Warren Wealth Article Archive

Why emerging market equities have the world’s attention.

provided by Jacob Warren

Brazil. Russia. India. China. These four nations have some of the fastest-growing economies on earth and are becoming drivers in the world economy. In the coming decades, they may command as much attention as the U.S., Japan and other “heavy hitters” … or more.

The future aside, we know one thing about the BRIC nations and other emerging markets: collectively, stocks in these countries have outperformed U.S. stocks for the last 20 years.

During this past decade alone, the MSCI Emerging Markets Index brought a total return of 102.4% while the S&P 500 posted a total return of -10.0% (-24.1% before dividends). Across the 1990s, the S&P 500 produced a total return of 432.0% - pretty impressive. Yet the MSCI Emerging Markets index posted a total return of 2408.6% for that decade.1,2

Great volatility … but also great potential. If U.S. stocks soar or fall, emerging markets really feel the effect. We’ve seen them recoil in the first quarter of 2010. Yet short-term slumps aside, there are compelling arguments for investing in emerging market equities as part of a diversified portfolio.

Look at last year’s returns. In 2009, the benchmark index in Brazil (the Bovespa) gained 82.66%. Russia’s RTS gained 128.62%. India’s Sensex 30 advanced 81.03% and China’s Shanghai Composite rose 79.98%.3

Look at the last decade. The Dow and the S&P 500 underperformed in the 2000s compared to previous decades. How did benchmark indices in the BRIC nations do?
Are you sitting down? Brazil’s Bovespa gained 301% across the 2000s. India’s stock market gained 249%. China’s Shanghai Composite was the laggard, only rising 72% over that stretch. Russia’s RTSI gained 863% in the past decade.3

BRIC, or BRIMCK? Some economists would modify BRIC to BRIMCK, arguing that Mexico and South Korea belong in this collective powerhouse. The key market indices in Mexico and South Korea respectively advanced 44.87% and 49.65% last year.3

The (corporate) opportunity of a lifetime? Wall Street bulls see wisdom in giving more and more weight to the BRICs in portfolios. They draw a line between the impressive, sustained growth of these nations to higher returns and rising demand for capital. They look at these nations and see a rapidly growing middle class and upper middle class and a corresponding rise in spending … translating to a momentous opportunity for global companies who leap into the right place at the right time … translating to great corporate profits down the line.

Of course, this vision assumes that the BRIC nations will a) keep economic policies in place that drive growth, b) avoid political and social upheaval, and c) escape the worst of global economic crises.

A new alliance? A decade ago, “BRIC” was simply Wall Street slang – a term coined by Goldman Sachs economist Jim O’Neill. Today, the BRIC nations appear to be heading toward some form of coalition. In recognition of their power, BRIC leaders have scheduled annual economic summits – the first one was in Russia in 2009, the 2010 summit is in Brazil. The presidents and prime ministers of these countries entered into dialogue to determine how their economies can work together and maintain their fantastic growth.

In sum, the BRIC nations are responsible for about 15% of global GDP, and about 40% of the gold and hard currency reserves on earth are in their possession.4

Does the BRIC demand your attention? Some financial consultants think that any well-diversified portfolio should have a toe (or a foot or a leg) in emerging markets – the gains of recent years are simply too spectacular to ignore. Others counter with the argument that past performance is no guarantee of future results, and cite the remarkable volatility that can affect the stock markets of these nations. If you are interested in learning more, have a chat with the financial professional you know and trust.

Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464









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Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.



These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.


Citations.
1 realclearmarkets.com/blog/Omnivest_1-4-10.pdf [1/4/10]
2 cnbc.com/id/34645043 [12/31/09]
3 cnbc.com/id/34643111 [12/31/09]
4 nytimes.com/2009/06/17/world/europe/17bric.html?_r=1&pagewanted=print [6/17/09]


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A popular estate planning feature.

provided by Jacob Warren

Have you heard of the “survivor option”? How about a “death put”? These rather bleak terms reference a very useful choice for beneficiaries who inherit certain kinds of corporate bonds. This option has become increasingly common.

What does a death put do? If a bondholder dies before a bond reaches maturity, a death put lets the beneficiary sell the bond back to the bond issuer at face value. If your children inherit a corporate bond from you, a death put may be a much better choice than keeping the bond until maturity or selling it in the secondary market.

Why has it become so attractive? Look at the current interest rate environment. If rates go up and beneficiaries decide to sell a corporate bond before maturity, they may have to take a loss. With a survivor option, that problem is off the table. If your heirs exercise the death put feature, they will be able to redeem the bond at par value even if it is trading at a steep discount.

Of course, this feature comes at a price. It is a “sweetener” – one of those things you pay for up front or indirectly via a lesser return rate on the security.

Are there limits on survivor options? Most certainly. Most retail bond issuers will only take back a small amount of their bonds in a year (in the neighborhood of 1-2% of the original retail issue). There is also usually a per-estate limit ($200,000 par value per estate is a typical figure).1

Often issuers require a minimum holding period before a survivor option can be used – a year from the original issue date is common. If a bondholder dies before those 365 days go by, his or her estate must hold the bond until the one-year window closes.2

One more detail to note: the beneficiaries of the bond have to implement the survivor option before they take possession of the bond. For the option to be used, the bonds must be held in the deceased bondholder's account.2

Do your bonds have a survivor option? Do your loved ones know about that feature? You and your beneficiaries will want to acquaint yourself with the details. If you don’t own bonds with a survivor option, ask a financial professional for information on them.

Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464









---------------------------------------------------------------------------------
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.



Content provided by Peter Montoya, Inc. These are the views of Peter Montoya, Inc., not the named representative or Woodbury Financial Services, Inc., and should not be considered investment advice. Neither the representative or Woodbury Financial offer tax or legal advice. All information is believed to be from reliable sources; however, the publisher makes no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting, or other professional services. If expert assistance is needed, the reader is advised to work with a competent professional. Consult your representative for further information.

Citations.
1 cfainstitute.org/memresources/communications/privatewealth/2009/august/article_3.html [8/09]
2 incapital.com/index.cfm?fuseaction=newsArticles.viewArticle&NewsID=100223 [7/19/05]






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A special category of securities worth exploring.

provided by Jacob Warren

Stocks that tend to pay sizable dividends. Institutional and individual investors buy preferred stocks because they offer fixed dividends – in fact, dividend yields are typically greater than those of common shares.1
Preferred stocks are occasionally called hybrid securities, because they have characteristics of debt instruments as well as equities. Let’s review some of their features and pitfalls.

Priority dividend payouts. As the “preferred” adjective implies, these shares are a step above common stock. If you own preferred stock in a company, you will get your dividend first; all the common shareholders will get theirs second. You also have preference if a corporation declares bankruptcy or liquidates and sells assets. In that instance, debt holders are paid first, then the preferred shares, and finally the common shares.

Dividend determination. Dividends paid out on preferreds are akin to coupon payments on a bond. A preferred stock obviously doesn’t have a maturity date like a bond, but it does have a par value, which is used to figure out the payouts. (A good stock research website can help you find the par value and preferred dividend rate of return.) You determine the preferred dividend by multiplying the preferred dividend rate percentage by the par value.

If you need to figure out the market value of a preferred stock, you can do that simply. Divide the dividend amount by the yield (required rate of return stated by the issuer). A visit to a stock research website will give you the yield percentage on a preferred.

Similarly, the price of a preferred stock equals the preferred dividend divided by the yield percentage.

Accumulating dividends. Sometimes a corporation can’t pay dividends to preferred shareholders. If that’s the case, the company will often let the preferred stock dividends accumulate until cash flow improves.

The five kinds of preferreds. Most preferred stocks are cumulative – that is, any missed dividend payments accumulate for an eventual payout. Most preferreds are also callable – that is, the stock issuer has a chance to call (redeem) the shares at par value. Yields on preferred shares sometimes include premiums in recognition of this risk.

Some preferred stocks are convertible, with embedded options allowing you the chance to exchange preferred shares for common ones. (Sometimes a provision is allowed that gives the issuer the chance to call for the conversion.)

Some preferreds are participating – when a company does well, the dividends from these shares may be greater than the published yield. Finally, when a corporation issues multiple rounds of preferred stock, there may be preference-preferred shares; if you own shares from the first issuance, your preferreds take priority over preferreds issued later.

Possible pitfalls. So what is the downside of owning a preferred stock? Well, they do present potential and actual disadvantages. When a market sector heats up and common shares take off, preferreds often lag behind. Interest rate hikes can reduce the value of preferred shares. Additionally, you have no voting rights as a preferred shareholder.

Ratings. There is no “official” rating system for preferred stocks; however, the big credit agencies that rate bonds rate preferreds as well. Standard & Poor’s and Moody’s do, and when they downgrade, it can hit a preferred stock hard. Preferred stocks rated beneath BBB- at Standard & Poor’s or beneath Baa3 by Moody's are considered junk preferreds.2 If you have to go outside of S&P or Moody’s to find a preferred stock’s rating, that’s a red flag – it might mean that it couldn’t get a decent rating from S&P or Moody’s.

A preferred stock investor would do well to research a company’s financial ratios and cash flow, and its interest coverage ratio (higher is usually better).

Consider the variables. Preferred stocks have looked attractive to retirees and others seeking consistent dividends. Rather than explore them alone, you should see a financial professional who can help you thoroughly understand your options in this area and compare them to other choices you may have.

Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464







---------------------------------------------------------------------------------
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.


Content provided by Peter Montoya, Inc. These are the views of Peter Montoya, Inc., not the named representative or Woodbury Financial Services, Inc., and should not be considered investment advice. Neither the representative or Woodbury Financial offer tax or legal advice. All information is believed to be from reliable sources; however, the publisher makes no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting, or other professional services. If expert assistance is needed, the reader is advised to work with a competent professional. Consult your representative for further information.


Citations.
1 mercurynews.com/columns/ci_14249188 [1/23/10]
2 kiplinger.com/magazine/archives/2003/10/preferred.html [10/03]


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