Tag Archives: outlook

3 Strong Buy All-Cap Value Mutual Funds

Value mutual funds provide excellent choices for investors looking for bargains, i.e., stocks at a discount. Value mutual funds are those that invest in stocks trading at discounts to book value, and have low price-to-earnings ratio and high dividend yields. Value investing is always a popular strategy, and for a good reason. After all, who doesn’t want to find stocks that have low P/Es, solid outlooks and decent dividends? However, not all value funds solely comprise companies that primarily use their earnings to pay dividends. Investors interested in choosing value funds for yield should be sure to check the mutual fund yield. The mutual fund yield is the dividend payment divided by the value of the mutual fund’s shares. Below we share with you three top-rated all-cap value mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. Investors can click here to see the complete list of all-cap value funds, their Zacks Rank and past performance. DFA Tax Managed U.S. Marketwide Value II (MUTF: DFMVX ) seeks long-term growth of capital. DFMVX invests 100% of its assets in its Master Fund, The Tax-Managed U.S. Marketwide Value Series. The Master fund is expected to invest the lion’s share of its assets in companies located in the U.S. DFA Tax-Managed US Marketwide Value II has a three-year annualized return of almost 9.1%. DFMVX has an expense ratio of 0.22% as compared to the category average of 1.10%. Pioneer Core Equity Fund A (MUTF: PIOTX ) invests the majority of its assets in equity securities of U.S. companies. PIOTX may invest a maximum of 10% of its assets in securities of non-U.S. issuers, which include up to 5% of its assets in securities of emerging economies. The fund may also invest in initial public offerings of equity securities. Pioneer Value A has a three-year annualized return of almost 6.3%. Craig Sterling is one of the fund managers of PIOTX since last year. Homestead Funds Value (MUTF: HOVLX ) seeks capital appreciation over the long run. HOVLX primarily focuses on acquiring common stocks of undervalued companies with market capitalization higher than or equal to $2 billion. The fund considers factors including earnings valuations and debt ratios to identify undervalued companies. Homestead Value has a three-year annualized return of almost 9.9%. As of December 2015, HOVLX held 48 issues, with 5.47% of its assets invested in Bristol-Myers Squibb Company (NYSE: BMY ). Original Post

Why Some Funds Become Closet Trackers

By Detlef Glow Click to enlarge Closet trackers or closet indexing funds are a hot topic in Europe. Market observers are questioning the added value delivered by active managers who follow their index very closely, and regulators are looking into the business models of those asset managers. A number of funds under review with regard to closet indexing charge active management fees. Even though this seems to be a worthwhile topic for discussion, the critical discussion may go too far, as Jake Moeller-Thomson Reuters Lipper’s Head of U.K. and Ireland Research-described in his article ” Closet Trackers – Storm in a Teacup ” published earlier this year. From my point of view the discussion of closet indexing misses two very important reasons that may lead fund managers to a closed indexing approach: the size of the fund and the risk management process employed by the asset manager. Fund Size One point often neglected when discussing closet indexing is that funds may need to move in the direction of the index when they grow in size. The reason for this is quite simple: The larger a fund gets, the higher the order volume in a given security becomes. Since the securities in the index normally offer the best liquidity, the fund manager may need to buy these securities to fulfill the liquidity needs of the fund and its investors. Other than a fund promoter limiting access to a given fund by subscription rules, there are two common strategies a fund manager, driven by fund flows, can use to avoid becoming a closet tracker. Neither strategy may favor the fund promoter, since they limit fund sales, but both strategies seem appropriate to protect a fund from becoming too big. The first strategy is the so-called soft closing of a fund, meaning that only investors who already hold shares of the fund can buy additional shares. This technique is very commonly used by fund promoters, but it doesn’t help when the existing investors continue to buy more and more shares of the fund. In this case it is time for a hard closing, meaning no one can buy additional shares of the fund. Since investors can still sell shares of the fund, there is a chance the fund will reopen. In some cases the fund promoter maintains a waiting list, and all redeemed shares are sold directly to an investor from this list. As with a closed-end fund, it is always possible to list an open-end mutual fund on an exchange so that the redemptions can be directed to investors looking for shares of the fund. Risk Management Process A second reason for being a closet tracker might be the risk management process of the asset manager. Risk in this case is defined as additional risk to the benchmark (index) of the fund and not the risk of losing money. The holdings of the fund are monitored against the constituents of the benchmark, and the portfolio manager has only limited room to move away from the benchmark in terms of sector, country, and regional weightings. In some cases fund managers also are restricted at the securities level, so that a negative view on a single security means this security has a 10% lower weighting in the fund than in the benchmark. For example, the weighting for the security in the index is 3% while it is 2.7% in the fund. Such internal rules and guidelines lead automatically to closet indexing, and one can’t blame the fund manager for this. Even though the risk management process is a very important part of the due-diligence process of fund selectors, selectors need to think very carefully about the impact on the fund manager coming from the overall portfolio and risk management process. From my point of view every fund that charges a fee for active management should not stick too closely to its index, since this limits the ability to deliver an above-benchmark return to the investors. But on the other hand, it is the duty of the fund selector to identify those limits and to make a decision about whether the fund is the right vehicle for the investor. For retail investors it is even harder to evaluate the performance potential of a fund, since retail investors often have the chance to select a fund only based on its past performance and the official documents such as the fund prospectus and the key investor information document (KIID). This means a retail investor has to monitor the performance of the funds in his portfolio even more closely, since that might be his only chance to identify closet trackers and to make a decision as to whether to continue holding the fund. I think litigation, especially when institutional investors are involved, such as that being undertaken in the Nordic countries, is the wrong tack, and it will/should not be successful. The investor bought the fund for a reason and needs to check it frequently to see that the vehicle is still the right product for reaching a predefined goal. The views expressed are the views of the author, not necessarily those of Thomson Reuters Lipper.

What Makes A Stock Go Up (Or Down)?

When it comes to the stock market, one thing is for certain: stocks go up and stocks go down. The question is: what makes a stock go up or down? What makes a stock go up or down is determined by the recent operating results of a business and its future expectations. This means stock prices reflect both fundamentals (operating results) and emotions (future expectations). When either one or both of these change for a particular stock, its price will be affected. What Makes A Stock Go Up (Or Down)? It’s impossible to pinpoint exactly what makes a stock go up or down on a daily basis. To borrow a phrase from The Princess Bride , “Anyone who says differently is selling something.” On the other hand, it’s quite simple to see what makes a stock go up or down over time. Stock prices are based on how investors think a company will perform in the future compared to how the company is performing now. In any investment, investors are betting on the future. Because the future is uncertain, stocks cannot be priced based on a business’s current operating results alone. They must be valued by predicting future performance. Price Ratios In order to quantify these predictions, investors use price ratios. Price ratios are simple tools which show how a stock is priced compared to its recent operating results. For example, a Price-to-Earnings (P/E) ratio of 10 says that a stock is valued 10 times higher than its current earnings. This does not mean that investors expect the company’s earning to increase by a multiple of 10 in the near future. It merely means that if the earnings were to stay constant, investors would break even on their initial investment after 10 years. In other words, the earnings yield on the principal is 10% (10/100 = 0.1). Say a stock has a P/E of 50 and investors still expect to receive an earnings yield of 10%. Paying 50 times earnings only makes sense if the company’s earnings are expected to increase substantially over time. Multiple Futures No matter how badly stock analysts pretend to be fortune tellers, no one can accurately forecast a company’s future performance (especially on a consistent basis). Charles Duhigg, in his book Smarter, Faster, Better: The Secrets of Being Productive in Life and Business , summarizes the reality of what the future is. Duhigg says, “The future isn’t one thing. Rather, it is a multitude of possibilities that often contradict one another until one of them comes true.” These multitude of possibilities are what cause price ratios to fluctuate so often for any one stock. Although there are countless numbers of possible futures when considering a stock investment, there are really only three general scenarios. Scenario #1: A company’s operating results will increase. Scenario #2: A company’s operating results will remain constant. Scenario #3: A company’s operating results will decrease. The level of a stock’s price ratios is determined based on which scenario investors anticipate will come true for that particular stock. Scenario #1: High price ratios. Scenario #2: Average price ratios. Scenario #3: Low price ratios. Operating Results Before getting too focused on price ratios, it’s important to remember that change in operating results is the second half to determining what makes a stock go up or down. Say a stock is reporting earnings per share (EPS) of $5 and has a P/E of 10. The stock would be valued at $50 per share ($5 x 10 = $50). Then, the company unexpectedly reports EPS of $5.50. If the P/E stays at 10, the stock is now valued at $55 per share. To summarize, stock prices go up or down depending on changes in operating results and the levels of its price ratios. The interesting thing is that changes in operating results most often trigger changes in price ratios. Because the future is hard to predict, operating results often differ (sometimes greatly) from what investors expect them to be. When a surprise like this happens, future expectations are reconsidered and price ratios are modified. Impact of Surprises In David Dreman’s book, Contrarian Investment Strategies: The Psychological Edge , he notes the impact of such surprises. Here is Dreman discussing the market’s reaction to unexpected results: Several researchers have found that when a company reports an earnings surprise (that is, a figure above or below the consensus of analysts’ forecasts), prices move up when the surprise is positive and down when it is negative.” It makes intuitive sense that stock price adjustments correlate with positive or negative surprises. Not only do the surprises reveal a change in operating results, but the change in operating results affect the future expectations of the company. This explains why value stocks (low price ratios) outperform growth stocks (high price ratios) over time. Value Goes Up, Growth Goes Down Low price ratios anticipate negative futures (decreased profits) and high price ratios anticipate positive futures (increased profits). Therefore, stocks with low price ratios have more upside potential. On the flip side, stocks with high price ratios have nowhere to go but down. In Contrarian Investment Strategies , Dreman references several studies which show that positive surprises impact value stocks greatly but only minimally affect growth stocks. The studies similarly show that negative surprises impact growth stocks greatly but only minimally affect value stocks. Here’s Dreman explaining the impact that both positive and negative surprises have on growth stocks: Growth Stocks: Positive Surprises Since analysts and investors alike believe that they can judge precisely which stocks will be the real winners in the years ahead, a positive surprise does little more than confirm their expectations.” Growth Stocks: Negative Surprises Investors expect only glowingly results for these stocks. After all, they confidently – overconfidently – believe that they can divine the future of a ‘good’ stock with precision. Those stocks are not supposed to disappoint. People pay top dollar for them for exactly this reason. So when a negative surprise arrives, the results are devastating.” And here’s Dreman explaining the impact that both positive and negative surprises have on value stocks: Value Stocks: Positive Surprises Those stock moved into the lowest category precisely because they were expected to continue to be dullards. They are the dogs of the investment world and investors believe they deserve minimal valuations. A positive earnings surprise for a stock in this group is an event. Investors sit up and take notice. Maybe, they think, these stocks are not as bad as analysts and investors believed.” Value Stocks: Negative Surprises Investors have low expectations for what they believe to be lackluster or bad stocks, and when these stocks do disappoint, few eyebrows are raised. The bottom line is that a negative surprise is not much of an event.” Fundamentals Change Expectations These scenarios explain why value stocks have nowhere to go but up, and growth stocks can only go down. If a value stock’s fundamentals unexpectedly increase, not only will its operating results improve, but investors’ future expectations will be raised as a result. Contrarily, a growth stock’s fundamentals are already expected to increase. Any improvement in operating results is already priced into the stock. Decreased operating results are already priced into value stocks but not growth stocks. Unexpected poor performances wreak havoc on growth stocks, but not value stocks. Buy Value Stocks Because human emotion plays a critical role in what makes a stock go up or down during the short term, investors are wise to invest where expectations are low and positive surprises are likely. To paraphrase a line from The Wolf of Wall Street, “It doesn’t matter if you’re Warren Buffett or Jimmy Buffett, no one knows if a stock will go up, down, or sideways.” We can know, however, which stocks are more likely to go up. Buying stocks with low price ratios is a time-tested approach to achieving superior investment returns.