Interest Rate Sensitivity and Low-Vol Investing

Interest rates have a significant impact on security prices, according to an article by Morningstar’s Alex Bryan, CFA, the firm’s Director of Passive Strategies Research, North America. Bryan writes that, unlike bonds, which have a finite life and fixed cash flow, the impact of rates is more difficult to anticipate for equities. He explains his theory that firms that are “more sensitive to the business cycle tend to experience greater cash flow growth during economic expansions” and, therefore, should do better in a rising rate environment. Bryan discusses his research that shows high-dividend-yielding stocks, those stocks in more defensive industries, […]

Pimco Strategist on Trump and the Global Savings Glut

A study conducted by economists at the Bank of England found that the vast majority of the 450-basis point decline in global interest rates since the 1980s was due to a decreased desire in saving and investing rather than lower potential economic growth. This according to a Bloomberg article by Pimco managing director Joachim Fels, who shares his thoughts on the potential impact of the Trump administration in this regard. Fels argues that “quite a few aspects of President-elect Trump’s potential policies might actually work toward lowering, not increasing, that natural or equilibrium interest rate rather than increasing it.” He […]

Active Investors Get a Chance to Shine

From the investor’s standpoint, a low level of unemployment isn’t necessarily good news, says a recent Bloomberg article. However, it can bode well for active versus passive investors. When more people are working, it says, “Wage growth can exceed economic growth, putting pressure on corporate profit margins. Interest rates can rise, tightening financial conditions. Inflation can rise, putting more pressure on central bankers to remove liquidity from the system.” For active investors, however, it presents the opportunity to outperform benchmarks, “which are much lower hurdles to beat than in the early investor-friendly stage of an expansion.” During the current, long-winded […]

Hedge, But at What Cost?

Crowded trades can undermine investors’ attempts to find safe havens, according to an article in last month’s Wall Street Journal. “Now it is more expensive to insure against losses in utility and consumer-stapes stocks and related trades than numerous assets world-wide.” Defensive stocks “soared” in the first half of this year, the article says, “as ultralow bond yields drove money flows into shares of high-dividend companies.” But this flow has fallen off in the third quarter “as valuations for the sectors reached multiyear highs.” And if the Fed raises rates in December, the effect on “bond-proxy” stocks such as utility, […]

What Rising Rates Mean to Low-Vol Investors

“Confusing risk with volatility can be dangerous,” says a recent report by Greenline Partners, as it “can lead to seeing things that do not exist.” This according to an article published this past May in Chief Investment Officer. Greenline, the article states, found that low-vol strategies outperformed the index by nearly 1%-2% annually over the last 50 years, but two-thirds of this period coincided with falling rates. A recent report published by the asset management firm said, “We think this environment gave low-volatility investing a tailwind that will likely not repeat going forward.” Future return expectations should be discounted “especially […]