. The expected outcome is a result of the analysis of factors required to achieve the outcome. Summary Very few filling out brackets this year will pick Duke solely because they won the tournament last year. Many investors, however, will select investments based on what performed well last year. The following table (courtesy invest-assist.blogspot.com and Koch Capital) is a great reminder that building a portfolio based on last year’s performance is a surefire way to ensure you are not making the most out of your portfolio. Click to enlarge Winning or losing a basketball pool has benefits like bragging rights and potentially winning some money. Managing a client’s investments deserves much more thoughtfulness. Those who apply a well thought out process-oriented approach provide their clients a much more rigorous, durable and time-tested method to consistent performance. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.