Dear Mr. Berko: Because the 401(k) where I work has a lousy choice of funds (list enclosed), I am moving $30,000 of the $91,000 into an individual retirement account to seek a better return. The stockbroker recommended $10,000 each in Macquarie Infrastructure, the Fidelity Select Banking Portfolio and American Electric Power. Please comment on these choices. — TW, Kankakee, Ill.
Dear TW: I know that the messenger sometimes gets shot, but several employees where you work ought to down a few gum ticklers and then have a face-to-face with the boss or human resources. If the boss knows that those high-cost mutual funds have such ratty performance records and has done nothing about it, he may eventually face some heavy legal costs. And if he hasn’t any idea how cruddy those funds have performed, I think he should appreciate that knowledge and make the proper changes.
Macquarie Infrastructure (MIC-$77) is a $1.8 billion-revenue company with 3,200 employees that owns a cluster of businesses that focus on the United States’ infrastructure, hence the name. MIC owns Atlantic Aviation, which provides fuel, hangaring and other airport services at 69 airports across the United States. MIC also owns a liquid storage and terminal business, a Hawaiian energy business and various solar and wind facilities. The revenues of these four businesses are expected to grow between 4 and 5 percent a year. And Wall Street projects above-average growth in earnings and dividends. This is possible by expanding free cash flow and smartly improving net profit margins. MIC’s net profit margins have grown from 5 percent two years ago to 7.9 percent last year. Net profit margins are expected to be 8.7 percent this year and 10.5 percent by 2021. Meanwhile, the current 6.7 percent dividend yield, which should increase annually, makes it easy to own MIC and wait for future capital gains. SunTrust Banks, Barclays, BB&T Capital Markets, Oppenheimer and Jefferies have “buy” recommendations. There could be 20 points waiting for you in the coming two to three years, plus that sweet dividend. Your broker has made a good recommendation. Go for it; invest 10 grand.
Fidelity Select Banking Portfolio (FSRBX-$30.90) is really a stinky fund, which is why its 10-year annualized return is an embarrassing 2.8 percent. Imagine if you had invested $10,000 in FSRBX 10 years ago and reinvested all the dividends and capital gains; this fund would be worth $12,672 today, versus $21,000 for the Standard & Poor’s 500. And that piteous 10-year return includes last year’s 39.5 percent gain from FSRBX’s top nine positions — Wells Fargo, Bank of America, JPMorgan Chase, Citigroup, Huntington Bancshares, U.S. Bancorp, Capital One, M&T Bank and PNC. Holy moly, a tattooed teenager with a sixth-grade education would do better tossing darts at a target with 100 bank names printed on it.
Your broker has the right idea, because bank stocks may be among the best performers in the coming three to four years, but he suggested the wrong investment product. John Sheehy, who runs FSRBX, is a nice guy and doesn’t kick his dog. But I think the SPDR S&P Regional Banking ETF (KRE-$52) will have far superior performance. I believe that KRE’s smaller regional banks — e.g., First Republic Bank, CIT Group, People’s United Financial and KeyCorp — have more room to grow their share values than those huge money-center banks that are plagued by politics and bundled in bureaucracy. Discuss this with your broker.
I really like your broker’s selection of American Electric Power (AEP-$72), which yields 3.1 percent and has increased its dividend by about 5.6 percent annually since 2007. If you had invested $10,000 in AEP in 2007 and reinvested all dividends, those shares would be worth $29,500 today. That’s an attractive 10 percent annualized return from a stodgy, unexciting and dry-as-dust electric utility. I like your broker’s recommendation because management has been reducing costs, which has very nicely improved net profit margins. And I like it because AEP management seems to have exceptional skills in seeking rate hikes with numerous public service commissions in the 11 states where AEP serves over 5.4 million customers. AEP is a good place for $10,000.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.