Thanks for the thought provoking and disparate feedback. For those who dismissed low volatility investing as a "gimmick" or "flavor of the month", attached is thoughtful economic research that shows that this anomaly has existed across markets, geographies, and time, and is calling into question the Capital Asset Pricing Model in the minds of some investors and academics (including me).
The question then arises as to whether market's have figured out this anomaly and bid up the prices of low volatility stocks accordingly. While low vol stocks now trade at roughly an earnings multiple that is 3 turns higher (20x vs. 17x for market), if you flip this on its head then low vol stocks have an earnings yield 88bps lower. This is roughly the spread the between the debt of high quality companies (AA) and mid quality companies (BBB). I think that the equity multiple differential should be higher than the debt differential.
For those that view the P/E of 20x as too rich, it still looks cheap to Treasuries (think of the 2% yield on Treasuries as a 50x earnings multiple when you divide the 2% coupon by the 100 price. There is alot of money in cash and Treasuries that is going to find a home and it will not move straight to high beta equities. I think we will see some more multiple expansion in low vol equities still. 20x is not that much higher than the earnings multiple on the market over the last 20 years.
Certainly if we have a pickup in economic growth, cyclicals will outperform as will companies with high financial or operating leverage. I believe that low vol stocks will still outperform when adjusting for their low risk. Investors are like snowflakes - unique horizons, risk tolerances, liquidity - for those who are seeking dividend income and want lower volatility - this is a great fund for the long-run.
Thanks - fschew - BRK generated this outperformance with greater volatility however (due to its leverage) - annualized standard deviation of returns was about a third greater than the overall market. Can the success be replicated - managers are in their 80s and they are having trouble re-investing their cash ...
Thanks - apacheman - one of the hardest things I have found about being a contributor is that the audience has disparate risk tolerances, investment horizons, and market outlooks. I think Low Vol investing should be part of an individuals long-term asset allocation. If the economy continues to expand, cyclicals will outperform, so an investor with that tactical view would want to reposition approrpriately. For investors, who want less equity volatility, I don't think Low Vol is too expensive currently.
High Yield Bond Market Sets New Records [View article]
of course it depends on your horizon, risk tolerance, and current asset allocation; solid dividend payers have done very well - outperforming the S&P 500 - I would say that they continue to outperform high yield bonds over the intermediate term
High Yield Bond Market Sets New Records [View article]
Yes - that is correct - I think that spreads tighten as rates backup leaving you fairly well protected for the first 50-75bps or so higher in Treasury yields. High yield bonds have been a great trade and the best days of the trade are behind us - unfortunately, there are few good alternatives in the fixed income universe.
High Yield Bond Market Sets New Records [View article]
I will have to check out DIV Kath - I have written about SDIV, which tracks a related index before: http://seekingalpha.co...
It has roughly a 7% dividend yield, but is decidedly not low beta and has trailed the S&P year-to-date. Perhaps, I will write a new column on DIV and SDIV.
High Yield Bond Market Sets New Records [View article]
The yield-to-worst referenced in the article would then be to the call date that produces the lowest total return. The premium is factored into this yield.
High Yield Bond Market Sets New Records [View article]
Michael - these are average returns historically - the average return on high today will be the current yield to worst less realized defaults - the average return over the next 5-7 years will be closer to 3-4% and not the double digit returns of the trailing 20 years.
High Yield Bond Market Sets New Records [View article]
I don't think that the AAA index is a good benchmark because it is much longer duration than the HY index. You are comparing 30-yr Johnson and Johnson bonds to seven year high yield bonds. The yield curve is steep. The spread differential between matched duration AAA corporates and matched duration HY is roughly 350bps per year. I think that long Treasuries will end up having more price volatility than the HY index - you don't want to move out the yield curve in this low rate environment. Long duration bonds have trailing volatility akin to equities. http://seekingalpha.co...
A New Market Beating Dividend Fund [View article]
http://bit.ly/10UlUTl
http://bit.ly/16QDgZi
The question then arises as to whether market's have figured out this anomaly and bid up the prices of low volatility stocks accordingly. While low vol stocks now trade at roughly an earnings multiple that is 3 turns higher (20x vs. 17x for market), if you flip this on its head then low vol stocks have an earnings yield 88bps lower. This is roughly the spread the between the debt of high quality companies (AA) and mid quality companies (BBB). I think that the equity multiple differential should be higher than the debt differential.
For those that view the P/E of 20x as too rich, it still looks cheap to Treasuries (think of the 2% yield on Treasuries as a 50x earnings multiple when you divide the 2% coupon by the 100 price. There is alot of money in cash and Treasuries that is going to find a home and it will not move straight to high beta equities. I think we will see some more multiple expansion in low vol equities still. 20x is not that much higher than the earnings multiple on the market over the last 20 years.
Certainly if we have a pickup in economic growth, cyclicals will outperform as will companies with high financial or operating leverage. I believe that low vol stocks will still outperform when adjusting for their low risk. Investors are like snowflakes - unique horizons, risk tolerances, liquidity - for those who are seeking dividend income and want lower volatility - this is a great fund for the long-run.
Low Volatility Investing In 2013 [View article]
Low Volatility Investing In 2013 [View article]
Low Volatility Investing In 2013 [View article]
Low Volatility Investing In 2013 [View article]
Low Volatility Investing In 2013 [View article]
Low Volatility Investing In 2013 [View article]
Low Volatility Investing In 2013 [View article]
High Yield Bond Market Sets New Records [View article]
http://seekingalpha.co...
High Yield Bond Market Sets New Records [View article]
High Yield Bond Market Sets New Records [View article]
It has roughly a 7% dividend yield, but is decidedly not low beta and has trailed the S&P year-to-date. Perhaps, I will write a new column on DIV and SDIV.
High Yield Bond Market Sets New Records [View article]
High Yield Bond Market Sets New Records [View article]
High Yield Bond Market Sets New Records [View article]
High Yield Bond Market Sets New Records [View article]