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Current Trends: Business Development Companies(6:38)

Dean Choksi
Senior Vice President of Finance & Head of Investor Relations, Fifth Street Finance Corp.

November 19, 2013
      

Debt Investments or Equity Investments


 

DEAN CHOKSI: Most BDCs primarily focus on debt investments and they have anywhere from five to 15% of their portfolios dedicated to equity investments. If you think about the BDC business model, the way the sector views equity investments is if you're invested primarily in debt, you're not going to really generate much NAV appreciation or book value growth because debt investments don't really appreciate in value unless interest rates are declining or spreads are tightening.  So the sector generally invests a small amount of its capital in equity investments, under the view that appreciation in the equity investments over time may potentially offset any credit losses in the portfolio to leave book value essentially stable.


BDC Versus Bank


 

CHOKSI: We're not really competing with banks, we're competing around banks.  When banks are in cash flow lending, they're very focused on safe loans that are senior in the capital structure and they're not expanding much debt.  When banks are in cash flow lending, they're doing it very safe in the capital structure.  Banks typically prefer to lend to its assets – real estate receivables, a factory, or some sort of an infrastructure.  So when a company such as a professional services company that doesn't have assets wants more debt than a bank is willing to provide, a BDC can step in.


  

BDCs Positioning for Rising Rates


 

CHOKSI: BDCs may actually perform relatively well in a rising interest rate environment compared to other fixed-income asset classes.  A BDC manager can manage interest-rate risk on both sides of the balance sheet: assets and its liabilities.  To manage interest rate risk in its assets, many in the sector have shifted their portfolios from fixed-rate investments to floating-rate investments. When it comes to their liabilities, many managers have done the opposite and have shifted their funding from floating-rate debt to fixed-rate debt.  When interest rates do increase, the asset yields will reset higher than their funding costs.  You should also be aware that a typical floating-rate loan has a floor of around one to two percent.  So LIBOR will have to increase above the floor before the underlying asset yield resets higher.


Addressing the Threat of Rising Rates


CHOKSI: To protect this portfolio from rising interest rates, Fifth Street shifted its asset mix to floating-rate debt investments.  About 70% of our debt investments are floating-rate loans.  And on the liability side of the balance sheet, we've extended the maturity of our floating-rate bank debt, as well as issued multiple sources of unsecured fixed-rate term debt.


  

Financing Lending and Investment


CHOKSI: BDCs can use up to one times leverage.  They get debt from multiple sources.  The largest source of the debt for the industry is bank funding.  These are typically revolving credit facilities and fall anywhere between three to five years in maturity.  BDCs can also access the unsecured debt markets by issuing term debt.


 

BDCs can use up to one times leverage.  They get debt from multiple sources.  The largest source of the debt for the industry is bank funding.  These are typically revolving credit facilities and fall anywhere between three to five years in maturity.  BDCs can also access the unsecured debt markets by issuing term debt.


Using BDCs for Advisors and Investors


CHOKSI: In my position at Fifth Street, I'm talking to a lot of financial advisors and individual investors.  Financial advisors are increasingly looking at the sector.  They're attracted to the high yields of business development companies, and they're using it to replace a portion of their clients' high-yield bonds as well as equity income allocations.  They are attracted to the sector due to the historically high yields, monthly dividends, and the liquidity provided by being publicly-traded investments.


Institutional Investor Interest in BDCs


CHOKSI: Institutional investors, particularly ones that invest in financial services, are looking at traditional lenders such as banks, and they're seeing stagnant loan growth compressing debt-interest margins, and they're seeing a much tougher regulatory environment where the regulators are clamping down on bank business models and trying to reduce risk across the sector. They're looking for areas in financial services that are positioned to benefit from those trends.  So they're looking at non-bank lenders -- one area is BDCs.  So I'm spending a lot of time educating institutional investors about what BDCs are, and why they exist, and how they can generate their alpha.


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IMPORTANT DISCLOSURE


The views and opinions expressed are those of the speaker and are current as of the video's posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com.


 

Dean Choksi is Senior Vice President of Finance and Head of Investor Relations at Fifth Street Finance Corp. and is not involved in the portfolio management of Van Eck funds.


 

Please note that Van Eck Securities Corporation offers additional investment products that invest in the asset class(es) included in this video [Market Vectors BDC Income ETF]. Important disclosure for BDC Income ETF Investors:  Business Development Companies (BDC) invest in private companies and thinly traded securities of public companies, including debt instruments of such companies. Generally, little public information exists for private and thinly traded companies and there is a risk that investors may not be able to make fully informed investment decisions. Less mature and smaller private companies involve greater risk than well-established and larger publicly-traded companies. Investing in debt involves risk that the issuer may default on its payments or declare bankruptcy and debt may not be rated by a credit rating agency. Many debt investments in which a BDC may invest will not be rated by a credit rating agency and will be below investment-grade quality. These investments have predominantly speculative characteristics with respect to an issuer’s capacity to make payments of interest and principal. BDCs may not generate income at all times. Additionally, limitations on asset mix and leverage may prohibit the way that BDCs raise capital. The Fund and its affiliates may not own in excess of 25% of a BDC’s outstanding voting securities which may limit the Fund’s ability to fully replicate its index. The Fund is currently concentrated in the financial services sector and may depend, to a greater extent, on the overall condition of the sector. The Fund may loan its securities, which may subject it to additional credit and counterparty risk.


 

The “Net Asset Value” (NAV) of a Market Vectors Exchange Traded Fund (ETF) is determined at the close of each business day, and represents the dollar value of one share of the fund; it is calculated by taking the total assets of the fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as the ETF’s intraday trading value. Market Vectors ETF investors should not expect to buy or sell shares at NAV.


 

ETF Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.


 

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 888.MKT.VCTR or visit vaneck.com/etf. Please refer to the Fund’s prospectus and summary prospectus, which should be read carefully before you invest.


 

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation. © 2013 Van Eck Securities Corporation.

Van Eck Securities Corporation, Distributor

335 Madison Avenue, New York, NY 10017

Hard Assets (12)
LPL Financial Research:US Energy Renaissance Q&A with Van Eck Global(9:56)
Shawn Reynolds
Portfolio Manager, Van Eck Global Hard Assets Investment Team

posted on April 14, 2014


"The U.S. energy renaissance is a remarkable resurgence in oil and gas production here in the United States... It’s up over 50% in the last five years, growing at a steep rate. There’s no other country or region in the world that has grown that fast that quickly in the last 30 or 40 years."


Global Research: Mining in Burkina Faso(4:29)
Joe Foster and Ima Casanova
Senior Gold Analysts

posted on April 10, 2014


"We invest across the spectrum, but in Burkina, it is mostly mid-tier and junior companies that are active. Most of Burkina’s gold deposits are moderate to smaller-sized, so we find smaller companies there. Because of the favorable operating environment, there are quite a few interesting opportunities."


Gold 2014: Investment Demand, Geopolitical Risks, and Corporate Discipline (4:25)
Joe Foster and Ima Casanova
Senior Gold Analysts

posted on April 7, 2014


"Emerging markets geopolitical risks have probably been the main driver of gold this year. People are worried about financial stability with headlines coming from Thailand, Venezuela, Ukraine, and Turkey. People are also concerned about the growth in China and the Chinese banking system."


Gold 2Q 2014: Review of Earnings Results and Costs(4:29)
Joe Foster and Ima Casanova
Senior Gold Analysts

posted on April 3, 2014


"The market focused more on cost and operating results, and did not necessarily punish companies that missed earnings expectations"


Industrial Metals 2Q 2014: Commodity Outlook, Capital Management, and Mine Strikes(5:58)
Charl Malan
Metals & Mining Analyst

posted on April 3, 2014


"We believe that towards the latter part of 2014 capital management, defined as cost management and CAPEX reductions will be a potential significant kicker for higher earnings. It will ultimately develop into a higher rating for metals and mining companies through either a cash flow multiple or an EV/EBITDA multiple."


Agribusiness 2Q 2014: Crop Yield, Pricing, and Precision Farming(5:24)
Sam Halpert
Agriculture Analyst

posted on March 25, 2014


"We're headed toward the U.S. planting season and the USDA has come out with its initial estimates. They predict very good acreage numbers, both in corn and soy. Assuming normal weather, we expect another good crop which should ultimately put some downward pressure on prices."


Gold: Back on Track for 2014?(5:41)
Joe Foster
Senior Gold Analyst

posted on January 21, 2014


“In the near-term, $1200 is an important technical level. The gold market fell to around the $1200 level in June of this year, and we're retesting those lows right now in the wake of the Fed announcement that they will begin tapering in 2014.”


CMCAX: Using the Constant Maturity Approach to Commodities(8:27)
Roland Morris
Commodities Strategist

posted on January 7, 2014


"Amongst the three drivers: commodity exposure, roll exposure, and collateral exposure, CMCAX does a great job of isolating commodity exposure. It does that through its constant maturity approach to reduce the roll risk, does not take collateral risk, and maintains a very short-term Treasury bill-holding which essentially eliminates collateral risk.


Agribusiness: Review of 2013 and Outlook for 2014(6:01)
Sam Halpert
Agriculture Analyst

posted on December 4, 2013


“RFS, which is the Renewable Fuel Standard, will likely be reformed in 2014. There has been a ton of pressure from various constituents on the fuel standard. It's based on assumptions about gasoline demand that are outdated and we think that it will change.”


Industrial Metals: Focusing on Capital and Cost Management in 2014(7:09)
Charl Malan
Metals and Mining Analyst

posted on November 20, 2013


"We've seen many management changes among mining companies over the last year and a half. Many of the top twenty mining companies have changed senior management. Where previous management was focused much more on growth at any cost, new management is focused on capital and cost management... in 2014 [we] are likely to continue to see this aggressive approach by new management on reducing costs."


Current and Future Themes: Unconventional Resources(3:23)
Shawn Reynolds
Portfolio Manager, Van Eck Global Hard Assets Investment Team

posted on October 9, 2013


"We see many opportunities in the Permian Basin, in West Texas, which is divided into two areas: the Midland eastern basin and the Delaware western basin. The Midland Basin is a bit more advanced than the Delaware basin but we have exposure to both regions."


Evolving Themes: Global Mining (4:00)
Shawn Reynolds
Portfolio Manager, Van Eck Global Hard Assets Investment Team

posted on October 9, 2013


"There's been a big paradigm shift in the mining sector over the last year, and we are seeing high-level management changes that reflect this. The industry is shifting from a focus on growth, to one that emphasizes expense reduction, margins, returns, and eventually getting to higher valuations.”


Emerging Markets (15)
EM Debt 2Q 2014: Emerging Markets in Crisis? (4:23)
Fran Rodilosso
Portfolio Manager, Market Vectors® Fixed Income ETFs

posted on April 1, 2014


"The emerging markets are not a single asset class, nor obviously a single country or region. There are pockets that are in a period of crisis… I would be remiss to talk about a potential crisis without discussing China, which has grabbed so many headlines this year."


Fixed Income 2Q 2014: Rates, Credit, and U.S. Corporates(5:00)
Fran Rodilosso
Portfolio Manager, Market Vectors® Fixed Income ETFs

posted on April 1, 2014


"The consensus has been that the risk would be for rates to rise to 4% on the 10 year. But the perspective looking into the second quarter is that we're range-bound on 2.6 to 3%. If that consensus holds that's going to be supportive for a lot of financial markets."


Global Research: Highlights from Eastern Europe(3:52)
Eric Fine and Natalia Gurushina
Portfolio Manager and Economist, Van Eck Unconstrained Emerging Markets Bond Investment Team

posted on March 11, 2014


"Even though large parts of the region benefit from growth recovery in the euro zone, especially Germany, there are two large economies, Russia and Turkey, where the growth dynamics remain extremely anemic."


Global Research: Poland(3:25)
Eric Fine and Natalia Gurushina
Portfolio Manager and Economist, Van Eck Unconstrained Emerging Markets Bond Investment Team

posted on March 12, 2014


"I think Poland is uniquely positioned to benefit from Germany's rebound... My key concern about Poland, however, is potential exposure to change in sentiment from political risks in Ukraine."


Global Research: Hungary(4:38)
Eric Fine and Natalia Gurushina
Portfolio Manager and Economist, Van Eck Unconstrained Emerging Markets Bond Investment Team

posted on March 14, 2014


"The shift in my outlook for Hungary has been fairly dramatic… the government, together with the central bank implemented fairly aggressive and large-scale funding for lending programs but I have yet to see the results in terms of stronger growth in Hungary."


Global Research: Turkey(5:36)
Eric Fine and Natalia Gurushina
Portfolio Manager and Economist, Van Eck Unconstrained Emerging Markets Bond Investment Team

posted on March 14, 2014


"The macroeconomic fundamentals in Turkey are getting worse. Turkey is vulnerable, but it’s always been vulnerable. It’s never had enough reserves. Its real interest rates have never been that satisfying. But the political context is the worst I’ve seen in twenty years."


Global Research: Romania(3:48)
Eric Fine and Natalia Gurushina
Portfolio Manager and Economist, Van Eck Unconstrained Emerging Markets Bond Investment Team

posted on March 14, 2014


"My outlook on Romania did not necessarily change for the negative but certain red flags were raised during my trip."


Global Research: Ukraine(4:59)
Eric Fine and Natalia Gurushina
Portfolio Manager and Economist, Van Eck Unconstrained Emerging Markets Bond Investment Team

posted on February 12, 2014


"The scenario of civil war and perhaps a civil war that has broader implications for the region is a scenario we have to think about. It's hard to assign probabilities to that, but the market seems to be saying it's a zero and I think zero is definitely the wrong answer."


Global Fixed Income Investment Themes in 2014(6:35)
Fran Rodilosso
Portfolio Manager, Market Vectors® Fixed Income ETFs

posted on February 21, 2014


"As a fixed-income investor, some key themes for 2014 are not that different from 2013. We believe that it may make sense to shorten duration, and to take on some additional credit risk to make up for the loss of yield by moving to shorter durations appear to makes sense."


2013 Review of Global Fixed-Income Markets(4:37)
Fran Rodilosso
Portfolio Manager, Market Vectors® Fixed Income ETFs

posted on February 21, 2014


"In 2013, improving growth in the U.S. helped short-term interest rates remain low which helped support credit markets in general… European sovereign debt traded quite well last year, as did European credit, particularly high yield, for many of the same reasons that credit did well in the U.S."


How Will Tapering Affect EM Bonds?(4:08)
Eric Fine
Portfolio Manager, Van Eck Unconstrained Emerging Markets Bond Fund

posted on February 19, 2014


“I don't have a blanket answer that says the taper is just not an issue for EM, but I do think it's been priced in generally. I think some countries have been able to react, and if tapering's happening because of good final demand, because economies are growing, then that's a high-quality problem for EM countries.”


Global Research: Indonesia, Malaysia, Philippines, and Vietnam(9:51)
Eric Fine
Portfolio Manager, Van Eck Unconstrained Emerging Markets Bond Fund

posted on February 19, 2014


“A big attraction for Japanese and Korean investments in China is low wages. There are substantial and continuous wage pressures in China and that brings a big challenge for existing investments. The countries that I visited are all seeing substantial interest and in many cases are already seeing inflows from Japan.”


Why Unconstrained Approach to EM Bond Investing?(4:25)
Eric Fine
Portfolio Manager, Van Eck Unconstrained Emerging Markets Bond Fund

posted on February 11, 2014


“In one word, the value of an unconstrained approach to emerging markets bond portfolio investing is ‘flexibility’. The market changed a lot in the past 20 years. At first, it was only hard currency bonds. Then came hard currency corporates followed by local currency sovereigns. Nowadays, local currency corporates are becoming more prominent. Having an unconstrained mandate is key to optimizing the portfolio using all four sub asset classes.”


EM Equities: Middle-Income Trap, Tapering, and Frontier Markets 2014(5:56)
David Semple
Portfolio Manager, Van Eck Emerging Markets Fund

posted on January 24, 2014


“Over time, we think that there will be increasing idiosyncrasies from country to country. Allied to that is the effect of tapering which should sort out which countries are stronger than others. Our thesis last year was to not see emerging markets as a beta block but rather as a collection of countries where we can pick the best stocks.”


EMAG: No Assembly Required(5:14)
Fran Rodilosso
Portfolio Manager, Market Vectors® Fixed Income ETFs

posted on December 10, 2013


“EMAG offers a way for investors to gain broad exposure to emerging markets fixed income, both hard currency and local currency, in their portfolios….EMAG encompasses the broad opportunity set within the emerging markets fixed-income space.”


Editor's Choice (4)
Muni 2Q 2014 Investment Themes (5:06)
Jim Colby
Portfolio Manager, Market Vectors® Municipal Bond ETFs

posted on April 1, 2014


"We have a platform where we believe the Federal Reserve is going to modestly adjust its quantitative easing and provide us with a stable platform going forward with respect to interest rates."


SHYD: Shorten Up for Rising Rates(4:43)
Jim Colby
Portfolio Manager, Market Vectors® Municipal Bond ETFs

posted on February 26, 2014


"One of SHYD's compelling features is that it is uniquely positioned to deal with some of the current problems that investors are facing in today's markets… including rising interest rates."


Israel: Positive Economic Surprises in 2013(5:19)
Steven Schoenfeld
Founder and Chief Invesment Officer,
BlueStar Indexes


posted on January 15, 2014


“There have been positive surprises in the economy, both because of fiscal discipline, greater tax receipts, and the fact that energy exports are starting to come online. We’re very positive on the Israeli economy.”


Israeli Capital Markets: Challenges, Return of Equity Flows, and Opportunities(7:56)
Steven Schoenfeld
Founder and Chief Invesment Officer,
BlueStar Indexes


posted on January 15, 2014


"The research we do at BlueStar looks at both valuations and technical patterns in the market. Even though the BlueStar Israel Global Index has had a very strong rally and could be due for a pause, we expect further highs in 2014.”


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