A Shift In Strategy


Posted in: Economics, General, Stock Market, Thought of the Week

This past year, our Investment Committee has seen income seeking investors take on more risk in equities in order to find an acceptable return on their investments. This large demand for attractive returns caused several “stocks that look like bonds” to soar in valuation in sectors such as utilities, consumer staples, mortgage REITs, etc. Our Investment Committee anticipated this large move into equities in 2013, and we were positioned properly.

However, 2014 began with most sectors of the market sitting at all-time highs. Situations like this pose far too much risk for our conservative portfolios, and our Investment Committee has been selling the stocks that we believe could be targeted if we were to see any type of valuation-led correction. Although many stocks are still paying decent yields, our Investment Committee prefers to participate in areas of the equity and fixed income markets that offer a more attractive “risk-adjusted” yield.

The good news is that there are opportunities for generating attractive risk adjusted income. Our Investment Committee does not anticipate the rising tide of 2013 to continue, and therefore, they have shifted their strategy to the following for income generation:

  1. Fixed Income: Select bond Exchange Traded Funds (ETFs) offer attractive yield with low interest rate sensitivity. For bonds, they are looking for short maturity and high yield.
  2. Stock-specific: Our Investment Committee does not see many sectors that look attractive as a whole, and hence, there are very few equity sector ETFs in the conservative portfolios. Having said that, there are opportunities in 2014 within specific stocks spread across nearly every sector of the market.
  3. Laggards and Pullbacks: A handful of stocks never participated in the 2013 rally and currently deliver relatively attractive risk-adjusted dividend yields. Furthermore, and 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 monopolies.

Our Investment Committee is still not anticipating that the Fed will begin raising interest rates until 2015/16 at the earliest, and the byproduct of this extended period of zero interest rates is that finding income will continue to become more difficult. Although it will be more difficult, our Investment Committee is a dedicated team 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 they are seeking the best opportunities for income with the least amount of risk possible.

Read this week’s Thought of the Week to learn more about the new strategy our Investment Committee will be adopting for risk-adjusted yields in 2014.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.