Smaller reigns supreme in hedge funds
When it comes to hedge funds, the little guy has the upper hand.
Smaller hedge funds — those with less than $100 million in assets under management — have notched the greatest year-to-date gains, standing at 4.1 percent, according to data released by Preqin.
By comparison, funds whose assets exceed $1 billion averaged year-to-date gains of just 0.54 percent, the worst class of performers in terms of size.
Preqin showed largely positive data for the hedge fund industry after a rough patch. Their trailing 12-month performance entered into positive territory for the first time since December, up 1.58 percent.
So far this year, hedge funds are up 3.67 percent.
“After a difficult start at the beginning of the year, 2016 has now proved to be a positive year for hedge fund performance, with July marking the fifth straight month of industry gains,” Preqin said in Friday’s report.
As for the recent success of smaller funds, their size is proving to be an advantage in a challenging environment.
Earlier this week, Barclays released a study of the hedge fund industry and concluded that the hedge fund industry has become too big for the opportunities in it.
“As hedge funds become larger, their investable universe can often be diminished (e.g., due to position limits) as it is often not ‘worth it’ to invest in smaller situations that can hardly move the profit and loss needle,” Barclays wrote.
The Restaurant Group strategy review to recommend sale of 40 restaurants - The Times
The Restaurant Group [LON:RTN] has conducted a strategic review that will recommend the sale of a portfolio of the UK-based company’s restaurants, according to a report in The Times. The newspaper did not cite a source for the information, which appeared near the end of a report about The Restaurant Group’s appointment of Andy McCue as chief executive.
It is thought that the review concluded that TRG should begin a sale process for as many as 40 underperforming restaurants, the item said. TRG’s Frankie & Benny’s brand would account for most of the restaurant disposals, according to the newspaper.
TRG Chairman Debbie Hewitt said TRG will reveal the outcome of the strategic review in a couple of weeks, the report continued.
The item noted previously-reported talk that TRG has attracted takeover interest from private equity firms.
The Restaurant Group’s market capitalisation stood at GBP 839m (EUR 971m) at the close of trading in London on Friday, 12 August.
Restaurant Group plc
On the mid-cap index, Restaurant Group enjoyed its best day in more than seven years after the under-pressure Frankie & Benny’s owner ousted its chief executive Danny Briethaupt, replacing him with the former boss of betting company Paddy Power. Andy McCue will join the group on September 17. Ivor Jones, of Peel Hunt, said: “We believe it is also encouraging that McCue has led a business through a takeover, which may be in the medium-term future for Restaurant Group.” Shares leapt 40.9p, or 10.9pc, to 417.7p.
EasyJet flies higher on M&A chatter
Shares in no-frills airline easyJet ascended to its highest level in more than three-weeks as it became the latest victim of takeover chatter.
Rumours swirled the City that a private equity fund was interested in swooping in on the low-cost carrier. However, traders talked down the idea of an outright bid, saying it was “unlikely”.
But some City analysts said the stock price move could be attributed to Sir Stelios Haji-Ioannou, the outspoken founder of the FTSE 100 company. They suggested it is always possible Sir Stelios may want to reduce his holding. His family currently own a 33pc stake in the business.
Shares have had a turbulent time since the Brexit vote, slumping 28.2pc. Just last month chief executive Carolyn McCall conceded that the pound’s dramatic fall since the referendum on June 23 had cost the airline £40m, as it increased the airline’s cost and made it more expensive for Britons to travel abroad.
2 Overlooked U.K. Plays on a Weakening Post-Brexit Pound
FirstGroup and Balfour Beatty, FTSE 250 components, could take advantage of sterling’s 13% tumble since the vote to leave the EU.
Shares of the United Kingdom’s largest companies have ramped up following the post-Brexit slump in the value of the British pound, but some smaller firms have missed the party despite standing to benefit just the same.
Since the U.K. referendum in June, the benchmark FTSE 100 index, comprising the biggest companies, has climbed more than 8%, while the broader FTSE 250 index has gained little more than 2%.
It isn’t difficult to explain. The British pound has retreated more than 13% from its pre-vote high against the dollar. A weaker sterling inflates earnings generated in stronger currencies.
The FTSE 100, whose constituents collectively earn about 80% of their revenue outside the U.K., has been the biggest beneficiary. The FTSE 250, whose components largely have a more domestic bias, has lagged behind. But in some cases, the baby has been tossed out with the bathwater.
Shares of transport company FirstGroup (ticker: FGP.UK) fell more than 13% after the referendum, although they have since retraced most of those losses.
Yet FirstGroup generates about two-thirds of its revenue in North America, where its First Student business operates a fleet of 47,000 school buses and its First Transit unit is one of the largest providers of public-transit management and contracting. It also owns Greyhound, and operates bus and rail services in the U.K.
Its profit picture show signs of brightening. FirstGroup sees profit margins at First Student rising to at least 9% this year, compared with 7.1% last year. “If you assume current rates stay where they are, you have quite an upgrade on the translation,” due to the decline in the value of sterling, says Matthew Tillett, a portfolio manager at Allianz Global Investors.
He estimates profits this year could accelerate at least 5%.
The Aberdeen, Scotland–based company has a troubled past. It piled on debt to fund expansion in 2007 at what turned out to be the top of the market. In a bid to maintain its dividend, it underinvested in its businesses, and profitability deteriorated, prompting a rights issue in 2013. Its stock has fallen more than 60% in the past five years.
However, new management has gotten FirstGroup back on track. The company has invested 1.1 billion pounds ($1.43 billion) on new buses, allowing it to catch up with rivals.
FirstGroup also could benefit from refinancing its 2007 debt, on which it pays interest at an average of 6.3%. Its longest-dated maturity is a 2024 6.9% bond that currently trades at a substantial premium to par, equating to a 2.15% yield to maturity.
If FirstGroup could refinance all of its debt at the current rate, free cash flow would rise by £79 million this year, Tillett reckons. While this won’t all happen at once, FirstGroup has a number of maturities arising over the coming years. Currently, free cash flow is estimated at £104 million this year, up from just £20 million last year.
FirstGroup is forecast to earn net income of £139 million, or 12 pence per share, this year, on sales of £5.46 billion, rising to £160 million, or 14 pence, on £5.60 billion in sales the following year. At Friday’s close of £1.03, its shares trade for attractive multiples of 8.4 times this year’s earnings and 7.4 times next year’s. The company has American depositary receipts (FGROY) that were trading on Friday at $1.26.
Investors are wary because of the company’s past missteps. Tillett thinks the shares can jump 50% to 100% over the next two to three years as cash flows rise, the dividend is reinstated, and the balance sheet improves. “In my view, the investment proposition today looks compelling,” he says.
ANOTHER COMPANY WHOSE PROSPECTS could be underappreciated is Balfour Beatty (BBY.UK), a London-based infrastructure-services provider that last year generated more than half of its revenue outside the U.K.
Balfour Beatty is expected to return to profit this year after two years of losses due to poor contract discipline and high costs. New management has strengthened governance, controls, and processes.
The company this year is forecast to report net income of £79 million, or 11 pence a share, on revenues of £7.13 billion. In 2017, it is projected to earn £117 million, or 17 pence a share, on £7.25 billion in sales.
At Friday’s close of £2.41, the stock trades for 14.3 times next year’s estimated earnings. The shares are still almost 5% below the level they traded at prior to the referendum result.
Allianz Global Investors’ Tillett likes the fact that the £1.25 billion value of Balfour’s infrastructure assets covers much of its £1.67 billion market cap, and that the company is debt free. With improvement in profit margins, the stock could be worth £3 on a sum-of-the-parts basis.
5 Safe European Stocks With Yields Up to 5%
European shares tend to yield more than U.S. shares. The case for Vodafone, Novartis, Nestlé, more.
By Andrew Bary
Dividend stocks are the investment du jour, but most income seekers are avoiding one of the most promising places for payouts: Europe. European shares tend to yield more than U.S. stocks, reflecting an investor preference for dividends over stock buybacks. And European markets continue to trail the Standard & Poor’s 500 index, with the Euro Stoxx 50 down 7% this year, versus a 7% gain for the S&P. Concerns about the United Kingdom’s vote to leave the European Union haven’t helped, especially for companies with sizable U.K. exposure.
Barron’s has come up with five European stocks with yields ranging from 2% to 5%: Vodafone Group (ticker: VOD), Deutsche Telekom (DTEGY), Novartis (NVS), Nestlé (NSRGY), and National Grid (NGG). We avoided some high-yield areas, such as financials and energy, where dividends could be in jeopardy.
“Our portfolio is 35% to 40% in European stocks,” says Eric Sappenfield, who manages the MainStay Epoch Global Equity Yield fund. “We seek a globally diversified portfolio of companies that can sustain and grow their distributions.” The MainStay Epoch portfolio includes Vodafone, Nestlé, and National Grid, the largest U.K. utility.
High-yielding European stocks could get a boost as European investors seek alternatives to ultralow—or negative—government bond yields. The German 10-year bond yields negative 0.10%; the U.K. 10-year, 0.50%; and the Swiss 10-year, negative 0.60%.
THE BULL CASE for European telecoms like Vodafone and Deutsche Telekom is that they trade at discounts to Verizon Communications (VZ) and AT&T (T), based on enterprise value/cash flow, and are benefiting from some improvement in admittedly competitive markets. Deutsche Telekom, Germany’s leader, is an intriguing asset play because it owns 65% of T-Mobile US (TMUS), the fast-growing and increasingly profitable No. 3 U.S. wireless company. That T-Mobile stake is now worth $25 billion, or about 30% of Deutsche Telekom’s market value.
The core Deutsche Telekom business has gotten cheaper this year. Its U.S.-listed shares, now around $17.50, are down 3%, while T-Mobile is up 20%. The Deutsche Telekom shares now yield 3.4%, less than Verizon (4.2%) and AT&T (4.4%). Deutsche Telekom pays that dividend without getting any cash from T-Mobile, which pays no dividend. As free cash flow grows at T-Mobile, it could be in a position to pay dividends in 2017, benefitting Deutsche Telekom and allowing the company to boost its payout. Deutsche Bank analyst Robert Grindle carries a Buy rating on the stock, with 23% upside to his price target.
More than just a U.K. wireless company, Vodafone is the No. 2 cellphone provider in Germany, behind Deutsche Telekom. It has wireless operations in Italy and Spain, plus exposure to the developing world with sizable businesses in India and South Africa.
The U.K. accounts for less than 10% of the estimated value of the company. The U.S. shares, at about $31, yield 4.8%. Vodafone’s first-quarter report last month showed what JPMorgan analyst Akhil Dattani called “impressive underlying acceleration in revenue growth,” with organic growth up 2.2%. He carries an Overweight rating and sees 25% upside to his target price on the U.K. shares. “Vodafone has the best wireless network in Europe,” says Sappenfield, adding that its balance sheet is in great shape as it winds down a period of heavy capital spending.
National Grid has U.K. exposure to natural gas, water, and electricity, plus a U.S. unit that controls gas and electricity distribution in New York and New England. Its U.S.-listed shares, at about $71, yield 4.4%. That’s almost a percentage point above the average U.S. utility, and its projected 2016 price/earnings ratio of 17 is slightly below the average of its U.S. peers. RBC Capital Markets analyst John Musk wrote recently that the company “has an enviable combination of predictability, asset growth, secure balance sheet, and attractive dividends,” though he downgraded the stock to Sector Perform from Outperform on valuation.
Novartis is among the most-diversified global drug companies, with a broad portfolio of prescription drugs, eye-care products, and generics. The U.S.-listed shares, now around $82, are off 20% in the past year and yield 2.8%. The weak showing reflects concerns about generic competition for Novartis’ leukemia drug Gleevec, and a slow, expensive U.S. launch for heart-failure drug Entresto.
Bernstein analyst Tim Anderson has an Outperform rating on the stock and a $94 price target. In a client note, he admitted that Novartis is a “show-me stock” and needs to hit its financial targets. The company trails in the hot immuno-oncology market and has been under pressure to “do something,” such as buy Bristol-Myers Squibb (BMY). Novartis wisely resisted that pressure, which now looks smart given the recent fallout from the failure of Bristol’s lead oncology drug in a key clinical trial.
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Nestlé is the world’s largest food company, with a wide international portfolio and a relatively low but ultrasafe dividend of 2.4%. Food stocks have been in vogue, but Nestlé, at a recent $82, is up less than some peers because it’s not a takeover candidate. The insular giant could benefit from the appointment of an outsider, Ulf Mark Schneider, as CEO starting in early 2017. He comes from the European health-care company Fresenius (FRE.Germany).
RBC Capital Markets analyst James Jones last month listed some investor-friendly steps that Schneider could take, including selling Nestlé’s valuable L’Oréal stake, worth $25 billion; getting out of its candy business, where it lacks a market-leading position; adding debt to a conservative balance sheet; and cutting costs. Given its high credit rating, it can borrow in euros at close to zero.
DIVIDENDS ON MANY FOREIGN stocks are subject to withholding taxes. Several countries, including Germany, Switzerland, and France, impose a 15% withholding tax, while others, like the U.K., impose none. Tax expert Robert Willens says U.S. investors effectively can get back the withholding taxes through a credit on their tax returns.
Foreign taxes can’t be credited when the shares are held in an individual retirement account or other tax-advantaged account. An exception is Germany, which doesn’t impose withholding taxes on stocks held in IRAs.
Weekly Market Update: Risk-On Rules Despite Doubtful Data
The DJIA and the S&P500 both notched fresh all-time highs this week and the Nasdaq came very close to record levels as markets kept melting up in the August heat. Crude prices saw their second week of gains off the late July low, providing an assist to higher US equity valuations, while the dollar is gradually softening. Trading volumes were about 20% below average. In the US, decent retail sector earnings were seen, with the quarterly earnings season coming to a close. Economic data was less than stellar, with the July retail sales report flat after three months of solid gains. Both the July PPI report and the import prices data showed inflation losing steam again. The focus in both Japan and China was on the possibility of fresh central bank action to help prop up growth, while in the UK, the Bank of England had trouble finding enough bonds to purchase under its restarted QE program. For the week, the DJIA gained 0.2%, the S&P500 edged up less than 0.1% and the Nasdaq added 0.2%.
The bounce back in crude prices continued this week, with WTI reaching its 200-day moving average at around $44 and Brent back to $47/bbl. Further inventory builds in weekly crude stocks reports undercut prices midweek, but that impact was more than offset after OPEC confirmed that its member would hold an informal meeting in Algiers on the sidelines of an energy forum on Sept 26-28, consolidating talk that Russia, Saudi Arabia and Iran might be able to set aside their differences and put in place some sort of production ceiling.
Economic data out of China further called into question the ability of Beijing to meet even the +6.5% low end of its 2016 growth target. July industrial production and retail sales growth decelerated, while new bank loans fell significantly in July from the prior month and widely missed expectations. Pressure is building on the PBoC to further ease policy, but the central bank has stalled and simply repeated its standing promise to keep policy slightly loose to meet growth targets. Once again, repeated reports made it clear that very high debt levels across the economy and murky bank balance sheets are making policy-makers very nervous about asset bubbles. With that in mind, regulators this week ordered a large-scale review of the nation's banking system, including inspections of deposits, outstanding loans, interbank business and bonds.
Last month, the Bank of Japan launched a comprehensive review of its policies in the era of Abenomics. Reports circulating this week suggest a preliminary outline of the review has identified sharp declines in oil prices, a prolonged hit to growth from the 2014 sales tax hike and the nation's inability to shake off its deflationary mindset as the main obstacles to achieving its 2% inflation target. Analysts were quick to point out the BoJ is only blaming external factors for disappointing inflation gains, and appears to have avoided a frank reckoning with the implications of its own policy decisions. In any case, the BoJ is expected to announce a big new easing plan next month to complement the government's latest stimulus package. Markets expect the bank to change the parameters of the inflation target, cut rates further and possibly expand asset purchases.
In an ominous sign for ambitious quantitative easing programs across the globe, the Bank of England's restart of QE bond purchases ran into trouble on its second day, as it failed to find enough sellers of bonds. The first auction on Monday went off without a hitch, but on Tuesday the bank fell £52 million short of its target to buy £1.17 billion in long-dated government debt. The BoE issued a statement asserting that would be able to make up the shortfall later this year, but with lower and lower yields forcing funds and other investors to hold more and more bonds to maintain returns, it appears that the bank has a real problem on its hands. In the wake of the failed BOE operation, the 10-year gilt yield touched a record low of 0.55%, while the bund yield dove to -0.16%, within range of the all-time low of -0.20% seen in early July. Separately, BoE hawk McCafferty acknowledged that further easing will likely be necessary to further cushion the shock of the Brexit vote on the UK economy.
On Thursday, the Reserve Bank of New Zealand (RBNZ) met expectations and cut rates to new record low of 2.00%. This is the bank's sixth policy easing since 2015, and analysts expect the RBNZ to cut at least one or two more times, bringing the rate to 1.50%. The policy statement added a focus on house price inflation becoming "more broad-based across the regions, adding to concerns about financial stability." As for headline inflation, the statement foresees growth resuming in Q4. The RBNZ specifically stated that "further policy easing will be required" to get inflation to the middle of its target range.
Bank of Korea remained at 1.25% for the second straight month after a surprise rate cut earlier this summer, though expectations of more easing down the line have been sustained after BoK Governor Lee acknowledged the continuing strength of the currency. Also note that South Korea's credit rating was increased to AA from AA- by Standard & Poor's, which cited the nation's steady economic performance, sound fiscal position and flexible fiscal and monetary policies.
Shares of Delta Airlines fell as much as 4% from last Friday's close after a major system-wide network outage massively impacted its flights worldwide. The computer problem was caused by a power outage at its headquarters in Atlanta. The airline cancelled nearly 2,000 flights Monday to Wednesday, and there were further technical issues even after the systems were brought back online, which slowed down the recovery process.
The judge overseeing the review of the Aetna/Humana merger said the trial would begin on November 7th, favoring requests from the Aetna/Humana team. The DOJ had moved for the trial to be held in 2017. This comes just a week after the court agreed to separate consideration of the Aetna/Humana and Anthem/Cigna mergers into two separate trials. The judge in the Anthem/Cigna case said that trial would start by late November, but that she would not likely rule until early next year.
After a week of rumors, Walmart confirmed it reached a deal to acquire online retailer Jet.com. Walmart will pay $3 billion in cash plus about $300 million of Walmart shares for the site. The two operations will maintain separate branding for now, and the deal is expected to greatly boost Walmart's attempts to compete with Amazon. Walmart has generated about $14 billion in annual e-commerce sales, compared with Amazon's annual run rate at over $100 billion.