Tag Archives: spy

Should You Buy Value Stocks Today?

The third quarter was abysmal for stock markets. October has proven the pain short-lived. Growth stocks have outperformed value stocks. But value has the long-term track record of outsized returns. The typical investor is a notoriously bad timer at buying and selling. A good advisor helps limit emotion-driven mistakes. The third quarter is now on the books and it was an ugly one for stocks. The S&P 500 ( SPY , IVV ) fell 6.4% while the Russell 1000 Value ( IWD ), arguably one of the best indices to benchmark “value” stock performance, was down 8.4%. We commented last month, “We concede that there are plenty of reasons to hesitate, but we’re putting capital to work. The economic landscape in the U.S. remains favorable to equities and more importantly, ample long-term investment opportunities exist. … And that’s why we’re buyers.” At least for now, the recent turmoil has proved short-lived. The S&P 500 is up over 8.0% in October and the Russell 1000 Value has posted a similar gain. For the year, the S&P 500 has delivered a 2.5% gain, while the Russell 1000 Value returned negative 1.8%. Growth stocks are up over 6.0% in 2015. Value stocks’ year-to-date underperformance of growth stocks isn’t a new trend. It’s been a tough going for value for many years now. (click to enlarge) Since Black Cypress’s inception in the summer of 2009, over six years ago, growth stocks have outperformed value stocks by 23% — about 3.0% per year. Growth’s cumulative outperformance stretches back even further, all the way to the end of 2006 before the onset of the recent financial crisis. Growth has bested value by 5% per year for almost nine years. There are only two other instances in history where growth’s dominance reigned longer: the Great Depression (another financial crisis) and the technology bubble of the 1990s. Such multi-year value underperformance is unusual. Historically, it lasts a few years at most and growth’s cumulative gains are reversed over a one or two-year period. At least that’s the historical precedent. Since 1927, value stocks have returned an average 2.5% more per year than growth stocks. Academics call this historical outperformance of value over growth the “value premium”. And yet, while the value premium is a well-documented phenomenon, most investors fail to capture it. Owning an underperforming asset taxes one’s patience. Continuing to own it requires a deep conviction in one’s research as well as the emotional fortitude to withstand the frustration that comes with being at odds with the market. Most investors have neither. And therein lays the likely reason the value premium remains despite widespread knowledge of its existence: capturing it entails suffering through occasional periods of underperformance. Individual investors buy and sell at inopportune times, fund managers fear redemptions and hug their benchmarks, and advisors chase the hottest funds. And the value premium persists. One of the best studies to illustrate such bad investor behavior and its impact on performance is DALBAR’s Quantitative Analysis of Investor Behavior. This study doesn’t address the value premium in any way, but it is illustrative of investor actions and their effects, which makes it relevant to our discussion. The 2014 QAIB stated that over the last 30 years, investors in stock mutual funds averaged annual returns of 4.0%, while the S&P 500 averaged about 11.0%. That is, the very investors that were seeking equity market performance by buying stock mutual funds underperformed stock markets by over 7.0% per year. The culprit? Poor timing decisions. Investors — including individuals, advisors, and consultants — added to their stock positions at or near stock market peaks and sold near market lows. Investors also hesitated to invest again after markets bottomed. Investors are their own worst enemy. We choose to address these topics for two reasons. First, because we’re value-oriented investors and it has been one of the more inhospitable environments in history for our investment approach. In the last two years alone, growth stocks have outperformed value stocks by 9.0%. To say the least, it has been a challenge to provide outsized returns with our currently out-of-favor approach. And yet, despite the headwind of growth over value since our firm’s inception, our strategies have held their own with broad markets. Considering what we’ve been up against, including growth’s dominance as well as no opportunity to showcase our risk management practices in this ongoing bull market, we’re pleased with our results. And today, we think our portfolio is about as well-positioned against the market as it has ever been. Broadly, we like value’s prospects over the next five years. The second reason we delved into these topics is because one of the most important functions of an investment advisor is to provide a check on emotion-driven decisions. Coaching to buy, sell, and hold, and the timing of these recommendations, often goes overlooked in an advisory relationship. But it can be more important than security selection itself. Get an advisor you can trust if you’ve found yourself buying and selling for no other reason than emotion. You’ll save yourself some well-deserved self-ridicule and probably a lot of money too. Our portfolio is well-positioned to capture the value premium and to create excess value through our carefully selected individual company holdings in the years ahead. Is yours?

The Global X SuperDividend ETF Illustrates The Risks That Come With Yield Chasing

Summary The SuperDividend U.S. ETF has underperformed considerably this year posting a loss this year of 6.5% compared to a gain 0.6% for the S&P 500. The fund’s yield of over 7% may have been tempting for investors but the fund’s composition showed it took positions in riskier investments to achieve that yield. The fund increased its position in MLPs to around 15% of fund assets at the end of Q2 right around the time when losses in MLPs were accelerating. A heavier allocation to underperforming utility stocks also contributed to the fund’s poor performance. As Treasury yields remain near all time lows and bank products struggling to yield as much as 1%, investors often look to riskier products in search of higher yields. Corporate bonds sport modestly higher yields. That leaves a lot of people turning to much riskier equities for income. The SuperDividend family of ETFs from Global X was created to appeal to investors looking for a high yield product. The Global X SuperDividend ETF (NYSEARCA: DIV ) has been around since the beginning of 2014 tempting investors with yields as high as 6% and currently has a 30 day yield of over 7%. The fund has drawn nearly $300 million in total assets since its inception but some investors are now finding out the hard way that those high yields come with risks. High dividend equity ETFs like the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) and the iShares Core High Dividend ETF (NYSEARCA: HDV ) have performed roughly on par with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) year-to-date but DIV has lagged considerably. DIV Total Return Price data by YCharts A big chunk of the blame could come from the composition of the fund itself. The Vanguard and iShares ETFs are well diversified broadly among the major sectors. DIV is much more concentrated. As of 10/23/15, utilities and real estate count for nearly half of the portfolio. Real estate has performed in line with the S&P 500 but utilities have lagged the index by about four percent. DIV Total Return Price data by YCharts The biggest offender however could be MLPs. MLPs have gotten hammered this year as the Alerian MLP Index is down 30% year-to-date. The index’s losses accelerated just as DIV begin piling in. DIV Total Return Price data by YCharts Consider some of the fund’s most recent quarterly fact sheets. The holdings as of the end of the first quarter indicate that about 8% of assets were committed to MLPs At the end of the second quarter, MLPs accounted for over 15% of fund assets. It’s right around this time that you can see losses in the ETF began to accelerate. Even now, taking a look at the fund’s current assets shows that about 12% of the fund is still in MLPs. The Alerian MLP Index’s total return is still sitting over 40% below its high reached in 2014 thanks to the fall in oil and other energy prices. The MLP Index rallied over 20% between the end of September and the middle of October but a chunk of that gain has been given back demonstrating again that some of these high yielding investments aren’t necessarily conservative. Conclusion The moral of the story here is pretty simple. Higher yields usually mean higher risk. As we’ve seen this year, risk isn’t always rewarded as there’s been a pretty sizeable shift out of riskier assets into more conservative investments. But maybe another reason is that the ETF has just plain old performed lousy. The relatively high exposure to MLPs at a time when their value was tanking doesn’t help the fact that year-to-date the ETF has lagged almost every sector that it has a reasonable exposure to. It’s understandable that income seeking investors are looking for ways to improve on the low yields that they’re seeing in just about every other corner of the market. But one of the primary principles of investing is that the chance at higher returns usually only comes when taking on additional risk. Sometimes that risk doesn’t pay off and some investors may be learning that rule the hard way.

4 Portfolio Recipes That Consistently Beat The ‘Lazy Portfolios’

Summary We analyzed several Lazy Portfolios (e.g., static asset allocation portfolios) by running a full set of risk and return metrics. We compared these Lazy Portfolios to over 250 other asset allocation portfolio recipes, both tactical (with dynamic reallocation) and strategic (with a fixed allocation). Four portfolio recipes emerged as winners that consistently beat the Lazy Portfolios. These winners have lower risk and higher return over both the 1-year and 10-year time periods. We recently received a question about the performance of the 8 “Lazy Portfolios” tracked by investment columnist Paul B. Farrell. The term “Lazy Portfolio” refers to a fixed asset allocation that is periodically rebalanced. We like to call this a “strategic portfolio recipe,” but a fixed asset allocation like this can also go by several other names, such as buy-and-hold portfolio, static portfolio, or passive allocation. A strategic portfolio with a fixed allocation can be contrasted with a tactical/dynamic portfolio that changes its allocation over time. Each of the Lazy Portfolios has a backstory or underlying theme, such as modeling the Yale endowment’s asset allocation or copying Ted Aronson’s family portfolio. This article will focus on the overall performance of the 8 portfolios, not their origin stories. Since VizMetrics already tracks over 250 portfolio recipes , we decided to add these 8 Lazy Portfolio recipes to the list of portfolios that we analyze monthly. We were eager to see how these compared to our entire set of strategic and tactical portfolio recipes. The Analysis Process We followed four steps to analyze the risk and return of the Lazy Portfolios and then search for portfolios that outperform the 8 Lazy Portfolios. Create the Lazy Portfolios . We used the exact Vanguard mutual funds and allocations specified for each Lazy Portfolio, and then we backtested their performance using monthly total returns and monthly rebalancing. Our data covered the 10 years ending September 30, 2015. Run the analysis . Then we compared risk and return over the past 1 year and over the past 10 years. We like using the 1-year period since we’ve seen some market turbulence recently, and we like looking at the last 10 years since that period includes the downturn of 2008-2009. If you look at risk vs. return for only a short, upward period, then you can overlook the true risk of the portfolio since the evaluation period doesn’t include much downside variation. Create scatterplots. We plotted risk vs. return for the Lazy Portfolios and all the other portfolios that we track. Filter the results . We found portfolios that beat the Lazy Portfolios, based on both risk and return. Identify the winners . We identified 4 portfolios that beat every Lazy Portfolio over both the 1-year and 10-year periods. The winners included two mutual funds, and two tactical portfolio recipes. Step 1: Create the Lazy Portfolios We created the Lazy Portfolios using Vanguard mutual funds, matching Farrell’s allocations. ETFs could be used instead of mutual funds, but we wanted to remain true to the original portfolio recipes. The Lazy Portfolios are constructed as follows: Lazy Portfolio Name Lazy Portfolio Recipe (ingredients and percentages) Lazy Portfolio: Aronson Family Taxable VEURX =5%, VIPSX =15%, VPACX =15%, VWEHX =5%, VISGX =5%, VISVX =5%, VTSMX =5%, VEIEX =10%, VEXMX =10%, VUSTX =10%, VFINX =15% Lazy Portfolio: Fundadvice Ultimate Buy & Hold VFINX=6%, VFISX =12%, VFITX =20%, VEIEX=6%, VGSIX =6%, NAESX =6%, VISVX =6%, VIVAX =6%, VIPSX=8%, VTMGX =12%, VTRIX =12% Lazy Portfolio: Coffeehouse VFINX=10%, VGSIX=10%, NAESX=10%, VISVX=10%, VIVAX=10%, VGTSX =10%, VBMFX =40% Lazy Portfolio: Margaritaville VIPSX=33%, VGTSX=33%, VTSMX=34% Lazy Portfolio: Dr. Bernstein’s No Brainer VFINX=25%, VEURX=25%, NAESX=25%, VBMFX=25% Lazy Portfolio: Second Grader’s Starter VBMFX=10%, VGTSX=30%, VTSMX=60% Lazy Portfolio: Dr. Bernstein’s Smart Money VEIEX=5%, VEURX=5%, VPACX=5%, VGSIX=5%, NAESX=5%, VISVX=10%, VIVAX=10%, VTSMX=15%, VFSTX =40% Lazy Portfolio: Yale U’s Unconventional VEIEX=5%, VTMGX=15%, VIPSX=15%, VUSTX=15%, VGSIX=20%, VTSMX=30% Step 2: Run the analysis Next we calculated the risk and return metrics for each of the 8 Lazy Portfolios. For the risk measure, we used Maximum Drawdown, which is the maximum percentage that each portfolio lost in value during the period, as measured at the end of each month. We like Maximum Drawdown for measuring risk since it captures quantitatively the “ouch!” that we feel when our portfolio hits the bottom. For the return measure, we used total annual return, which assumes that distributions are reinvested during the period. The Lazy Portfolios showed the following risk and return characteristics, for the period ending September 30, 2015: Lazy Portfolio Name 1-year annual return (%) 1-year maximum drawdown (%) 10-year annual return (%) 10-year maximum drawdown (%) Lazy Portfolio: Aronson Family Taxable -2.8 -9.2 5.9 -41.1 Lazy Portfolio: Fundadvice Ultimate Buy & Hold -2.4 -7.2 5.3 -35.7 Lazy Portfolio: Coffeehouse 0.7 -5.6 6.1 -36.0 Lazy Portfolio: Margaritaville -4.0 -8.5 5.0 -40.5 Lazy Portfolio: Dr. Bernstein’s No Brainer -1.6 -7.8 6.0 -43.3 Lazy Portfolio: Second Grader’s Starter -3.4 -9.6 5.7 -49.2 Lazy Portfolio: Dr. Bernstein’s Smart Money -1.0 -6.3 5.5 -37.6 Lazy Portfolio: Yale U’s Unconventional 0.9 -7.0 6.5 -42.2 Benchmark: The SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) -0.8 -8.5 6.7 -50.8 Note that all the Lazy Portfolios had a maximum drawdown exceeding -35% over the past 10 years, with most worse than -40%. By comparison, the SPDR S&P 500 Trust ETF had a maximum drawdown of -50.8% with a 10-year return of 6.7%. Step 3: Create the scatterplots Now let’s separate the wheat from the chaff using a risk vs. return scatterplot. We plotted the performance of all the Lazy Portfolios along with all the other portfolio recipes in one view. This allows us to visualize two important metrics (risk and return) at the same time. With risk and return shown on the scatterplots below, the best portfolios (with the highest return and lowest risk) appear at the top left. In the plots below, the orange diamonds are the Lazy Portfolios. The blue squares are the portfolio recipes that showed both higher return and lower risk compared to the Lazy Portfolios. The yellow triangles are the additional portfolio recipes tracked by VizMetrics . For a benchmark comparison, we’ve also added SPY, shown as the purple circle. (click to enlarge) The 10-year scatterplot covers the period October 2004 to September 2015. The 1-year scatterplot covers the period October 2014 to September 2015. Step 4: Filter the results You can see that several blue squares are “northwest” (above and to the left) of all the orange Lazy Portfolios. Each blue square represents a portfolio with higher return and lower risk than every one of the Lazy Portfolios. In the 1-year scatterplot, there are 36 blue squares that beat all the Lazy Portfolios. In the 10-year scatterplot, there are 38 blue squares that beat all the Lazy Portfolios. Over the past 10 years, the broad U.S. equity market (represented by an exchange-traded fund, SPY) has generated a higher return than each of the Lazy Portfolios. But this higher return is accompanied by higher volatility. The Lazy Portfolios each have some fixed income exposure and this offers a lower-risk alternative to SPY that some investors may prefer. If we consider both the 1-year and 10-year time period, we find that the following four portfolios beat every Lazy Portfolio based on risk and return: The Four Winners (that outperform all of the Lazy Portfolios) 1-year annual return (%) 1-year maximum drawdown (%) 10-year annual return (%) 10-year maximum drawdown (%) Vanguard Wellesley ( VWINX ) 0.9 -3.2 6.8 -18.8 Vanguard Balanced ( VBIAX ) 1.0 -5.2 6.6 -32.5 Minimum Conditional Value-at-Risk Portfolio ( t.cvar ) 4.1 -4.0 10.0 -11.0 Minimum Drawdown Portfolio ( t.loss ) 8.0 -4.6 9.8 -13.4 Benchmark: S&P 500 ETF -0.8 -8.5 6.7 -50.8 Another portfolio, the “Strategic 60-40 Portfolio” ( s.6040 ) nearly beats all of the Lazy Portfolios, too. This portfolio beats 7 of the 8 Lazy Portfolios (all except “Yale U’s Unconventional”) over the 1-year and 10 year periods. The Strategic 60-40 Portfolio returned 6.4% over 10 years, and “Yale U’s Unconventional” returned 6.5%. Conclusions The 8 Lazy Portfolios do provide some diversification and have shown middle-of-the-pack performance. But there are better choices for investors. If you want a lazy, easy-to-maintain portfolio then either of the Vanguard funds, VWINX or VBIAX, are a better choice. These funds are even lazier than the 8 Lazy Portfolios, since you don’t have to buy and rebalance the ingredients yourself. Importantly, these Vanguard funds also provide better performance with lower risk. That’s a true “no brainer.” Or if you seek higher returns, and if you’re willing to rebalance monthly, you can look at tactical portfolio recipes, such as t.cvar and t.loss . To view the full set of risk and return scatterplots for over 250 portfolio recipes, sign up for a free trial of the VizMetrics Investor subscription. This also includes risk and return analytics for the 1-, 3-, 5-, 7-, and 10-year periods.