Research Library

The impact of indexation is not limited to the equity market.  It is at least as pronounced in the bond market. The largest fixed income ETFs trade such large amounts every day that it is easy to imagine many scenarios that could trigger an illiquidity event.  The inclusion rules of the various indexes appear likely to exacerbate such an event rather than mitigate its impact.  This is not a recipe for success. 
In a different (and uncorrelated) part of the market, cryptocurrencies, the biggest being Bitcoin, represent an emerging and exciting asset class. Cryptocurrencies are not yet large enough to function as an asset class investable by institutions, but that time may be rapidly approaching. Though there are many unknowns regarding cryptocurrencies, this is an area we are following with great interest.
Highlighted securities: T-Mobile USA 6.375% Due 5/1/2025, Activision Blizzard 5.625% Due 9/15/2021, Nuveen High Income 2020 Target Term Fund (JHY), PIMCO Strategic Income Fund (RCS).
Carl Icahn, undoubtedly one of the greatest investors of all time, recently wrote an open letter to Apple Inc.’s management, proposing a share repurchase program, since he believes the shares are far too cheap.  His analysis is quite uncomplicated; it merely deducts the company’s enormous balance sheet cash – which it doesn’t need to operate – from the stock price, and compares the adjusted price to earnings.  On that basis, Apple trades at about 11x earnings versus about 17x for the S&P 500.  As the largest, perhaps most ubiquitous company in the world, if any shares should be priced efficiently, it should be Apple’s.  Yet they are not. His profound question about the irrationality of the valuations of the largest, most liquid companies:  if Apple’s shares are fairly valued at 11x earnings, how can the far higher-priced blue-chips at the top of the S&P be fairly valued as well, unless for reasons other than fundamentals like earnings and growth?

Highlighted companies: IG Group Holdings Plc. (IGG LN), Dominion Diamond Corporation (DDC), and Amaya Inc. (AYA CN).

The high yield bond market no longer exists – the high yield index pays 5.4%, before allowance for defaults – but there is a way to find high yield bonds and there is a way to create them.  Featured companies: Cliffs Natural Resources Inc. (CLF), AK Steel Corp. (AKS), Pacific Drilling SA (PACD), and SandRidge Energy Inc. (SD).

Reviews the scale of recent exchange-traded fund flows in comparison to the size of the Federal Research quantitative easing program, discusses energy royalty trusts, addresses ETFs tracking the S&P 500 Index, and examines the decline in rig count. Featured companies: Armstrong World Industries (AWI), The Babcock & Wilcox Company (BWC), Barnes & Noble Inc. (BKS), E.I. du Pont de Nemours and Company (DD).

Discusses one of the ironies of the indexation phenomenon: while a basic assumption is that past returns are not indicative of future returns, back-testing is a standard step in the development of indexed products. Reviews the risks of a short sale in bonds given the current, shrinking inventory of bonds, considers the potential impact on bonds from rising interest rates, and discusses ETF fees and flows. Featured companies: iShares Core S&P 500 ETF (IVV), iShares Micro-Cap ETF (IWC), Royce Micro-Cap Trust Inc. (RMT), Permian Basin Royalty Trust (PBT) & iPath S&P GSCI Crude Oil Total Return Index ETN (OIL), Market Vectors Junior Gold Miners ETF (GDXJ) & Market Vectors Gold, Miners ETF (GDX), Fairholme Fund (FAIRX) & iShares Core S&P 500 ETF (IVV), MoneyGram international Inc. (MGI).

Though many investors have allocated assets to the Utilities sector in search of yield in a low interest rate environment, we believe that the sector faces many risks, driven by a threat to demand.  This white paper walks through many of the current risks we see to Utility sector stock valuations. Though we cannot predict when the impact will be felt on U.S. utility companies, we do not believe it will be much longer, and the results may be dramatic.

Considers valuation metrics for Google Inc.,  discusses Gold and Silver royalty trusts, and reviews fees and asset flows for BlackRock. Featured companies: Affiliated Managers Group (AMG), HFF Inc. (HF), CBRE Group, Inc. (CBG), Jones Lang LaSalle, Inc. (JLL), Live Nation Entertainment, Inc. (LYV).

In this report, we ask whether the Russell 2000 Index has performed in the manner that investors expect, both with relative to large cap indexes and relative to a small cap universe.

Discusses the spin-off anomaly, and the differences in characteristics between spin-offs in the past and those recently come to market.  Highlights the local newspaper business as an area with spin-offs that have characteristics similar to those seen in the past. Featured companies: Time Inc. (TIME), Tribune Publishing Co. (TPUB), News Corp. - Class A (NWSA), E.W. Scripps Co (SSP), Journal Communications Inc. (JRN).

Considers the impact of an organizational change at a major master limited partnership on the many indexes and ETFs that include this company, addresses the supermarket industry, discusses Procter & Gamble, and reviews recent fund flows. Featured companies: Reckitt Benckiser Group Plc. (RB/ LN), Crompton Greaves Ltd. (CRG IN), Reliance Communications Ltd. (RCOM IN), BHP Billiton (BHP AU, BLT LN).
Reviews a recent article by Nobel laureate Robert C. Merton about the importance of focusing on income needs rather than volatility or asset levels in retirement planning, compares the valuation characteristics of exchange-traded funds tracking emerging markets indexes to those tracking major domestic indexes, and discusses historical profit margins at utilities and brand name companies. Featured companies: Alliant Techsystems Inc. (ATK), Automatic Data Processing, Inc. (ADP), Energizer Holdings Inc. (ENR), and Harbinger Group Inc. (HRG).
Considers the recent performance and relative valuations of the S&P 500 Index and the Russell 2000 Index and the cash flows into and out of the investment products that track them and discusses land companies as a hedge against inflation. Featured companies: World Fuel Services Corp. (INT), Tredegar Corp. (TG), American Homes 4 Rent (AMH), and Lexington Realty Trust (LXP), as well as an update on Cal-Maine Foods, Inc. (CALM).
Discusses the impact of decoupling on the utilities industry, developments in solar energy and the potential results for electric utilities, as well as factor investing in the context of the utilities and solar industries. Featured companies: Nuance Communications, Inc., Toll Brothers Inc., SEACOR Holdings Inc., and Ryland Group Inc., as well as an update on Molina Healthcare, Inc.
Our investment process is focused on identifying companies with the potential to create shareholder value over an extended investment horizon.  One of the most compelling predictive attributes for outperformance is owner-operator management, where a principal or owner (frequently a founder) is directly involved in the management of a company AND has a significant portion of his or her wealth invested in the equity of the business.  In this white paper, we introduce the owner-operator concept, providing historical context as well as data supporting our view that such companies are likely to outperform agent-managed companies over the long term.
Considers the actions taken by corporations to reduce their risk profile, namely increasing their cash balance and liquidity ratios, discusses some companies with more leverage in the balance sheet, and reviews U.S. corporate, mortgage, and  Treasury debt levels since 1980.  Featured companies: Kimberly-Clark Corp. (KMB), Exelis Inc. (XLS), Simon Property Group Inc. (SPG), and Starwood Property Trust Inc. (STWD)
Discusses the continued search for yield by investors, some of whom are turning to emerging markets investments as a result and reviews closed-end funds as a potential source of yield.  Featured companies: Ally Financial Inc., LMP Corporate Loan Fund Inc. (TLI), Brookfield Real Estate Services Inc. (BRE), and Texas Competitive Electric.
Considers predictive variables in the context of Real Estate Companies, discusses real estate owners with investment management businesses, and reviews the contraction of mortgage debt levels as well as the premium at which municipal bonds trade as compared to Treasuries.  Featured companies: Smith & Wesson Holding Corp. (SWHC), Biglari Holdings, Inc. (BH), Denny’s Corp. (DENN), Teletech Holdings Inc. (TTEC), Updates on Oaktree Capital Group, LLC (OAK), The Wendy’s Company (WEN).
Discusses issues related to interest rate risk, reviews a selection of closed end municipal high-yield bond funds, and compares a municipal bond portfolios to a mixed fixed income portfolio. Featured companies: Nuveen Short Duration Credit Opportunities Fund (JSD), Nuveen Michigan Quality Income Municipal Fund (NUM), Millicom International Cellular S.A. (MIICF), Lamar Media Corporation (LAMR)
Discusses the methodology used to construct growth and value indexes, questions the use of quantitative criteria in the absence of qualitative assessment in assigning growth or value labels, compares the spending levels allocated to education and to advertising, and examines the MLP industry. Featured companies: Booz Allen Hamilton Holding Corp. (BAH), Boardwalk Pipeline Partners, LP (BWP), Biglari Holdings Inc. (BH), Spirit AeroSystems Holdings, Inc. (SPR).

We present our Alternative Income Investing strategy as a potential solution for investors seeking yield in a low interest rate environment.

This white paper explores the methodology used to construct the Russell 2000 Index, and the somewhat surprising results for investors.

Addresses the credit crisis of 2012, Master Limited Partnerships, the phenomenon of Wikipedia, and topics related to the Russell 2000 Index.  Featured companies: Cemex (CX), Meritor, Inc. (MTOR), MGM Resorts International (MGM).
Discusses the impact of the low interest rate environment on fixed income investors and examines data regarding the funded/unfunded status of pension plans as well as the discount rates assumed by companies in calculating the present value of their post-employment benefit obligations.  Stocks covered: Lockheed Martin Corp. (LMT), Huntington Ingalls Industries Inc. (HOO), United States Steel Corp. (X), AK Steel Holding Corp. (AKS).
Discusses the credit crisis of 2012, the risks of Financial Preferred stocks, and U.S. Bond market tradable debt statistics.  Featured companies: American International Group, Inc. (AIG), CenturyLink, Inc. (CTL), Arch Coal Inc. (ACI), Vanguard Extended Duration Treasury ETF (EDV).
Examines the profit margins of companies in the S&P 500 Index, private equity valuations, and the decline in fundamental company research. Featured companies: Archer Daniels Midland (ADM), Tiffany & Co. (TIF), American International Group, Inc. (AIG), TE Connectivity Ltd. (TEL).
Highlights companies with significant investments in other publicly-traded companies, including Brookfield Asset Management (BAM) Henderson Land Development (12 HK), and WPX Energy, Inc. (WPX).
Discusses the business of indexation and its impact on stock prices, low price to book value stocks, and statistics related to the Federal Deposit Insurance Corporation (FDIC). Stocks covered: McDonald’s Corp. (MCD), Procter & Gamble (PG),DST Systems, Inc. (DST), iShares Barclays TIPS Bond Fund (TIP).
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