Tag Archives: mutual funds

Best And Worst Q3’15: Small Cap Growth ETFs, Mutual Funds And Key Holdings

Summary The Small Cap Blend style ranks eleventh in Q3’15. Based on an aggregation of ratings of 11 ETFs and 353 mutual funds. SLYG is our top-rated Small Cap Growth ETF and VSCRX is our top-rated Small Cap Growth mutual fund. The Small Cap Growth style ranks eleventh out of the 12 fund styles as detailed in our Q3’15 Style Ratings for ETFs and Mutual Funds report. It gets our Dangerous rating, which is based on an aggregation of ratings of 11 ETFs and 353 mutual funds in the Small Cap Growth style as of July 20, 2015. See a recap of our Q2’15 Style Ratings here. Figure 1 ranks from best to worst the eight small-cap growth ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated small-cap growth mutual funds. Not all Small Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 29 to 1218). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Growth style should buy one of the Attractive-or-better rated mutual funds from Figure 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 Vanguard S&P Small-Cap 600 Growth ETF (NYSEARCA: VIOG ) and the PowerShares Russell 2000 Pure Growth Portfolio ETF (NYSEARCA: PXSG ) are excluded from Figure 1 because their 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 Managed Portfolio Smith Group Small Cap Focused Growth Fund ( SGSNX , SGSVX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. The State Street SPDR S&P 600 Small Cap Growth ETF (NYSEARCA: SLYG ) is the top-rated Small Cap Growth ETF and the Virtus Small Cap Core Fund (MUTF: VSCRX ) is the top-rated Small Cap Growth mutual fund. SLYG earns a Neutral rating and VSCRX earns an Attractive rating. The iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) is the worst-rated Small Cap Growth ETF and the Alpine Small Cap Fund (MUTF: ADIAX ) is the worst-rated Small Cap Growth mutual fund. IWO earns a Dangerous rating and ADIAX earns a Very Dangerous rating. Methode Electronics, Inc. (NYSE: MEI ) is one of our favorite stocks held by Small Cap Growth funds and earns our Very Attractive rating. Since 2009, the company has grown after-tax profit ( NOPAT ) by 61% compounded annually. Methode Electronics currently earns a top-quintile return on invested capital ( ROIC ) of 23% and boasts an impressive 12% NOPAT margin. Weak quarterly guidance caused an overblown decline of 50% in the stock in early July. We think MEI is undervalued. At the current price of $27/share, Methode Electronics has a price to economic book value ( PEBV ) ratio of 0.9. This ratio implies that the market expects the company’s profits to permanently decline by 10%. If Methode Electronics can grow NOPAT by just 5% compounded annually for the next five years , the stock is worth $33/share today – a 22% upside. Healthways Inc. (NASDAQ: HWAY ) is one of our least favorite stocks held by Small Cap Growth funds and earns our Dangerous rating. The company’s NOPAT has fallen by 28% compounded annually since 2010. ROIC dropped to a bottom-quintile 3% from 8% over the same time period. Healthways’ business fundamentals are showing signs of weakness. In stark contrast, the stock price reflects quite sanguine expectations about future cash flows. To justify the current price of $12/share, Healthways must grow NOPAT by 12% compounded annually for the next 14 years . Expecting Healthways not only to reverse its profit decline but also sustain such levels of profit growth for over a decade seems highly optimistic and risky. Figures 3 and 4 show the rating landscape of all Small Cap Growth ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds (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 Max Lee receive no compensation to write about any specific stock, style, style or theme. 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. I have no business relationship with any company whose stock is mentioned in this article.

401(k) Fund Spotlight: American Funds New Perspective Fund

Summary The New Perspective Fund is the largest global growth oriented mutual fund in the world. The managers’ long-term approach has consistently resulted in outperformance within its category. Despite the fund’s strengths, investors should avoid it in an environment of a rising U.S. dollar. 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) Fund 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 out of this article it is helpful to understand my approach to investing in 401(k)s . New Perspective Fund The New Perspective Fund has the following share classes: If the fund is an option in your 401(k), it will most likely come in the form of the A shares or one of the R share classes. The expense ratio for the A shares is .76%. The expense ratios for the R shares vary widely, from as low as .45% to as high as 1.55%. For the purposes of this article I will assume the A shares are the available option and evaluate the fund based on the .76% expense ratio. The fund invests primarily in blue chip , multinational companies from anywhere in the developed world. Its stated focus is that of companies with strong growth prospects related to changes in global trade and economic relationships. It may also hold convertibles, preferred stocks, and bonds. At present, about half the fund’s holdings are U.S. companies. The fund has about $61 billion in total assets and is the largest global growth mutual fund available. Given its size, it tends to (indeed has to) focus on large capitalization stocks. As of June 30, 2015, the weighted average market capitalization (“cap”) of its 316 equity holdings was $52 billion. Simply put, the fund is a large (or more specifically, “mega”) cap global growth fund. Consistent Long Term Performance American Funds compares the New Perspective Fund’s performance to the MSCI World Index, which is a market capitalization weighted index that combines the stock markets of all the developed nations in the world (20+ countries). As far as I can tell, American Funds uses this index, because it is really the only one available that is comparable. As of June 30, 2015, the fund has outperformed this index in the past 1-year (+4.6%), 3-year (+2.2%), 5-year (+2.0%), and 10-year (+2.5%) periods. Using the Barron’s fund screener and looking at the universe of global, large cap growth funds with at least $3 billion in assets, I found the fund to be the top performer over the last one, five, and ten year periods. The fund’s managers (there are eight of them) take a long term approach to investing. This is reflected by the fact that the fund’s portfolio turnover was only 25% in 2014. The fund clearly adds value for investors wanting to invest in the growth dynamic of the entire developed world. An Important Consideration I think the most important consideration for 401(k) investors who have this fund as an option is whether or not they want to be invested in large cap growth companies of the international developed world. Currency fluctuations are an important consideration. The following chart shows the performance of the U.S. dollar index going back to the early 90’s: ^DXY data by YCharts In 2014, the U.S. dollar began a sharp move higher, which looks similar to the move back in 1997. In line with my forecast , I expect the present move higher of the U.S. dollar to be temporarily stalled by a spike in oil prices, before resuming a multi-year move higher. In this timeframe I also expect the Japanese Yen to outright crash and the Euro to also suffer. Given this, I prefer to stay exclusively in domestic U.S. stocks. The following chart shows how the total return of the New Perspective fund lagged the S&P 500 total return from January 2014 through February 2015 when the U.S. dollar was rising sharply: ANWPX Total Return Price data by YCharts I don’t know how the New Perspective Fund was invested during the second half of the 1990’s, but the following chart reveals how its total return severely lagged the total return of the S&P 500 during this period. Recall from the first chart above that this was the period of time when the U.S. dollar was rising significantly. My guess is that this underperformance was due to the fund’s foreign holdings at the time. ANWPX Total Return Price data by YCharts I suppose an argument could be made that the fund will not lag in such an environment because most of its holdings are multinationals, however, I expect global capital, fleeing falling domestic currencies, to migrate to U.S. stocks. Low Dividend Yield Could Hurt The U.S. is due for a recession in the next few years. I think we are still at least a year away, but soon enough, one will be here. In an environment of slower growth and low interest rates, I would prefer to hold stock funds with higher dividend yields. As of July 31, 2015, the New Perspective Fund’s dividend yield over the previous 12 months was a weak .56%. That doesn’t cut it for me, especially considering the fact that a good portion of historical equity returns have come from dividends. Investors who want growth do not have to sacrifice good dividend yields . Moreover, 401(k) plans are tax deferred so it is a good place to be receiving ample dividend payouts. Conclusion The New Perspective Fund is a strong performer within its category, but its category is not well positioned in an environment of a rising U.S. dollar. Investors are better off sticking with domestic U.S. funds with high dividend yields. 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.

Fund Manager Briefing: TwentyFour Corporate Bond

By Jake Moeller Lipper’s Jake Moeller reviews highlights of a meeting with Chris Bowie, Portfolio Manager, TwentyFour Corporate Bond Fund , on August 26, 2015. The new TwentyFour Corporate Bond Fund is the sister of the highly successful (and Lipper Award-winning ) TwentyFour Strategic Bond Fund . Launched only in January 2015, the fund is designed to perform against a relative benchmark (TwentyFour will shortly launch an absolute return bond fund) and is not slavishly devoted to maintaining a high yield. Mr. Bowie is a fund manager obsessed with liquidity. “You won’t find any private placements or unrated securities in this portfolio,” he stated. “I like quality and I want a small, compact portfolio.” Indeed, this fund is refreshingly compact. With only 70 securities, it is very small compared to some of the large corporate bond funds occupying the U.K. market, and Mr. Bowie doesn’t expect his fund will likely hold a significantly larger amount of holdings. In a credible move TwentyFour has recently stopped marketing its Strategic Bond Fund (at £750 million) to new clients in order to prevent pressure to increase the number of lines. TwentyFour has undertaken to similarly protect the Corporate Bond Fund from capacity constraints, should that need arise. The fund is designed along similar lines to Mr. Bowie’s previous Ignis Corporate Bond Fund , with an emphasis on delivering risk-adjusted returns across all sources of alpha, including duration and yield curve, stock selection and assets, country rating, and sector tilts. Mr. Bowie has an excellent pedigree in all aspects of corporate bond management and carries an enviable performance track record, once ranked by Citywire with the fourteenth best Sharpe ratio of all funds globally. Table 1. Composite Performance* of Chris Bowie from December 31, 2008 to Present within IA £Corporate Bond Sector Quartiles (click to enlarge) Source: Lipper for Investment Management. As a former computer programmer, Mr. Bowie has built his own system for examining risk/return that gives him some unique insights, particularly in constructing his credit buckets. “My system calculates a risk-adjusted return metric for every single bond,” he states. “This examines the last three-year cash price volatility for a bond and compares it to its current yield. If a bond is yielding 5%, but its three-year cash price volatility is 7%, that is quite a poor investment. If it is yielding 4% but has cash price volatility of 2%, this is much more attractive.” The fund has a very large position in BBB-rated securities at a whopping 44% (compared to the sector average of 38%) and a large component of BB-rated debt (16%), mainly around the five- to ten-year part of the curve. Mr. Bowie is also keen on corporate hybrids, with a 12% exposure there. “They’ve been good for us,” he states. “We have been selectively overweight for a while now.” Using his proprietary value system, Mr. Bowie cites the example of his preference for a Barclays Upper Tier 2 position that appears to have the wrong cash-price volatility for its rating. “It’s a no brainer!” he states. “If you buy the Barclays BBB on the same yield, you’ve increased your cash-price volatility three times for a single notch improvement in credit rating.” Table 2. Comparative Performance of Various Asset Class Proxies since 2000. (click to enlarge) Source: Lipper for Investment Management. Past performance does not guarantee future performance. For a fund manager whose week has just commenced with the “Black Monday” selloff in global markets, Mr. Bowie is strikingly calm and composed. “It’s not yet a solvency event,” he states. “This is a big question about growth.” While his tone is reassuring and his longer-term investment thesis is relatively intact, he does concede the crisis has warranted a few changes to his positions. He has just increased the duration of his portfolio from 7.1 years to 7.4 years (the sector average is 7.5 years) on the back of the selloff in Treasuries on Wednesday, August 26. This has created a partial hedge against the credit risk in some of his higher-beta names. He has also sold a small amount of his AT1 (additional Tier 1) bonds to further bring down his beta. “We expect further short-term volatility in equities markets,” he states, “and we don’t want to be selling bonds into the cash market. But we do want to mitigate some credit volatility.” While Black Monday hasn’t forced a redesign of Mr. Bowie’s overall strategy, it has placed emphasis on the outlook for inflation. “Until a week ago I thought the most likely thing was that the Fed would raise rates in September, the Bank of England following suit in Q1 next year, that we would have a normal recovery where inflation starts to gently rise, and we would see wage pressures elevate.” he states “But now, I’m wondering with what’s happened to oil and volatility and the noise out of China whether deflationary risk is more of a threat.” This concern comes despite Europe’s supportive quantitative-easing program and increasing business confidence and is also reflected in the fund’s duration increase outlined earlier. Table 3. Proportion of IA Sterling Corporate Bond Sector by Fund Size Ranking Source: TwentyFour AM. Data as at April 2015. The fund currently holds 14% exposure to gilts and supranationals. Mr. Bowie is well aware of outflows from competitors’ funds in the sector and the potential for investors to undertake a broader rotation out of corporate bonds. The gilt position and the high level of highly rated names is protection for him, should this occur. He argues, however, that corporate bonds should be an ongoing component of investors’ portfolios, with the long-term performance profile (even including 2008 – see Table 2, above) measured by the iBoxx Non Gilts BBB Index since 2000 offering considerably better performance with lower volatility than equities. He notes also that there are some headwinds for the asset class, but an active fund that examines the drivers of volatility is best placed to protect capital. There are many things going for this new launch. TwentyFour is a vibrant fixed income specialist that has made a canny hire in Mr. Bowie. His pedigree is strong, and-although he is running what is currently a defensive portfolio-his unique processes bring a fresh dynamic. Furthermore, the concentration of flows in the sector (see Table 3, above), with 70% of the entire sector contained in the ten top funds, should be of concern to all investors. A small and nimble fund has much to offer. * The composite is constructed in the private asset module of Lipper for Investment Management as follows: Ignis Corporate Bond Fund from 31/12/2008 – 30/6/2014, IA £Corporate Bond sector from 1/7/2014 to 13/1/2015 & TwentyFour Corporate Bond from 14/1/2015 onwards.