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Lookin’ For Yield In All The Right Places

In a world of low and in some cases negative interest rates, investors continue to struggle to find yield. As such, they still find themselves in an all too familiar place: Accept less income, or take on more risk in the search for yield. But with global growth still sluggish and bond and stock prices looking expensive, balancing income and risk is more important (and challenging) than ever. The question for investors isn’t “Where can I go for yield?” It is: “In this environment, where can I find meaningful yield without taking on significant or unknown risk? ” There is a bit of a balancing act between yield and risk. Let’s take a look at how it can be done in three areas of opportunities for investors seeking income today. Fixed income Bonds or fixed income essentially play two roles in a portfolio: They offer yield or income, as well as potential diversification benefits as a sort of ballast to counter equity risks. Bonds run the gamut of risk and income. Short-term Treasuries offer the lowest default risk and generally the lowest yield, while high yield bonds typically offer considerably higher yields, but with significantly more risk. These two investments are quite different, but both can play a crucial role in a portfolio. However, the yields of Treasuries are paltry while credit instruments like high yield bonds exhibit equity-like risk, albeit with potentially higher yields. For investors looking to balance yield AND risk, risk-adjusted returns are important. That’s where municipal bonds come in. Municipal bonds aren’t an exciting topic over a cocktail party, however they were one of the best performing bond categories in 2015. According to Bloomberg data on the S&P AMT-Free National Municipal Bond Index, munis returned 3.3 percent in 2015, beating taxable investment grade bonds. This year, munis remain one of the highest sources of yield on a risk-adjusted basis. The sector’s tax-exempt status is another plus, and munis are a portfolio diversifier, with negative correlations to equities and high yield, our analysis shows. Other parts of the fixed income market have experienced volatility recently due to energy exposure or anticipation of Federal Reserve (Fed) moves, but the municipal bond market has been relatively stable. This may surprise some given the recent default announcement of Puerto Rican debt, which is a vivid reminder of why it’s important for investors to be completely aware of what they own and the risk they take in search of yield. (iShares ETFs are not impacted directly by the default, as none hold bonds issued by any U.S. territories, such as Puerto Rico or Guam.) Equity income If you prefer equity-like risk to come from equities in your search for yield, dividend stocks are a logical place to look. But it is important to remember that not all dividend stocks are created equal. As I’ve written before, my preference is for the segment of the market known as “dividend growers,” which as the name implies, are companies with a history of increasing dividends. There are some conditions – and clear distinctions – that may set dividend growers apart from other dividend stocks in today’s market, particularly their attractive valuations, stable earnings and stronger balance sheets. Somewhere in between Finally, there is an often overlooked option for investors looking to balance risk and yield: preferred stocks. Preferreds are income-generating securities that have both stock and bond characteristics. When it comes to risk, they’re somewhere in the middle of the spectrum. Similar to a bond’s coupon payment, preferred stocks pay fixed or floating dividends. They can appreciate in value like a common stock, but they’re not as volatile. Some question if preferred stocks will remain an attractive asset class in a rising rate environment. But since we expect the Fed to continue its dovish stance and rate rises to be gradual, we wouldn’t expect to see big downward spikes in preferred prices. Preferred stocks may also be attractive in this environment due to the fact that they’re issued mainly by financial companies, like banks, where net interest margins generally show improvement. Also, see what my colleague Russ Koesterich has to say on preferreds. Investors looking to balance risk and income while searching for yield may want to consider the iShares National AMT-Free Municipal Bond Fund (NYSEARCA: MUB ), the iShares Core Dividend Growth ETF (NYSEARCA: DGRO ) and the iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ). This post originally appeared on the BlackRock Blog.

Why Now May Be The Moment To Get In On Value

The market’s almost immediate plunge to start 2016 cast a pall over what might have been shiny prospects for a new year, just two weeks from the Fed’s “balanced” assessment of U.S. economic conditions and the first rate hike in nearly nine years. Often forgotten in the doom and gloom is that volatility means down… and up. What intrigues me as a 30+-year value investor is that value stocks have been among the most volatile. And that seemingly has sent investors packing. At the end of 2015, there was $2.7 trillion in growth mutual funds, almost double the $1.5 trillion invested in value mutual funds. This underallocation to value stocks could mean missed opportunity. Let’s look at a hypothetical $10,000 investment in growth, core and value segments over the last decade. We can see where an investor might have missed out in this case. Click to enlarge Opportunity in the making We believe the recent overallocation to and performance strength in momentum and growth sets the stage for investor rebalancing. While the long-term path to value outperformance is not a straight line, and may be marked by alternating spates of value and growth leadership, we fully expect that investors are going to want and need to re-allocate back to value in their portfolios. As shown below, some of the periods of greatest value underperformance are followed by some of the most significant periods of outperformance. While the timing is impossible to predict, it’s not too great a leap to suggest we may be setting up for a rotation in favor of value stocks. Click to enlarge Actively seeking value Beginning in August of last year, the market began to price in weakening global economic conditions. The bearishness tightened its grip in the fourth quarter and early 2016, and as a result, we saw defensive stocks bid up to very full prices as value stocks got cheaper. It seems clear to me that the heightened volatility over this period has created attractive valuations in certain areas of the market. Indeed, by producing dislocations in the market, volatility effectively separates the potential stock winners of the future from underperformers. As the chart below shows, the valuation spreads within sectors are wider than their long-term historic average in many areas of the market. The greater the controversy in the investment case, the greater the dispersion in valuation. That means some stocks are priced low and others high. We are seeing that most acutely in the energy sector. Click to enlarge But buyer beware: Determining which of those low-priced names are true bargains and which are priced low for good reason requires deep understanding of each industry and company. While we approach the market stock by stock, certain areas seem riper for the picking now: Banks. We see banks as less volatile than they have been in the not-too-distant past, characterized by stronger balance sheets and less volatile results. Yet, they are trading at lower valuations. Energy. The key questions here are: 1) when will oil prices bottom and 2) how high will oil prices go in a recovery? We lean to the optimistic side on both. We think oil prices could bottom in the second quarter and head up in the second half of 2016. And while the consensus sees oil recovering to $50-$60 a barrel, our year-end estimate is above $75. But selectivity is important. An investor grab for high-quality, low-risk stocks without regard for valuation or risk/reward has created some attractive long-term opportunities elsewhere in the sector, but a number of stocks in this sector will continue to underperform. Technology. By our analysis, large-cap tech stocks with high return on invested capital are trading at cheap valuations relative to both their history and the broader market, while also generating solid cash. The significant cash balances allow flexibility, and the recent price declines of fast-growing companies may create attractive merger and acquisition opportunities. Healthcare. Despite current market fears, we’ve found a number of interesting stocks that are attractively priced relative to history and compared to the broader market. Healthcare also exhibits better growth and is cheaper than other defensive sectors, such as consumer staples and utilities. The sector benefits from favorable demographic tailwinds (namely, the aging of the population) and continued innovation. Of course, this only scratches the surface. My colleagues and I are excited about the opportunity ahead. Our objective is to work from the bottom up (starting with the individual stocks) to find compelling investment opportunities that are mispriced by the market over a two- to three-year time horizon. We believe the current environment is wildly conducive to that. While we acknowledge China’s overcapacity and economic weakness, we believe the market was overzealous in pricing in the probability of a U.S. recession. In fact, February and early March have shown a reversal in pessimism… and in markets. This has created some attractive investment opportunities. In our assessment, the period of underperformance has produced some bargains and sets the stage for a rebalancing in favor of value. This post originally appeared on the BlackRock Blog.

3 Ways To Get Comfortable With Investing This Year

By Heather Pelant “When I grow up, I want to be an investor,” is never something I hear when talking with my daughters about their future selves. The irony is that they already are investors through their education savings accounts, and they almost certainly will be for the rest of their lives. This disconnect between what we say and what we do is not unique. Amazingly, 69 percent of Americans don’t think of themselves as investors, according to BlackRock’s 2015 Investor Pulse survey. Our research shows people feel nervous about investing because they think it’s risky (37 percent) or complicated (47 percent). A whopping 60 percent of average Americans compared investing to gambling, in contrast to only 45 percent who feel comfortable making their own investment decisions. But in reality, like my daughters, most of us are investors. Six out of 10 of us are “saving” for retirement. If your money is in a 401(k) or IRA, then it’s very likely invested in mutual funds or exchange-traded funds (ETFs). So as you head into this New Year, turn a fresh page on your relationship with investing and make a pledge to do a few simple things that will allow you to wear your investor badge confidently. Make a plan Just 14 percent of Americans have a formal financial plan for retirement, but three-quarters of those people feel confident their money will last through retirement. If you want to be part of this small, confident group, determine how much retirement income you want by a certain age, and then map an investment strategy to navigate that path. You don’t have to do this alone. A financial advisor or online financial resources can help. The sooner you start the better, because the longer you let your money work for you, the less you’ll need to set aside today to meet those goals. And you’ll be able to take on a little more risk for greater potential returns. Read your statements If you don’t read your retirement account statements, you’re not alone. Only 28 percent of Americans actually review the performance of their savings or investments regularly. And less than 20 percent know how much income they’re earning or examine their holdings. Rather than throw them in a pile or click delete, open up those statements and take a good look at them. While they can be loaded with jargon and (important) legalese, the key areas to focus on are: Asset classes: Most good statements or account websites will break down the percentage of stocks, bonds, cash and other types of investments you hold, and let you know if they gravitate toward aggressive or conservative. Make sure you are properly diversified depending on your goals and time you have to invest. Expense ratios: These are the underlying fees and costs of the fund which can eat into your total returns. ETFs tend to have cheaper expense ratios than actively managed mutual funds, so make sure you’re getting your money’s worth. Market performance: Compare the gains or losses of your total portfolio to the performance of major indexes such as the S&P 500 or the Barclays Global Aggregate bond index. Are you doing better than those benchmarks? This isn’t something you should be doing every week or even every month, as the near-term bumpiness of the market can be disconcerting. If you’re invested for the long term, reviewing once or twice a year is fine to make sure you’re on track to meeting your goals. If you’re getting closer to the time when you’ll need your savings, then perhaps look at them quarterly. Get educated Conquering fear of the unknown can simply be done by knowing more. You do not need an MBA to be an engaged investor. One easy way to act on your resolution is by subscribing to a financial news magazine or newspaper, or even just reading the business section of your regular newspaper. Understanding what is happening in the global and local markets can bring home how these events may affect your investment returns. But be careful about overreacting to noisy headlines, and stay focused on your goals. If you choose to work with an advisor, find one who will answer all of your questions. And read the informative emails and newsletters you get from your advisor or brokerage firm. Finally, keep visiting the BlackRock Blog, which covers a wide range of investing topics daily. It’s an old, but true, cliché that knowledge is power. So if your New Year’s resolutions include a financial makeover, start on the pathway to success by understanding who you really are-an investor. This post originally appeared on the BlackRock Blog.