Morningstar Runs the Numbers

Inspired by Harper's Index (with a tip of the hat to FiveThirtyEight's Significant Digits blog), Morningstar Runs the Numbers uses a numbers-based approach to highlight recent Morningstar research, along with some outside news stories.

9.9%

Bill Ackman's Pershing Square revealed it had a 9.9% stake in Chipotle CMG this week. R.J. Hottovy is leaving his fair value estimate unchanged, but thinks Ackman could have a

:

We're intrigued by what types of corrective measures Pershing Square will offer, but based on Ackman's previous transactions, we're expecting at a minimum a series of constructive operational improvements (including new restaurant formats, daypart expansion, throughput measures, and a more substantive loyalty program than the current Chiptopia platform) and corporate cost reductions but also proposals calling for a shift to a more franchised business model, new board leadership, as well as capital structure changes. While these changes would likely take time to implement, we believe the aforementioned operational improvements would help to improve Chipotle's customer experience--including correcting any taste and throughput disruptions that may have resulted from the implementation of recent food safety measures--and drive more consistent traffic.

$28 Billion Enbridge is paying $28 billion in stock to buy Spectra Energy SE. Joe Gemino sees this deal as helping to diversity and fortify Enbridge:

The deal positions Enbridge to diversify its operations toward natural gas while protecting the company's dividend growth. Currently, 70% of Enbridge's earnings are derived from crude-oil operations. Under the announced deal, less than half of the combined company's earnings are expected to come from crude operations. The majority of the remainder is expected to be derived from natural gas operations, primarily focused in the fast-growing Marcellus basin.

0.99 The price/fair value ratio for the healthcare sector today. It may not be hugely cheap, but as Karen Wallace explored in an article this week it is one part of the market that is producing a fair number of bargains.

6% Morningstar Investment Management's Brian Huckstep sat down with Christne Benz this week to talk about why they are downplaying commodities in the Morningstar Lifetime Allocation Indexes. Huckstep explains how a 6% negative roll yield makes it challenging to buy liquid commodity investments:

When you a buy a future on a commodity, the price will go up or down relative to that price. And today roll yield for commodities is negative for the majority of them and for the entire basket; it's been negative for quite a while--almost 10 years now we've seen negative roll yields. And so, typically, when you look back in history that roll yield has been positive and what that means is that investors have been paid to guarantee purchasing a commodity future in the future. And so, it used to be like a form of insurance. You used to get paid to provide that insurance. But today, there are a lot of people who have written about why this is the case, but it's clear that roll yields are negative. So, you pay for the right to buy that security in the future. It's almost like paying to provide insurance, and so that's not really attractive. And at a roughly an annual rate of 6% per year right now it's almost like an expense to these liquid investment funds, these liquid commodity funds. So any investment fund with a 6% expense per year is not necessarily that attractive to us.

1.1% The average fee paid by front-load investors for equity funds is 1.1%, below the full rate. Russ Kinnel explores why this has come down in recent years:

So there's a couple of big trends. One is just simply the line between load and no-load is blurring both in terms of sales channels and what funds are available. So, really, you see it no longer matters that much. If you go to an array of advisors, many of them can pick from a really big array of no-load, load, and even institutional funds. So that matters less. And then the other part that's going on is, if you meet certain minimums, you can pay a lower level of load which is how you can get to say, pay 1% or none. So, for instance, if you're going through an advisor and you're investing over $1 million, you probably pay no load. If you invest half a million, you pay half a load. If you're going through a 401(k) plan that has more than $1 million, even if your sum is only $20,000, you probably aren't paying any load either. So there are a number of ways to get around paying that full freight.

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