Tag Archives: investing-strategy

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.

A Star-Spangled April For Moats

Performance Overview Moat-rated companies continued their strong start to 2016 in April. U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) topped the S&P 500® Index (5.20% vs. 0.39%) in April and widened the gap in relative performance year-to-date (12.05% vs. 1.74%). On the international front, Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) lagged the MSCI All Country World Index ex USA in April (1.43% vs. 2.63%), but maintained relative outperformance year-to-date (4.09% vs. 2.25%). U.S. Domestic Moats: Healthcare Rotation Pays Off St. Jude Medical, Inc. (NYSE: STJ ) was the big winner among domestic moat-rated companies in April. Late in the month Abbott Laboratories (NYSE: ABT ) announced its intent to buy STJ US in a deal that is expected to close in the coming fourth quarter. As part of its quarterly review, the MWMFTR Index rotated into several healthcare companies, including STJ. According to Morningstar, the healthcare sector offered a number of attractive valuation opportunities in March, some of which contributed to MWMFTR’s strong performance in April. Drug manufacturer Allergan plc (NYSE: AGN ), however, provided no such boost to results. A U.S. Department of Treasury tax ruling squashed any hope for its planned merger with Pfizer (NYSE: PFE ), pushing AGN lower for the month. International Moats: Oh, Canada MGEUMFUN’s exposure to financials companies, particularly Canadian banks, contributed to positive performance in April. Only three of the 24 financials companies in the Index posted negative returns last month. Additionally, Russian operator Mobile Telesystems (NYSE: MBT ) has been on a roll since announcing solid fourth quarter results in March. Strains on performance came largely from some of the Index’s consumer discretionary constituents, such as Macau gaming firm Sands China ( OTCPK:SCHYY ) and Chinese car manufacturer Dongfeng Motor Group Co. ( OTCPK:DNFGY ). Monthly Index Total Returns Top/Bottom Index Performers Index Reconstitution Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

One Size Fits All… If It’s Customized

Portfolio design comes in many flavors, but so do investors. Finding a sensible balance is job one in the pursuit of prudent financial advice. Yet for some folks the idea of keeping an open mind for customizing strategy to match an investor’s goals, risk tolerance and other factors reeks of treachery. There can only be one solution for everyone – all else is deceit. Or so some would have you believe. This biased worldview comes up a lot with the discussion of buy and hold, but the one-size-fits-all argument knows no bounds. The danger is that pre-emptively deciding how to manage assets for all investors is the equivalent of diagnosing illness and recommending treatment before meeting with the patient. Sound financial advice requires more nuance, of course, for two primary reasons: the future’s uncertain and the human species is afflicted with behavioral biases. In other words, a given investment strategy can be appropriate – or not – for different individuals. Consider the concept of buy and hold. By some accounts, it’s all you need to know. Stick your money in, say, the stock market and let the magic of time do the heavy lifting. Sensible? Perhaps. But it may be hazardous. The determining factor is the particulars of the investor for whom the advice is dispensed. Buy and hold – perhaps by focusing heavily if not exclusively on stocks via a handful of equity funds – may be eminently appropriate for a 25-year-old with a budding career, a saver’s mentality, and the behavioral discipline to focus on the long-run future. The same solution can be toxic, however for anyone with a time horizon of 10 years or less. Even for someone who’ll be investing for much longer, may run into trouble with buy and hold if he has a tendency to over-react to short-term events. In that case, buy and hold can be wildly inappropriate for an investor without the discipline to look through market crashes and bear markets. Ah, but that’s where a good financial advisor can help by keeping the client on the straight and narrow: Ignore the short-term volatility and stay focused on the long term. Fair enough, but it doesn’t always work. Some investors will bail at exactly the wrong time no matter how much hand-holding they receive. Deciding who’s vulnerable on that score can be tricky, but not impossible. Perhaps, then, a portfolio strategy with less risk – asset allocation – or the capacity to de-risk at times – some form of tactical – is more appropriate for certain individuals. The flip side of this equation is no less relevant. Forcing every client into a tactical asset allocation strategy simply because that’s your specialty (and/or it pays better for the advisor) is also misguided. Higher trading costs, taxable consequences and the inevitability of timing mistakes can and probably will take a bit out of total return over the long haul relative to buy and hold. The “price” of tactical can still be worthwhile for some folks, if the portfolio has a tamer risk profile. The point is that there’s no way to decide what’s appropriate without first understanding the client. Granted, a 25-year-old investor is more likely to benefit from buy and hold vs. a newly retired 65-year-old client. But there are exceptions and it’s essential to identify where those exceptions arise. The good news is that there’s an appropriate strategy for every client. The great strides in financial research and portfolio design capabilities via computers over the last several decades provide the raw material for building and maintaining portfolios that are suitable for any given client. Buy and hold may still be appropriate, but maybe not. The greatest strategy in the world is worthless if a client jump ships mid-way through the process. As such, the goal for managing money on behalf of individuals isn’t about identifying the strategy with the highest expected return or even the strongest risk-adjusted performance. Rather, the objective is to build a portfolio that’s likely to work for the client. That may or may not lead to a buy-and-hold strategy – or some variation thereof. Such talk is heresy in some corners. But matching portfolio design and management particulars to each client’s time horizon, goals, etc. – and behavioral traits – is the worst way to manage money… except when compared with the alternatives.