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January 28, 2014

 

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John R. Deitrick, CFP� 
         
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Thought for the Week:

A Shift In Strategy

 

 

Synopsis

  • The rising tide in 2013 lifted all stocks that generated attractive income, and most of these "stocks that look like bonds" performed exceptionally well.
  • Many of these bond proxies now appear expensive, and we have been selling those that represent an unattractive upside vs. downside scenario.
  • We envision a new paradigm for income generation in 2014, one where attractive "risk-adjusted" yield will exist in specific securities instead of a more broadly based sector or region call.   

The Rising Tide of 2013    

 

The war on seniors and savers instigated by the Fed's bond buying program known as Quantitative Easing (QE), forced income seeking investors up the risk curve last year into equities in order to find an acceptable yield on their investments.

 

This demand for attractive yield caused several "stocks that look like bonds" to soar in valuation in sectors such as utilities, consumer staples, mortgage REITs, etc.

 

NOTE: A stock that looks like a bond, or a "bond proxy", is a stock that is owned for the same purpose as a bond. Investors buy these stocks because the companies typically have very strong balance sheets, steady cash flow, low volatility, and attractive dividend payouts that have been in place for many years.

The Investment Committee had anticipated this move up the risk curve prior to 2013, and we were positioned to not only collect the yield that an investor would expect in an income generating fund, but we also were able to deliver very strong capital appreciation as well (total return = income + capital appreciation).

 

However, we now begin 2014 with most of these sectors sitting at all-time highs.  For example, many companies that will be lucky to see 2-3% revenue growth this year are trading above 20x this year's earnings vs. a historical average closer to 12-14x.

 

Situations like these pose far too much risk for our conservative portfolios, and we have been selling the stocks that we believe could be targeted if we were to see any type of valuation-led correction.

Simply put, we are risk managers first and foremost, and although many of these stocks still pay decent yields, we prefer to participate in areas of the equity and fixed income markets that offer a more attractive "risk-adjusted" yield.

 

There's Good News and Bad News    

 

The good news is that opportunities for generating attractive risk adjusted income do exist in both equities and fixed income, but the bad news is that finding them requires skill, experience, and tremendous patience.

 

We do not anticipate the rising tide of 2013 to continue, and therefore, we have shifted our strategy to the following for income generation:

  • Fixed Income: Select bond Exchange Traded Funds (ETFs) offer attractive yield with low interest rate sensitivity. For example, we own the Barclays Short Term High Yield Bond ETF (ticker: SJNK) in our conservative portfolios because this fund participates in what we feel are the two most attractive subsectors in fixed income right now - short maturity and high yield.
  • Stock-specific: We do not see many sectors that look attractive as a whole, and hence, we own very few equity sector ETFs in our conservative portfolios. Rather, we see the opportunities in 2014 within specific stocks spread across nearly every sector in the market.
  • Laggards and Pullbacks: A handful of stocks never participated in the 2013 rally and currently deliver relatively attractive risk-adjusted dividend yields. Furthermore, any pullback in sectors like telecom would represent a wonderful chance to buy high yielding stocks from these strong cash flow generating companies that continue to consolidate and operate as quasi-monopolies.

We do not anticipate that the Fed will begin raising interest rates until 2015/16 at the earliest, and the unfortunate byproduct of this extended period of zero interest rates is that finding income will continue to become more difficult.

 

For example, finding stocks that offer attractive risk-adjusted yields is not as easy as screening for those that offer dividend yields higher than 8% and then buying a basket. More often than not, a stock that pays an abnormally high interest rate does so for a reason. The stock price may be under pressure (yields move inverse to price), or even worse, the company may not have the financial strength to continue to pay that dividend for the foreseeable future.

 

The bottom line is that although income generation will continue to become more difficult, Global Financial Private Capital has a dedicated team of investment professionals whose sole purpose is finding attractive risk-adjusted yield. The need for active management has never been higher for income seekers, and rest assured that we are actively seeking the best opportunities for income with the least amount of risk possible.

 

 

This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private Capital is an SEC Registered Investment Adviser.  All charts courtesy of Bloomberg.

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The specific products or services described in this section of the newsletter are neither offered through or recommended by Global Financial Private Capital, LLC., an SEC Registered Investment Adviser. 

Please Contact Us:

 

I hope you find this information adds value. If you would like to talk to John regarding these, or any other financial concerns, please feel free to call us at (614) 602-6506 and we will be happy to schedule a visit.
 
Have a great week!  Enjoy His gift of today!

 

Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser. Past performance is not indicative of future results. This commentary is not intended as investment advice or an investment recommendation it is solely the opinion of our investment managers at the time of writing. Nothing in this commentary should be considered as a solicitation to buy or sell securities. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company, and are not offered through Global Financial Private Capital. 
 
 

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP�, CERTIFIED FINANCIAL PLANNER™ and the federally registered CFP (with flame design) in the US., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

In This Issue
Featured Question of the Week!
Thought for the Week: A Shift In Strategy



John R. Deitrick,

CFP�,

  Founder

 

Advanced Retirement Design, LLC
 
7263 Sawmill Rd. Suite 150
Dublin, OH 43016
 
 ph: 614-602-6506
fax: 614-259-6094 
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