Chances are the emerging markets sleeve of your portfolio didn’t shine last year. The iShares MSCI Emerging Markets ETF (EEM) lost about 3% in 2014 on a total return basis. But as the chart below shows, what often gets lost when investing in this sector is that it’s not some circa-1997 homogeneous monolith where all markets tend to move in lockstep, but the aggregate of very disparate economies and stock markets. The iShares MSCI Russia Capped Index ETF (ERUS) and the iShares MSCI Emerging Markets Latin America ETF (EEML) took it on the chin -- no surprise given their dependence on commodity revenue -- while the iShares MSCI India ETF (INDA) had a very strong year:
In an investment outlook, William Blair makes a case for the heterogeneity playing out among individual issues as well. William Blair focuses on quality companies that are generating plenty of free cash flow—from both organic revenue growth as well as operational jujitsu.
Back in 1997 the William Blair folks worked from a global universe of 1,300 stocks that met their quality parameters, with only 10% of those in emerging markets. Fast forward to today, and the report notes that “not only has the universe doubled in size, but the number of high quality companies in EMs has risen seven-fold, and is now on par with the number of high quality companies in the U.S.” And there is a wider dispersion among returns, as “the market is much more aggressively trying to differentiate between really true, sustainable quality companies and those that are not. The market appears to be paying for this as the differences in valuation are also notable.”
We’re all agreed that the vast majority of active stock fund managers don’t outperform their index benchmarks. Thus at first blush it makes plenty of sense that inflows to passive mutual funds and ETFs last year outpaced active portfolio inflows nearly 10:1.
But the efficacy of indexing obscures two salient issues. It’s not necessarily indexing that is all that, but rather the fact that indexing often comes with very low carrying costs: an index fund charging an 0.20% expense ratio obviously has a lot lower bar to step over than a fund charging 1.20%.
Yet that presumes all active managers have too-high expenses to overcome (or they have to take undue risk in pursuit of high returns that can counteract the stiff fee, making them a lousy proposition for sentient investors.) And that’s just wrong.
As Morningstar’s John Rekenthaler clearly laid out, active v. passive is not the right construct to focus on. What matters is cost.
Using YCharts Fund Screener, you can generate a list of actively managed stock funds that when ranked by assets under management shows plenty of the biggest active portfolios have fees of 0.80% or lower.
The week before Christmas was a crummy one for those holding Dunkin Brands (DNKN) shares, as the donut-and-coffee franchise king reduced its guidance on results for the fourth quarter of 2014 and for all of 2015 -- same-store sales increases coming in lower than previously forecast being the most notable metric.
Dunkin’s CEO Nigel Travis -- “Nigel” seems an upper crust name for a donut boss, but the man has down-market cred; he previously worked at Papa John’s (PZZA), Blockbuster and Burger King (BKW) -- promised, beyond 2015, “we are committed to returning to double-digit growth.” The company continues to add hundreds of stores.
Those seeing last week’s stock dive as a buying opportunity, however, might think twice. Once because Dunkin shares remain dear, trading at a forward PE ratio of nearly 25. That reflects our ebullient market, with major indexes hitting records in recent days, and the general mania for coffee-driven investments. Twice because wringing sustained increases in same-store sales from coffee-and-pastry joints, going forward, is going to require some fancy footwork. Dunkin mightn’t be the one to pull it off.
If you’re sniffing around looking for values in the energy sector, the just-reconstituted Market Vectors Wide Moat ETF (MOAT) that tracks the Morningstar Wide Moat index needs to be on your must-vet list. For the upcoming first quarter of 2015, eight of the 20 spots in the equal-weighted portfolio will be energy stocks that have the double allure of possessing a competitive wide moat and a share price that Morningstar estimates is a discount to fair value.
The three steepest discounts are Schlumberger (SLB), National Oilwell Varco (NOV) and Williams Companies (WMB) all selling at discounts of at least 25%. Those discounts are based on a fresh round of reduced fair value estimates from Morningstar that reflect the sell-off in oil prices.
A quick aside if you’re not familiar with the success of the wide moat index: Morningstar’s index has a terrific long-term record, and the Market Vectors ETF that was launched in mid 2012 to track it has in its short history has managed to more than keep pace with the SPDR S&P 500 ETF (SPY). (Full disclosure: Morningstar is an investor in YCharts.)
A testament to the stock-picking chops for the Wide Moat ETF is that outperformance comes despite having a 49 basis point expense ratio drag, compared to just 9 basis points for the SPDR S&P 500 ETF.
Old school high-quality bonds were supposed to be the dogs of 2014. The popular meme among the bond cognoscenti heading into this year was that given the end of the 30+ year cyclical bull market for bonds, you had to get creative and venture far beyond the traditional bond fodder -- Treasuries, government backed bonds, high quality corporates -- to position yourself for the new world order. The explicit message: how or why would you be content sticking with a traditional bond fund or ETF tracking the Barclays U.S. Aggregate index with its piddly 2% yield?
And let’s remember that it was also just a year ago that municipal bonds were still nursing wounds from a year full of headline -- if not fundamental -- risk.
As this chart shows, staying old school in fact paid off quite well in 2014. The iShares Core Total U.S. Bond Market ETF (AGG) that tracks the all-U.S., all high grade Barclays US Aggregate index and the iShares S&P National AMT-Free ETF (MUB) posted strong total returns, while the high yielding non-traditional fare struggled to stay afloat:
Now to be clear, both the junk and senior loan ETFs bested the higher quality fare over the past five years:
But over the past three weeks an interesting divergence has emerged. Chevron stock is no longer tracking the sharp decline in oil. Here’s a zoom into performance from December 1:
With a few ups-and-downs, Starbucks (SBUX) shares essentially marked time in 2014, up just 3% as we write this, after a spectacular 2013 performance that featured a 43% rise in the coffee seller’s stock.
View 2014 as a year of consolidating gains, then, but Starbucks enters 2015 (the fiscal year actually ended September 28) with an audacious growth program that could make current trading levels a nice entry point. Or, if there is failure to execute on an increasingly complex business model, the 2014 pause could be viewed in hindsight as what was an excellent and sustained opportunity to hop off CEO Howard Schultz’s happiness bus.
Schultz’s twin attributes – grandiose self-regard and weakness for the worst of business clichés, coupled with an amazing rigor and discipline in operating the hot-drinks chain – attach a cult of personality to Starbucks shares, and perhaps a Howard-premium to go with it; the PE ratio based on trailing net income is just shy of 30 right now.
For the love of clichés, sample this buzzword-heavy quote attributed to Chairman Howard (God help his family and friends if the guy actually talks like this; we’ve helpfully italicized the most obvious clichés jammed into his remarks) in Starbucks’ recent announcement of the new five-year plan:
Financial advisors often call it a case of “get-back-itis,” the urge many investors have to hold onto losing stock positions until the shares return to some arbitrary level, like the buyer’s purchase price or, in extreme examples, the stock’s high.
If you happened to buy some of 2014’s big losers – here we see year-to-date results for Sprint (S), Twitter (TWTR), Mattel (MAT), Las Vegas Sands (LVS) and Amazon (AMZN) – you, too, may be feeling the urge to hang on in hopes that your losses are covered by a subsequent gain in the stock. Don’t, unless your up-to-the-minute analysis of the stock suggests you’d buy it now at its current price.
Get-back-itis is also known as the Anchor Trap, and is among a handful of behavioral financial biases explained in a YCharts White Paper; click on the link to download the full report. Most investor suffer from some irrational beliefs that hamper their performance. The white paper explains these biases and offers ways to avoid suffering losses due to them.
Falling oil prices, rising consumer confidence amid an improving labor market, and a smidge of wage increases is not surprisingly fueling expectations for consumer discretionary stocks to outperform. Since the mid October low, the Vanguard Consumer Discretionary ETF (VCR) and the Consumer Discretionary Select SPDR (XLY) are significantly outpacing the broad market SPSR S&P 500 (SPY).
Benefitting from a pickup in consumer spending -- regardless of what is purchased -- are the intermediary payment systems. Both Visa (V) and MasterCard (MA) have indeed been bid up since sentiment shifted in mid October.
It’s not news that consumer discretionary stocks are topping the lists of projected 2015 outperformers. Piper Jaffrey pegs the sector as one of its three overweight ideas (along with healthcare and technology) in the year ahead. And Piper Jaffrey is still decidedly bullish on 2015. It’s 2,350 estimate for the S&P 500 is about 15% higher than where it recently traded.
Exchange traded funds such as Vanguard Consumer Discretionary (VCR) offer a cheap and broad way to tilt toward this sector. The three largest positions, Walt Disney (DIS), Home Depot (HD) and Amazon (AMZN) speak to the broad range of consumer stocks.
For a more nuanced look with consumer discretionary, the Leuthold Group recently called out Retail Home Furnishings and Department Stores as having moved up into their “Attractive” group rating.
In fact, U.S. home furnishing store sales are up more than 4% year to date, and that’s half of the entire sales growth this slice of the economy registered in the preceding five years:
Department stores haven’t had the same bounce. Store sales are down nearly 2% over the past year. But in a market where it’s hard to find value, department stores are intriguing: they are an unloved and beaten up sector that has reasonable upside in an environment where consumers have more to spend away from the suddenly less-expensive gas pump. Moreover, while real wage growth was anemic into 2013, it has begun to pick up: