@Mulder420, Scott, & Other MFO Members:
Regards,
Ted
Copy & Paste 5/3/14 Jack Hough Barron's
The Many Ways To Tap The Water Boom:
A perfect storm is brewing, water is the 21st-century oil," wrote Bank of America Merrill Lynch in a 133-page report last month. BofA calls water scarcity a "global megatrend" and says "investors need to go blue." Credit the bank's conservation efforts; it has been recycling that report for a few years now. Returns for the theme have been just OK. The S&P Global Water index has returned 12.1% on average over the past three years, beating the 9.5% return for the broad S&P Global 1200, but falling short of the 13.9% return for the U.S.-focused Standard & Poor's 500 index.
The opportunity may indeed be more compelling than recent returns suggest. Water infrastructure is crumbling in the U.S., but municipalities have delayed spending to help balance their budgets. That has created enormous pent-up demand for pipes, pumps, and wastewater-treatment gear, and water main breaks are now occurring more frequently from San Francisco to Milwaukee to Springfield, Mass. In emerging markets, growing middle classes are consuming more water-intensive goods like meat, and clamoring for things Americans take for granted, like the ability to draw a clean glass of tap water.
The problem with theme investing, however, is that some key factors that drive stock returns have nothing to do with the themes. Chief among these is valuation; the price an investor pays is easily as important to long-term returns as what he buys. The S&P Global Water index recently traded at 23 times trailing earnings, versus 18 times for the S&P 500. Investors with a thirst for water exposure must be careful not to pay too much. Promising names include Rexnord (ticker: RXN), HD Supply Holdings (HDS), American Water Works (AWK), and two others belo
Our blue planet holds plenty of water, but only 2.5% of it is fresh. The amount of fresh water has fallen 35% since 1970, as ground aquifers have been drawn down and wetlands have deteriorated. Meanwhile, demand for water-intensive agriculture and energy is soaring. Overall water demand is on pace to overshoot supply by 40% by 2030. Water scarcity will damp long-term economic growth unless governments spend more to recycle wastewater, turn salt water into fresh, and build smarter plumbing. BofA therefore expects companies that meet these needs to deliver outsize growth for many years.
BUT INVESTORS MUST PAY attention to other factors, too. For example, now is a good time for stock buyers to turn their attention from pumps to plumbing, says Matt Sheldon, manager of the Calvert Global Water fund (CFWAX), which has returned 12.9% a year over the past three years, ranking among the top 2% of natural-resources funds, according to Morningstar. A boom in hydraulic fracturing of oil and gas reserves over the past decade sent demand for pumps soaring, and provided outsize returns for companies like Flowserve (FLS). Its stock price has multiplied 10 times over the past 10 years. But growth there has slowed and shares look fully priced. Flowserve is expected to increase its revenue by less than 4% this year, and its shares go for 19 times this year's earnings forecast.
Meanwhile, a rebound in the U.S. housing market should drive improving results for companies that sell plumbing systems to builders and municipalities. Sheldon likes Rexnord, which makes valves, floodgates, backflow preventers, and other water products. Its revenues are expected to increase by 7% this fiscal year, which runs through March 2015. Its shares go for 16 times earnings.
HD Supply, an 8% revenue-grower, sells a broad line of building and maintenance supplies, and is seeing particularly brisk growth from its waterworks division. The company, a former unit of Home Depot, went public and swung to a full-year profit last year. Shares go for 20 times this year's earnings forecast, but earnings are still ramping up quickly from a low base. The price/earnings ratio drops to 13 based on next year's forecast and to less than 10 based on 2016. Last August we wrote that shares were poised for 20% upside over the coming year (Aug. 12, "The Home Depot of Commercial Construction"). They're up 11% since then, on par with the S&P 500.
Utilities offer another way into water. American Water Works is the largest investor-owned water and wastewater utility in the U.S., with customers in 40 states. For utilities, aging water infrastructure represents not only a future cost, but a future profit. That's because regulators allow them to invest in infrastructure at handsome returns on equity, and in many states, if realized returns fall behind projected ones, utilities can top them up with customer surcharges. American Water Works is expected to increase its revenue by 7% this year, and shares sell for 19 times this year's earnings estimate. Janney Capital Markets cites the stock as a favorite utility in part because of the potential for stable and rising income. Shares yield 2.7% and management links its payout to earnings, which Janney predicts will grow 7% to 10% a year over the long term.
China represents a top opportunity for water investments in emerging markets, says BofA. In China, all those coal-fired power plants account for 20% of total water consumption, and that figure could rise to 40% over the next decade. Beijing Enterprises Holdings (392.Hong Kong) has a hand in water treatment and sewage, along with toll roads, beer, and gas pipelines. Its shares go for 18 times this year's earnings forecast. That looks inexpensive compared with its projected revenue growth of 16% this year and 21% next year.
EMERGING MARKETS STOCKS aren't the only way to invest in emerging markets, says Andreas Fruschki, manager of the AllianzGI Global Water fund, which ranks among the top 6% of natural resources funds for three-year performance, according to Morningstar. Fruschki's fund has only a 10% stake in companies based in the emerging markets; he prefers to invest in those markets through global companies that sell there. Danaher (DHR) was recently the fund's top holding. It's an acquisition-driven company that focuses on niche markets, and has a hand in water analysis and treatment, test equipment for electronics and medical research, and more. Revenue is expected to grow 5% this year. Danaher shares go for nearly 20 times this year's earnings forecast, but earnings understate the amount of cash the company generates because of charges related to past deals. Shares go for less than 17 times this year's projected free-cash flow.

Current MFO Great Owls...

Found in Multi-Search.

And, on a lot less volatility...both above 50-day and 200-day averages...both near all-time highs.
Here's summary for AGG:

And, for SPY:

"Does anyone out there own FPNIX?"
Yes. Not a lot, but I'm considering increasing my position. It's a very unique income fund in that I don't believe it has ever lost money in a calendar year while managed by FPA, which IIRC is 30 years. Their first goal is not to lose money. A lot of funds say that, but FPNIX puts it into practice. Performance has often suffered due to this risk aversion, but not losing is more important to them than gaining. I like Tom Atteberry.
They are very concerned that interest rates are historically low and are going to rise, and they have positioned themselves according to that thesis. The duration is only 1.51 years, and the yield is very high for the amount of duration risk taken: 3.5%.
On their website, fpafunds.com/
they have a major presentation given by Tom Atteberry showing FPA's fixed income thesis:
October 17, 2013
Presentation to CFA Institute: Fixed Income Portfolios in the New Frontier
By Thomas H. Atteberry
It's very educational and shows their strong opinions on interest rates.
Another item on their website:
December 23, 2013
Morningstar describes FPA New Income as "An intriguing choice for interest-rate bears."
FPA has their Investor Day coming next month, so there should be a lot of information coming from that. And FPNIX just had their First Quarter 2014 webcast about a week ago, available for viewing/listening online. About 58 minutes.

If the brokerage option is part of the 401k plan; one would suspect you would be allowed to invest in whichever funds, stocks and etfs that are not part of Fidelity, but with which Fidelity has an agreement. Whether reduced minimums would be available for these outside funds is another question. Group plans, as with the 401k; likely have very low minimums ($500); but restrictions still usually apply. These restrictions vary by fund family but may include holding period times; or resticting investing in a same fund if one sold an entire position (not allowed to move monies into that fund until a waiting period is finished (60 days or ???)
Hopefully, your company will offer a nice plan. Many such plans are junky.
Regards,
Catch

By the way, the VIIIX mentioned above normally has a minimum of $200 million to get in! In the 401k plan, there is no minimum at all. VBTIX normally has a minimum of $5 million to get in: no minimum at all in the 401k plan. So I think your company has a big opportunity here to create the ultimate investment vehicle of their choosing. Go for it!

I think the possibilities are almost without limit. Your company can probably work out whatever they want in there. There are tons of possibilities that are not possible in a regular Fidelity IRA.
For example, I have a company 401k with Fidelity and it contains the PIMCO Total Return Institutional Share Class PTTRX, 0.46% expense ratio, which normally has a $1 Million minimum, but in the 401k plan there is no minimum at all. It also has Vanguard Institutional Index Plus, VIIIX, an S&P 500 Index fund that charges only 0.02% expense ratio (2 basis points!), there is a private Stable Value investment as a choice, there are two DFA mutual funds, and DFA funds are normally not available to anyone who doesn't go through a Registered Investment Advisor, there is VBTIX, the Vanguard Total Bond Market Institutional class, with only a .07% expense ratio, etc........
So yes, your corporate 401k plan with Fidelity has a lot of flexibility to put funds into your 401k plan from many different fund companies, institutional shares, etc.....And mine also has a Brokerage Link option, where you can purchase anything available to anyone with a Fidelity Brokerage account.
I would lobby to get a Stable Value fund, which is a fixed income fund that uses Guaranteed Investment Contracts to produce an investment with a $1.00 NAV that always stays at $1.00/share, but has a decent yield. It's a super conservative, almost no risk fixed income investment that yields a lot more than the traditional counterparts such as CDs, MMAs, etc., and not available outside a 401k, so it is very unique. Standish BNY Mellon is a company that has these investments ready made, a very high quality company that I would recommend.
Regarding SGIIX, that's probably something your company would have to negotiate with Fidelity to see if they can get it in there. My guess is that the chances are good with respect to getting a bunch of institutional share classes in there, especially if your company has a decent size. The size of your company and the number of 401k participants may be a factor here. I would also lobby to get some DFA funds in there. Certainly you want some Target Date Retirement funds in there. I think the Brokerage Link is great, because you can purchase any stock/bond/mutual fund/ETF, so no one in the 401k plan will feel left out.

FYI:
Regards,
Ted
http://blogs.wsj.com/moneybeat/2014/05/02/jeremy-grantham-on-bubbles-i-am-sure-it-will-end-badly/tab/print/

FYI:
Regards,
Ted
http://blogs.marketwatch.com/thetell/2014/05/02/investor-money-leaves-crowded-bank-loan-funds-after-95-weeks-of-inflows/tab/print/
M* Bank Loan Fund Returns: http://news.morningstar.com/fund-category-returns/bank-loan/$FOCA$BL.aspx

Putting that 16% in all caps doesn't make it more meaningful. This is the same type of silly argument made with marginal tax rates. It isn't worth getting a million more because you will pay almost half of it in taxes. I don't know any millionaires who thought that way. But saying 50% tax rate makes the point look incredible when arguing ideologically about taxes. Seeing the post here, it seems to work too.
The real argument is that the expense is not tied to a gain over the benchmark. If it was, it would be a no-brainer. You will pay that expense even if you lose money, you will lose more money because of the higher expense. The marginal rate for some hypothetical gain is irrelevant and meaningless. You can make it 50% by making the manager over perform by just 1.6%.
Ellis is being generous by arbitrarily picking just 16% but also using a sensationalist type of argument even if the point being made about mutual fund costs is valid.

The case is in hindsight only. If someone had suggested buying long dated bonds at the beginning of the year, they would have been put in a padded cell.
Even the Moose call switched to EDV after a rise of 12% or so this year close to its 52 week high. Is there a case now? The case for holding it is the same as it was at the beginning of the year and so is the case for not holding it. Only one of them will be right going forward.

This math (cost differentials) reminds me of a retirement decision I grappled with a few years ago:
"When should I take my retirement pension".
My employer provided me with a retirement pension calculation chart to consider (an annuity chart of sorts) . Calculations started at 25 years of service and maxed out at 37.5 years of service. To simplify the math of this annuity chart, a 59.5 years old worker with 30 years of service could retire with a pension roughly equal to 60% of their salary. An employee could also continuing working (earning a full salary) for 7.5 more years at which time that employee would qualify for a pension roughly equal to 70% of their salary.
What I tried to get across to my follow workers who wanted to continue working towards qualifying for a 70% annuity rate was the fact that they were working for the differential (salary minus a pension @ 60% of last year's salary) or basically 40%.
Of course this worker would earn 40% more money while continuing to work and eventually qualify for a higher pension payment (70%), but from my standpoint these 7.5 years are the "last best" 7.5 years of our lives.
Aside from the enjoyment of work (not really), I was not willing to spend 100% of my time over the next 7.5 years earning a 40% pay differential (salary - pension). Much of this 40% differential disappears from net (take home) income anyway (in the form of pension contributions, union dues, Medicare / SS deduction, state and local tax deductions, and work related expenses).
Cost differential can be steeper than we might image.

@jaba: I agree with you, this fund is one and a half drumsticks away from being a turkey. Here are the returns from the funds website.
Regards,
Ted
Martin Focused Value Fund (MFVRX) 3-Mo. -0.20% 6Mo. .50% 1-Year 2.22% Since Inception .82%
S&P 500 Index 3Mo. 1.81% 6Mo. 12.51% 1Yeae 21.86% Since Inception 21.16%
+ 1.39% expense ratio

How many people do you think would've put up with -15% ANNUALIZED underperfomance between 2003-2007?
I'd attach the annual report so you can see for yourself but I don't see that there's any way to do that here.

Another way to put it is that you know what it costs to get the S&P/Total Market performance.
You are paying Mick the Bookie for any outperformance beyond that, IF he or she achieves it. In this case 80bps of 500bps is 16%.
Of course, if Mick the Bookie achieves outperformance, you also have more money to compound.

Apparently, it would be those who wish to outperform the SP500 by being better at playing defense than offense ('better relative performance 2000-2002, 2008). There's more than one way to skin a cat.

Per their 2013 annual letter, Martin Capital Management has returned 5.3% annualized net of fees from 2000-2013 vs 3.6% for the S&P 500.
From 2003-2013, they lagged the S&P in every single calendar year, except 2008.
To quote from the commentary: "There are some investors for whom this strategy is a very good fit"
My question is who are these "some investors"?

Hi Guys,
The little trick to easily reproduce the Ellis calculation is to perform the analysis using dollars and not percentages.
Any dollar amount will do. Let’s assume a 1000 dollar investment.
The active investor was rewarded with a 410 dollar payday; the passive investor’s return was 360 dollars.
The active investor’s cost was 8.50 dollars; the passive investor’s cost was 0.50 dollars.
The excess incremental reward for the active investor over the passive investor was 50 dollars (410-360). The incremental cost for that reward was 8 dollars (8.50-0.50). The incremental cost for the incremental excess return therefore is 8/50 or 16%.
Extra performance is usually a costly matter. A ballplayer who hits at a .320 level draws a much more formidable salary than a .250 hitter. That’s only true if those averages hold water over time. Persistency matters much.
I too admire Charlie Ellis. He is a smart commonsense guy. But in this instance, I believe he is emphasizing the wrong side of the argument. If I could identify a fund manager who generated a lifetime excess return record in the 5% range I would be ecstatic and would gladly pay him 16% of that excess returns. These superinvestors are rare and hard to identify before the fact.
I hope this helps.
Best Regards.

David et al. how is this number added up? I am only good at math when I have a formula.
I love this...it's actually more disturbing and relevant than Flashboys/HFT. Great issue!!
"Assume an S&P 500 Index Fund achieves in a year a total return of 36% and charges investment management fees of 5 basis points (0.05%). Assume your other investment is Mick the Bookie’s Select Investment Fund which had a total return of 41% over the same period and charges 85 basis points (0.85%). Your incremental return is 500 basis points (5%) for which you paid an extra 80 basis points (0.80%). Ellis would argue, and I believe correctly so, that your incremental fee for achieving that excess return was SIXTEEN PER CENT."
Mike

MarkM: Thanks. What is Jim Stack's performance record? I know the Hulbert Financial Digest tracks him closely, but I don't subscribe to that. What was Jim Stack's performance during bear markets, such as March 15, 2000-October 2002, or October 2007-March 9, 2009, and during bull markets, such as the past 5 years, and 1991-March 2000?
Are you in Meb Faber's ETF's? I just read his book, Global Value.