Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Financial economics wikipedia , lookup
Beta (finance) wikipedia , lookup
Securitization wikipedia , lookup
Systemic risk wikipedia , lookup
Business valuation wikipedia , lookup
Lattice model (finance) wikipedia , lookup
Public finance wikipedia , lookup
Negative gearing wikipedia , lookup
Investment fund wikipedia , lookup
Investment management wikipedia , lookup
Stock trader wikipedia , lookup
THE OVERLOOKED SWEETSPOT FOR INVESTING September 2012 Central bankers have forced bond yields to such artificially and historically low levels that returns on fixed income portfolios have been disappointingly low. Further, as low interest rates persist and coupon payments remain depressed, the sensitivity of bond prices to interest rate changes increases. In other words, with low interest rates the likelihood of higher interest rates—and consequently lower bond prices--in the future increases. During this period of disappointing bond yields, dividend paying stocks have moved into what we consider “the sweet spot” of investing. Whereas in previous decades fixed income securities were purchased for income, coupon payments are now such that blue chip companies like Royal Dutch Shell and AT&T are paying far more on dividend payments than they do on their medium term debt issuance (Exhibit A) even after taking account of tax withheld at source. Equities for Yield Dividend Yield Gross Net 5 Yr US Treasury Yield pick-up vs. Net 6.06% 4.24% 1.37% +287bps 4.67% 3.27% 1.21% +215bps 4.64% 3.25% 1.09% +355bps 3.59% 2.51% 0.77% +174bps Exhibit A: Equities for Yield (source: Bloomberg) The Overlooked Sweet Spot for Investing September 2012 Page 1 of 5 So the focus at BIAS in recent years has been dividend paying stocks which have a history of maintaining and increasing income distributions to its shareholders. Fixed income securities should now be used only for capital preservation purposes, but dividend paying stocks, controlled for consistency of payment, do provide an opportunity for recovering income flow into the portfolio whilst giving potential for capital appreciation. Moreover, an investment portfolio entirely invested in fixed income securities presents some risk when one considers that in a rising rate environment, bond prices will fall. To further illustrate the attractiveness of stocks versus bonds, consider two valuation measures that we have presented in our most recent Quarterly Market Briefing: 1. The Fed Model compares S&P 500 Index earnings yield against the US Treasury Ten-Year bond yield. 2. Credit Suisse First Boston’s (CSFB) Global Risk Appetite (GRA) measure. In the former (Exhibit B), when Ten-Year Treasury yields are well in excess of earnings yields on S&P 500 Blue Chip stocks, stocks are considered over-priced relative to US Treasures. On this basis however from 1980 to 1982 and 2011 through today, stocks were/are under-priced. Although these anomalies can persist for some time, history has shown that they provide rich opportunities when yield disparities are at their extremes. Fed Model 10-Year Treasuryminus S&P500 Earnings Yield 6 Stocks Expensive Sell 4 2 Ja nJa 62 nJa 64 n6 Ja 6 nJa 68 nJa 70 nJa 72 nJa 74 nJa 76 n7 Ja 8 nJa 80 nJa 82 nJa 84 nJa 86 nJa 88 n9 Ja 0 nJa 92 nJa 94 nJa 96 nJa 98 nJa 00 n0 Ja 2 nJa 04 nJa 06 nJa 08 nJa 10 n12 0 -2 -4 Stocks Cheap -6 Buy -8 Exhibit B: The Fed Model The Overlooked Sweet Spot for Investing September 2012 Page 2 of 5 As to point two above, in the late 1990’s CSFB initiated a study to measure extremes of investor sentiment. They discovered how these extremes signal turning points in stock market performance as indicated by the S&P 500 Index (Exhibit C). Specifically, extremely negative sentiment, as shown by a global risk appetite (GRA) score below negative 3, was followed by strong rallies in the stock market. We see this in 2002, 2008/9, and more recently in 2011. Risk Appetite 9 Previous Extreme Lows in Global Risk Appetite Have Been Associated with a Major Turning Point for Equities 7 Global Risk Appetite Euphoria = +5 5 3 1 -1 -3 -5 -7 Panic = -3 -9 1600 S&P 500 1400 1200 1000 800 In 1982 the GRA predicts recovery in the S&P 500 600 In 2002 the GRA predicts recovery in the S&P 500 400 200 0 Jan-81 Jan-86 Source: Credit Suisse First Boston Jan-91 Jan-96 Jan-01 In 2008 Bottom the GRA predicts recovery in Advance Jan-06 Jan-11 EXHIBIT C: CSFB’s Global Risk Appetite and the S&P 500 Index At present GRA hovers slightly above the panic stage which tells us that stocks are reasonably valued (because sentiment remains only ‘somewhat’ negative) and that any deterioration in sentiment near term could result in a strong upward movement in the broad stock indices thereafter. Many stocks in the S&P 500 Index do not pay dividends and those that do tend to fare better in good and bad times. All of this leads us at BIAS to believe that the place to be during times of negative GRA is in stocks that have a discipline of regularly returning capital to investors in the form of dividends. This is reinforced by a review of the performance of our Dividend Income Strategy for various periods up to June 30, 2012. The outperformance relative to the S&P Global 1200 Index has been substantial. Indeed in assessing BIAS’ own dividend income strategy, performance well exceeded that of the broad stock indices as indicated below (Exhibit D) The Overlooked Sweet Spot for Investing September 2012 Page 3 of 5 Performance Performance* YTD 1-Year 31-Aug-12 Dividend Strategy S&P Global 1200 Index 2 - Years 3 -Years 5 -Years Cumulative Cumulative Cumulative 40.76% 24.74% 69.20% 27.96% 45.70% -5.10% 12.92% 17.41% 10.31% 8.95% EXHIBIT D: BIAS Global Dividend Income Strategy vs. S&P Global 1200 (Performance shown is current dividend income strategy back valued 5 years, rebalanced annually. Past performance is no guarantee of future results). In addition to the greater potential return benefits, dividend income strategies have provided a lower level of risk than the broad stock indices as shown in Exhibit E. All this argues for a higher allocation to equities in investment portfolios subject to equities exposure being focused on stocks that have consistently maintained or increased dividends over an extended period of time. Risk vs. Return--Annualised Last 10 Years--June 2002 - June 2012 8.0% 7.3% 7.0% 6.0% S&P Dividend Aristocrats Return 5.0% 4.0% S&P Global 1200 3.0% 2.6% 2.5% 2.0% S&P 500 1.0% 0.0% 14.0% 14.5% 15.0% 15.5% 16.0% 16.5% 17.0% 17.5% 18.0% Risk EXHIBIT E: Risk Return Comparisons of Stock Indices (source: BIAS, Bloomberg, Standard & Poors) The Overlooked Sweet Spot for Investing September 2012 Page 4 of 5 Disclaimer: This release contains “forward-looking statements” which are based on the firm’s current expectations and beliefs concerning future developments and their potential effects on the firm and the fund. There can be no assurance that actual developments will be those anticipated by the firm. Actual results may differ materially from those projected as a result of significant risks and uncertainties, changes in interest rates, effect of the performance of financial markets, fair values of investments, as well as others that may cause actual results to differ materially from projected outcomes. The firm undertakes no obligation to publicly update any forward-looking statements, except as may be required by law. Potential investors are advised to seek professional assistance prior to making any investment. The BIAS Global Dividend Income Fund is not eligible for US investors. Further information, disclaimers and policy notes may be found on the firm’s website www.bias.bm and as disclosed in the firm’s ADV Part II also on the firm’s website. BERMUDA CAYMAN Bermuda Investment Advisory Services Limited BIAS (Cayman) Limited st 1 Floor Wessex House P.O. Box 30862 45 Reid Street Grand Cayman KY1-1204 Hamilton, HM 12 Cayman Islands Bermuda Tel: (441) 292-4292 Tel: (345) 943-0003 Fax: (441) 292-7292 Fax: (345) 943-0004 The Overlooked Sweet Spot for Investing September 2012 Page 5 of 5