Tag Archives: mutual funds

Concentrated Mutual Funds: Leaving Too Much To Luck

Summary The International Monetary Fund had raised caution on US mutual funds with large positions in high-yielding bonds that are issued by risky companies in the country or in emerging economies. To tap the low-rate environment, many mutual funds had stacked up these high-risk securities. Investors must note that mutual funds with a concentrated portfolio offer plenty of risks. The International Monetary Fund had raised caution back in September on US mutual funds with large positions in high-yielding bonds that are issued by risky companies in the country or in emerging economies. To tap the low-rate environment, many mutual funds had stacked up these high-risk securities. What this also indicates is a risk of concentrated holdings. While we are well acquainted with the benefits of having a diversified portfolio, investors must also note that mutual funds with a concentrated portfolio offer plenty of risks. The latest example of a mutual fund fiasco due to a concentrated exposure takes us back to the Valeant Pharmaceuticals (NYSE: VRX ) stock, which has seen a freefall since after mid-September. Eventually, Sequoia Fund (MUTF: SEQUX ) that has nearly 30% of its assets invested in Valeant suffered a nosedive. While this is one example, data from Thomson Reuters’ Lipper show that 13 other US equity funds (having over $1 billion worth of assets) have over 10% exposure to a single stock. Valeant’s Loss Drags SEQUX Down Valeant’s stock nosedived after it increased the price of two drugs (Nitropress and Isuprel) in Sept. 2015. Since Sept. 18, Valeant has slumped nearly 70%. Better-than-expected third-quarter earnings failed to halt the plunge, as allegations of debatable transactions with specialty pharmacies surfaced. Investors questioned the accounting and business practices of Valeant, in particular its relationship with specialty pharmacies. Valeant had issued a press release defending the accusations on its financial reporting and operations. The company clarified in its statement that it does not draw sales benefit from any inventory held at these specialty pharmacies. Valeant emphasized that its revenue recognition policy and accounting plan are in compliance with the law. However, these efforts were wasted as Valeant shares continued to decline even after a presentation in favor of the company by Bill Ackman, Chief Executive of Pershing Square Capital Management. Incidentally, Ackman is also the third-largest shareholder at Valeant. The stock’s slump affected its investors and the largest mutual fund holder, Sequoia Fund, ended up as a big loser. Since Sept. 18, SEQUX has lost 25.3%. Recent events related to this perhaps highlight the risks of concentrated holdings or investing too much in one stock. In late October, Vinod Ahooja and Sharon Osberg , two of the five independent directors of Sequoia Fund, resigned from the board. Separately, the fund house had to post a letter on its website to defend its significant investment in Valeant. The letter stated, “We have been asked by clients and friends why we own such a company. In our view, Valeant is an aggressively managed business that may push boundaries, but operates within the law… We believe the company will learn from the current crisis the importance of reputation and transparency to all stakeholders, especially the shareholders.” Focused Funds and Risks Focused funds are ones that invest in a limited number of companies, rather than having a diversified portfolio. The advantage of a diversified portfolio is that losses from certain investment instruments can be offset by gains in others. So the risk is diversified. However, for the concentrated or focused funds, the fate solely rests on the direction that the limited numbers of stocks are taking – either north or southward. A counter argument here is that well-chosen stock picks that are surging can also translate into significant gains for mutual funds. However, does that terminate the risk of the stock stumbling on hurdle and slipping into the bear territory? A case in point is Putnam Equity Spectrum A (MUTF: PYSAX ), which has 20.3% exposure to Dish Network (NASDAQ: DISH ). While in 2014 Dish Network gained 26.4%, PYSAX registered gains of nearly 3%. However this year, DISH’s 11.7% year-to-date loss of 11.7% is in tune with the 10.5% loss slump in the Putnam Equity Spectrum A fund. At the end of last year, Fairholme Fund (MUTF: FAIRX ) had almost half of its assets invested in American International Group, Inc. (NYSE: AIG ). However, Fairholme has diluted the holding to 19.59%, while 19.16% of its assets are invested in Bank of America (NYSE: BAC ) and 10.9% in Sears Holdings (NASDAQ: SHLD ). Funds with Above 10% Exposure to Single Stocks Some market experts are of the opinion that the purpose of a mutual fund is questionable when it has over 10-15% exposure to a single stock. However, we do have some examples of funds having at least 10% exposure to a certain stock. To begin with, Blue Chip Investor (MUTF: BCIFX ) has 30.8% of its assets invested in Berkshire Hathaway Inc. (NYSE: BRK.A ). While Berkshire Hathaway is down 9.6% so far this year, BCIFX has lost 3.4%. As of Jun 30, the total issues in the stock holdings for this Zacks Mutual Fund Rank #4 (Sell) fund was 14. Fairholme Allocation (MUTF: FAAFX ) and Fidelity Select Computers Portfolio (MUTF: FDCPX ) also have at least 20% invested in a single stock. FAAFX has invested 23.3% in Sears Holdings, while FDCPX has a 20.6% exposure to Apple Inc. (NASDAQ: AAPL ). FDCPX has also invested 9.2% in EMC Corporation (NYSE: EMC ). Year to date, Fairholme Allocation has lost nearly 7% while SHLD is down 33.7% in the same period. FDCPX has slumped 10.1% year to date. While Apple is up 6.3%, EMC has slumped 15.4% year to date. FAAFX has just 9 issues in the stock holding, FDCPX has 30. Both FAAFX and FDCPX carry a Zacks Mutual Fund Rank #3 (Hold). Separately, Fidelity Select Telecommunications Port (MUTF: FSTCX ) and Putnam Global Technology A (MUTF: PGTAX ) are two funds that have at least 10% invested in two separate stocks. Moreover, total issues in these stock holdings are also fairly high. FSTCX has invested 24.4% and 15.4% in AT&T, Inc. (NYSE: T ) and Verizon Communications Inc. (NYSE: VZ ), respectively. In case of FSTCX, year-to-date losses of respectively 0.2% and 3% for AT&T and Verizon were in contrast to the 2.5% gain for the fund. Perhaps, having 50 total issues in stock holdings helped to mitigate the loss. For example, among other holdings T-Mobile US, Inc. (NASDAQ: TMUS ) and Telephone & Data Systems Inc. (NYSE: TDS ) have gained 38.5% and 14.1 and FSTCX has invested 4.5% and 2.7% in them, respectively. FSTCX carries a Zacks Mutual Fund Rank #1 (Strong Buy). Coming to PGTAX, it has 11.9% invested in Alphabet (NASDAQ: GOOGL ) and 10.6% invested in Apple. Year to date, PGTAX has jumped nearly 12%, riding on Google and Apple’s year-to-date gains of 43.2% and 6.3%, respectively. PGTAX holds a Zacks Mutual Fund Rank #2 (Buy). So, taking a call to either invest in or abstain from concentrated funds depends on investors’ investment objective as the element of risk stemming from the direction of the largest stock holding decides their fate. While investing in PGTAX and FSTCX has proved fortunate, SEQUX, BCIFX and FAAFX have not been too lucky. Original post

3 Top-Rated Prudential Investments Mutual Funds To Buy

With around $74 billion of assets under management (as of Dec 2014), Prudential Investments – a segment of Prudential Financial, Inc. (NYSE: PRU ) – offers a wide range of funds including both equity and fixed-income, and open- and closed-end funds. The company currently offers services across 41 countries and territories including the U.S., Asia and Europe. Investment professionals of the company are also involved in managing assets of major corporations and pension funds throughout the globe. Founded in 1875, Prudential Financial has $1.1 trillion in assets under management (as of Sep 2015). Below we share with you 3 top-rated Prudential Investments mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. Prudential Jennison Growth A (MUTF: PJFAX ) invests a minimum of 65% of its assets in equity securities of companies having market capitalization of over $1 billion. PJFAX primarily focuses on acquiring securities of companies that are believed to have an impressive growth potential. PJFAX invests in securities including common stocks, nonconvertible preferred stocks and convertible securities. The Prudential Jennison Growth A fund has returned 10.5% over the past one year. PJFAX has an expense ratio of 1.05% as compared with the category average of 1.19%. Prudential Municipal Bond High-Income A (MUTF: PRHAX ) seeks to maximize income exempted from federal income taxes. PRHAX invests the lion’s share of its assets in municipal debt securities that are expected to provide return free from federal income tax. However, PRHAX may invest in securities that provide interest income, which is not exempted from the federal alternative minimum tax (NYSE: AMT ). The Prudential Municipal High-Income A fund has returned 4.3% over the past one year. As of September 2015, PRHAX held 412 issues, with 1.13% of its assets invested in Golden St Tob Securitization C Toba 4.5%. Prudential Short-Term Corporate Bond A (MUTF: PBSMX ) invests a large chunk of its assets in corporation bonds irrespective of their maturity durations. PBSMX is expected to maintain an effective duration of not more than three years. PBSMX may also invest in mortgage-related and asset-backed securities. PBSMX may allocate a maximum of 35% of its assets in dollar denominated debt securities issued by foreign entities. Not more than 20% of PBSMX is invested in securities that are rated below investment grade. The Prudential Short-Term Corporate Bond A fund has returned 1.1% over the past one year. Steven Kellner is one of the fund managers of PBSMX since 1999. Original Post

Best And Worst Q4’15: Large Cap Value ETFs, Mutual Funds And Key Holdings

Summary The Large Cap Value style ranks first in Q4’15. Based on an aggregation of ratings of 44 ETFs and 855 mutual funds. DIA is our top-rated Large Cap Value style ETF and FVSAX is our top-rated Large Cap Value style mutual fund. The Large Cap Value style ranks first out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Large Cap Value style ranked first as well. It gets our Attractive rating, which is based on an aggregation of ratings of 44 ETFs and 855 mutual funds in the Large Cap Value style. See a recap of our Q3’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Large Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 17 to 1000). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Large Cap Value style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The First Trust NASDAQ Rising Div Achiev ETF (NASDAQ: RDVY ), the iShares Enhanced US Large-Cap ETF (NYSEARCA: IELG ) and the State Street SPDR Russell 1000 Low Volatility ETF (NYSEARCA: LGLV ) are excluded from Figure 1 because its total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The State Street SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) is the top-rated Large Cap Value ETF and the Fidelity Rutland Square Trust II: Strategic Advisers Value Fund (MUTF: FVSAX ) is the top-rated Large Cap Value mutual fund. Both earn a Very Attractive rating. The Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) is the worst-rated Large Cap Value ETF and the Dunham Alternative Income Fund (MUTF: DAALX ) is the worst-rated Large Cap Value mutual fund. RPV earns our Neutral rating while DAALX earns our Very Dangerous rating. PACCAR Inc. (NASDAQ: PCAR ) is one our favorite stocks held by Large Cap Value ETFs and mutual funds and earns our Very Attractive rating. Since 2011, PACCAR has grown after-tax profits ( NOPAT ) by 10% compounded annually. During the same time frame, PACCAR improved its return on invested capital ( ROIC ) from 17% to a top quintile 21%. Despite the strong fundamentals, the stock is down 22% year-to-date, which has left shares undervalued. At its current price of $50/share, the company has a price to economic book value ( PEBV ) ratio of 1.0. This ratio implies that the market expects PACCAR’s NOPAT to never meaningfully grow from current levels. If PACCAR can grow NOPAT by 8% compounded annually for the next 10 years , the stock is worth $64/share today – a 28% upside. Unum Group (NYSE: UNM ) is one of our least favorite stocks held by RPV and earns our Dangerous rating. Since 2010, Unum’s NOPAT has declined by 17% compounded annually on the heels of NOPAT margin falling from 9% to 4% over the same time frame. The company currently earns a bottom quintile ROIC of 3%, which is well below the 8% earned in 2010. While UNM is down nearly 5% this year, shares remain priced for exceptional profit growth. To justify its current price of $36/share, Unum must grow NOPAT by 10% compounded annually for the next 17 years. This expectation seems overly optimistic given Unum’s inability to grow profits over the past five years. Figures 3 and 4 show the rating landscape of all Large Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, style, or theme.