Tag Archives: nreum

Conservative Total Return Portfolio: Sells A Winner And Welcomes Back An ‘Old Friend’

Summary The CTR sold VLO after less than a month following double digit gains. While money was left on the table, the market in this name seemed a little “frothy”. After recently selling BX, the combination of a price drop and company strategic moves prompted the equity to be “welcomed back”; BX is still best-in-breed. AAPL is nearing an inflection point, while IBM may be nearing a breakout. GM is universally hated, but that has to change (or does it). I introduced the ” Conservative Total Return ” or CTR portfolio in August 2014 and try to provide monthly updates. The general philosophy of this method has allowed me to cumulatively beat, since 1999, the S&P 500 by a wide margin. As the market has “evolved”, so have the holdings. While the investments in the CTR are conservative, the portfolio is dynamic (as is the market and its “favorites”). In the June report, I noted broadening the portfolio base to add a transport (American Airlines (NASDAQ: AAL )) and an energy company (Valero (NYSE: VLO )). Unfortunately for the diversification strategy (but fortunate for the portfolio), VLO appreciated significantly and I exited the position. Why did I exit below my target price? Simply put, VLO appreciated fast in a short time. In reviewing my investing mistakes, I have learned that in the past I have been reluctant to sell; waiting for the market to “get it right” and hit my target price. Often my stubbornness has been costly. In recent years (with a lot of prompting from my wife), I have been more prone to take a quick profit as I am skeptical of “one-way elevator rides”. So when VLO jumped more than 10% in less than a month, I decided not to be greedy and took profits. Subsequently, VLO has considered to appreciate. While the greedy side of my wishes I held on, the logical side of me believes the market is over-reacting to perceived good news and is happy I sold. I will continue to monitor VLO and my re-enter if 1) the core value has changed and/or 2) pricing becomes favorable. During the month, I re-entered a favorite (Blackstone- (NYSE: BX )) that I had previously sold for reasons similar to VLO. In that case, BX had become “everyone’s favorite stock”, which always makes me nervous. I sold my position at $42.80 and re-entered at $39.45. While I was absent from the stock, BX made some moves I “approved of”, including accelerating the sale of US single family homes. The worsening energy market also makes it more likely BX will be able to deploy recently raised funds productively (previously I was concerned too much money was chasing too few deals and the funds could underperform). Even while selling (and subsequently adding KKR & Co. (NYSE: KKR )), I maintained BX was “best of breed”. I am happy to once again be holding this winner. An error I made was not being focused enough on the markets during the short-lived Greece/China crisis. I have been looking to increase exposure to financials, but at more attractive prices. Frankly, I wanted to buy Citigroup (NYSE: C ) and missed out. I may still enter C, or another financial, but the post-Q2 earnings response to the group was a little too optimistic for my tastes; there may be another opportunity during the next mini-crises or when enthusiasm pulls back. I am OK with missing an opportunity, if it means not overpaying and having my risk/reward skew too heavily toward risk. The Conservative Total Return Philosophy The essence of the CTR method is to combine a strong value bias with flexibility, opportunism and an ability to assimilate and respond to new information. The core philosophy will always be the same; however, as the economic cycle grows older, identifying the appropriate time to “harvest” becomes increasingly important. In assessing the prospects for all of the portfolio members, I feel good that the risk-reward dynamic is positive and, on a risk-adjusted basis, market beating (taking into account the strong value provided by dividends). Feedback from readers has been a partial motivator in my broadening my market segment exposure. The Individual Stocks The core stocks in the portfolio are (alphabetically): AAL, Apple (OTC: APPL ), Blackstone Discover Financial Services (NYSE: DFS ), Ford, (NYSE: F ), GE, General Motors (NYSE: GM ), Harley Davidson (NYSE: HOG ), International Business Machines (NYSE: IBM ), JPM, KKR and Siemens (OTCPK: SIEGY ). (click to enlarge) As the above chart confirms, my positions will generally have a strong bias toward dividends, reasonable valuation and a moderate (in most cases) PEG. Below are comments summarizing my interest in the equity. The chart also contains the appropriate metrics (valuation, fair value, potential gain). Holdings Apple – APPL has a bit of room to run, whether upward valuation is based on more than iPhone sales will be clarified following Q2 earnings. I believe the watch is a non-event (a disappointment for some bulls) and payments have potential. By the end of the year, AAPL has to demonstrate the catalyst for further appreciation or risk being “dead money” (or worse). I am not a “perma-bull” on APPL (though I use the Company’s products). Blackstone – As noted above, BX was re-introduced at a price reflecting a sold risk/reward opportunity. Still the best of breed, well-funded and poised to profit from market distress and volatility (especially in energy). The harvest of US residential is viewed by the author as a positive. Discover Financial – DFS should be worth more. The stock is trading below levels of Q1, when it announced some bad news. I continue to believe the US economy is very strong, and DFS will benefit (and reflect the growth in higher EPS and stock price). Ford – F has underperformed due to the (predictable) ramp-up of the F150. The industry in general is out of favor, with investors using the excuse de jure to send stock prices lower. Yes China is slowing, but Europe is recovering and the US economy continues to do well. While not quite as cheap as General Motors , F offers nice appreciation potential and is a good “partner” to GM in the portfolio. General Electric (NYSE: GE )- I am thrilled about GE’s medium-term future. The near-term makes me a little nervous as the stock is near fully valued and there is uncertainty with respect to the Alstom and Electrolux transactions. Higher post-GE Capital tax rates also make stock appreciation more challenging. General Motors – Even more than F, GM is the stock everyone loves to hate. Looking at the numbers, it is hard to see much downside (or at least the risk/reward looks very favorable). As with F, China is concerning, but solid progress in Europe and the US should continue. Low gas prices for the foreseeable future put a backstop on highly profitable truck and SUV sales. I believe analysts are too concerned with unit sales and not focused enough on product mix. Harley Davidson – I may have bought HOG too early. However, HOG is an iconic brand and will, over time, garner the premium multiple it deserves (and has held historically). At the current 12.2x forward earnings, it is hard to see much downside (and a lot of upside). Housing prices in the US are rising; historically, HOG sales increases have been incredibly strongly correlated to appreciating housing prices (wealth effect x more retiring baby boomers). International Business Machines – IBM has been a disappointing investment. However, the Company has repositioned and is making solid progress. Improving Europe and progress in “Cloud” should drive a break-out sometime in the next 3 (or at the most three) quarters. Trading at less than 11x forward, there is little downside and much (potential) upside; a 3% dividend provides a bit of a reward for waiting. JPMorgan (NYSE: JPM )- JPM has performed very well, as have the financials. The stock has grown into its valuation and I am confident in twelve months the stock should perform well. As I have mentioned, I would like to add more in the sector, but recently investors have been a bit too eager. Siemens – Continues to be a play on recovering Europe and a weak US dollar. After GE and Honeywell (NYSE: HON ) have performed and appreciated, SIEGY remains a “show me” laggard. It may take a while, but SIEGY should deliver appropriate total returns through the investment period. Position Summary In my opinion, the positions continue to provide a nice balance of innate conservatism, multiple and earnings driven appreciation potential and exposure to a more mature stock market. Please keep in mind that my portfolio also consists of actively managed real estate, index funds (international, emerging markets and domestic) and bond proxies. I this in response to readers who thought the noted stocks were 100% of my investments and lacked diversity (if that were the case, I would agree). The CTR is a portfolio of stocks that in my opinion are conservative (strong reward vs. risk bias) and well positioned to outperform with below-average risk. I own all of the stocks in the CTR (I also own other positions which I consider speculative or otherwise inappropriate to recommend). I appreciate any feedback on individual securities and recommendations on equities to add to the CTR. This article reflects the personal opinions of the author and should not be relied upon or used as a basis in making an investment decision. Investors should always do their own due diligence prior to making an investment decision. 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. Disclosure: I am/we are long AAL, AAPL, BX, DFS, F, GE, GM, HOG, IBM, JPM, KKR, SIEGY. (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.

5 Second-Half Tips For Investors

Rising Rates Aren’t the Only Market-Mover Much of the market’s focus so far in 2015 has been on when the US Federal Reserve (Fed) will raise rates. With the Fed promising to be “data-driven,” each economic release has received more scrutiny than usual. But the decision on rates is not the only driver of markets. Increasingly, events and data outside the US are having an impact on markets here at home, adding to the range of factors that affect investors: 5 Tips for Investors 1. Ensure adequate exposure to risk assets. Many investors with longer time horizons are in jeopardy of being unable to fund their goals because their allocations are over-exposed to cash and core bonds. For long-term goals like retirement or a college education, portfolios need exposure to asset classes that have the potential to deliver growth – which means investors need adequate exposure to stocks. 2. Watch out for interest-rate complacency. At some point, the Fed will begin raising interest rates, and we don’t believe most market participants are prepared for the hike. Equity investors should anticipate some negative short-term reactions in the stock market, but should also keep in mind that equities have historically sustained several rate rises before declining. What’s more, given how low short-term rates currently are, higher rates would be unlikely to constrain economic output and activity which means that any equity-market selloff should be limited. The greater risk of complacency may lie with owners of US treasuries and other core bonds who are anticipating continued lower rates, those investors may be unpleasantly surprised. 3. Be risk-aware. While many investors worry about more obvious risks, such as tail risk (the risk of an asset or portfolio moving more than three standard deviations away from its current price), they may be less aware of other dangerous threats, such as liquidity risk. For example, in a recent Allianz Global Investors survey on risk, we found that 95% of institutional investors believe tail risks pose a medium, high or very high risk of likelihood over the next 12 months, but 40% view liquidity risk as little or no threat. And even though investors worry about tail risk, far fewer believe they are adequately equipped to protect against it: just 27% use strategies that hedge against it. It’s critical for investors to be well-informed about all the risks facing their portfolio and the risk-management tools they have at their disposal. 4. Protect against volatility. We expect increased volatility in both stock and bond markets. This may mean investors should reduce their exposure to fixed income. However, investors shouldn’t abandon stocks because of higher volatility; instead, they should manage that volatility wherever possible. We recommend the use of options strategies and other sophisticated tools, in addition to broad portfolio diversification and exposure to dividend-paying stocks, which have historically offered lower volatility than the overall stock market. 5. Use active management. In this unique and unpredictable market environment, we expect correlations among stocks and among asset classes to fall, creating a more differentiated market environment in which active managers can outperform. In addition, we expect rotations in leadership among different asset classes. Investors might want to consider using an actively managed multi-asset investment that offers broad exposure and can adjust allocations to take advantage of opportunities (including low valuations) and manage risks (including rising rates and geopolitical crises). Strategies like these can also help investors offset behavioral biases and self-inflicted psychological obstacles by providing one professionally managed investment that they can “set and forget.” The Bottom Line In the second half of 2015, investors need to recognize that downside risk has increased for both stocks and bonds. However, if they have long time horizons – and if they use risk-management tools in a well-diversified, actively managed portfolio with adequate exposure to risk assets – then they should be in a much better position to meet their long-term goals.

Securities Lending – The Dark Side Of Mutual Funds

A topic that hasn’t been discussed by market observers and regulators for a while is securities lending, but it might be on the agenda again soon. iShares – the exchange-traded fund (ETF) arm of the world’s largest asset manager, BlackRock (NYSE: BLK ) – has announced that the firm will increase its engagement in securities lending and has therefore scrapped its self commitment on the percentage of securities held by the firm that can be lent to third parties. This step is rather surprising, since securities lending by ETFs was one of the main points raised by critics in the past. The reaction of the ETF industry to this announcement was for some ETF promoters to introduce a ban on securities lending, while others such as iShares introduced a maximum percentage of securities that can be lent. From my point of view, this discussion did not go far enough, since securities lending is not done only by ETFs. The vast majority of securities-lending activity is done by actively managed mutual funds, since the overall assets under management are much higher in this market segment. Is securities lending bad for the investor? Don’t get me wrong, securities lending is not bad per se , but one needs to think twice about getting a fund involved in this kind of activity, since it can have negative impacts on the fund’s performance. The first point to take into consideration is that most counterparties that lend securities use them to build short positions. If this works, the fund and therefore the shareholder of the fund will face a loss on the given position, since it is still a long position for the portfolio. This raises the question of whether securities lending is in the best interest of the fund owner/investor, since the loss might have a higher negative impact on the fund’s performance than what the lending fee adds on the positive side. Income from securities lending as a source of return The income from securities lending is the second point one needs to take into consideration, since the fund does not benefit from the full lending fee. Even though the fund and therefore the investor bear the full risk of the default of a borrower, the lending fee is normally shared between the investor and the fund promoter. Securities-lending activities offer a free lunch to fund promoters, since they get return without bearing any risk. This stream of risk-free cash might be one of the reasons iShares has scrapped its restrictions on securities lending. iShares has lowered dramatically the management fees for some of its ETFs on major market indices to compete with Vanguard in Europe. This means the revenue of iShares and therefore the revenue of the asset manager, BlackRock, might have decreased, and they may want to regain profit by increasing their securities-lending activity – one of the easiest ways to achieve this goal. I think it would be much fairer if the fund promoter got a fixed handling fee for its involvement in the securities-lending activities of the fund instead of a large percentage of the overall income generated by these activities. Again, the fund promoter does not bear any risk and should therefore receive only a small part of the income. An investor should carefully read the annual report of the fund, especially where it is stated how much revenue the fund has made from securities lending and how much of this revenue has been paid to the fund promoter. Collateral as an additional source of risk One may argue that the investor bears no risk from securities-lending activities, since normally all transactions are secured by collateral. That is right, and in most cases these transactions are even over-collateralized. But, since the current regulations on which securities can be used as collateral are rather weak, some market participants may use the collateral to offload toxic or illiquid paper from their balance sheet. If a bank wants to reduce risk on its balance sheet, it may borrow some government bonds from a fund and return unrated or other risky assets as collateral to the lender. This may not look like a serious issue for fund shareholders at first sight, since they won’t own this paper as long as the borrower does not default. But if there is a default, it would be questionable whether all the securities within the collateral are liquid and at what price they can be sold to pay the dues. In this case even an over-collateralization might not protect the investor from a loss in the net asset value of the fund. Increased market efficiency-the bright side of securities lending Even though securities lending seems to be a questionable practice from a shareholder’s point of view, it has some positive effects on the markets. One of these positive effects is increased liquidity in the markets, since all transactions done by the lender increase the liquidity in the underlying security and therefore in the overall market. But it is not only liquidity that makes a market efficient. In addition, the different market participants need to have the ability to “bet” against a security, if the valuation seems to be too high. In this regard, securities lending does help increase the efficiency of markets, since short selling has the effect of bringing down the price of a security. The strategy of a short seller is to search for securities that seem to be overvalued and try to bring the price of the security to a lower level, i.e., a price that is closer to the real value of the security. Monitoring securities-lending activities-a call for investors and regulators From my point of view, the idea of securities lending is not bad at all. But to follow this strategy with securities held in a mutual fund, which is owned by long-term retail investors who can’t evaluate the risk of this kind of activity is a bad idea, especially when the revenue from securities lending is shared between the fund promoter and the investor. Again, I don’t think securities lending is necessarily a bad thing, but investors in a fund should know about these activities before they buy the product. Regulators should force fund promoters to disclose in the key investor information document (KIID) whether they are doing securities lending or not and how the revenues are shared. In addition, the regulator should set clear guidelines on the quality of the securities used as collateral, since this could decrease the level of risk for the investor. It would be helpful for the investor if all funds and not only ETFs would disclose on their website the collateral they accept for the securities they lend out. This would help fund selectors and investors make educated decisions on the risk they might have from securities lending within the fund and would lead to more educated decisions in the fund selection process. Even though some promoters may find this level of transparency hard to achieve, investors should claim a need for this information; they own the assets of the fund and the promoter is the fiduciary who should act in the best interests of the investor. On the other hand, it might be possible that regulators should ban all securities-lending activities from retail mutual funds, if fund promoters are not willing to disclose all the information needed by investors to make a proper evaluation of a mutual fund. After the financial crisis of 2008 investors have become very cautious on the use of derivatives, securities lending, and the involved collateral of mutual funds. I could imagine that it might be a competitive advantage for an asset manager to not be employing any of these techniques when the next crisis hits the market. The views expressed are the views of the author, not necessarily those of Thomson Reuters.