Top Income Investor Still Likes Equities

Ed Perks, whose Franklin Income Fund is in the top 2% of funds in its class over the past five years and the top 4% over the past ten years, according to Morningstar, is continuing to find the strongest opportunities for income in the equity market. Perks tells WealthTrack’s Consuelo Mack that over the past few years, the fund’s allocation has flipped from about 65% fixed income/35% equities to close to 65% equities and 35% fixed income. He thinks rising rates aren’t necessarily a bad thing if they occur as part of a normalization process, and he sees large dividend payers as one area that is generally attractive, though he says his fund looks at investments from a bottom-up, investment-by-investment view. He’s particularly high on certain utilities with steady cash flows, and says his fund has found more opportunities in energy, materials, and tech stocks as it has increased its equity exposure. He thinks declining growth projections and the accompanying market volatility in emerging markets made for good opportunities in materials and energy stocks.

Does Buy-and-Hold Reduce Risk?

How do you reduce risk in your investment portfolio? Most people try to do so by diversifying their assets and avoiding stocks when fears are high. But new research indicates the best risk-reducing measure is to buy stocks — and hold them, Marketwatch’s Chuck Jaffe says. Continue reading

Herro on 2014, and What Japan Needs To Do Now

Top fund manager David Herro says that, while stocks jumped far more than most expected they would in 2013, they still should have room to run going forward.

“Despite the strong past performance of global equities, I believe there is still value in global equity markets,” Herro writes in his fourth-quarter letter to Oakmark shareholders. “Certainly, stocks are not selling at the incredible bargains they were in early 2009 or even early 2012, but with global economic growth appearing to be poised to accelerate, and with stock valuations that are still attractive, I believe there are reasons to be confident that global equities will continue to be an attractive asset class.”

Herro, whose funds profited greatly from overweight positions in Japanese firms last year, says the big gains seen for Japanese stocks has led to him paring back on those positions. “Since the low of the Topix in 2012, the market climbed around 80%!” he says. “As a result of the extremely strong uplift in prices, our holdings became less undervalued and caused us to trim some of our positions.¬† Given that prices rose faster than corporate value creation, by the end of 2013, we were actually well underweight in the Japanese equity market.”

Herro talks more about the corporate changes going on in Japan, and what he thinks is needed for the country to continue its progress. “I believe that in order for the economic recovery to endure, the Japanese government needs to implement real structural reform,” he says.¬†“This means that Japan’s government must complete at least three steps: take away protections from specific industries, like agriculture; remove impediments to productivity and workforce growth; and take away the barriers to mergers and acquisitions within corporate Japan.”

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Faber on Discipline and Diversification

Marc Faber of the Gloom, Boom & Doom Report is worried about inflation given the Federal Reserve’s massive money printing efforts. But he doesn’t think diving headlong into gold and/or real estate is the best move. Faber tells FOX Business Network that he thinks investors should still use a diversified strategy, owning stocks, real estate, gold, and bonds as part of a disciplined approach. He also talks about his belief that US growth had been driven mainly by deficit spending and money printing.

OSAM on the Efficient Market Myth

While many believe that equity markets — particularly large-cap equity markets — are efficient, quantitative investing guru James O’Shaughnessy’s firm says the data shows otherwise.

“Our research shows that, with the right strategy and the right discipline, the U.S. large cap market remains very inefficient and — by selecting stocks using historically proven themes — investors can outperform it by significant margins,” writes Patrick O’Shaughnessy in a new research report from O’Shaughnessy Asset Management. In the report, entitled “The Myth of the Most Efficient Market”, O’Shaughnessy discusses how more and more investors are turning to index funds for the large-cap portion of their portfolios, since the vast majority of large-cap fund managers fail to be the market. But, he says, passive indexing approaches have a key weakness: “The stock selection and weighting criteria for the index are based on one factor: market cap.”

O’Shaughnessy talks about “proven factors” that OSAM has used to beat the market, like value and shareholder yield (dividend yield plus buyback yield). On top of those, OSAM overlays a “quality” test. “To replace market cap in the selection and weighting process, we’ve isolated the stock selection themes that are the most predictive of strong future excess return among U.S.-listed large cap stocks,” O’Shaughnessy writes. “Our research shows that we should favor companies with attractive valuations and strong shareholder yields and avoid companies with highly bloated and unsustainable balance sheets, poor earnings quality, and poor recent earnings growth trends. Each of these five themes can be measured objectively using data from financial statements and applied with the same discipline that characterizes the passive index investment process.”

The results, he says, have been stellar and show that the large cap market is not efficient. A live portfolio built with the above characteristics that was created in late 2001 has outperformed the Russell 1000 Value Index by an average of 5.5 percentage points per year, beating the benchmark in 96% of three-year periods. The same strategy beat the Russell 1000 Value by 5.0 percentage points annually and had a 95% three-year base rate when back tested from 1963 through 2012.

O’Shaughnessy also says that the current environment offers a particularly good opportunity for investors who focus on shareholder yield rather than dividend yield. With interest rates so low, high dividend yield stocks are trading at an 11% premium to the broader market as investors reach for income, he says. But high shareholder yield stocks trade at a 20% discount to the broader market. He also offers some intriguing data showing how high dividend stocks tend to perform in rising interest rate environments compared to high shareholder yield stocks. Bottom line: “We believe investors who index their large cap investments should instead consider an allocation to proven active strategies,” O’Shaughnessy says.