Tag Archives: nreum

AZIA: A Worthwhile Investment Despite Challenges For Central Asia Ahead

Summary Although the economic outlook is not entirely favorable in Central Asia, the current valuation of the Global X Central Asia & Mongolia ETF presents a buy opportunity. While falling commodity prices have slowed economic growth in Central Asia, and will still present challenges ahead, it still has a favorable investment climate. The fund is trading extremely close to its 52-week low, is trading below its book value, and has a P/E of 11.34. Countries that are currently suffering from low commodity prices actually present excellent buy opportunities. Global X Central Asia & Mongolia ETF (NYSEARCA: AZIA ) is at a very strategic buy point, as it is trading near its 52-week low and has extremely low valuation. It invests into high-growth countries in Central Asia that have had an economic downturn due to falling commodity prices. The fund’s price drop to 9.53, far from its 52-week high of 14.45, has provided very favorable valuation . P/E Ratio: 11.34 P/B Ratio: 0.98 P/S Ratio: 1.28 A combined look at the macroeconomic outlook for Central Asia and the performance of the individual fund holdings shows that while economic growth will be slower and some companies have had setbacks in financial performance, the impact on the fund’s price has been sensationalized. Many companies were not drastically impacted by the decline of commodity prices, and have a favorable future outlook. This shock in the fund price has created opportunities for investors to invest in a fund trading below its book value, and that has room for growth amidst the economic challenges that Central Asia has ahead of it. Macroeconomic Outlook GDP growth has most recently been substantial, and is impressive to note given the fund’s sharp drop in price. While the GDP growth forecast for 2016 is less favorable overall, the growth is still impressive for Asia and a favorable climate for investment. The IMF has projected a 2% decrease in growth in Central Asia, due to lower commodity prices and the economic downturn in Russia. Inflation is another issue this region will continue to face, as inflation is projected to increase from 4.82% to 5.45% in 2016. As seen by an assessment of the fund’s holdings later in this article, commodity prices have had a mixed effect on the companies while companies with operations in Russia have witnessed a threat to financial performance. While Central Asia may not be the best environment for investment, the key opportunity presented here is within the fund, rather than the region. Moreover, the majority of the fund’s holdings are listed on US exchanges, providing investors with the opportunity to cherry pick the most favorable options, and to potentially avoid waiting long term for Central Asia’s holistic recovery. Top Exports As many of these countries rely on revenue from exports, the declining price of commodities has resulted in slowed economic growth. The fund’s performance is therefore correlated with the successful outlook for commodity exports and price recovery of commodities, with oil prices having the largest overall effect on many of these countries. Fund Holdings A closer look at the fund’s top holdings, which comprise 65.8% of the fund’s total holdings, provides a favorable outlook. Although the fund’s price sharply dropped since its high of 14.45 in 2014, financial performance of the fund’s holdings has not been poor enough to make this sharp drop in price justifiable. Dragon Oil ( OTCPK:DRAGF ) increased its net income from $512.6 million to $650.5 million in 2014. Although Highlands Bancorp ( OTCPK:HSBK ) was able to drastically increase net revenue, it still witnessed a sharp decline in net income in 2014 from $2.3 million to $0.7 million. The company has a P/E of 14. KMG Chemicals (NYSE: KMG ) increased its net income from $9.3 million to $13.8 million in 2014, and its net revenue from $263.3 million to $353.4 million. KCell JSC GDR’s net income decreased from 63,392 KZT Million to 58,271 KZT Million in 2014. Nostrum Oil and Gas’s net income fell from $220 million to $146 million. Turquoise Hill Resources (NYSE: TRQ ) has consistently been increasing its bottom line since 2010, resulting in the beginning of profitable operations in 2014. Vimpelcom ( OTC:VMPLY ) operated at a loss of $903 million in 2014, and its revenue continues to be threatened due to its operations in Russia . MIE Holdings ‘ net income fell from $45.6 million to $9.4 million in 2014. Mongolian Mining Corporation ( OTC:MOGLY ) had a substantial drop in net income and net revenue, and is being threatened by increased operations costs and the declining price of coal. Conclusion Overall, the financial performance of the fund’s holdings was exceptional, and the sharp drop in the fund’s price during this year is not entirely befitting. A buy opportunity has thus emerged, either directly into this fund, or into some of the individual holdings. Low commodity prices and economic adversity in Russia have been negative drivers for this fund, although they have not completely deterred the fund’s performance. While the fund is overall a favorable endeavor, Dragon Oil stands out the most at first glance, due to its lower valuation and growth in 2014. The level of growth projected for the future in Central Asia is still acceptable, and the valuation of this fund is certainly superior, when compared to other alternatives in Asia. While the threat of commodity prices poses an exceptional risk, the fund’s superior valuation and the buy opportunity that has thus emerged makes it a worthwhile endeavor. Central Asia is merely one of many destinations that is currently suffering from the drop in commodity prices; I have previously mentioned Peru , Chile , and Brazil as having similar opportunities. This current economic situation has created global buy opportunities, and Central Asia is surely one destination with ample potential for a rebound. 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.

Why Do Fundamentals Matter?

With a booming market, everyone forgets fundamentals. Someone, the other day, told me that “You don’t need profits to pay bills” when talking about Amazon. If that’s not a sign of euphoria and not understanding how wealth is built, I don’t know what is. The reason fundamentals matter in the long run is that wealth is built on cash flow, profit, and overall returns. Yes, a company can profit but if you’re paying too much for that profit, it’s going to hurt you in the long run because there will be a time when your investment is out of style and everyone will revert back to fundamentals. It happens in every bear market. People flee the exciting fast growing stocks that aren’t doing as well financially to go to companies that generate cash flow and build their balance sheet. Not only in stocks. Real estate as well. The last 15 years have been a boom in real estate, even after a big bust. Real estate is driven by income. I randomly pulled 28 markets that I could think of in this country and looked at their median income growth and their real estate value growth since 1990. The direct correlation from one city to another wasn’t exactly there, but when you looked at all 28 cities as a whole, they were very much in line. Median income growth was 2.32% per year on average and the average real estate growth was 2.6% per year. Not exact, but close. During the recent 15 years of booms in major markets (that were also in my 28 city analysis), we were seeing 15-20% growth per year even though income wasn’t growing NEARLY as much. Then we saw a massive drop in prices and another rebound, so everyone assumes that the past problems were past problems. We shall see. The bottom line is that everything reverts to the mean. We are never exactly fairly valued. We are either overvalued or undervalued in every investment asset. You are either a buyer or seller of assets. It’s that simple. I choose to wait until asset prices get to the point where they are undervalued enough to make me feel that above-average returns will be experienced based on historical averages. Does it require A TON of patience? Absolutely. Is it frustrating at times? 100%. To hear the so-called “experts” tell me that I’m missing it and I don’t understand and “This time is different” has become annoying. But I stick to fundamentals. And at the end of the day, they win out. Fundamentals are the only true way to measure value. You have to find out what truly defines the price of an asset and buy when the asset is selling for below that fundamental point. Is it just one thing? No. But is it a ton of complicated points? Absolutely not. There are a few things that matter when looking at investments and it is the job of a true investor to understand what those are and where they have stood historically (not just over 25 years but over 60+ years). Share this article with a colleague

Vanguard Wellesley Income Fund: The Reverse Of Wellington

Having written about VWELX, a reader asked my take on sister fund VWINX. The two are pretty much the reverse of each other. That, in the end, winds up being a risk issue for potential investors. A lot of investors look at bonds as a way to generate income. And that’s true. But in an asset allocation model, they are also a way to provide diversification and stability. In other words, a big part of owning bonds is safety. And that’s where a comparison of value-focused Vanguard Wellesley Income Fund (MUTF: VWINX ) and Vanguard Wellington Fund (MUTF: VWELX ) leads to some interesting findings. One down, now for number two I recently wrote an article about Vanguard Wellington . Within the comments, a reader asked if I would also take a look at sister fund Vanguard Wellesley. The comparison of the two is actually pretty interesting and highlights an important aspect of investing: risk. Wellington’s portfolio goal is to actively invest in stocks and bonds with a mix of roughly two-third stocks and one-third bonds. There’s a band around those percentages since it’s an actively managed fund, but it generally keeps pretty close to its goals. Sister fund Wellesley’s goal is the mirror image, one-third in stocks and two-thirds in bonds. And what that means for performance is very important. For example, as you might expect, Wellington outperforms bond-heavy Wellesley over the trailing one-, three-, five-, 10-, and 15-year periods through June on an annualized total return basis. That said, over the longer periods, the numbers start to get pretty close. There’s just 30 basis points or so separating the two funds over the 15-year period and around one percentage point over the trailing decade. But, the trend is intact, the fund with more stocks does, indeed, do better on an absolute basis. Interestingly, the income both funds generate is pretty close, too. Wellesley’s trailing 12-month yield is a touch under 3%. Wellington’s yield is roughly 2.5%. To be fair, a good portion of that has to do with the current low rate environment. In a different period, with higher interest rates, I would expect Wellesley’s yield advantage to be larger. But what about risk? But return and distributions aren’t the only factors to consider. Bonds are also about risk control. And on that score, these two funds have very different profiles. For example, over the trailing three years, Wellington’s standard deviation, a measure of volatility, is around 5.5. That’s a pretty low standard deviation. However, Wellesley’s number is an even lower 4. For most conservative investors, either of those two figures would be agreeable. Looking out over longer periods starts to show a bigger gap. For example, over the trailing 15-year period, Wellesley’s standard deviation is roughly 6 and Wellington’s is around 9.5. That’s a more meaningful difference. And remember that the two funds had very similar performance numbers over that span. Thus, over the trailing three years, Wellington’s Sharpe ratio of 2, a figure that measures the amount of return relative to the amount of risk taken, outdistances Wellesley’s 1.7. But over the trailing 15 years, those numbers flip, with Wellesley’s Sharpe ratio of 1 outdistancing Wellington’s 0.7 or so. Since performance over that longer term is so close, the big reason for the difference here is risk. Who’s right for what? At the end of the day, the two funds are both good options for conservative investors looking for a balanced fund. The biggest difference is really in the investor’s desire for safety. If the higher bond component in Wellesley will help you sleep better at night, then you should probably go with the more conservative of these two funds. If you don’t find solace in having more bonds in your portfolio, go with Wellington – noting that the choice is likely to lead to a slightly higher risk profile. That said, there’s a caveat. Interest rates are at historic lows. Bond prices and interest rates move in opposite directions. So when rates go down, bond prices go up. That’s been a tailwind for Wellesley for quite some time. If rates start to move higher quickly, however, that could turn into a headwind because as rates go up, bond prices go down. Wellesley’s higher debt component will mean rising rates are a bigger issue for the fund than for its sibling. However, both funds are run by the same management company and have been around a long time. They have dealt with shifting interest rates before. So this is something to keep in mind, but I wouldn’t let it deter me from purchasing either of these two well-run funds if my goal was to own them for a long time. 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.