What do you think of sector mutual funds? I’ve been looking at Highland Long/Short Healthcare Z (HHCZX).
This is a long/short fund which means the fund’s focus is buying attractive stocks and shorting shares of unattractive stocks, i.e., borrowing shares from others and selling them. We do not recommend shorting stocks for several reasons. Throughout history, most of the time, stocks go up in value. When shorting, the best you can do is make 100%, i.e., the stock goes to zero, but there is no ceiling to how high a stock can go. Even if you’re right, it may take a very long time for the market to recognize any fault with a business. Company management and other investors in the companies are always going to fight you. It’s also very expensive to short sell because there are often high costs associated with borrowing shares. With Highland’s expense ratio of over 3% a year, you can certainly find something cheaper.
The purpose of a sector fund is to achieve the performance of the business sector. This fund has clearly had a difficult time tracking its benchmark. In the last three years, twice it ranked in the top 5% and once it ranked in the bottom of its category. But that doesn’t tell the whole story. Over the last five years, on two occasions, the fund underperformed the index by about 30%. During the other three years, it essentially tied the index.
We prefer the iShares Dow Jones U.S. Healthcare Sector ETF (NYSEARCA: IYH). If you want global exposure to the healthcare sector, try iShares S&P Global Healthcare (NYSEARCA: IXJ). Both are much more highly correlated to S&P 500 Healthcare at 0.952 and 0.993 respectively
What return should we expect for a six- to 10-year period?
We believe the markets return between 8% and 10% over a 10-year period. Historically, it is around 11% including dividends and increase in value. Keep in mind, we just lived through a 10-year period when the market did nothing. We saw the tech crash and the housing bubble.
These estimates also assume you invest all of your money at once and leave it in the market. If you dollar cost average money into the market, you will generally outperform the market because you buy more shares when the market is down, less when the market is up. Dollar cost averaging eliminates trying to determine the best time to buy.
What do you think of an investment in H&R Block? I know it jumped last week after it reported earnings, but that might level off.
Last Wednesday, H&R Block Inc. (NYSE: HRB) shares jumped about 5% after the company said its earnings rose 35% and revenue increased about 15%, as the tax preparer raised prices and its online business saw a bump.
The shares haven’t quite leveled off yet, rising another 5% since that day. In fact, H&R shares have risen about 20% since tax season wrapped up. Going forward, H&R Block may be one of, maybe the only, company to benefit from ObamaCare. The company should pick up additional customers since those who sign up for health insurance will receive a federal tax credit, while the government will levy a tax on those don’t obtain coverage.
We like that H&R Block is cutting back on their office count and increasing its online presence, which should protect it somewhat during economic downturns when people tend to file on their own behalf rather than consult a tax professional. However, the company doesn’t meet our strict investment criteria, and with shares hitting all-time highs and valuation levels more expensive than the overall market, I’d stay on the sidelines for right now.
What is a closed-end fund, and how is it different? One of the funds in my 401(k) closed. I know it was taken off our platform for new investments, but we weren’t forced to sell shares we already owned—I just can’t contribute more to it. Performance has been good and I see no obvious reason to sell otherwise.
First of all, a closed-end fund is very different than a fund that is closed in your 401(k) plan. A closed-end fund raises a fixed amount of capital and fixed number of shares through an initial public offering. After which, the fund’s shares are listed and trade more like a stock on an exchange. A closed-end fund will not create any more shares.
The majority of 401(k) plans have mutual fund options that are quote unquote open-end funds. Open-end funds do not limit how many shares they issue, meaning when an investor buys shares of the fund, more shares are created. When an open-end fund has a large redemption, like when an investor sells a lot of shares, the fund may need to sell some of the underlying assets, such as stocks, in order raise cash to pay the investor.
Now, when a fund in your 401(k) closes, it most likely means the fund manager has determined the fund’s assets have become too large to effectively perform its stated investment strategy or objective. For instance, if a small cap fund becomes too large, each time the manager tries to buy or sell a stock, they will likely move the market in a way that negatively affects its investors and its performance.
Often times, a fund sees a lot of money flow in because its performance has been really good and the portfolio manager is skilled. Not many people want to throw money at an unskilled portfolio manager. Although I don’t know the specific fund you’re referring to, you’re probably fine to hold it.
I have a little in Fresh Del Monte and Sanderson Farms. I’d like to drop one of them. Do you have a preference?
Well, with these two companies, we’re talking about food production of two different types. Fresh Del Monte Produce, Inc. (NYSE: FDP) is in the fruits and veggies business, while Sanderson Farms, Inc. (NASDAQ: SAFM) is in the chicken business.
Right off the bat, we prefer Del Monte to Sanderson. Other than seeding, watering, and spraying for pests, you don’t actually have to really feed produce so you don’t have the same feed costs that come with chickens. There are more variables with raising animals, again primarily feed costs and the price at which Sanderson can achieve for its chicken products. The volatility wreaks havoc on Sanderson’s profitability. Some years Sanderson posts operating margins north of 10%, but in far too many years, the company loses money, now having posted annual losses in three of the last seven years.
Although its margins are lower and with 2013 being the exception, Del Monte’s profitability is considerably more stable, achieving operating margins in the mid-single-digit range year in and year out. However, neither company meet our investment criteria.
At Henssler Financial we believe you should Live Ready, and that includes understanding your investment options. If you have questions regarding your stock holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at email@example.com.