New location for our blog

Please note that we have moved our blog. It now is on our website. All future posts will appear at http://www.harvestfinancialpartners.com/blog.

Thanks
Jim and John

Oppenheimer Developing Markets Fund

 

On May 29, we spoke with a portfolio specialist at Oppenheimer Funds about their Developing Markets Fund (ODMAX). 

Oppenheimer as a firm, and the management team of the Developing Markets Fund, are research driven and fundamentally focused. Instead of starting with a broad based macro view about countries and sectors currently that seem most attractive and then looking for investments in those areas, the fund’s weightings are the result of their individual stock analysis.  The managers seek companies with significant competitive advantages and the ability to dictate their own strategies. And they typically avoid capital intensive industries like energy, companies that are heavily reliant on government, such as Chinese banks and most companies in Russian (which represents only 5% of the portfolio). 

Geographically, Asia comprises the bulk of the portfolio at around 45%, with China carrying increasing weight. China is going through many changes, and the country is shifting from an exporter to a more consumer driven economy, which greatly impacts neighboring countries. The fund believes that as China focuses on building consumer base and investing in infrastructure, more attractive companies will arise.  

Within Asia, the fund believes that Taiwan and Korea will suffer from Japan’s quantitative easing and yen weakening policies, therefore, the fund maintains only a 4-5% weight in those countries. This is well below the index, which has Korea at a 25% weight. 

The fund can invest up to 20% outside of the Emerging Markets, and currently has 15% in developed Europe. The focus is primarily on companies that are selling heavily into the emerging markets, such as Prada, Ferragamo, Richemont, Burrberry, and SAB Miller. For example, Prada, a company which the fund bought two years ago, earns 40% of its revenue from emerging markets, mostly from China and its neighboring countries. The fund expects more growth from luxury consumer brands in these regions as the middle and upper classes continue their rapid growth. 

Latin America accounts for 20% of the portfolio, most in Brazil, but the fund finds Latin America and Brazil have poor macro outlooks and stretched valuations.  However, true to their research-driven approach, they found opportunities in Embraer and Petrobras despite their dim macro view.  

The Middle East and Africa represent 4.5% of the portfolio, with 1% in so-called frontier markets. Management likes the frontier space, in part due to lower company valuations, but has limited the fund’s exposure due to liquidity concerns, heavy state ownership and lack of investor protections.

Finally, the fund maintains 5% in cash (it has ranged from 3-6%). The cash is less of a valuation call, but more reflective of the need for liquidity in case of fund redemptions. 

Emerging markets have been underperforming developing markets – down 1% vs. up 10% in the past year, and management would not be surprised to see that continue in the near term. Going forward, the fund expects China to do well but may see volatility due to the nation’s reforms. The fund thinks India has the potential to become the fastest growing large market in the region, and will look to focus more of the portfolio in the region. 

We have used this fund for a couple of years. We remain very comfortable with management’s investment approach and we like that they are more focused on picking stocks than managing to an index. Of course, this approach can lead to period of relative underperformance. We were also pleased that Oppenheimer decided to close the fund to new investors. This is a sign that they are more focused on providing attractive returns for existing shareholders than trying to make as much money for the fund company.

 

 

Assistance on this post was provided by Ethan Xu 

(Harvest Financial Partners owns this fund in client portfolios. The principals of Harvest Financial Partners own this fund in their personal portfolios.  Positions may change at any time)

The Lord Abbett Short Duration Bond Fund

On May 7, we spoke with Don Annino, a portfolio specialist at Lord Abbett about the Short Duration Income Fund.  The fund attempts to maximize return by investing across all bond market sectors including investment grade and high yield corporates, mortgage, government, and asset backed securities while keeping the fund’s duration (a measure of interest rate sensitivity) within a 1-3 year range.  Prior to 2007, the fund could only invest in government backed securities. A mandate change in 2007 gave the portfolio managers the flexibility to invest in these other areas of the bond market. The two lead portfolio managers on the fund, Robert Lee and Andrew O’Brien, have been working together for twelve years. 

Since 2009, the fund has seen average returns of around 4.5%, and has consistently outperformed Barclay’s 1-3 year Government/Credit Bond Index.

The Short Duration Fund has seen a huge influx of cash recently and now has assets that surpass $30 billion.  Even with assets at these levels, management insists that they still have a lot of capacity.

The fund has few restrictions on where in the bond market it can invest, going wherever it finds the best relative value.  Currently the managers are more focused on interest rate risk than credit risk.  That has led them to invest 35.5% of the portfolio in Investment Grade Corporate bonds. High yield bonds are 14.5% of the portfolio, down from 25% in 2010.  They think corporates could weather a recession and find that most companies will not face significant refinancing needs until 2015.

Commercial Mortgage-Backed Securities make up 28% of the portfolio, down from 50% in 2008, an all-time high for the fund. These CMBS include loans on retail, office space and hotels. Growth in these sectors is tied to economy which continues to slowly recover. In addition, 10.2% is invested in Agency Mortgage-Backs, most of which are 5 year ARMs. Another 9% is invested in Asset Backed Securities (ABS), almost all with AAA ratings. Assets backing these bonds include autos, credit cards, and a few student loans, maturities are typically less than one year and the issues are very liquid. The Fund has only 1% in cash (it has ranged from -1 to 2%) but between the liquid ABS and the fund’s line of credit they believe they have ample liquidity.

Going forward, Lord Abbett sees slow growth- around 2% GDP. They are encouraged by the housing market and discouraged by unemployment. They expect the Fed to continue its highly accommodative monetary policy.  Consistent with the structure of the portfolio, they believe that there is more risk of a major move in rates rather than a collapse in credit. Management points out a number of potential risks that could possibly cause losses similar to those of 2008. The biggest risk is another scare that the Euro Zone will break apart. In addition, issues could also arise if China sees another slowdown of their economy (with growth slowing down to less than 6%).  At some point the continued increase of the Federal Reserve’s balance sheet could also cause the markets substantial concern.

We have started using this fund relatively recently in some client portfolios.  After our conversation, we remain very comfortable with managements approach. The fund has been very successful and has seen a huge inflow of assets recently. Still, the management team believes they have tremendous capacity as they operate in a very large and liquid part of the bond market.

Assistance on this post was provided by Ethan Xu 

(Harvest Financial Partners owns this fund in client portfolios. The principals of Harvest Financial Partners own this fund in their personal portfolios.  Positions may change at any time)

Getting back in the market

Click the link below for some comments we made on getting back in the market, if you have missed the recent move.  Our major takeaway: Take it slowly. Do not rush!

Get off the sidelines

Interview on the Entrepreneur Podcast Network

We recently were interviewed on the Entrepreneur Podcast Network.  We provided some background on our firm and some financial advice for those looking to start a business.

Our Recent Interview With the Wall Street Transcript

HFP WST Interview 2012 - 

 (Disclosure: As of this date the authors and clients of Harvest Financial Partners own Cisco Systems, Expeditors International and Norfolk Southern. Positions may change at any time. These are NOT recommendations. This blog is for informational purposes only)

Checking Your Social Security Benefit Estimate Online

The Social Security Administration is now making your estimated benefits statements available online.  To save money they stopped mailing statements last year, though they resumed mailing them this year if you are 60 or older.  They will also mail a paper statement in the year you turn 25 with a notice to login online.  Here is a link to the press release describing the change.

The estimated benefit statement is the statement showing your annual earnings history and your estimated monthly payment if you retire at your “full” retirement age (based on your year of birth), or if you retire early, at age 62 or defer to age 70 in today’s dollars. It also tells you what your survivor benefits will be and your benefits if you become disabled.

Here is the link to the site to register; you will need to answer a few questions to authenticate your identity. It took me about 5 minutes to complete the registration process and it reminded me how much of one’s life is public knowledge.

We suggest you periodically go to the site to review your earnings history and make sure it is at least roughly correct.  From a planning perspective, it is a very good idea to know your estimated benefit amount.  It will help you and your advisor in making investment or retirement planning decisions.  But it is a very rough estimate as the Social Security Administration points out.

Jensen Quality Growth Fund

On May 21^st, we spoke with Robert McIver, one of the portfolio managers of the Jensen Quality Growth Fund. He  discussed Jensen’s stock picking process and elaborated on why the Jensen fund experienced a downturn in the recent quarter.

We have written about Jensen in the past, but let us start by reviewing Jensen’s process:

Step 1: Jensen sifts through 5,000 publicly traded companies and narrows the universe down.  To be included, stocks must have market capitalizations above $1 billion and a 15% Return on Equity (ROE) each year for the previous ten years. The 15% ROE requirement is a very strict one. Recently Jensen dropped AMETEK from its portfolio because its ROE declined to 14.8%. Mr. McIver also emphasized that the 15% ROE must be consistent over 10 years. To cite an example, Apple’s ROE has been over 15% for 7.5 years. Although Apple is a robust company, Jensen won’t consider it for another 2.5 years.

Step 2: Jensen then looks at the 200 – 250 companies that meet those two criteria and selects those with the strongest combination of growth potential, consistency and strength of margins, business returns, financial strength, and other quality characteristics. That narrows the field down to 50 stocks.

Step 3: Jensen then does additional fundamental analysis, seeking companies with substantial and sustainable competitive advantages, growth drivers, and free cash flow potential.

Step 4: Jensen chooses 25 to 30 companies to include in their portfolios that have both these high quality characteristics and that can be bought at very attractive valuations.  Individual positions are between 1% and 7%.

Currently, the average market cap in the portfolio is $62 billion and there are 30 holdings.

Turnover is low in part because Jensen places such a premium on sustainability of a company’s competitive advantage through the ten years of over 15% ROE.  Currently Morningstar calculates a 7% turnover ratio.  Jensen’s buying process is numerically selective; similarly its maintenance and selling process is also very qualitative. Jensen’s investment team consists of various business executives who have managed companies themselves. When the investment team disapproves of companies’ management decisions, they will sell the stock. Mr. McIver gave us three examples of recent stock sales.

·         Johnson and Johnson was sold from the portfolio because management responded poorly to some operational difficulties. Furthermore, the company’s drug pipeline appears too thin to combat its growing number of patent expirations making it harder to generate sales growth.

·         Clorox was sold from the portfolio because the company did not have much exposure outside of US markets. Also, management’s acquisition of Burt’s Bees was integrated poorly and, in Mr. McIver’s opinion, destroyed shareholder value.

·         Sysco Foods was sold because Jensen felt management’s decision to invest in their distribution centers was an inefficient use ofcapital.  

Mr. McIver also mentioned that Jensen’s decline in the recent quarter was simply a result of stock market forces. According to Rob, the companies that Jensen invested in were financially healthy and making correct operational decisions. However, the companies’ stock prices diverged from the companies’ actual performances. Essentially, there was a disconnect between companies’ performances and their stocks’ performances.  Jensen remains very comfortable with its holdings.

 All in all, Jensen is a reputable firm that provides solid long term returns while minimizing risk. Its dedication to fundamental investment strategies helps it weather the toughest economic impacts and come out even stronger.

Returns through 5/31/2012

	YTD	1 Year	3 Years	5 Years	10 Years
Jensen Quality Growth	3.37%	-5.04%	13.19%	1.14%	3.35%
S&P 500	5.16%	-0.41%	14.92%	-0.92%	4.14%

Source: Jensen Management

Assistance on this post was provided by

(Harvest Financial Partners owns the Jensen Quality Growth fund in client portfolios and uses it as an investment option in a number of retirement plans where Harvest is the investment advisor.  The authors own it in their personal portfolios.  Positions may change at any time.)

Dodge & Cox International Stock Fund

We had a conference call with Dodge & Cox’s International Fund on May 30. We spoke to Tara Shamia a client services representative of the firm.  Ms. Shamia gave us a summary of how the fund operated and answered our questions concerning the fund’s investment processes and holdings, and risk management procedures.

Dodge & Cox’s International fund invests in companies domiciled outside the US.  The fund is low cost with an expense ratio of 0.64% compared to a category average of 1.41%.

Dodge & Cox does extensive fundamental research on potential investments.  That research is done by a team of 22 analysts using bottom-up stock-picking methods.  Analysts are expected to be advocates for their investment ideas and present them to a 9 member investment management team led by Diana S. Strandberg. The investment team is experienced and stable; the average tenure of members of the Investment Committee is 22 years. 

Dodge & Cox as a firm follows a value oriented investment strategy looking to buy well established companies at attractive valuations.  They build the portfolio one stock at a time without regard to index weightings.  The firm currently believes that they are finding “compelling valuations” overseas pointing to strong company fundamentals and dividend yields above 4%.  They think the macroeconomic concerns about Europe and slowing Chinese growth are depressing equity prices below fair value.

The firm reviews how companies allocate their capital to determine how shareholder focused management appears. This explains why the fund is underweight the Eastern countries of the Asia-Pacific region, specifically Japan and China. Ms. Shamia explained to us although Japanese companies exhibit many positive traits like low valuations, they often put very low emphasis on shareholder value. In a similar vein, Ms. Shamia described that Chinese companies often fail to recognize the needs of the shareholders. She pointed out that many Chinese companies exhibit poor corporate governance; a similar refrain we have heard from other fund managers.

The fund will invest in both developed and emerging markets.  As of quarter end, the fund had about 20% of its $40 billion portfolio allocated to emerging markets. The emerging markets exposure has been coming down as valuations look less compelling.  David Herro, of Oakmark made a similar point when talking about his International Fund and International Small Cap Fund.  Both Dodge & Cox and Oakmark feel valuations in the developed markets are extremely attractive.

Currently, the fund is overweight in the telecommunications and financial services sector. Dodge & Cox sees strong growth prospects for communications and media companies in emerging markets and believe that entertainment and news distribution services are in high demand.

In the financial services sector, Dodge & Cox believes that European banks have bolstered capital ratios, reduced their holdings of toxic assets and trade at low valuations, in part because of low expectations placed on them by investors.

Dodge & Cox also doesn’t have sector or weighting guidelines for risk management. The firm measures risk not by market volatility but by the potential for investors to lose their capital. Dodge & Cox’s investment team tries to fully understand the companies that they are invested in and maintains a moderately diversified portfolio.  At quarter end the fund had 89 holdings with about 29% of the fund invested in its top ten holdings.  The firm is also very fully invested with a cash position of about 1.2% of fund assets.

While volatile, we continue to find the fund an attractive vehicle to invest in international markets.  In addition, the fund’s low expense ratio is another positive.

Returns through 3/31/2012

	YTD	1 Year	3 Years	5 Years	Since Inception*
Dodge & Cox International Stock Fund	12.72%	-7.61%	22.20%	-2.07%	7.75%
MSCI EAFE index	10.86%	-5.76%	17.13%	-3.51%	3.71%

Source: Dodge & Cox

* Inception is 5/1/2001

Assistance on this post was provided by DiAn Zhu

(Harvest Financial Partners owns the Dodge & Cox International Stock fund in client portfolios and uses it as an investment option in a number of retirement plans where Harvest is the investment advisor.  The authors own it and other Dodge & Cox funds in their personal portfolios.  Positions may change at any time.)