Tag: Mitsubishi Corporation (MSBHF)

Master the Art of Safeguarding Your Investments From Currency Volatility With 5 Assets

Posted on by The INO.com Team

Jerome Powell and his team at the Federal Reserve have raised the benchmark borrowing cost to 5.25%-5.50%. While a 2.6% rise in inflation, down from a 4.1% rise in Q1 and well below the estimate for a gain of 3.2%, and an annualized increase of 2.4% in the gross domestic product in the second quarter, topping the 2% estimate, had raised hopes that the elusive “soft landing” could be within reach, recent developments have been less than encouraging.

As the Federal Reserve Bank of Kansas City’s annual gathering in Jackson Hole, Wyoming, gets underway, with a more-than-forecasted wage increase, there are increasing concerns that interest rates could stay higher for longer.

While a hawkish stance usually lends strength to the dollar, Fitch Ratings’ recent downgrade of the U.S. long-term rating to AA+ from AAA, citing the erosion of confidence in fiscal management, has weakened the global reserve currency.

Moreover, the slump in their market value and a consequent increase in their yields due to a selloff of long-duration fixed-income instruments, which led to Moody’s cutting ratings of 10 U.S. banks and putting some big names on downgrade watch, has not helped matters either.

With a material risk that an apparently resilient economy could find itself regressing into an economic slowdown, it is understandable why seasoned investors could look at international equities for diversification opportunities to manage tail risks.

However, the pandemic, armed conflict in Ukraine, shifting geopolitical inclinations in the Middle East, the recent expansion of the BRICS bloc of developing nations accompanied by calls to reduce reliance on the U.S. dollar, and the Bank of Japan’s policy tweak of loosening its yield curve are all indicating to a changing world order.

Hence, returns from international investments are as much a function of wild swings in currency exchange rates as they are of the performance of the securities of underlying businesses. To help investors reduce risk exposure to unfavorable impacts of the former, many currency-hedged mutual funds and ETFs focus on providing long (buy) and short (sell) exposures to many currencies.

In view of the above, these five exchange-traded funds could be worthy of consideration:

Xtrackers MSCI EAFE Hedged Equity ETF (DBEF)

DBEF is an exchange-traded fund launched and managed by DBX Advisors LLC. It offers currency-hedged exposure to developed equity markets outside the U.S., making it a suitable fixture in long-term buy-and-hold portfolios. DBEF uses short-term forward contracts to neutralize the impact of exchange rate fluctuations, thereby rendering the performance of the underlying stocks the sole driver of returns.

With $4.14 billion in AUM, DBEF’s top holding is Nestle S.A. (NSRGY), which has a 2.04% weighting in the fund. It is followed by  ASML Holding NV (ASML) at 1.72% and  Novo Nordisk A/S (NVO) at 1.65%. The highly diversified fund has 1,000 holdings, with only 18.97% of its assets concentrated in the top 10 holdings.

DBEF has an expense ratio of 0.35%, lower than the category average of 0.46%. It currently pays $6.22 annually as dividends, and its payouts have grown at a 55.7% CAGR over the past five years. It saw a net inflow of $21.22 million over the past month and $255.64 million over the past three months. The ETF has a beta of 0.71.

iShares Currency Hedged MSCI EAFE ETF (HEFA)

As the name suggests, HEFA is a currency-hedged exchange-traded fund that is managed by BlackRock Fund Advisors. The fund invests in public equity markets globally, excluding the U.S./Canada region, through derivatives and through other funds in value stocks of companies operating across diversified sectors.

Almost all of HEFA’s $3.46 billion in AUM is allocated to iShares MSCI EAFE ETF (EFA), which has a 99.95% weighting in the fund, with USD comprising the remaining assets of HEFA.

EFA’s top holding is Nestle S.A. (NSRGY), which has a 2.13% weighting in the fund, followed by  ASML Holding NV (ASML) at 1.76% and  Novo Nordisk A/S (NVO) at 1.68%. The highly diversified constituent fund has 1000 holdings, with only 17.08% of its assets concentrated in the top 10 holdings.

HEFA has an expense ratio of 0.35%, which is lower than the category average of 0.40%. It currently pays $6.56 annually as dividends, and its payouts have grown at a 49.1% CAGR over the past five years. It saw a net inflow of $74.06 million over the past month and $176.04 million over the past three months. The ETF has a beta of 0.7.

WisdomTree Japan Hedged Equity Fund ETF (DXJ)

DXJ is an exchange-traded fund co-managed by Mellon Investments Corporation and WisdomTree Asset Management, Inc. The fund offers broad-based exposure to the Japanese equity market while hedging out the effects of currency fluctuation. Hence, it is best suited for investors who are bullish on Japanese stocks but bearish on JPY’s value vis-à-vis that of USD.

With $2.72 billion in AUM, DXJ’s top holding is  Toyota Motor Corp. (TM), which has a 4.86% weighting in the fund, followed by Mitsubishi UFJ Financial Group, Inc. (MUFG) at 4.37%, and Mitsubishi Corporation (MSBHF) at 3.64%. The well-diversified fund has 435 holdings, with only 30.7% of its assets concentrated in the top 10 holdings.

DXJ has an expense ratio of 0.48%, which enables investors to benefit from hedging while incurring costs lower than what could be managed while doing it on their own. It currently pays $2.60 annually as dividends, and its payouts have grown at a 9.8% CAGR over the past five years.

DXJ’s net inflow came in at $23.56 million over the past month and $731.28 million over the past three months. It has a beta of 0.65.

WisdomTree Europe Hedged Equity Fund ETF (HEDJ)

HDJ is an exchange-traded fund co-managed by Mellon Investments Corporation and WisdomTree Asset Management, Inc. The fund offers broad-based exposure to the European equity market while hedging out the effects of currency fluctuation.

Hence, it is best suited for investors who are bullish on European stocks but wish to insulate themselves from the impact of fluctuation of the exchange rate of EUR with respect to USD.

With $1.40 billion in AUM, HEDJ’s top holding is Stellantis N.V. (STLA), which has a 6.91% weighting in the fund. It is followed by  ASML Holding NV (ASML) at 4.41% and  Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) at 4.37%. The fund has 127 holdings, with 41.83% of its assets concentrated in the top 10 holdings.

HEDJ has an expense ratio of 0.58% and currently pays $1.58 annually as dividends. The fund’s payouts have grown at a 9.8% CAGR over the past five years. DXJ’s net inflow came in at $28.25 million over the past three months. It has a beta of 0.88.

iShares Currency Hedged MSCI Japan ETF (HEWJ)

As the name suggests, HEWJ is a currency-hedged exchange-traded fund that is managed by BlackRock Fund Advisors. The fund invests in the public equity markets of Japan through derivatives and through other funds in value stocks of companies operating across diversified sectors. Hence, it is best suited for investors who are bullish on Japanese stocks but bearish on JPY’s value vis-à-vis that of USD.

Almost all of HEWJ’s $213.9 million in AUM is allocated to iShares MSCI Japan ETF (EWJ), which has a 99.95% weighting in the fund, with USD comprising the remaining assets of HEWJ.

EWJ’s top holding is  Toyota Motor Corp. (TM), which has a 5.16% weighting in the fund, followed by Sony Group Corporation (SONY) at 3.05% and Mitsubishi UFJ Financial Group, Inc. (MUFG) at 2.59%. The well-diversified fund has 238 holdings, with 23.5% of its assets concentrated in the top 10 holdings.

HEWJ has an expense ratio of 0.50%. It currently pays $12.31 annually as dividends, and its payouts have grown at a 92.3% CAGR over the past five years. HEWJ’s net inflow came in at $45.01 million over the past month and $61.84 million over the past three months. It has a beta of 0.63.

5 Stocks Warren Buffett Is Buying – Should You?

Posted on by The INO.com Team

Legendary investor Warren Buffett likes being in Omaha. The quiet, folksy surroundings of his hometown enable him to develop billion-dollar perspectives hidden, in plain sight, from the hyperactive money managers in busy fund houses in bustling financial hubs. However, occasionally when the Oracle travels out of Omaha for work, he means business.

Warren Buffett was in Tokyo for the first time in twelve years in April. He, along with his heir apparent and Vice Chairman Greg Abel, was in the Japanese capital to visit the heads of five trading houses in which his conglomerate Berkshire Hathaway (BRK.B) had acquired 5% stakes in August 2020 through its wholly owned subsidiary, National Indemnity Company.

During his visit, he upped stakes in all of those companies to 7.4%. However, according to the latest disclosure this month, BRK owns an average of more than 8.5% of each of the five companies. This has made its Japanese investments the largest outside the United States.

Moreover, in its June 19 press release, the conglomerate announced that its “intention continues to be to hold its Japanese investments for the long term.” While BRK may increase its holdings up to a maximum of 9.9% in any of the five investments, depending on the price, Buffett has pledged that the company will make no purchases beyond that point unless given specific approval by the investees’ board of directors.

In this context, let’s take a closer look at the investments in which Buffett and Berkshire are deploying a significant chunk of their mountain of cash.
Firstly, the five biggest trading houses based in Japan: Mitsubishi Corporation (MSBHF), ITOCHU Corporation (ITOCY), Mitsui & Co., Ltd. (MITSY),Marubeni Corporation (MARUY), and Sumitomo Corporation (SSUMY), are what the Japanese call "sogo shosha."

These are trading companies that deal in a wide range of products. They are involved in multiple businesses, such as imports, energy, minerals, materials, chemicals, textiles, and much more.

Mitsubishi is involved in multiple businesses, including automotive products, chemicals, energy, food, and mineral resources. Mitsui and Itochu aren't too far behind Mitsubishi in size, while Marubeni and Sumitomo are considerably smaller. However, together they are adequately geographically diversified to play an instrumental role in the functioning of the Japanese economy and the global economy.

Secondly, in addition to the large size of the investees that have put them on the radar of BRK in its perpetual search for “elephant-sized” acquisitions, the Japanese companies are in businesses within Buffet’s circle of competence.

Moreover, the attractively-valued businesses capable of generating strong cash flows were available for what Buffett has described as “ridiculous prices compared to the prevailing interest rates.” He added that he was “confounded by the fact that we could buy in these companies."

With the benefit of hindsight, these investments appear no-brainers because even after significant price appreciation in each of these stocks after disclosure of BRK’s expanded position, their dividend yields range from 2.54% at the very least to as high as 3.88%, with a CAGR as high as 5.3% over a horizon of 5-years.

In view of the above, as American investor Chamath Palihapitiya pointed out in his shout-out to one of the Greatest Of All Time (G.O.A.T), it’s hardly surprising that Buffett issued significant yen-denominated debt at dirt-cheap rates, used the proceeds to acquire stakes in the Japanese businesses.
Buffett is now using “the dividends he then gets from owning these stocks (which are greater than the interest rates he’s paying to borrow in the first place) to pay the coupon!” This translates to a “near-risk less bet” by borrowing trillions of Japanese Yen for free and using the proceeds to buy stakes in companies that are “growing earnings in the mid-teens.”

Moreover, an improbable but possible downside of the Japanese economy completely blowing up is covered by the global exposure of all of the trading houses.

Fit for A Retail Investor?

Without mincing words, Yes!

However, given the fact that all the stocks spit back capital in the form of dividends, if reinvestment of those funds is a headache investors would like to spare themselves from, it could be wise to take Mohnish Pabrai’s maxim of being a shameless cloner one step further and acquire a stake in the BRK, a capital allocation and compounding machine in and of itself.