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Pastimes : Triffin's Market Diary -- Ignore unavailable to you. Want to Upgrade?

To: Triffin who wrote (278)	12/12/2005 10:49:56 AM
From: Triffin	Read Replies (1) \| Respond to of 869

BC: PIV vs FVL .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. It's called the PowerShares Value Line Timeliness Select Portfolio (PIV: 15.70+0.13+0.83%) and it offers both advantages and disadvantages relative to other ways in which investors can exploit the famed Value Line stock ranking system. That system, for those not aware of it, has one of the best long-term records of any stock selection system of which I am aware. Largely on the strength of that system, the Value Line Investment Survey has been at or near the top of the Hulbert Financial Digest's ranking for long-term risk-adjusted performance for much of the last 25 years. Consider the growth of a hypothetical $100,000 invested in a portfolio of the stocks ranked highest for Timeliness by Value Line's stock ranking system, as calculated by the HFD. From June 30, 1980, which is when the HFD began monitoring the investment newsletter industry, to Nov. 30 of this year, this portfolio would have grown to $4.2 million. That works out to 15.8% on an annualized basis. In contrast, that same $100,000 invested in the dividend-adjusted Dow Jones Wilshire 5000 index would have grown to $2.1 million, or 12.8% annualized. Profiting from this impressive record has presented challenges, however. Value Line constructs its Timeliness rankings so that there always are 100 stocks ranked "1," for example. And it makes changes to this group every week. So an individual trying to follow exactly the Value Line ranking system would need to construct a big portfolio and undergo lots of transactions. Value Line's open-end mutual funds might have provided the answer to these challenges, but on the whole those funds have not been able to match the returns the HFD has calculated for Value Line's ranking system. Many skeptics, including Princeton University Economics Prof. Burton Malkiel, who several decades ago wrote the now-famous book, "A Random Walk Down Wall Street," have taken those funds' failure to do so as evidence that Value Line's ranking system doesn't work in the real world. In fact, for reasons that are not entirely clear, those funds have not always followed Value Line's own ranking system. And they may have suffered from other problems as well, as a recent story by MarketWatch investments editor Jonathan Burton made clear. Value Line provided a definitive response to the skeptics several years ago when it cooperated in the construction of a closed-end fund that religiously follows the Value Line Timeliness Ranking system. It is the First Trust Value Line 100 Fund ..FVL.. The fund's net asset value has grown right in line with what the HFD has reported for the ranking system itself. Perhaps the biggest drawback of the First Trust Value Line 100 Fund is that it is closed-end. That means that it can trade at a significant premium or discount to its underlying NAV, and that fluctuations in that discount and premium can have a big impact on your return when investing in the fund. Since the fund's inception in June 2003, for example, the fund's net asset value has grown 37%, but investors in the fund have realized a return that is only a third as large, 12.8%. That's because the fund is now trading at a significant discount to NAV. The new Value Line ETF overcomes much of this problem. Though ETFs are in some ways similar to closed-end funds, they are constructed in complex ways designed to keep deviations from NAV to a minimum. There are other differences between PIV (the new ETF) and FVL (the closed-end fund). One big one is that the PIV and FVL will not invest in precisely the same stocks. While the FVL is more or less a pure play on the group of 100 stocks ranked highest for Timeliness by Value Line, the PIV will be constructed out of the 50 stocks from this group of 100 that also have Value Line's highest "safety" and "technical" ranks. Furthermore, PIV's portfolio will be updated quarterly, while the FVL's is updated weekly. The HFD has not tracked Value Line's "safety" and "technical" ranks, but Value Line's own tracking shows that they add value. But PIV's less frequent updating will mean that it continues to hold stocks after Value Line has downgraded them, which presumably should cost the fund. Also affecting these two funds' relative performances is that PIV's less frequent turnover should translate into lower transaction costs. It is unclear how these differences will play out over time, and whether PIV will do better or worse than