Tag Archives: pro

Despite Concerns, Investors Take A Risk-On Approach To Fund Investing

By Tom Roseen Banking on the recent three-week rally in equities, supported by better-than-expected first-time jobless benefit claims, a jump in home builder confidence in October, hopes that Beijing would continue to provide more stimuli to the Chinese economy, and housing starts being near eight-year highs, investors took a risk-on approach to fund investing during the fund-flows week ended October 21, 2015, injecting a net $6.3 billion into conventional funds and exchange-traded funds (ETFs). Investors turned their back on money market funds, redeeming $2.6 billion for the week, but they were net purchasers of the other three fund macro-groups, injecting some $4.4 billion into taxable bond funds, $4.3 billion into equity funds, and $0.2 billion into municipal bond funds for the week. For the third consecutive week taxable bond funds (including conventional funds and ETFs) witnessed net inflows of a little less than $4.4 billion, their largest weekly inflows since the week ended May 20, 2015. As fund investors became more risk seeking, they padded the coffers of corporate high-yield debt funds, which attracted the largest amount of net new money for the week of the major fixed income groups, taking in $3.3 billion (their second largest weekly net inflows on record and the largest since October 26, 2011). (click to enlarge) Source: Thomson Reuters Interestingly, the risk-on mentality was not equally applied to the equity side of the business. While authorized participants (APs) injected $4.5 billion into equity ETFs for the week, conventional fund investors were net redeemers of equity funds, withdrawing $0.2 billion from the group. Despite continued concerns about the Q3 earnings season and in anticipation that the Federal Reserve may delay raising interest rates until 2016, APs were net purchasers of domestic equity ETFs (+$3.2 billion), injecting money into the group for a second consecutive week. They also padded the coffers of nondomestic equity ETFs (to the tune of +$1.3 billion) for the sixth week running. In contrast, on the conventional funds side of the business, domestic equity funds-handing back $0.8 billion-witnessed their fourth consecutive week of net outflows. Meanwhile, their nondomestic equity fund counterparts witnessed $646 million of net inflows-attracting money for the first week in four.

Tranche Model Applied To The ‘Swensen Six’ Portfolio

Diversify globally using six ETFs. Reduce portfolio risk through the use of a tranching model. Minimize the “luck-of-review-day.”. Rebalancing a portfolio, whether it is done monthly, quarterly, or annually, inserts a variable known as the “luck-of-review-day.” This problem is examined in a recent white paper readers can find at the end of this introductory blog post . The paper is titled, Minimizing Timing Luck with Portfolio Tranching . What is portfolio tranching and how can it be applied to the ” Swensen Six ” portfolio? While the “Swensen Six” is an example portfolio, the Tranche Model can be used with any group of securities. There is an advantage to including low correlated securities and the “Swensen Six” meets this requirement. The spreadsheet used for the following tranche analysis includes four critical worksheets. 1) A main menu where assumptions are set up for the analysis. 2) A portfolio worksheet for listing securities and number of shares held in each security. Available cash is also included. 3) Data worksheet for automatically downloading data. 4) Tranche recommendations based on the assumptions and securities used for portfolio construction. A few of the assumptions include the following. The Number of Offset Portfolios can be set from one (1) through twelve (12). I generally use eight (8) as this takes into account eight different portfolios ranging over the past sixteen (16) trading days. The second variable is to determine the Periods between Offsets and I generally use two (2). If the portfolio is updated after the market closes on a Friday, the data for the first portfolio offset is Friday, the second portfolio offset is the prior Wednesday and the third portfolio offset is the prior Monday. If one selects three (3) for the offset periods we jump back by three-day intervals. Look-back periods of 60 and 100 trading days are based on extensive research. Weights of 50% for the shorter look-back period and 30% for the longer look-back period are applied to ROC1 and ROC2 respectively. See the following screen-shot. For this example, two (2) ETFs are the maximum permitted for any offset portfolio. (click to enlarge) After the assumptions or variables are set in the Main Menu and the latest data is downloaded, we move to the Tranche Recommendations as shown in the following screen-shot. Based on the recommendations from the 10/23/2015 portfolio, 50% is invested in VNQ and 50% in TLT. The same was true two days prior of 10/21/2015. However, the recommendation ten trading days ago was to invest 50% in SHY and 50% in TLT. The seventh offset portfolio recommended investing 50% in TLT and 50% in TIP. Based on the eight portfolio offsets, the required number of shares is listed in the Required column. What these different offset portfolios are telling us is that we would have come up with different recommendations had the portfolio review come up on a different day or what is known as “luck-of-review-day.” (click to enlarge) For a $100,000 portfolio an investor, using this tranche model, would invest 75 shares in SHY, 450 shares in VNQ, 400 shares in TLT, and 50 shares in TIP. Rounding the number of shares is a personal judgment. Back-testing research shows tranching reduces portfolio volatility. There is a penalty to be paid for lowering risk as the return is also reduced. Portfolio turnover is another issue. I prefer to review portfolios every 33 days and depending on how one rounds the number of shares held in the various ETFs, one has some control over the portfolio turn over. All the ETFs using in the “Swensen Six” are commission free through certain discount brokers so commissions are not an issue. Note to readers: This tranche model differs from the model explained in the white paper referenced above.

Inside New Diversified Return U.S. Equity ETF By J.P. Morgan

The global economy is presently caught in a vicious cycle of volatility with the sole star U.S. (in the developed market pack) also finding itself trapped. Instead of leaning on policy tightening, the domestic economy is now backtracking on the issue. This was especially true given the slowing momentum in the labor market and muted inflation. In this backdrop, volatility has taken center stage. Still, several other economic indicators at home are sturdy enough for investors to bet on U.S. stocks. Plus, a dovish Fed eased tensions over the sudden cease or shrinkage in cheap money inflows. All in all, risky assets regained some lost ground but volatility prevailed. Probably keeping this in mind, issuers look to deploy quality factors as much as possible. After all, be it developed economies, emerging nations or commodities and currencies, shocks were felt everywhere. Thanks to this, J.P. Morgan’s new factor-based ETF targeted on the U.S. market – J.P. Morgan Diversified Return U.S. Equity (NYSEARCA: JPUS ) – deserves a detailing. JPUS in Focus The fund looks to track the performance of the Russell 1000 Diversified Factor Index and has exposure to domestic multi-cap stocks. The fund seeks to score high on basic factors like quality and momentum to mitigate risks and tack on capital appreciation. The 561-stock portfolio is equally weighted resulting in minimal company-specific concentration risk. No stock accounts for more than 0.65% of the basket at present. Xcel Energy Inc. (NYSE: XEL ), TECO Energy Inc. (NYSE: TE ) and Henry Schein Inc. (NASDAQ: HSIC ) are the top three holdings. Consumer discretionary (17%), health care (16%), utilities (13%), consumer staples (13%) and technology (12%) get double-digit exposure in the fund. Large caps rule the basket with about 60% focus followed by 35% of assets invested in the mid caps and 5% in the small caps. The fund charges 29 bps in fees. How Will it Fit in a Portfolio? Several academic researches indicated that the risk-adjusted returns from quality stocks outperform the broader market over long term. Thus, this ETF could be an intriguing pick for investors looking to invest in stocks that have high quality and are rich in momentum factors. This way the fund appears to stay afloat in a booming as well as in a volatile market. ETF Competition The craze for smart-beta or high-quality products is high of late especially given the heightened volatility in the market. Issuers are increasingly coming up with multi-factor ETFs, though the space is yet to be jam-packed. However, J.P. Morgan has been quite proactive with this technique and bet on the trend last year with the launch of a global equity ETF (NYSEARCA: JPGE ) which focuses on factors like value, size, momentum and low volatility. State Street is also ramping up its multi-factor lineup. Apart from these, a few products including PowerShares S&P 500 High Quality Portfolio (NYSEARCA: SPHQ ), MSCI USA Quality Factor ETF (NYSEARCA: QUAL ), MSCI USA Value Factor ETF (NYSEARCA: VLUE ) or Arrow QVM Equity Factor ETF (NYSEARCA: QVM ) could put pressure on this new J.P. Morgan ETF. There is also iShares MSCI USA Momentum Factor ETF (NYSEARCA: MTUM ) which is a notable momentum play. Despite these threats, we do not expect J.P. Morgan’s Russell 1000 Diversified Factor ETF to face much problem in garnering assets given a unique index, the strong brand name of the issuer and multi-factor techniques. Within just a few days of its launch, JPUS has accumulated over $10.5 million of assets which gives an idea about its forthcoming success. Original Post