How returns, liquidity, risk play role in asset allocation

Flashback to the start of 2008

The markets are roaring and everyone�s who�s been left out of the equity ride up is rushing to enter. Cut -- to the start of 2009: equity is worse than a four-letter bad word by now. Nobody can get it right 100% of the time; and, at both these times, the investor would have been protected with the asset allocation approach � taken out profits when his weightage of equity shot up beyond his risk-taking ability; and entered when no one dared to even look towards the markets in 2009.

Look at the Whole Picture

The allocation to debt is met for the salaried class through regular deductions and investment in the employee provident fund (EPF) scheme; and others create their safety net through Public Provident Fund, bank deposits, Post Office deposits, National Savings Certificates and the like. We all spend more time on analyzing why we made a loss of 10% on one share, even when that share is a miniscule proportion of one�s total financial assets. The focus needs to move away from making a profit in every transaction to having a suitable risk-adjusted return portfolio.

Beyond just debt and equity

Asset allocation is a way to reduce risks but it goes beyond the accepted debt and equity allocation. The starting point of reducing risks is to spread your assets across different countries and currencies. While we all believe that India is the place to invest in for the long-term, we do understand that in case of a war-like situation on India�s borders, the price of all assets � debt and equity, as well as real estate � will fall.

The Liquidity Factor

Assets can also be classified based on their liquidity. Why investors like property as an asset class is that there is no price ticker and a �Fill it; shut it; forget it� approach works. However, you may have realized during 2008 that the value of this asset was just on paper (even if you wished to assign a discount to it), as there were just no transactions taking place. And you cannot manage your daughter�s wedding expenses from a piece of paper that will gain value only on her first wedding anniversary.

"How much sugar do you take in your tea?"

This is a question I have often asked my prospective clients, and I get a straight-forward answer almost always. My logical mind wants to ask two questions instead: What is the size of the cup? What is the size of the spoon? When your cup of worries is huge (for example, in 2008), the spoon (of investments) that you dip into your equi-�tea� definitely needs to be larger.

How your financial planner will address asset allocation

There are three key factors that need to be considered and communicated correctly: financial objectives (returns required), liquidity requirements (a factor of the time horizon for investments) and risk profile (what is the loss the investor can bear).  Let us assume that fixed deposit rates for 3 years or more are at 7.5% pa, or 5% pa post-tax. If 86% of the total funds are invested in deposits, the portfolio will be capital protected at the end of three years. If the period of investment is 10 years, only 61% of the funds need to be locked into fixed deposits. The incremental benefit of investing the �riskable� funds in equity will be huge, and you do not want to miss this opportunity.

Email: lovaii@immpl.com
(The author is the Managing Director and Chief Financial Planner of International Money Matters Pvt Ltd)

Should I Buy DTV? 3 Pros, 3 Cons

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DirecTV (DTV) has made some of the funniest commercials in recent memory, and after the company's most recent earnings report, it's laughing all the way to the bank.

The largest satellite television provider reported an awesome quarter. Net income at DTV surged 24% to $699 million, or $1.28 per shares, easily beating the $1 per share consensus. Revenue spiked more than 6% to $7.88 billion, surpassing analysts’ $7.88 billion estimates.

DirecTV added 139,000 new subscribers in the quarter — the most since 2011, thanks to refugees from Time Warner Cable (TWC) and CBS (CBS) fee dispute. Time Warner, the second-largest cable company, was the clear loser in the two-week blackout. It lost 304,000 video customers in the quarter, almost double what analysts expected.

DTV has jumped almost 30% this year, on par with peers like Dish Network (DISH) and Comcast (CMCSA). One reason for DTV’s outperformance has been its strong international business and its satisfied customers. During the most recent quarter, DirecTV’s churn rate fell to 1.61% — its lowest quarterly churn in more than 6 years.

So, is now the time for investors to tune into DTV’s stock? Let’s examine the pros and cons.

DTV Pros

Happy customers: For years, DTV and its rival DISH have scored higher than their cable rivals on customer satisfaction surveys. Happy customers tend to be loyal customers, meaning that it will take more than a promotional rate to get them to leave DTV. It also means that they may be less tempted to “cut the cord” or quit pay television entirely.

Valuation: Shares of DTV trade at forward earnings multiple of 12.9, well under Dish’s 30.4 valuation and Comcast’s 19.1 valuation. The stock trades about 6% under its average 52-week price target of $68.04, while Dish trades about 3% under its average target of $49.73. Comcast, though, still has a 25% upside for its $53.74 target. But comparing CMCSA with DTV and DISH has its limits since the Philadelphia-based cable company also owns the entertainment giant NBC Universal.

Dish Merger: Earlier this year, Billionaire John Malone, the largest shareholder of DTV, has urged his counterpart at DISH Charlie Ergen to merge the two satellite providers “for the good of the industry.” Ergen, who is no slouch in the dealmaking department either, reportedly has his eye on a deal with Time Warner Cable. The potential of a DTV-DISH alliance should give the shares a boost, at least until the next shoe drops in the constantly changing world of Pay TV.

DTV Cons

Costs: Costs for original content seem to be soaring by the millisecond. Of particular concern to DTV shareholder is the company’s NFL Sunday Ticket program. The satellite provider’s $1 billion contract with the NFL expires in two years, and retaining that business won’t be cheap. Officials in the NFL are certainly keeping their options opened and have recently met with Google. As I argued before, NFL Sunday Ticket is such huge deal for DTV that it could force a “shotgun wedding” with DISH so it can gain the scale to counter the threat posed by the search engine giant.

Latin America: The company has been growing like gangbusters in Latin America in recent years, but it might nearing a cap. As of September 30, DTV had 11.3 million customers in the region, an increase of 260,000 from a year earlier. That number might seem like a big bump, but it's down from 543,000 a year earlier. This may not be a temporary hiccup, either: The International Monetary Fund recently lowered its forecast for the region’s economic growth to 2.7% for 2013.

Television Watching: In 2011, many people were shocked to learn that number of TV householders — defined by Nielsen as homes having at least one television set — fell for the first time in 20 years. The number rebounded slightly this year to 115.6 million, though it still lags 2010′s 115.9 figure. What this shows is the consumers increasingly want to consume media on their terms, which is going to create huge challenges for the pay TV industry going forward.

DTV Bottom Line

DirecTV has many challenges ahead. Not only is growth in Latin America slowing, but content costs and carriage fees continue to skyrocket. The fights between content providers and distributors are only going to get nastier over time. And then there's the uncertainty over DTV's lucrative NFL programing.

So should you buy DTV? No. For now, the stock's risks outweigh the rewards .

As of this writing, Jonathan Berr didn’t hold a position in any of the aforementioned securities.

Why Procter & Gamble Is Poised to Pop

Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, consumer products gorilla Procter & Gamble (NYSE: PG  ) has earned a respected four-star ranking.

With that in mind, let's take a closer look at Procter & Gamble, and see what CAPS investors are saying about the stock right now.

Procter & Gamble facts

Headquarters (founded)	Cincinnati (1837)
Market Cap	$223.5 billion
Industry	Household products
Trailing-12-Month Revenue	$83.7 billion
Management	Chairman/CEO Alan Lafley CFO Jon Moeller
Return on Equity (average, past 3 years)	16.3%
Cash/Debt	$5.9 billion / $32.2 billion
Dividend Yield	3%
Competitors	Colgate-Palmolive Johnson & Johnson Kimberly-Clark

Sources: S&P Capital IQ and Motley Fool CAPS.

On CAPS, 97% of the 7,674 members who have rated Procter & Gamble believe the stock will outperform the S&P 500 going forward.   

Just last week, one of those Fools, Gainster, succinctly summed up the Procter & Gamble bull case for our community:

Broad range of stellar brands, growth in developing countries, stable basic needs, cheap compared to Colgate Palmolive, good dividend stock, [Bill Ackman's] influence/return of Lafley (restructuring). I buy this to diversify and to own some solid stocks. I further see growth potential, but I'm not expecting too much of that.

If you want market-thumping returns, you need to put together the best portfolio you can. Of course, despite a strong four-star rating, Procter & Gamble may not be your top choice.

If you're on the lookout for other high-yielding stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.

Could New Fracking Laws Make This Company a Game Changer?

Companies that have unlocked vast quantities of oil and gas through hydraulic fracturing are all worried about the same thing: the rules regulating this new technique. These same companies have even more to worry about now because one state, Illinois, has brought about new regulations regarding the use of hydraulic fracturing. While Illinois is not exactly a huge oil and gas producer, it is possible that these fracking regulations could find footing in other places. 

The majority of companies will not be happy about these regulations, but Nuverra Environmental Solutions (NYSE: NES  ) is not one of them. As a water management company specializing in treating and storing hydraulic fracturing fluid, these kinds of regulations could be just what the company needs. 

Nuverra is but one of the new emerging players that has emerged thanks to the boom in U.S. oil and gas production. One energy stock that is built to profit from the oil and gas boom is the Motley Fool's chief investment officer's stock pick of the year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.