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Barron's Roundtable - New Picks and a Mid-Year Review

Wed, 15 Jun 2011 00:00:00 GMT

Barron’s most recent issue provides new picks from the Roundtable analysts for the 2nd half of 2011, some of which are highlighted below.

Barron’s also provides a scorecard for the picks made back in January 2011 but the returns do not consider dividends and don’t compare against appropriate benchmarks (small cap vs small cap index, etc.).

Below is a summary of the performance of nine of the Barron’s roundtable participants for 2011, and where possible, performance of their 2010 picks.

I’ve also highlighted two of the analysts – Oscar Schafer and Meryl Witmer, and provided more detailed information on their most recent picks and the January 2011 picks.

Trends in Retirement Planning Asset Allocation - Equities Now More Attractive Than Fixed Income

Tue, 03 May 2011 00:00:00 GMT

Over the past 5 years retirement planning strategies used by the top asset managers in the world have experienced an increase in equity allocations and have significantly increased exposure to non-traditional asset classes.

The rational conclusions are that asset managers now view equity investments as better values than fixed income investments, and that they are finding additional diversification value in non-traditional asset classes.

Investors doing their own retirement planning should compare their equity and non-traditional asset class exposure to the MarketGlide retirement planning market indexes noted in this article.

Plan Sponsors and advisors that select target date funds should re-examine target date options and determine how the asset allocation compares with the market average.

Copycat Portfolios: Mid Cap Fund Manager's Top Dividend Stocks Yielding 4%

Tue, 12 Apr 2011 00:00:00 GMT

An article in Barron’s this weekend highlights some recent research about the performance of copycat strategies that track and invest in the largest stock holdings of successful fund managers.

Here is a key quote from the research: “A team led by University of Maryland finance professor Russ Wermers reports that you can beat the market by four percentage points a year, using a technique that systematically harvests the best stock selections from the fund industry.”

Of course there are thousands of fund managers and a multitude of strategies to consider.

I have selected an exceptional manager, Nicholas Equity Income Fund, to track based on these three key requirements: (1) A proven long-term manager that generates alpha; (2) an income focused strategy that generates high dividend yields; and (3) a mid-cap market focus to provide investors with some additional diversification beyond the typical large cap dividend champions.

Income Opportunities in 2011: Updating Bill Gross's Long-Term Performance

Thu, 10 Feb 2011 00:00:00 GMT

In response to my previous article “Bill Gross’s Significant Income Opportunities in 2011”, one reader suggested that I take a look at Gross’s 2007 and 2008 picks since he felt like they performed poorly.

I had gone back to 2009 and 2010 in an effort to give readers a sense of Gross’s track record, which has been impressive.

The reader was correct – 2007 and 2008 were not stellar – but Gross’s picks actually did beat the appropriate LikeAssets benchmarks and the S&P500.

The hard part was the wild ride an investor experienced along the way.

First a brief update on the performance of the 2011 picks PTY and NLY.

Bill Gross's 2011 Fund Picks - Alternatives to Consider for Income Investors

Tue, 01 Feb 2011 00:00:00 GMT

In a previous article I provided some analysis of Bill Gross’s picks, historical (2009/2010) and current ones for 2011 provided in Barron’s Roundtable article.

One of Gross’s picks for 2011 was Pimco Corporate Income Fund (PTY), a closed end fund that uses leverage to generate investment income and maintain high dividend yields for investors.

Once Gross’s selection became public on Monday, PTY jumped, and now the premium to NAV is over 10% – a stiff entry price for investors to chase.

So I thought I would take a look at the other PIMCO closed end funds also managed by Bill Gross and team, and see if there are some alternatives to PTY.

Bill Gross's Significant Income Opportunities in 2011

Mon, 31 Jan 2011 00:00:00 GMT

The first installment of Barron’s Roundtable appeared in its January 22nd issue of the magazine.

Top investment strategists once again offered their market outlook and specific picks. One of the better known strategists is Bill Gross from PIMCO.

In 2010 Gross’s income oriented picks provided the highest absolute return and beat the LikeAssets benchmark by a greater margin than any of the other top nine strategists (this comparison excludes strategists’ picks not available on U.S. stock exchanges).

Gross’s 2009 performance also scorched the LikeAssets benchmarks with his income picks.

Income seeking investors might want to consider Gross’s 2011 picks given his track record to date, but with a couple of cautionary notes.

How the Market Tells Us the Appropriate Asset Allocation Strategy

Mon, 17 Jan 2011 00:00:00 GMT

Every investor should have an asset allocation strategy that is appropriate for their time horizon and investment goals.

Assuming an investor is trying to accumulate wealth to fund their retirement, an investor needs to select an asset allocation strategy, pick optimal investments for each asset class, and make changes as age or circumstances change.

There is an opportunity for investors to track an appropriate asset allocation and implement it with low cost ETFs.

If we assume that wealth to fund retirement is the goal and ask 25 mutual fund companies for an appropriate asset allocation strategy, we will get 25 different strategies.

Each mutual fund company’s asset allocation strategy are effectively presented to investors in the form of target date funds.

The asset allocation is designed to change over time to grow more conservative as the investor approaches retirement.

This is called the glide path. MarketGlide is a methodology …

Barron's Stock Picks Performance and Performance Report Cards - Barron's vs Fool

Thu, 13 Jan 2011 00:00:00 GMT

Barron’s Stock Picks Consistently Beat the Right Benchmarks. Don’t be Fooled by Fool’s Report Card

Barron’s has just published their own performance report card in their weekly magazine.

This offers a good opportunity to see how Barron’s has done and to consider some of the industry issues with performance reporting and benchmarking.

Barron’s excels at leading the market in terms of accountability. Stock picks are posted clearly and are always available on their site. Barron’s also attempts to assign …

Reviewing 2010 Picks of Morningstar and Motley Fool

Fri, 07 Jan 2011 00:00:00 GMT

Motley Fool knocks it out of the park +68%, Morningstar knocked out with -20%

With the new year just beginning, it is time to look back at the top 2010 picks made by the gurus. In previous posts I have discussed performance of the top picks for 2010 made by Fortune and Forbes.

LikeAssets has also analyzed the performance of many other research and financial websites.

Below I present a couple more examples – Morningstar’s Ultimate Stock Picking team and their top picks to consider for 2010, and Motley Fool’s Rick Aristotle Munarriz with 5 Stocks that Should Beat the Market in 2010.

Tracking Fortune's Top Ten Stocks for 2011

Thu, 06 Jan 2011 00:00:00 GMT

Majority of Picks are Small Caps

On December 6th, Fortune Magazine published its top ten stock picks for 2011. The theme is growth, and the goal was to pick growth stocks with below-market multiples.

Fortune notes that the ten stocks “are expected to bolster their profits an average of 61% next year – vs 14% for the S&P – and yet they trade at an average of 12 times next year’s earnings, vs. 13 times for the S&P”.

But there is an issue with this comparison – only 3 of the picks are in the S&P 500 – the picks are primarily small caps and should be compared accordingly as Fortune promotes its efforts to beat the S&P 500.

LikeAssets is now tracking the picks, and the portfolio is currently +4% against the LikeAssets benchmark which includes a blend of small and large cap indexes. Here is how the picks were asset classified:

Goldman's Picks - Reviewing Performance of 2010 Software Sector Picks

Wed, 22 Dec 2010 00:00:00 GMT

Whipped the benchmark with a LikeAssets score of 31

There are a lot of analysts now making their calls for 2011 investments. Last December Larry Dignan did a brief mention of Goldman Sach’s Software Sector picks for 2010. How did the Goldman picks pan out?

LikeAssets allows me to analyze how the picks did against their appropriate asset class benchmark, as well as an industry benchmark. I’ll be looking at this as I consider the Goldman picks for 2011.

Goldman’s 2010 Software Sector Performance Review

Goldman’s highlighted three primary themes driving their Software Sector investment picks: (1) PC and Server upgrade cycle; (2) Virtual desktop and growth of the cloud; and (3) M&A activity would step up.

Here are the picks (% allocation started equally weighted in 12/14/2010) and the associated asset allocation used for determining the LikeAssets benchmark:

A Review of 2010 Investment Guide Picks – Fortune vs Forbes

Wed, 15 Dec 2010 00:00:00 GMT

The score is Fortune 7, Forbes -5

It’s year end again, the holidays are upon us and so are the 2011 investment guides created by every one of the major financial media players. Before you look at their 2011 picks, let’s look at LikeAssets’ analysis of the picks from the 2010 investment guides. Not only did we calculate the returns, but LikeAssets calculated the alpha by using the appropriate benchmark for each investment selected. This post examines the performance of the picks in the 2010 investment guide issues put forth by Forbes and Fortune. The analysis assumes an investment of $1000 in each pick made when the articles became available on the web in late 2009.

It is interesting to note that while the ratio of losing picks/total picks was similar for both (Fortune 24%, Forbes 29%), there was a large gap in performance and alpha. With Forbes you got more winners than losers but overall, but you still would have been better off in passive index funds that tracked the Forbes picks. Here is how the picks were asset classified…

Safety in Dividends?

Thu, 18 Nov 2010 00:00:00 GMT

Where should investors look for income when traditional sources yield so little, or nothing at all? Dividend stocks have been cast as an alternative, but many investors remain nervous about fulfilling fixed income allocations with stocks, and rightfully so. With that in mind I set out to see what dividend yields I can receive while playing it safe. For me safe means a low probability of near-term dividend cuts, the ability to maintain or grow the dividend whether the economic scenario is deflation or inflation, and a stock price that is a bargain.

Dividend Cuts: Interest Coverage helps investors understand a company’s ongoing earning power and cash flow and measures the ability to adequately cover interest payments on debt. If Interest Coverage is tight (for me anything under 6X), the dividend may be at risk if there is a bump in the road. To play it safe, I wanted at least a 10X coverage level giving me comfort that a dividend cut is not likely near-term. For additional analysis beyond the screener, consider looking at the full debt service coverage (which includes scheduled principal payments as well as interest) and the mix of fixed and floating rate debt. A higher level of fixed rate debt means that future interest payments should be less likely to spike if interest rates jump.

Performance Update - MarketGlide, Fidelity, Vanguard and T Rowe

Fri, 05 Nov 2010 00:00:00 GMT

MarketGlide Target Date Portfolios, available as sets of low-cost ETFs at FolioInvesting.com, are performing well against target date funds from the biggest names in the industry – Fidelity, Vanguard, and T Rowe. Using data from Zephyr and IDC, we analyzed performance and volatility for MarketGlide, Fidelity, Vanguard, and T Rowe for each target date. The performance and volatility numbers are displayed in the tables below, but here are a few highlights:

T Rowe placed #1 in YTD and one-year performance, but also was #1 in volatility for every target date.
MarketGlide placed #2 in YTD performance behind T Rowe in 9 of 10 target dates.
MarketGlide placed #2 in one-year performance, behind T Rowe in 8 of 10 target dates.
MarketGlide had the lowest volatility in 4 of 10 target dates and had the 2nd lowest volatility in 3 of 10 years.
In terms of one-year realized Sharpe Ratios (return/volatility), MarketGlide beats all three families in 9 of 10 target dates.

Helping investors understand alpha

Tue, 28 Sep 2010 00:00:00 GMT

There has been noteworthy discussion in recent articles about alphas and betas. It can get pretty confusing for an investor. Beta is a tool for measuring the sensitivity of the asset’s returns to market returns. It answers the question, “how much market risk are you bearing relative to the market itself?” A Beta of 1 means that the security moves pretty much in sync with the market and a beta of 0 means it moves independent of the market. Alpha provides a performance measurement of excess return over a risk adjusted market return (an appropriate benchmark, for example).

Roger Nusbaum posts about the alpha/beta debate and also refers to a post at The Capital Spectator which challenges the very existence of alpha, citing recent work done by John Cochrane from the University of Chicago. Roger lays out his case for why he still sees a world with alpha, but his post helps investors understand both arguments and become better educated on this critical topic.

Choosing a Target Date Fund is Still a Risky Proposition

Tue, 17 Aug 2010 00:00:00 GMT

Target date funds all share a common goal: to give investors the appropriate asset allocation up to (or through) a specific date. Taking a look at the performance of target date funds (TDFs) during 2010 has highlighted a persistent dilemma that became apparent in 2008 – even the most conservative types can deliver a shockingly wide range of returns.

For instance, every 2010 TDF intends to give investors who are ready to retire a risk averse investment vehicle. However, in Q2 alone, between April 1st and June 30th, the most popular 2010 TDFs showed a wide range of returns, with over 7% separating the best from the worst!

Investors who are so close to retirement can not afford such a big disparity, but that’s exactly the risk they are accepting when choosing a target date fund. And for almost all investors it is a risk that is impossible to analyze and understand.

Are the SEC's new TDF regulations enough?

Thu, 01 Jul 2010 00:00:00 GMT

The SEC has just announced new disclosure requirements for target date funds.

The SEC’s proposal would require marketing materials that are in print or delivered electronically to include a prominent table, chart, or graph that clearly depicts the asset allocations among types of investments over the entire life of the fund. These proposals would also require that the table, chart, or graph be immediately preceded by a statement explaining that the asset allocation changes over time, noting that the asset allocation eventually becomes final and stops changing, stating the number of years after the target date at which the asset allocation becomes final, and providing the final asset allocation.

This type of transparency is a logical first step, but it is not enough to inform and protect investors. Managers design target date funds to hold all of an investor’s assets for years, if not decades.

Highlights from Morningstar’s 2010 Target-Date Industry Survey

Sun, 16 May 2010 00:00:00 GMT

Backtesting analysis of target-date funds demonstrates that the biggest risk is selecting target-date funds that provide extreme performance surprises. Such funds generally use outlying strategies that are not easily understood. Examples include heavy equity allocations at retirement for strategies focused on “through retirement” glide paths, and investments in CDOs that were allocated as low risk short-term bond investments. This risk increases the importance of thoroughly understanding the target-date strategy and underlying investments of a selected target-date fund.

The complexity of target-date funds receives plenty of attention in the press and from regulators, but what does it mean for investors, plan sponsors and advisors? Below I highlight some interesting examples from the recent Morningstar survey of the target-date industry. The survey demonstrates that analyzing and maintaining a clear understanding of target-date fund risk is a task only a few well qualified investors should do on their own. Defaulting to a market index based approach provided by MarketGlide portfolios is the prudent choice for everyone else.

The Art of Annuitization

Sat, 15 May 2010 00:00:00 GMT

The art of annuitization. How do advisors and their clients determine how much to annuitize? Ask 20 advisors randomly and I guarantee you will see an incredible range of responses. If recent research and advisor feedback are believed, annuitization remains a mysterious art.

One example – research recently completed by Mathew Greenwald Research provides insight into advisors’ views about using annuity products.

The advisor concern stems from a persistence of an all or nothing view of annuities’ role in financial planning. The research discusses a more moderate approach, targeting 20-30% allocation to annuities.

But why 20-30%? This feels like the 60/40 asset allocation approach that is the default lacking good client data. What this research shows is the lack of a rigorous method for advisors to get annuity allocation advice and be able to compare and explain options unique for each unique client.

The target date fund market shows explosive growth, with over $250 billion in assets

Sat, 08 May 2010 00:00:00 GMT

Morningstar has noticed an explosive growth in the target date fund market. Despite some negative attention from Capitol Hill and the financial media, it is clear that investors are comfortable with using target date funds as a retirement investment vehicle. At the end of 2009, the 15 largest fund companies had over $255 billion in assets in target date funds. With such rapid growth, participants will benefit from accurate personalized projections that properly account for a target date fund glide path.

“Net assets in target-date mutual funds at the 15 largest fund companies have grown to nearly $256.5 billion at the end of 2009, according to statistics published by Morningstar.”

Due Diligence & Annuity Advice

Sun, 02 May 2010 00:00:00 GMT

Big debate continues in the defined contribution industry about the need to add annuities to DC plans. There are still many issues with annuities in DC plans – Portability, counter party risk, cost, and advisor support to name a few. Here is an article highlighting latest discussions.

Key issue noted in the article is how the annuity option is communicated to the participant:

[As one executive in attendance noted] “We don’t give them (plan participants) the framework to make good decisions; we make it complex.” Mr. Iwry noted that, in that situation, the annuity is already part of the benefits picture, but in many other situations employees often feel like they face an all-or-nothing situation: Take the lump sum or take distributions of the benefit.

How do target date funds adjust to market turmoil?

Fri, 30 Apr 2010 00:00:00 GMT

FT added some interesting perspective to the recent reports on target-date funds. Fascinating how much a TDF investment strategy can change. Principal, Fidelity and T Rowe all admitted they need to add more asset classes. It is very hard for investors and advisors to keep track and know who is making the right moves and when.

More recently Principal increased diversification by allocating to the Diversified Real Asset Fund, which invests in treasury inflation-protected securities (TIPS), commodities, real estate investment trusts (REITs), and natural resources. Weightings to some of the other underlying funds were reduced.

Mike Finnegan, chief investment officer at Principal, says: “Perhaps in retrospect we were too concentrated.” The group added another manager to the series’ core fixed income allocation in the autumn of 2008. But Mr. Finnegan says it did not change the funds’ glide paths, which determine the way asset allocation changes over the life of the funds.

Advisors Frustrated with Retirement Income Planning Tools

Wed, 28 Apr 2010 00:00:00 GMT

Sounds like advisors are frustrated as retirement income planning needs grow, while they are equipped with confusing applications and reports for their clients.

Fifty-six percent of advisors surveyed in September and October of last year said they expect retirement income planning to increase within the next year. In addition, advisors who participated in focus groups in February of this year say there is greater emphasis on financial planning as more of their clients are nearing or entering retirement. Spurred by the economic downturn, clients fear they will not have enough money to last throughout their lifetime and are requesting retirement income planning.

Participants Face a Huge Gap in Guaranteed Income Product Education

Wed, 21 Apr 2010 00:00:00 GMT

80% of participants want a lifetime income stream but only 20% are planning to use them. This points to a significant gap in education, a need for advisors to communicate better with the potential annuity clients who want the result but don’t understand the product.

Retirement plan participants need more information about strategies for making retirement assets last, LIMRA told federal regulators.

LIMRA, Windsor, Conn., discussed its views on lifetime income education in a response to an income planning request for information issued by the U.S. Treasury Department and the U.S. Labor Department.

Federal regulators asked for advice about use of annuitization and other mechanisms for converting retirement savings into lifetime income streams.

Make sure your retirement planning tool is telling the truth.

Tue, 20 Apr 2010 00:00:00 GMT

It’s clear that target date funds are the leading default investment option for the defined contribution industry. Research from Vanguard shows tremendous growth in the TDF market. Participants who are automatically placed in TDFs should consider the tools and services they are offered to help them accurately plan for retirement.

We believe that every participant deserves to know how a TDF may impact their retirement goals. Not a single fund provider gives participants personalized retirement projections that consider a TDF glide path. This is a very big problem.

For example, a 25 year old participant may be placed in his provider’s 2050 TDF. This fund is sold with an ‘invest and leave it’ label, and he is assured that as he ages, his investment will be managed appropriately and properly contributed to.

To plan for retirement, he can enter his information into his provider’s retirement planning tool. When required to select a between a conservative, moderate and aggressive investment strategy, he decides that aggressive is the appropriate choice for a 25 year old.

Proposed regulations raise concern over active management in 401(k) advice. What does that imply for TDFs?

Tue, 20 Apr 2010 00:00:00 GMT

The new advice rules for 401(k) plans are creating quite a stir in the industry. One columnist shares his observations in a piece from CBS Moneywatch.

“The proposal, in part, concerns the delivery of advice to 401(k) participants. Worried that the advice might be slanted in favor of asset managers, the Department of Labor will require that the recommendations be provided by unbiased computer models. But the questions the Department is asking as it establishes the basis for those computer models have many in the brokerage industry up in arms. The questions, they fear, indicate that the guidelines for 401(k) advice will favor — if not exclusively require — the use of index funds.”

This brings a question to my mind: should target date funds only consist of passive funds as well?

Vanguard sees rapid growth in target date fund adoption. Are participants prepared?

Tue, 20 Apr 2010 00:00:00 GMT

Vanguard recently released research highlighting the rapid growth in the adoption of target date funds in plans.

“The percentage of Vanguard defined contribution (DC) plans offering target-date funds increased from 13% of plans in 2004 to 75% in 2009. Target-date funds are rapidly replacing risk-based life-cycle funds in plan investment menus and are the predominant choice for plans offering a qualified default investment alternative (QDIA). As this increased use reshapes investment patterns, a new research note from Vanguard Center for Retirement Research explores what this trend can mean for plans and participants.”

View the PDF, Target Date Fund Adoption in 2009

This research analyzed 3.2 million participants in 2,200 defined contribution plans administered by Vanguard.

Using indexes as benchmarks

Thu, 08 Apr 2010 00:00:00 GMT

In a Morningstar Investing Classroom course, novice investors are introduced to the concept of using indexes as benchmarks. Students are educated on how the most popular indexes may not be the most appropriate ways to measure their own investments.

“The Dow Jones Industrial Average (DJIA) may be the index that heads the stock market report on the evening news, but it’s rarely used as a performance benchmark for stock mutual funds… despite its widespread appeal, the S&P 500’s focus on large companies means it’s not representative of the entire market and smaller stocks’ performance in particular. It’s therefore inappropriate to measure a fund that doesn’t buy large companies.

“So what is the best index to use as a benchmark? Well, that depends entirely on what you’re comparing to it. Morningstar gives the reader some suggestions, “The Russell 2000 Index, which tracks smaller U.S. companies, is a good tool to evaluate many small-company funds, while the Morgan Stanley Capital International Europe Australia Far East (MSCI EAFE) Index, which follows international stocks, is a good measuring stick for foreign funds.”

Make sure your mutual fund is tracking its index

Wed, 07 Apr 2010 00:00:00 GMT

This great entry from My Money Blog takes a hard look at the Fidelity U.S. Bond Index Fund (FBIDX).

When the author began reading Morningstar’s FBIDX Analyst Report, he was surprised to learn that his investment had not been tracking its index.

“Although this fund was designed to track the Barclays Capital U.S. Aggregate Bond Index, it lagged that bogy by more than 3 percentage points from mid-2007 through the end of 2008.

“Lagging a benchmark by 3 full percentage points is a lot in the index world. Passive investors want low costs and low tracking error from the target benchmark!”

Dispelling myths of absolute-return investing

Mon, 05 Apr 2010 00:00:00 GMT

M. Barton Waring and Laurence B. Siegel take issue of the notion about “absolute return” investing, in their paper, The Myth of the Absolute-Return Investor. They review the problems with targeting absolute returns, examine their skepticism towards the practice, and explain the merits of benchmarks.

“Real added value comes only from relative-return investing.

“No wonder we could not sensibly define absolute-return investing: There is no such thing. The term is intended to capture investor attention by offering an intuitively appealing alternative to the disciplines required by relative-return invest- ing, but at the end of the day, it delivers beta returns plus or minus relative (alpha) returns. A sensible meaning for the term simply does not exist, unless one concedes that absolute return equals relative return, in which case there is no need for the term.