If You Are An Index Investor, Where Does Explore Investing Fit In?
In this week’s Forbes column, Rick Ferri asserts that “partial indexing works for Wall Street, not investors”. In this penetrating article, Rick ruthlessly uncovers Wall Street’s agenda is selling indexing for efficient markets while directing clients towards highly priced actively managed mutual funds for “inefficient markets”. As Ferry states, “Welcome to ‘Core and Explore’, also known by ‘Core and Satellite,’ ‘Barbell,’ ‘Core Plus’ and a variety of other witty names. The theory suggests that index funds (or ETFs) work best in large and liquid markets and that actively managed funds work best in small and less liquid markets. Accordingly, a combination of index funds and active management generates higher returns than an all index fund portfolio.”
With rapacious accuracy, Rick rips back the covers on Wall Street to expose the true motives in selling this story. Wealth managers are having an increasingly difficult time selling clients on the value of high priced mutual funds that are less tax friendly and have tragically underperformed low cost ETFs. In light of the giant swooshing sound of clients bailing out of the mutual fund merry-go-round for better constructed and performing ETFs, wealth manager came up with this core and explore pitch to sell manged products for small cap, foreign and emerging market investments. Unfortunately, Ferri points out that there actually is no such creature as an inefficient equity market. As he states:
“Core and Explore would be fine advice if it worked, but it doesn’t. The theory has several flaws. First, how does your adviser know which market is efficient and with is not, or if any market is efficient? The nation’s top academics cannot even agree. Second, why should your adviser suddenly become more skilled in selecting managers in inefficient markets simply because he or she is no longer selecting active managers in efficient markets? Third, there is no unbiased academic evidence to support the notion that active managers outperform in any market.
Two often presumed inefficient markets are U.S. small-cap stocks and emerging markets stocks. According to Core and Explore theory, these are two markets where active managers should have excelled. That has not happened. Data gathered from the S&P Indices Versus Active Funds (SPIVA) Scorecard for the first half of 2009 shows that over 67% of small-cap core funds under performed the S&P 600 index over the trailing five years and about 90% of actively managed emerging markets funds underperformed the S&P/IFCI Emerging Markets Composite index over the same time.
There are no inefficient asset classes where high cost actively managed funds consistently outperform their appropriate benchmarks. This means Core and Explore is about paying for something you do not need and likely will not benefit from. If your adviser has progressed to the point where he concurs with an all index fund portfolio, then you have a good adviser. If he insists that he can select superior funds on the explore side, then perhaps you should do some exploring on your own–for a new adviser.”
I am a big fan of Mr. Ferri’s and strongly agree with his poignant and entertaining expose. I would suggest an important caveat, however. Core and Explore does work, but only if you define the terms quite differently. I have used Core to reflect those assets which are directed at a long-term, reliable and scientifically sound retirement strategy. This Core portfolio should consist of indexes as recommended within the MarketRiders (www.marketriders.com) software. Explore, on the other hand, are the investments outside of my Core retirement portfolio that I am involved with that have a higher risk/return profile. I personally have ownership in a hydroelectric power company in Chile, oil and gas in the US, a retail store as well as equity in early stage tech companies – for me all part of my Explore strategy that complements the overwhelming majority of my assets in a Core indexed portfolio with MarketRiders. Even Ferri himself owns land in Texas and has investments outside his index portfolio. I personally like to direct between 10% to 20% of my investible liquid net worth in Explore style investments and see that percentage decreasing rapidly as I move into my 50s and towards retirement.
So, in conclusion, Core does fit with Explore, but when it comes to publicly traded equities, stay true to employing globally diversifed, low cost and tax efficient ETFs.
Miles Capital Holdings, Inc. Completes Purchase of WB Capital Management Inc. From West Bancorporation, Inc.
WEST DES MOINES, IA--(Marketwire - December 31, 2009) - West Bancorporation, Inc. (
Commenting on the acquisition, David Miles, President and Chief Executive Officer for Miles Capital Holdings, Inc. said, "We are delighted to complete this acquisition and look forward to serving the asset management needs of our current and future clients. To be able personally to return to this business is both gratifying and exciting for me."
Northeast Delta Dental Acquires General Agency From Fort Dearborn Life(R)
CHICAGO, IL--(Marketwire - December 31, 2009) - Northeast Delta Dental, Concord, NH, through its affiliate, Red Tree Holdings, Inc., has acquired Combined Services LLC, a general insurance agency, from Fort Dearborn Life Insurance Company®, effective December 31, 2009. Fort Dearborn Life is a Dearborn NationalT brand company.
"We are pleased to be more closely affiliated with Combined Services with whom we have had a 30-year marketing relationship," said Tom Raffio, president and CEO of Northeast Delta Dental. "Having them on board as a member of our team more closely aligns with our strategic objectives. This acquisition facilitates our efforts to diversify and sustain a solid future for our company."
QED Connect, Inc. and Southeastern Retail Services, Inc. to Complete Merger
MANCHESTER, NH--(Marketwire - December 31, 2009) - QED Connect, Inc. ("QED Connect")
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ImmunoGen (IMGN): John McCamant’s top stock for 2010
"Out top stock pick for 2010 is ImmunoGen (NASDAQ: IMGN)," says biotech specialist John McCamant.
In his The Medical Technology Stock Letter, he explains, "The company’s potent cancer-cell killing antibodies were developed for targeted delivery to tumor cells."
"Specifically, IMGN’s TAP technology uses antibodies to deliver one of the company’s proprietary cancer-cell killing agents specifically to tumors.
"These agents are 1,000 – 10,000-fold more potent than standard chemotherapeutics and are designed to be attached to antibodies using one of the Company’s engineered linkers
"IMGN’s lead drug candidate is T-DM1 which is Genentech’s Herceptin with the addition of IMGN’s powerful TAP technology.
"The company recently delivered positive Phase 2b data for TDM-1 in breast cancer patients that have failed all previous treatments. This positive data should allow the drug candidate to be filed for FDA approval in the first half of 2010.
"Adding to our enthusiasm is that Roche is also starting a single agent T-DM1 trial in adjuvant mBC, the biggest and most lucrative breast cancer market.
"This exceeds the expectations for most of Wall Street as they only expect sales for late-stage breast cancer, a much smaller market. We believe that Roche's ultimate goal is to gain approval of T-DM1 for all lines of HER2+ mBC, similar to Herceptin.
"In addition to T-DM1, five other compounds that make use of ImmunoGen’s TAP technology are in clinical testing.
"In addition to the company’s product pipeline, compounds utilizing the TAP technology are in clinical testing through IMGN’s collaborations with Genentech (a wholly owned member of the Roche Group), sanofi-aventis, Biogen Idec and Biotest.
"IMGN’s powerful platform technology is in itself a significant asset. In the past few years, there have been numerous premium buy-outs of companies that also have monoclonal antibody platforms.
"These buyouts have been sparked by the huge growth of anticancer antibodies such as Avastin, Rituxan, and Herceptin, all multi-billion dollar drugs.
"We believe there is a strong chance that someone steps up and buys IMGN at a premium in 2010 as they have what we believe to be the most attractive antibody platform available.
" T-DM1 is the cornerstone of IMGN’s value and is likely be approved by the end of next year.Additionally, the market for T-DM1 appears larger than expected and the most recent data represents a major transformative and de-risking event for IMGN.
"IMGN is poised to create significant shareholder value in 2010 which will either drive the stock price higher or result in a premium buyout."
Brandon Clay: Oceaneering Int’l (OII)
"Oil recently suffered a pullback, but we think it's temporary," says Brandon Clay. In Invest with an Edge looks to deepwater drilling services for his top 2010 pick -- Oceaneering Int'l (NYSE: OII.
"The Texas-based oil and gas services company gets most of its revenue by providing goods and services to companies that are drilling for oil and gas offshore. One of their specialties is deepwater remotely-operated vehicles (ROVs), or 'robots' in layman's terms.
"Oceaneering has turned a profit every year since 1999, including a record $3.65 a share in 2008. Analysts are forecasting a drop to $3.38 a share for 2009, but they also expect a nice rebound to $3.51 a share in 2010.
"The shares still appear inexpensive at just 16 times forward earnings. The firm's balance sheet is in good shape with just $140 million in debt and nearly $96 million in free cash.
"Oceaneering fills a unique niche in its industry. They help oil and gas explorers drill in deep water locations hundreds of miles offshore. Its services are expensive, but producers like Chevron and ExxonMobil have little choice if they want to replace their reserves.
"OII is in a market sweet spot. For an indirect play on rebounding crude prices, go with oil services performer Oceaneering International."
IMAX (IMAX): Dennis Slothower’s top stock for 2010
For his top pick for 2010, Dennis Slothower turns to the "big screen" and highlights a company that could benefit from the recently release film, Avatar.
The editor of Stealth Stocks says, "IMAX Corporation (NASDAQ: IMAX) is one of the world’s leading entertainment technology companies, specializing in motion picture technologies and large-format film presentations." Here's the reasoning behind his buy recommendation.
"The company’s principal business consists of large-format digital and film-based theater systems.
"The sale or lease of such systems to, or contribution of such systems under, revenue-sharing arrangements with its customers and the conversion of two-dimensional (2-D) and three-dimensional (3-D) Hollywood feature films for exhibition on such systems around the world.
"IMAX’s theater systems are based on proprietary and patented technology. Its customers that purchase, lease or otherwise acquire their theater systems are theater exhibitors that operate commercial theaters, museums, science centers or destination entertainment sites.
"The company generally does not own IMAX theaters but instead licenses the use of its trademarks along with the sale, lease or contribution of its equipment.
"In 2002, IMAX introduced a technology that can digitally convert live-action 35mm films to its large format at a modest incremental cost while meeting the company’s high standards of image and sound quality.
"In 2003, the company introduced IMAX MPX, a theater system designed specifically for use by commercial multiplex operators.
"The IMAX MPX system, which is highly automated, was designed to reduce the capital and operating costs required to run an IMAX theater, all without sacrificing image and sound quality.
"Avatar, a movie made in 3-D, was just released this Christrmas. Critics are saying that it could be the next The Lord of the Rings, only it uses a new kind of 3-D technology that is expected to revolutionize the movie industry, much as did sound and color did in the last century.
"High expectations are pushing theater chains around the world to invest in this new digital 3-D system. If Avatar is, in fact, a big hit, we’re sure to see many more 3-D action films and many more 3-D theaters, which should increase IMAX’s earnings sustainably."
Sy Harding: Diamond Foods (DMND)
"Diamond Foods (NASDAQ: DMND) is our top pick for 2010," says Sy Harding. In The Long & Short Stock Advisor, he adds, "It has had no problems with the recession or slow economy."
"The firm processes and markets culinary, snack, and in-shell walnuts, pine nuts, pecans, peanuts, macadamia nuts, hazel nuts, cashews, Brazil nuts, and almonds. It sells snack packages under its Diamond, Emerald, and Pop Secret brand names.
"The company seems to have had no problems with the recession or slow economy. Its sales and earnings remain on a fast growth track.
"In fact, it may well be that the slow economy and high unemployment are a plus for this company, with more people eating at home, watching home movies - and eating snacks.
"The company’s growth is also supported by the growing interest in healthy eating, which includes recommendations from the healthcare industry to include nuts in our daily menus, and to snack on nuts rather than unhealthy fatty-food items.
"In any event, the trend of Diamond’s top and bottom lines are impressive, with gains each of the last four years, in spite of the recession. Value Line estimates earnings in 2010 will be rise another 24% over 2009’s earnings.
"Always positioning for continued growth, the company is working on expanding its distribution network of grocery stores, food processing companies, restaurants, bakeries, and food service companies in over 100 countries. Foreign sales currently account for only 20% of total sales.
"Diamond also continues to introduce add new products to its snack lines, like Cocoa Roasted Almonds, and Sea Salt Cashews, which were added recently.
"At the current price the shares are selling at 18 times estimated 2010 earnings, a relatively low P/E ratio for what appears to be a solid, if small, growth company. Our upside target is $41. We suggest a ‘mental’ protective stop at $25.80."
Chuck Carlson: General Mills (GIS)
"With the market looking toward high-quality, dividend-paying stocks General Mills (NYSE: GIS) looks especially tasty for total returns in 2010," says Chuck Carlson in The DRIP Investor.
"Profits for the leading food company should show nice gains in 2010, which should provide support to the stock price. Also, the stock offers certain defensive characteristics should the market become more tumultuous.
"Its stable of strong brand names, focus on costs, and overseas growth opportunities should drive profits higher in the near and long term. I like the stock for all seasons.
"General Mills owns some of the strongest brands on your grocer’s shelves, including Green Giant vegetables, Old El Paso Mexican food, Häagen-Dazs ice cream, Yoplait yogurt, and Cheerios and Wheaties cereals.
"Finally, General Mills has pricing power that could be very useful should inflationary fears increase among investors. The stock's yield of 2.7% is an added bonus. I look for the stock to outperform the overall market in 2010.
"I think the stock will continue to put up decent gains should the market rally continue. And I would expect the 'defensive' qualities of the stock to fuel above-average price resiliency should the overall market turn down.
"Investors should note that General Mills offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company. The minimum initial investment is $250. For information on the direct-purchase plan call (800) 670-4763."
The Best Stocks for 2010: Favorites from 80 experts
Happy holidays! Please enjoy the just-released Top Picks 2010: our 27th annual survey of the the nation's leading advisors.
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