Tag Archives: time

Understanding Liquid Alternatives: Ask The Right Questions

Financial advisors and other professional investors often have a lot of questions about liquid alternatives, and for good reason. The investment strategies used in alternative mutual funds and ETFs are not straight forward by any means. Many use some form of leverage. Most utilize the ability to short securities, while others use a variety of derivative instruments to efficiently gain exposure to certain assets classes or securities. But when used properly, liquid alternatives can be an effective tool to mitigate risk, increase diversification and/or enhance returns. So what questions should advisors be asking? To answer that question, Cognios Capital , managers of the Cognios Market Neutral Large Cap Fund (MUTF: COGIX ), has produced a handy guide, “FAQ: Liquid Alternatives.” The eight-page white paper answers the following frequently asked questions: What is the difference between traditional alternative investments and liquid alternatives? What is the benefit of adding alternatives to my portfolio? How many different alternative strategies do I need? From where should I fund my alternative allocation? Are there risks that are unique to alternatives? Why not just invest in a multi-strategy fund? Why is there such a large difference in returns among the different types of alternative strategies? What does it mean to be Beta Neutral? How are fees and expenses reported for alternative mutual funds? Cognios’s white paper answers each of the above queries in great detail, devoting nearly a page to each answer. What follows is an abbreviated summary of the report. Traditional vs. Liquid Alts Alternative investments include assets such as commodities, currencies, and private equity; as well as public-equity strategies such as long/short equity, market neutral, and equity arbitrage. Traditional alternatives are subject to less stringent regulation by the SEC, have less liquidity and transparency than liquid alts, and are open to wealthy individuals and institutions only. Liquid alts offer similar exposures but through SEC-regulated mutual funds and ETFs, with daily liquidity and greater transparency. Benefits of Allocating to Alts Alternatives present many potential benefits, but perhaps the most obvious is their potential to improve the risk-adjusted return of portfolios through exposure to assets and strategies with low correlation to traditional stocks and bonds. How Many Alts are Needed? According to Cognios, a 10% to 25% allocation “may be an optimal range” for individual investors. As for the optimal number of different alternative strategies, this depends on investors’ desired outcomes. Alternatives aren’t a single “asset class” – a variety of strategies pursue a variety of different outcomes. Funding an Alts Allocation Should alternatives be funded from the equity portion of a portfolio, the fixed-income sleeve, or a separate “alts” sleeve? According to Cognios, there is no one right time to add alts to a portfolio – and similarly, there is no one right way to fund them. Unique Risks Cognios cites the following as unique risks to investing in alts: Insufficient manager experience Limited track records Difficult-to-understand strategies Multi-Strategy Funds Investing in a multi-strategy fund leaves the decision of which strategies to invest in and how much to allocate to each strategy up to an outside manager. While this can be beneficial, multi-strategy funds sacrifice customization for ease. Furthermore, multi-strategy funds aren’t always fully diversified within the alts space, so certain single strategy funds may be needed to complement multi-strategy holdings. Dispersion of Returns Since alts aren’t a single “asset class,” it makes sense that there would be a wide dispersion of returns across the different alternative assets and strategies. But even within a given strategy, wide dispersion between the best and worst performers is common, since many funds operate different sub-strategies and most are unconstrained by benchmarks. Beta Neutrality A “beta” of 1.0 indicates 100% correlation with a given benchmark. Equity market neutral funds pursue “beta neutrality,” meaning a beta of as close to 0.0 as possible. This way, their returns are isolated from the fluctuations of the broad market. Liquid Alts Fees While alternative mutual funds certainly have lower fees than their hedge-fund counterparts (in most cases, at least), their fees aren’t necessarily as straightforward as those of traditional mutual funds. This is because strategies that engage in short-selling incur related costs, whereas traditional mutual funds don’t sell short, and thus don’t incur these added charges. Download the full guide for complete answers to the nine questions (linked above). Jason Seagraves contributed to this article.

Retail ETFs To Watch Ahead Of Q4 Results

The Q4 earnings season has been weak across all sectors with growth harder to come by in a slowing global economy, a stronger U.S. dollar, and weakness in oil. In fact, Q4 may be the third quarter in a row of negative earnings growth. However, with about half of the Q4 reports yet to come, retail is faring better than many other sectors. Total earnings for the retail sector that has reported so far are up 6.8% on 11.8% revenue growth. Notably, revenue growth of this sector has been the best so far this season. This is especially true given the robust numbers from retailers like Whole Foods Market (NASDAQ: WFM ), Yum! Brands (NYSE: YUM ) and Michael Kors (NYSE: KORS ). The strength is likely to continue when the big retailers like Wal-Mart (NYSE: WMT ) and Nordstrom (NYSE: JWN ) reports earnings results tomorrow. Other major retailers such as Home Depot (NYSE: HD ), Macy’s (NYSE: M ), Lowe’s (NYSE: LOW ), Target (NYSE: TGT ), Gap Inc. (NYSE: GPS ), and Kohls (NYSE: KSS ) release earnings reports next week. Solid Trends Though consumer spending, which accounts for more than two-thirds of U.S. economic activity, moderated in the final quarter of 2015 buoyed by more savings, it started regaining momentum lately as consumers began to reap the benefits of a slow but recovering economy, better job and wage prospects, and a lower oil price. As a result, retail sales edged up 0.2% in January, better than the market’s expectation of 0.1% growth. Further, U.S. consumer confidence is improving, as measured by the Conference Board. The Consumer Confidence Index jumped to 98.1 in January from a revised 96.3 in December while the index of consumer expectations for the next six months climbed to 85.9 in January from 83. Moreover, the upside to this segment could be confirmed by the Zacks Industry Rank, as three-fifths of the industries falling under this segment have a solid Rank in the top 42% at the time of writing. ETFs to Buy Given encouraging fundamentals and a spate of earnings releases this week and in the next, investors should carefully watch the movement in retail stocks and could consider a broad play via ETFs in order to take advantage of the power-packed earnings releases seen so far and solid trends. For this, looking at some of the top-ranked retail ETFs having a Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy) could be excellent picks as these funds have potentially superior weighting methodologies, which could allow them to outperform in the coming months. SPDR S&P Retail ETF (NYSEARCA: XRT ) This product tracks the S&P Retail Select Industry Index, holding 100 securities in its basket. It is widely spread across each component as none of these holds more than 1.48% of total assets. Small cap stocks dominate nearly three-fifths of the portfolio while the rest have been split between the other two market cap levels. In terms of sector holdings, apparel retail takes the top spot at one-fourth share while specialty stores, automotive retail and Internet retail also have double-digit allocations each. XRT is the most popular and actively traded ETF in the retail space with AUM of about $404.5 million and average daily volume of more than 4.3 million shares. It charges 35 bps in annual fees and gained 3.8% over the past one month. The fund has a Zacks ETF Rank of 1. Market Vectors Retail ETF (NYSEARCA: RTH ) This fund tracks the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket. It is a large cap centric fund and is heavily concentrated on the top 10 holdings with 64.1% of assets. The largest allocations go to Amazon.com (NASDAQ: AMZN ), Home Depot and Wal-Mart. Sector wise, specialty retail occupies the top position with less than one-third share, followed by double-digit allocation to Internet and catalogue retail, hypermarkets, drug stores, departmental stores and healthcare services. The fund has amassed $151 million in its asset base while average daily volume is moderate at about 77,000 shares. Expense ratio came in at 0.35%. The product lost 0.7% over the past one month and has a Zacks ETF Rank of 2. PowerShares Dynamic Retail Portfolio ETF (NYSEARCA: PMR ) This retail fund provides a diversified exposure across various market caps with 45% in large caps, 43% in small caps and the rest in mid caps. This is easily done by tracking the Dynamic Retail Intellidex Index. The fund has accumulated just $21.4 million in its asset base while it trades at a light volume of under 5,000 shares a day. The ETF charges 63 bps in fees per year. In total, the product holds 29 securities with none accounting for more than 6.12% of assets. In terms of industrial exposure, specialty retail takes the top spot at 48%, while food retail (19%) and drug stores (12%) round off the top three positions. PMR is relatively flat over the past one month and has a Zacks ETF Rank of 2. Original Post

Be A Proactive Investor

During volatile times in the market, like what we have been experiencing since May, it’s difficult to see through the disparaging news headlines (Oil is Collapsing! Bear Market in Stocks! US Is In A Recession!) and to not lose the forest for the trees. Investing is a long-term game with seemingly unlimited number of opportunities and it’s imperative as an investor to not get caught up in the day-to-day swings (and explanations) of the stock market. It’s times like this where a word like “casino” gets tossed around as a synonym for the stock market. And you know what, in the short run, the market is a lot like a casino. One day the market is up, the next day the market is down. Don’t believe me since it feels like the market has been down a whole lot more than it has been up lately? Well, would you be surprised to know that over the past 200-days developed world equities have been up 47% of the days and down 53% of the days. Pretty close to a 50-50 coin flip, right? Percentage Of Positive Performance Days For Stocks Proactive Investor But long-term investors know that the stock market isn’t really like a casino at all. The “payoff odds” in the stock market are not static like they are in a casino. Hitting the right number in roulette will always pay 35:1 but investing in the right stock could return 10% or it could return 10,000%. Therefore, it’s key to think of investing in terms of probabilities instead of binary outcomes. Investing is not about calling the top or bottom in the market exactly right. It’s about understanding if there are more positive investment opportunities in the market than there are negative opportunities (or vice versa). Put another way, it’s about properly identifying where the market currently falls on the risk/reward spectrum. This way, you as an investor can be proactive rather reactive to changes in the market. We have known for quite some time that this is the longest running cyclical bull market in a secular bear market , so a selloff like the one we are in now was bound to happen sometime. And in the long term, that is actually great news for investors because future returns have undoubtedly improved thanks to the opportunity to buy stocks on “sale.” But this is where investor psychology really comes into play. If your risk antennae was not tuned up to the fact that the probability of a selloff had increased (i.e. the opportunity set had shifted from more buying opportunities to more selling opportunities), then it’s really difficult to realize after a 15-20% decline that the opportunity set is ALREADY shifting again back into your favor. You are reacting to the declining market and when you are reacting, it’s hard to make the correct rational decision. To sell stocks into a declining market is always hard because in the back of your mind you know you missed out on the optimal time to get out and it’s so easy to tell yourself “I’ll sell out of stock XYZ just as soon as it rises 5-10%.” Of course, in a slide like we are in now, it’s very rare for the market to ever give you that 5-10% gain, and so you sit on the underperforming stock far longer than you would have liked. However, if an investor is proactive in identifying where we currently sit on the risk/reward spectrum, there is a very good chance that that investor had begun to shift his or her portfolio into more defensive sectors and perhaps into cash as well. While they would have been undoubtedly early and missed out on some of the gain back in May, they are already mentally prepared to begin to take advantage of some of the positive opportunities that are presenting themselves in this correction. This is why at Gavekal Capital, we focus so much on risk management. Yes, risk management is about protecting the downside. But more so, it’s about being proactive in your investment process so that when the risk/reward spectrum flips in your favor you are ready to take advantage of it and capture the gains in your portfolio. Disclosure: None.