Tuesday, December 8, 2009
Time to Cycle Into Quality (Not that we ever left)
We saw this article on the web. It reinforced what we are seeing, high quality stocks are much more reasonably valued than lower quality names.
Monday, December 7, 2009
Thomas White International Fund
Last week we spoke with Douglas Jackman CFA, an Executive Vice President at Thomas White, about the Thomas White International Fund (TWWDX). Thomas White started his eponymous firm in 1992 when he left Morgan Stanley. His initial investors were Sir John Templeton and John Galbraith, partners in the extremely successful Templeton Galbraith investment firm and pioneers in international investing. The firm manages mostly international assets.
The fund remains fully invested throughout market cycles. Its twin objectives are outperforming its benchmark (MSCI All-Country ex US) with lower volatility. A key way it achieves those twin objectives is by attempting to preserve capital during declining markets. They have been successful at this, outperforming in 19 out of 24 down quarters (79% of the time).
Thomas White’s proprietary research has broken down the its roughly 2,000 international stock universe (it only buys stocks with a market capitalization great than $1 billion) into 97 distinct regional industries (European banks, Japanese autos, for example). The key factors in this breakdown are that Thomas White believes that it has identified the most important valuation metrics in each of these 97 industry groups and the firm also believes that local market factors have a bigger impact on the stocks than global factors. Given the firm’s valuation-driven investment style, it ranks the companies in their respective industry groups to determine the most undervalued in each. After they have that ranking, the analysts at Thomas White then group all the stocks into deciles based on their expected returns. The most compelling 200-300 names are subject to additional qualitative analysis focusing on the quality of their accounting, management and products. From this group, the fund will select the most attractive 100 to 150 names for its portfolio (currently 141 names).
To manage risk, the fund monitors the valuations of each stock in its universe every month, has individual position size limits and also limits as to how far it will allow the fund to deviate from the index.
The fund does not hedge its currency exposure. While allowed to by prospectus, it never has hedged. The firm pointed out to us that its benchmark, the MSCI all-Country ex US contains both Emerging Markets and Canada unlike the more usual MSCI EAFE index.
Mr Jackman commented that the managers are concerned about the effects on the global economy as the massive amount of excess government liquidity is unwound. The fund has been cutting back its exposure to health care and retail. The managers also have 24% of the fund’s assets in emerging markets, its highest level ever.
The Thomas White International Fund’s uses more quantitative tools and owns more stocks than other funds we typically use. Importantly, they apply their approach in a consistent and disciplined manner with results that are impressive. They are good stewards of their fund holder’s capital. We continue to like this fund as a way for ourselves and our clients to get broad exposure to all international stocks whether in developed or emerging markets. We also think the fund’s focus on volatility reduction and relative valuation make this fund a core holding for many investors.
The fund remains fully invested throughout market cycles. Its twin objectives are outperforming its benchmark (MSCI All-Country ex US) with lower volatility. A key way it achieves those twin objectives is by attempting to preserve capital during declining markets. They have been successful at this, outperforming in 19 out of 24 down quarters (79% of the time).
Thomas White’s proprietary research has broken down the its roughly 2,000 international stock universe (it only buys stocks with a market capitalization great than $1 billion) into 97 distinct regional industries (European banks, Japanese autos, for example). The key factors in this breakdown are that Thomas White believes that it has identified the most important valuation metrics in each of these 97 industry groups and the firm also believes that local market factors have a bigger impact on the stocks than global factors. Given the firm’s valuation-driven investment style, it ranks the companies in their respective industry groups to determine the most undervalued in each. After they have that ranking, the analysts at Thomas White then group all the stocks into deciles based on their expected returns. The most compelling 200-300 names are subject to additional qualitative analysis focusing on the quality of their accounting, management and products. From this group, the fund will select the most attractive 100 to 150 names for its portfolio (currently 141 names).
To manage risk, the fund monitors the valuations of each stock in its universe every month, has individual position size limits and also limits as to how far it will allow the fund to deviate from the index.
The fund does not hedge its currency exposure. While allowed to by prospectus, it never has hedged. The firm pointed out to us that its benchmark, the MSCI all-Country ex US contains both Emerging Markets and Canada unlike the more usual MSCI EAFE index.
Mr Jackman commented that the managers are concerned about the effects on the global economy as the massive amount of excess government liquidity is unwound. The fund has been cutting back its exposure to health care and retail. The managers also have 24% of the fund’s assets in emerging markets, its highest level ever.
The Thomas White International Fund’s uses more quantitative tools and owns more stocks than other funds we typically use. Importantly, they apply their approach in a consistent and disciplined manner with results that are impressive. They are good stewards of their fund holder’s capital. We continue to like this fund as a way for ourselves and our clients to get broad exposure to all international stocks whether in developed or emerging markets. We also think the fund’s focus on volatility reduction and relative valuation make this fund a core holding for many investors.
Friday, November 20, 2009
Extension of time to redeposit RMDs
Required Minimum Distributions (RMDs) were suspended for 2009. If you took an RMD in 2009 (and you do not need the funds), the IRS has allowed you until November 30 to roll it back into your IRA, an extension from the typical 60 days one has to roll over funds. Here’s a link to Ed Slott’s blog where he goes into the details.
If you have any questions, give us a call.
If you have any questions, give us a call.
Monday, November 2, 2009
Recent Article
We recently wrote this article for our local paper, The Main Line Suburban. It contains a few ideas on how to manage in the current market environment.
Tuesday, October 6, 2009
Don't Invest Your Emergency Reserves
We recently read this article and felt it was worthy of comment. We think the author is quite simply providing BAD ADVICE! Emergency reserves are just that, money that should be available in case of emergency and not tied up in a relatively risky investment like stocks. Now we like dividend stocks as well (if not better) than the next guy, but they should only should be used for your investment portfolio, not for money that you could require in case of emergency. If you had followed the author’s advice last year, your reserve could have declined by 20-30%, at a time when you may have really needed the money.
Bottom line, keep your emergency funds in a very low risk and easily accessible place like a bank account, money market fund or very short term CDs. The interest you earn will be very low, but the money will be there when you need it. Emergency funds are about return of principal, not return on principal.
Bottom line, keep your emergency funds in a very low risk and easily accessible place like a bank account, money market fund or very short term CDs. The interest you earn will be very low, but the money will be there when you need it. Emergency funds are about return of principal, not return on principal.
Friday, September 25, 2009
“We are analysts.”
On 9/23/09 we talked with Vincent Sellecchia, co-manager of the Delafield Fund (and author of the quote above) about the fund, markets and some of the business issues of running an investment management firm. Here are some of the highlights:
Delafield is moving from Reich & Tang, a subsidiary of Natixis Global Asset Management to Tocqueville. Natixis made a corporate decision to only retain money market and deposit business at Reich & Tang (interestingly, they requested that the Delafield Fund remain available to their employees through the company’s retirement plan). The principals of Delafield are confident that the move to Tocqueville should prove a good fit. While there is not extensive overlap between the existing Tocqueville funds and Delafield, they will still sit in on research meetings and meet with the “one company per day” that goes through Tocqueville’s offices.
We spent a little time reviewing the company’s investment process. As they come up with ideas for the fund, they take historical financial information and Wall Street projections to complete a template they have developed. From that template they derive an Enterprise Value to EBITDA ratio. If the company appears interesting, they will then typically schedule a call with the company. If at that point they are still interested, they will meet with senior management in person and visit some of the company’s facilities. After a meeting, the Delafield team will re-evaluate and recast the projections with their financial estimates to see what Enterprise Value to EBITDA ratio comes out and determine if the stock appears attractive for purchase
In buying stocks for the portfolio, Delafield attempts to be very price sensitive. If the price declines after an initial purchase and they are confident in their analytical work they will average down. Typically they accumulate positions over time.
During periods when the fund’s share price is rising and performing well (like now) turnover also starts to increase as they peel off portions of their positions and hopefully recycle the proceeds into new names.
The sell discipline is a primarily a function of valuation. As a stock approaches fair value, the managers will begin to sell. Other reasons they may sell a stock include the business results are not what Delafield had anticipated through a mistake in their analytical work or assessment of management. They will also sell if management changes direction on them.
The fund had a difficult fourth quarter last year primarily due to the credit market freeze causing investors to view what had previously been considered reasonably capitalized companies as bankruptcy candidates. This has led the fund to be much more focused on credit issues on a firm’s balance sheets (debt maturities, debt covenants, etc.) as they go through their investment analysis. Many of those same companies that were driven down last year have surged up in price leading to Delafield’s 38.41% year-to-date return through August31 (vs. the S&P 500’s 14.97% return).
At August 31, Morningstar reported the firm held over 18% of its assets in cash, but Vince noted that the cash position is currently higher. Given lower cash yields, the fund has taken about 4.5% of its assets and invested in bonds maturing in 1-5 years.
The managers are not finding values in the market today, hence the even higher cash position. Their outlook is that the US economy (this being a domestic fund) has bottomed and the credit crisis is over but the recovery will be muted. They believe consumers will want to save more and so companies will have a tougher time growing their top lines. And after the recent market run up, Vince believes you need to look to 2011 to start justifying some of the valuations they are seeing in the market. Their thoughts on the markets are greatly influenced by the frequent conversations they have with company managements.
The fund currently owns 60 stocks in the portfolio, which is closer to the upper end of their range. The large number of stocks also reflects the fact the managers have fewer higher conviction ideas. Vince noted they are very conscious of risk and given their concerns about valuation and the consumer, the high cash position makes a lot of sense.
After our conversation with Vince, we both felt very comfortable with our holdings in the Delafield Fund. The fund managers (who have been with the company since inception) continue to remain very disciplined in their allocation of their fund holder’s capital. We share their belief that the market has moved up rapidly and there are not that many good purchase candidates available. We are very comfortable with their decision to raise some cash to be used later when more attractive ideas appear. We also found his honesty in discussing the 4th quarter of 2008 and the lessons they learned to be refreshing.
We continue to find the mangers at Delafield to be great stewards of ours and our client’s capital. We conclude with one of our favorite lines, “Our best risk management is knowing our companies as well as we can.” We couldn’t agree more.
Delafield is moving from Reich & Tang, a subsidiary of Natixis Global Asset Management to Tocqueville. Natixis made a corporate decision to only retain money market and deposit business at Reich & Tang (interestingly, they requested that the Delafield Fund remain available to their employees through the company’s retirement plan). The principals of Delafield are confident that the move to Tocqueville should prove a good fit. While there is not extensive overlap between the existing Tocqueville funds and Delafield, they will still sit in on research meetings and meet with the “one company per day” that goes through Tocqueville’s offices.
We spent a little time reviewing the company’s investment process. As they come up with ideas for the fund, they take historical financial information and Wall Street projections to complete a template they have developed. From that template they derive an Enterprise Value to EBITDA ratio. If the company appears interesting, they will then typically schedule a call with the company. If at that point they are still interested, they will meet with senior management in person and visit some of the company’s facilities. After a meeting, the Delafield team will re-evaluate and recast the projections with their financial estimates to see what Enterprise Value to EBITDA ratio comes out and determine if the stock appears attractive for purchase
In buying stocks for the portfolio, Delafield attempts to be very price sensitive. If the price declines after an initial purchase and they are confident in their analytical work they will average down. Typically they accumulate positions over time.
During periods when the fund’s share price is rising and performing well (like now) turnover also starts to increase as they peel off portions of their positions and hopefully recycle the proceeds into new names.
The sell discipline is a primarily a function of valuation. As a stock approaches fair value, the managers will begin to sell. Other reasons they may sell a stock include the business results are not what Delafield had anticipated through a mistake in their analytical work or assessment of management. They will also sell if management changes direction on them.
The fund had a difficult fourth quarter last year primarily due to the credit market freeze causing investors to view what had previously been considered reasonably capitalized companies as bankruptcy candidates. This has led the fund to be much more focused on credit issues on a firm’s balance sheets (debt maturities, debt covenants, etc.) as they go through their investment analysis. Many of those same companies that were driven down last year have surged up in price leading to Delafield’s 38.41% year-to-date return through August31 (vs. the S&P 500’s 14.97% return).
At August 31, Morningstar reported the firm held over 18% of its assets in cash, but Vince noted that the cash position is currently higher. Given lower cash yields, the fund has taken about 4.5% of its assets and invested in bonds maturing in 1-5 years.
The managers are not finding values in the market today, hence the even higher cash position. Their outlook is that the US economy (this being a domestic fund) has bottomed and the credit crisis is over but the recovery will be muted. They believe consumers will want to save more and so companies will have a tougher time growing their top lines. And after the recent market run up, Vince believes you need to look to 2011 to start justifying some of the valuations they are seeing in the market. Their thoughts on the markets are greatly influenced by the frequent conversations they have with company managements.
The fund currently owns 60 stocks in the portfolio, which is closer to the upper end of their range. The large number of stocks also reflects the fact the managers have fewer higher conviction ideas. Vince noted they are very conscious of risk and given their concerns about valuation and the consumer, the high cash position makes a lot of sense.
After our conversation with Vince, we both felt very comfortable with our holdings in the Delafield Fund. The fund managers (who have been with the company since inception) continue to remain very disciplined in their allocation of their fund holder’s capital. We share their belief that the market has moved up rapidly and there are not that many good purchase candidates available. We are very comfortable with their decision to raise some cash to be used later when more attractive ideas appear. We also found his honesty in discussing the 4th quarter of 2008 and the lessons they learned to be refreshing.
We continue to find the mangers at Delafield to be great stewards of ours and our client’s capital. We conclude with one of our favorite lines, “Our best risk management is knowing our companies as well as we can.” We couldn’t agree more.
Wednesday, September 23, 2009
Chasing Yields Revisited
We thought this article in yesterday's Wall Street Journal provides additional support for our recent warning to avoid chasing high yields. While it is certainly tempting given the low yields available in money market funds and high quality bonds, we think that in the long run it will be better for your personal net worth to avoid the temptation.
The article also provides a little more clarity on why we prefer purchasing individual bonds or CDs for our clients’ portfolios as opposed to using a bond fund. We like the certainty of getting our principal back when a bond matures. We also like being able to use individual bonds to meet specific future liabilities, and to provide a steady stream of cash to rebalance the portfolio or simply to reinvest in another bond. At times, bond funds are the only alternative, but just remember, like all investments, they come with risks.
The article also provides a little more clarity on why we prefer purchasing individual bonds or CDs for our clients’ portfolios as opposed to using a bond fund. We like the certainty of getting our principal back when a bond matures. We also like being able to use individual bonds to meet specific future liabilities, and to provide a steady stream of cash to rebalance the portfolio or simply to reinvest in another bond. At times, bond funds are the only alternative, but just remember, like all investments, they come with risks.
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