Tag Archives: portfolio

Chasing Beta Outside The U.S

Summary According to famous value investor Murray Stahl, beta is out of favor. The contrarian play is to seek out beta. The Powershares S&P Intl Dev Hi Beta ETF is one way to go long beta outside the U.S. Examination of its valuation and contents show how contrarian this bet really is and whether there is value. In his latest investment commentary , famous investor Murray Stahl says investors are now en masse shunning beta in favor of stability. This influx of funds into ETFs with stable prices further helps this category to stabilize. This powers a virtuous cycle that has led to large inflows to so-called low-volatility products or low-beta products. The contrarian thing to do is to go high beta. I don’t think it is a coincidence I’m finding lots of bargains among companies with highly volatile earnings patterns. The contrarian idea can be played through ETFs very easily and one option is the PowerShares S&P Intl Dev Hi Beta ETF (NYSEARCA: IDHB ). IDHB data by YCharts What is beta? Beta shows you the level of volatility in asset prices compared to a benchmark. The baseline volatility is that of the benchmark and it is equal to 1. Assets exhibiting more volatile prices have a beta above 1 and assets with more stable pricing profiles have betas below 1. It is all about movement and it doesn’t matter in which direction it goes. Portfolio Holding high-beta stocks isn’t easy. At times it requires nerves of steel. Often they are highly levered, as leverage amplifies underlying developments for better or for worse. This particular ETF is focused on developed markets ex-U.S. and ex-South Korea and within those markets targets specifically the 200 stocks with the highest beta over the past 12 months. Generally stocks with float under $100 million or less than $50 million of annual trading volume are excluded. So how does such a portfolio look in practice? Well, its top 10 holdings are: Penn West Petroleum (NYSE: PWE ), Alibaba Health Information Technology ( OTC:ALBHF ), Canadian Oil Sands ( OTCQX:COSWF ), Meg Energy Corp. ( OTCPK:MEGEF ), Det Norske Oljeselskap ASA ( OTCPK:DETNF ), Tullow Oil PLC ( OTCPK:TUWOY ) ( OTCPK:TUWLF ), Nokian Tyres PLC ( OTCPK:NKRKY ) ( OTC:NKRKF ), Raiffeisen Bank International AG ( OTC:RAIFF ) ( OTCPK:RAIFY ), Hargreaves Lansdown PLC ( OTCPK:HRGLF ) ( OTCPK:HRGLY ) and DNO ASA ( OTCPK:DTNOF ) ( OTCPK:DTNOF ). Most of the portfolio companies have large or medium market caps. Together these categories make up 68% of the portfolio. On average, the companies have one-third the market cap of the benchmark constituents, so on this front there is a clear discrepancy between the two. It makes sense that prices of small caps are somewhat more volatile, as their earnings are more profoundly impacted by a subset of real-world events. Financial services is the largest sector taking up 24% of the portfolio. This is 9% below the benchmark weighting. The ETF allocated 21.55% of its funds to the energy space, which is double that of its benchmark. A recovery in oil would definitely not hurt this ETF’s performance. One last important sector is basic materials at 14.39%. Another sizeable bet that is different from the benchmark. From a geographic diversification perspective, the ETF disappoints because 83% of the money is bet on companies in continental Europe and another 16% on companies in the U.K. In summary, this ETF is a short cut to bet on Europe / Energy and Leverage. Sounds good, doesn’t it? Valuation The concept of overweighing Europe / Energy and Leverage does not really excite me either, but looking at the ETF from a valuation perspective, it starts to look quite a bit more attractive. It doesn’t score well on forward earnings, but beats the benchmark easily on a present price/cash flow basis. It is also much more attractive on a price/sales basis and offers a slightly higher dividend yield. PowerShares S&P Intl Dev HI Beta ETF MSCI ACWI Ex USA Value NR USD Price/Forward Earnings 14.03 12.56 Price/Book 0.86 1.13 Price/Sales 0.56 0.82 Price/Cash Flow 3.49 4.02 Dividend Yield % 4.9 4.45 Data: morningstar Expenses The ETF’s expense ratio is about 0.35%, but Invesco agreed to waive 0.10% of fees until 2016. Probably in an attempt to increase the assets under management. The expenses are modest, especially considering it invests in mostly foreign issues. Bottom line Even if the contrarian play of going long beta but the idea of going long this ETF does not it is still a useful starting point for further research. Beta is a decidedly backward-looking way of evaluating stocks. If you can dig up companies that experienced high volatility in the past twelve months but where it’s smooth sailing from here on out and buy them at low price/cash flow multiples, you are doing great even if beta stays out of favor. For the brave and lazy, this ETF can serve as an all-in buffet. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Am I Too Overweight In Mutual Funds?

As investors, one of our favorite words is diversification. We are taught to diversify our portfolios to avoid exposure to any one particular investment or sector of the market and achieve balance. One of the easiest ways to achieve diversification is through purchasing mutual funds, which I did at the beginning of my investing career. However, now that I have grown as an investor and now own 30 individual stocks, I wanted to take a look back at my current mutual funds to determine if too much of my portfolio is allocated to these diversified holdings. It is time to take a look at the five mutual funds I hold and determine if ACTION needs to be taken. The Mutual Funds Currently, I own five different mutual funds . In total, the mutual funds total $16,200, or 25.5% of my total portfolio. These five funds are located in two different accounts, which impacts the accessibility of the capital if I were to decide to make a move. Roth IRA Three of the funds are located in my Roth IRA. I opened these positions during the infancy stages of my dividend growth investing career. At the time, I wanted both dividend income and diversification, so focusing on dividend paying mutual funds sounded like a great idea. So I took the capital I had and divided it evenly among the three funds listed below. ACLAX – 119.803 Shares; MV $1,994; 3.0% of Portfolio – This fund is a four star, silver rated fund on Morningstar. Some of the top ten holdings include: RSG , EMR (One of our favorites), NTRS , OXY , IMO , and CAG . The major selling points on this fund were the diversification, historical performance, strong/consistent management team, and the fact that the fund has a mid-cap focus but still pays a strong dividend. The one major downfall of this fund is the expense ratio, which is slightly over 1%. However, I knew that a fund centered on finding mid-cap funds would cost more than others due to the extra research and time needed to manage the lesser-known stocks. OIEIX – 138.551 Shares; MV $1,916; 2.9% of Portfolio – Another fours star, silver rated fund. This fund does not mess around and is focuses on large cap, value stocks. Some of the largest holdings include: JPM , XOM , JNJ , MO , AAPL , PNC , PFE , and HD . My favorite aspect about this stock is that it pays a monthly dividend. While my check usually isn’t that large on a monthly basis, as evidenced in last month’s dividend income summary, it is nice to see your position grow on a monthly basis. Isn’t that right Realty Income shareholders? MEIAX – 55.556 Shares, MV $1,952; 3.0% of Portfolio – Also a four star, silver fund. This fund has some overlap with OIEIX as some of the top holdings include: JPM , JNJ , PM , PFE , LMT , USB , and MMM (one of my favorites). However, unlike OIEIX, this fund pays a quarterly dividend and has a lower annual fee than the other two above. Since these funds are held in a personal retirement account and are not affiliated with my employer sponsored retirement account, I have the ability to trade these funds without restrictions and liquidate my positions at any moment. Employer Sponsored Roth 401(k) Accounts Like most of us that are still working for an employer, we have a 401k plan that allows us to select from a small pool of mutual funds or the company’s stock. For my company, we are allowed to select from a wide variety of Vanguard mutual funds. Vanguard funds are nice because of the extremely low expense ratios. In this account, I own two different mutual funds. VWNAX – 149.224 shares; $9,726.42; 14.9% of Portfolio. This Vanguard fund is a large-cap value fund with an expense ratio of just .27%, significantly lower than the three funds disclosed above. Some of the top ten holdings include JPM , MDT , PFE , BAC , OTCQB:MFST , WFC , PM , and PNC . If you recall, I left my current employer in March and returned later in the year. This was the mutual fund that I contributed to in my first stint at my current employer and I am no longer contributing to this mutual fund. Therefore, the only changes in value/shares owned are related to changes in market price and the receipt of dividends. Another interesting nugget about this fund is that it pays a semi-annual dividend in June and December. So it doesn’t pay frequently, but when it does, the dividend income checks have a huge impact on my monthly dividend income figures. Want proof? Check out my dividend income summary from the last time I received a payout. VINIX ­- 224 shares; $9,726.42; .8% of portfolio very similar to the last mutual fund. However, two small differences. First VINIX focuses on mirroring the S&P 500 versus investing in dividend stocks so the yield is slightly lower. Second, VINIX pays a quarterly dividend versus a semi-annual dividend. When I re-joined my old company, I thought it might be a good idea to invest in a new mutual fund to diversify my holdings. Since this position will keep growing, I didn’t want to become too overweight in one mutual fund. So now I will share the wealth in Vanguard and continue to max my contributions in this fund so I can receive the full benefit of my employer’s 401k match, which can be a very powerful tool for dividend investors. Analysis As I compiled the section above, there were a few things that jumped out at me. Here are some of the thoughts that came to my mind. There is a lot of Overlap ­- This became evident when I started listing out some of the major holdings in each fund. Outside of ACLAX, which focuses on mid-cap dividend stocks, there is a lot of overlap in holdings in the other four mutual funds. Which makes sense considering that these funds are focused on generating a dividend from large cap stocks and there are only so many stocks to select from. However, if my goal is to achieve diversification among these holdings, do I really need four different funds investing the same pool of stocks? Wouldn’t one suffice? Why am I paying Such High Expense Fees – Is it terrible that my answer is “I don’t know why?” At the time of investment, it made sense to invest in mutual funds. But I wasn’t as much of an expense hawk as I am now so I was willing to overlook the high expense ratios to achieve my goal of diversification. In this day in age, with ETFs designed to achieve the same goal as mutual funds with minimal fees, why on earth am I voluntarily paying this annual fee? A stupid/reckless mistake on my part. I understand paying a fee for a mutual fund that invests in mid or small cap stocks because these companies require more time and research to identify/trade successfully. But paying a fee to invest in a pool of highly covered large cap stocks seems ridiculous going forward. Lack of REITs in Holdings – This one kind of surprised me, especially considering I selected these funds with a dividend-focused attitude. I did not see one REIT in any of the mutual funds I own. I am sure there is some reason why and the tax rules may be too unfavorable for fund families. This was just an interesting observation to me so I wanted to share it all with you. Where do I Go From Here? Based on my analysis and observations above, I think the answer to the title of this article is yes. Holding five mutual funds, which account for over 25% of my portfolio , seems a little heavy. Especially considering that many of the mutual funds invest in the same pool of stocks and are accomplishing the same goals. Well, first things first. Let’s talk about the liquidity of these funds. Since two of my mutual funds are in an employer-sponsored plan, there isn’t much I can do outside of investing my capital in a different mutual fund. And trust me, Lanny and I have performed plenty of research on the available plans in the portfolio and we have selected two of the best. So as of now, I am not going to touch the two Vanguard funds and I will continue to invest in VINIX with each paycheck. Our employer matches 50% of all contributions, so I will continue to contribute the maximum amount each paycheck that will allow me to receive the full employer match next year. Plus, the expense ratio is very low, which is a huge positive compared to the other funds. While I can’t liquidate my two Vanguard funds, it is a completely different story for the three mutual funds in my Roth IRA. I have the freedom to trade these funds as I please. When I initially invested in these funds, I was at a different stage of my investing career and I needed the diversification. However, now that I have grown as an investor, owning 30 individual stocks, there is no need to diversify through owning independent mutual funds. The fees are too high and diversification is achieved through my employer’s plan. So after I receive my capital gain distribution in December, which always results in a nice payout, I am most likely going to sell these funds and use the ~$6,000 to invest in some powerhouse dividend stocks. Which stocks will I invest in? I’m not entirely sure yet. I’m going to special screener in the next month unique to this situation that will help me identify how I should allocate the $6,000 in capital when it becomes available. The screener will look to identify great companies with a long-term track record with a yield in excess of the yield I am receiving on these dividend-focused mutual funds. I’m not certain yet, but I believe one of the moves I am going to make is to invest half in Realty Income based on the results of my last stock analysis. Another option is to focus on one of the stocks on my “Always Buy” list or one of the high yielding stocks on our foundation stock listing. What are your thoughts on my strategy? What percentage of your portfolio are allocated to mutual funds? Do you think I am overweight? Should I consider investing in ETFs in lieu of mutual funds or dividend stocks with the capital to maintain the diversification? Do you have any recommendations for stocks that I should consider?

The V20 Portfolio Week #8: Relative Calm

Summary The V20 Portfolio declined by 0.51%, less than S&P 500’s gain of 0.04%. The share repurchase program will continue to support Conn’s. I wouldn’t worry too much about MagicJack. Despite lower activation, the company continued to produce good cash flow. The V20 portfolio is an actively managed portfolio that seeks to achieve annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read last week’s update here ! The S&P 500 was essentially flat this week, rising only 0.04%, beating the V20 Portfolio’s performance of -0.51%. While the V20 Portfolio didn’t beat the index, considering its historical volatility, the “decline” was inconsequential. Portfolio Update Our biggest position, Conn’s (NASDAQ: CONN ), continued to rally, rising 5% from $25.72 to $27.02. This echoes my sentiment in my previous update, that the company’s share repurchasing activity will continue to buoy the share price. As the company inches closer to its Q3 earnings in December, it would appear that investors are quite optimistic (or at least more optimistic than before). Month to date, shares have risen by 42% from its low in October. Last week I also mentioned that we should pay attention to the consumer sentiment index, which could impact investor expectations, especially for the retail sector. Recently we’ve seen several retail stocks fall (e.g. Walmart, Best Buy). The final consumer sentiment index for November was 91.3, which was higher than October’s reading of 90.0. This hasn’t stopped investors from dumping retail stocks however. Fortunately for us, Conn’s buyback program will offset this near-term downward pressure. MagicJack (NASDAQ: CALL ), previously our largest position, continues to account for a substantial portion of the entire portfolio (~20%). It was quite surprising when I heard of news of a short attack on the stock. MagicJack can possibly take the title for the worst short candidate in the world with its high cash balance and high cash flow generation. These are the reasons why I still want the V20 Portfolio to get some exposure to the stock in the first place. I haven’t bothered to write a piece rebuking the short pitch, since it doesn’t reveal anything that we don’t all know already. The facts are right, but everyone is entitled to their own interpretation. Ever since day one, I believed that MagicJack’s value is derived from a core group of customers that will renew year after year. Now that shares have appreciated from a few months ago, more value has to come from growth. But this doesn’t change the fact that the company still has a good business (albeit declining) that is generating cash flow year after year. Furthermore, growth opportunities come at almost no cost to MagicJack. There aren’t expensive projects that would require a truckload of cash or any upfront commitments that would put a drag on the company’s current operation if things don’t go their way. In other words, the company can’t really lose with these expansions Looking Ahead Conn’s will report Q3 earnings next month. From a sales perspective, we know that Q3 numbers will experience a boost from new stores. The company releases monthly sales data, so the revenue increase should be expected. The determining factor will be the company’s bad debt expense, which forecasts future delinquency rates. The company has made significant improvements in its credit policy, so I believe that the number could improve. After all, the company is now lending to more credit-worthy customers. Dex Media (NASDAQ: DXM ) is still undergoing restructuring negotiations. The forbearance period was supposed to expire on Monday, but it was extended since the negotiation is still ongoing. It would seem that the forbearance period is really just a legal nuisance, and could be dragged on while negotiations take place. Nevertheless, I do believe that Dex Media is very close to its end-game, and shareholders will soon know the results of the restructuring. The amended forbearance period expires on December 14th, so keep your eyes peeled for any new developments. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.