Tag Archives: united-kingdom

Does The Size Premium Apply To Countries?

Summary A size premium has been extensively documented in financial literature and some studies have reported a size premium at the country level as well. Portfolios constructed under max-country weight strategies have achieved higher returns and better risk-adjusted performance as measured by Sharpe ratios, albeit with higher volatilities, compared to the benchmark. Max-country weight strategy suggests a potential robust portfolio construction methodology that could provide diversification benefits and improve the portfolio’s risk-adjusted performance compared to the benchmark. Since 1981, the “size premium,” or the tendency for smaller-capitalization securities to outperform their larger-cap counterparts, has been extensively documented in financial literature in the United States. Some studies have extended this research and reported that the size effect applies for country indices as well. Gerstein Fisher conducted research on the relationship between aggregate country equity market capitalizations and country-level market index returns and explored how a market-cap weighted international portfolio can be improved by limiting the weight of larger countries, such as Japan and the United Kingdom, and redistributing weights to smaller countries. For our study, we examined a capitalization-weighted basket of developed-market country indices (excluding the US) that resembles the MSCI EAFE Index. We used this index as our benchmark, and have reported country component weights of this index in the right-most column of Exhibit 1. We then limited the maximum weight of any one country in the portfolio (ranging from a 10% cap to 15%) and re-distributed that weight to all other countries according to their market capitalizations. If, after the re-allocation, any country exceeded the maximum portfolio weight, we repeated the process and re-allocated the additional weights. Exhibit 1, which provides the average exposures of each country in the various country-capped portfolios, and the benchmark over the sample period from January 1997 to July 2015 shows that this process generally reduced the weight of the two largest countries, Japan and the United Kingdom, and added the most weight to the larger of the smaller countries – France, Germany, Switzerland and Australia – resulting in a more even distribution of country weights in the modified portfolio. (click to enlarge) Exhibit 2 reports the performance of our strategy on a cumulative and annualized basis relative to the benchmark; Exhibit 3 shows results on a cumulative basis over time. As shown in both of these exhibits, all of the capped approaches have achieved modestly better cumulative and annualized returns compared to the benchmark over the period from January 1997 to July 2015. Note that this outperformance is achieved with higher volatilities (as measured by annualized standard deviations). The highest volatility (18.45%) is observed for the portfolio applying a 10% country-weight limit and the lowest (17.92%) for the portfolio applying a 15% country-weight limit, compared to 17.14% for the benchmark. Despite the higher volatilities, all capped approaches delivered better risk-adjusted performance as measured by Sharpe ratios (ranging from 0.345 to 0.373), compared to the Sharpe ratio of the benchmark (0.304). (click to enlarge) (click to enlarge) Without further research, we can only speculate about what causes the “small country effect.” The higher return may be explained by the tilts towards the value factor: we have assigned greater-than-market weights to stocks with high fundamentals relative to price and less-than-market weights to stocks with low fundamentals relative to price at the country level in the form of country max limits since smaller countries tend to have higher growth potential and less expensive equity markets. For example, Japan, a country with a relatively low dividend yield, sees its weight in the country-capped portfolios decrease by a range of 9% to 14% with respect to the benchmark. There is a trade-off associated with tilting toward small countries, however, by using this technique. The increased volatilities indicate that small markets are riskier than larger ones. But the increase in volatility is limited since by applying a max-country weight strategy we limit the portfolio’s exposure to any single country, thus enhancing portfolio diversification and lowering concentration risk. Overall, a max-country weight strategy suggests a potential robust portfolio construction methodology that could improve the portfolio’s risk-adjusted performance, as shown by increased Sharpe ratios compared to the benchmark. For more detail and the full results of our study, we invite you to read our research paper, Country Size Premiums and Global Equity Portfolio Structure . Conclusion Our research points to a possible methodology to better structure a multi-country portfolio: varying allocations to different countries based on their equity market capitalizations. As we show, re-distributing some of the weight of larger countries to smaller countries can improve an international stock portfolio’s risk-adjusted performance.

ETFs And Stocks To Add On Solid Jobs Data

After weak back-to-back months of job growth in nearly two years, U.S. hiring numbers came in stronger than expected in October, easily dodging the impact of a global slowdown and a struggling manufacturing sector. The U.S. economy added 271,000 jobs in October, much above the market expectation of 180,000. This marks the strongest pace of a one-month jobs gain in 2015, and came from increased employment in the higher-paying sectors, in particular, professional and business services. Meanwhile, unemployment dropped to a new seven-year low to 5% from 5.1% in September, and average hourly wages accelerated nine cents to $25.20, bringing the year-over-year increase to 2.5% – the sharpest growth since July 2009. The robust data suggests that the U.S. economy is rebounding strongly after a lazy summer, and is continuing to outpace the other economies. Additionally, solid pay gains will increase consumer spending in the crucial holiday season, which will translate into stepped-up economic activities. Market Impact This has bolstered the chance of an interest rates hike, the first in almost a decade, in December. The jobs data even supports the comments of the FOMC meeting held in October and the latest Fed testimony that hinted at a December lift-off if the U.S. economy remains on track. As a result, the stock market has seen a big rotation in trade, and this trend will likely continue at least in the near term. This is especially true as investors are taking money out of the income-yielding sectors like utilities and REITs and putting them in the sectors like financials that are expected to benefit from the rising interest rates. On the other hand, yields on two-year Treasury bonds soared to the highest levels in more than five years, while the U.S. dollar climbed to a seven-month high against the basket of major currencies. Further, staffing stocks also have seen smooth trading. Given this, we have highlighted three ETFs and stocks that are the direct beneficiaries of the job gains and will likely see smooth trading in the days ahead. ETFs to Consider PowerShares DB USD Bull ETF (NYSEARCA: UUP ) A healing job market and the resultant improving economy will pull in more capital into the country and lead to appreciation of the U.S. dollar. UUP is the prime beneficiary of the rising dollar, as it offers exposure against a basket of six world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 58% in euro and 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $994.9 million, while it sees an average daily volume of around 2.1 million shares. It charges 80 bps in total fees and expenses, and added 1.2% on the day following the jobs report. The fund has a Zacks ETF Rank of 3 or “Hold” rating, with a Medium risk outlook. Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA: DBEF ) The strength in the greenback and global monetary easing is once again compelling investors to recycle their portfolio into the currency hedged ETFs. For those seeking exposure to the developed market with no currency risk, DBEF could be an intriguing pick. The fund follows the MSCI EAFE US Dollar Hedged Index and holds 916 securities in its basket, with none accounting for more than 1.98% share. However, it is skewed toward the financial sector, which makes up for one-fourth of the portfolio, while consumer discretionary, industrials, consumer staples and healthcare round off the top five with double-digit exposure each. Among countries, Japan takes the top spot at 22%, closely followed by United Kingdom (18%), France (10%) and Switzerland (10%). The ETF has AUM of $13.9 billion, and trades in solid volume of more than 3.9 million shares a day. It charges 35 bps in fees per year from investors, and gained 0.6% on the day. DBEF has a Zacks ETF Rank of 3, with a Medium risk outlook. iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) As yield rise, bonds and the related ETFs falls. But this product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund takes a weighted long position in 2-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses, while volume is light at around 1,000 shares a day. Additionally, it is an unpopular bond ETF, with AUM of just $2.5 million. The note surged 2.4% following the robust jobs data. Stocks to Consider In the stock world, the direct beneficiary of healthy hiring is the staffing industry. The industry bodes well at least in the near term, given the superb Zacks Industry Rank (in the top 5%) at the time of writing. Investors seeking to ride out the optimism could look at a few top-ranked stocks having a Zacks Rank #1 (Strong Buy) or #2 (Buy) with a Growth Style Score of B or better using the Zacks Stock Screener . Cross Country Healthcare Inc. (NASDAQ: CCRN ) Based in Boca Raton, Florida, Cross Country is a leading healthcare staffing services’ company which primarily focuses on providing nurse and allied, and physician staffing services and workforce solutions to the healthcare market. The stock has seen solid earnings estimate revisions of 7 cents for the current quarter over the past 30 days. Full-year earnings are expected to increase at a whopping rate of 286.1% versus the industry average of 19.4%, reflecting massive growth prospects. The stock rose 7.3% in Friday’s trading session, and currently has a Zacks Rank #1 with a Growth Style Score of “A”. Heidrick & Struggles International Inc. (NASDAQ: HSII ) Based in Chicago, Illinois, Heidrick & Struggles International is one of the leading global executive search firms. With years of experience in fulfilling clients’ leadership needs, it offers and conducts executive search services in every major business center in the world. The stock has seen upward earnings estimate revision by a couple of cents for the current quarter over the past one month. The company is expected to post earnings at a growth rate of 179.3% annually this year. HSII gained 3.7% on Friday, and has a Zacks Rank #1 with a Growth Style Score of “A”. TrueBlue Inc. (NYSE: TBI ) Based in Tacoma, Washington, TrueBlue is a leading provider of staffing, recruitment process outsourcing and managed services in the United States, Canada and Puerto Rico. This company has also seen rising estimates of four cents for the ongoing quarter, and expects to grow earnings at rate of 24.5% annually for the full year. The stock was up 3.7% in the Friday session, and has a Zacks Rank #2 with a Growth Style Score of ‘B’. Original Post

Consider Adding Health Care To Your Winning Allocation: And The ETF To Do It

Summary Supplementing your core ETF portfolio with smart sector bets can lead to healthy returns. Powerful demographic and related trends make health care one such sector, and now may be a good time to get in. However, there are risks. A quality ETF can help to mitigate these. I share my suggestion as to the one you should choose. When building your ETF portfolio, it is good to start with the basics. In my previous work on Seeking Alpha, I have suggested a simple, yet powerful and globally-diversified portfolio based on just 3 ETFs . However, you may wish to enhance such a basic approach by supplementing it with ETFs targeted at certain sectors of the marketplace. REITs are one such possibility. In a follow-up article , I built a four-ETF variant of the base portfolio that includes REITS. For this article, however, let’s take a look at another sector in which you may want to make a targeted investment. I will also suggest that you use a specific ETF to do so. Why Health Care? Why Use an ETF? In my personal portfolio, I have chosen to add a targeted investment in the health care sector. Why? Please allow me to share just a couple of quick items I found when researching this topic. We have an aging population. Consider the following, from the Administration on Aging , part of the U.S. Department of Health and Human Services: The older population-persons 65 years or older-numbered 44.7 million in 2013 (the latest year for which data is available). They represented 14.1% of the U.S. population, about one in every seven Americans. By 2060, there will be about 98 million older persons, more than twice their number in 2013. People 65+ represented 14.1% of the population in the year 2013 but are expected to grow to be 21.7% of the population by 2040. Not surprisingly, with an aging population comes increased costs for health care. Consider two excerpts from a report on aging from the Centers For Disease Control : The increased number of persons aged > 65 years will potentially lead to increased health-care costs. The health-care cost per capita for persons aged > 65 years in the United States and other developed countries is three to five times greater than the cost for persons aged 65 years ($12,100), but other developed countries also spent substantial amounts per person aged > 65 years, ranging from approximately $3,600 in the United Kingdom to approximately $6,800 in Canada ( 13 ). However, the extent of spending increases will depend on other factors in addition to aging ( 12 ). The median age of the world’s population is increasing because of a decline in fertility and a 20-year increase in the average life span during the second half of the 20th century ( 1 ). These factors, combined with elevated fertility in many countries during the 2 decades after World War II (i.e., the “Baby Boom”), will result in increased numbers of persons aged > 65 years during 2010–2030 ( 2 ). Worldwide, the average life span is expected to extend another 10 years by 2050 ( 1 ). The growing number of older adults increases demands on the public health system and on medical and social services. Chronic diseases, which affect older adults disproportionately, contribute to disability, diminish quality of life, and increased health- and long-term-care costs. In summary, the reports reveal that, due to longer life spans, people often live longer with chronic disease. Sadly, factors such as obesity and diabetes, more and more common in our culture, also lead to greater need for medications and other health care support. Finally, technological advances are making possible the treatment of certain conditions that simply could not have been treated in the past Certainly, factors such as these bode well for the long-term outlook for health-care related products and services. At the same time, investment in the health care sector is not without its risks. For example, pharmaceutical companies must spend vast amounts on R&D to develop and bring new drugs to market. But getting a drug to market is no small task. To begin with, it is a real challenge to identify and develop new chemical compounds for such drugs. And even once a potential drug is developed, it must go through rigorous clinical trials before it is approved for sale to the public. Needless to say, not all drugs make it through this process. This is where the ability to use an ETF to invest in health care can be, well, good for your investment health. I will get into the specifics of our focus ETF as it relates to this matter in just a little bit. Why Now? I have been hoping to write an article on this topic for some time. Why did I choose to do so now? The impetus actually came from this news item right here on Seeking Alpha. I won’t bother recapping it; it is short and you can read it for yourself. But here is a picture that will make very evident what the quoted analyst was getting at. VHT data by YCharts The blue line represents the Vanguard Health Care ETF (NYSEARCA: VHT ), the focus of our article. The yellow line represents the broader S&P 500 index. As can be seen, there was a roughly 12% gap between the performance of this index and the S&P 500 just a little earlier this year. Due in large part to recent concerns having to do with the biotech sector, that YTD gap has narrowed to a mere 1.2%. As the quoted analyst suggests, this may offer a good opportunity to either enter, or add to your position in, this sector. The Power of VHT Earlier, I briefly touched on some of the risks involved in investing in the health care sector and suggested using an ETF to mitigate such risk. Simply put, this is because a well-chosen ETF will allow you to remain well diversified, thus lessening single-company risk. As alluded to earlier, in this article I chose to focus on the Vanguard Health Care ETF. This ETF is based on the MCSI US Investable Market Health Care 25/50 Index . Let’s start with a closer look at that index, in the below picture taken from the factsheet for the index. (click to enlarge) Here are a few things worthy of note: There are 349 constituents, or companies, in the index. The Top-10 holdings comprise some 44.96% of the overall index, and are mostly large-cap pharmaceutical companies. This is also reflected in the overall 36.58% weighting of pharmaceuticals in the index (see pie chart). However, this risk is somewhat balanced by the inclusion of McKesson Corp. (NYSE: MCK ) and similar companies involved in the distribution of health care products, and UnitedHealth Group (NYSE: UNH ) and similar companies involved in healthcare services. This diversifies your risk, as the pie chart shows, across various sub-industries within the overall health sector. If you look at the Portfolio and Management tab of the factsheet for VHT, you will notice that this ETF is extremely faithful in tracking this index. Vanguard supplements this with a rock-bottom expense ratio of .12%. The fund’s total net assets of $6.1 billion and average daily trading volume of $58.37 million mean that the fund is extremely liquid, leading to a low .07% trading spread (the average difference between “buy” and “sell” transactions). I would hope you hold this ETF for the long term, but the above figures will hold you in good stead should you need to trade. Finally, VHT carries a 1.45% distribution yield, which Vanguard recently shifted from being an annual distribution to a quarterly distribution, which I really love. Summary and Conclusion I believe health care is a great sector in which to make a targeted investment. In this article, I have recommended using an ETF to do so, and featured the Vanguard Health Care ETF as what I believe to be your best tool to do so. This excellent choice gives you tremendous diversity across the sector, coupled with a low expense ratio and great liquidity. Happy investing!