- A person who invested $100 in an index made up of ‘high-yield’ stocks at the start of 2011 would have made just over 40% more than a person who invested only in an index made up of all other stocks.
- But going forward, the future for high-yield stocks might not be as good as the historical long run.
- An investment in overseas equities – via the unhedged ETF representing the S&P 500 (IVV) – has paid off over the past six months.
Following the February/April bubble in the four high-yield sectors (financials, property, telcos and utilities), the relative outperformance to the seven other sectors fell by nearly 5% points.
High-yield delivers to date
However over the long-term, they are still well ahead and I conducted the following experiment with indexes to illustrate.
To construct Chart 1, I made up two new indexes (one for ‘high yield’ and one for ‘other’) from the 11 sectors using market cap weights. I did the exercise for both the standard price index and also the accumulation index – which includes re-invested dividends but not franking credits. I then took the ratio of the two price indexes and then the two accumulation indexes scaled to be 100 at the beginning of 2011.
Chart 1: Relative outperformance of ASX 200 High-Yield sectors
The accumulation index ratio in red is just above 140, meaning that a person who invested $100 in the ‘High-Yield’ index at the start of 2011 would have made just over 40% more than a person who invested only in the ‘Other’ index. At the right hand side of the chart, you should see that, after peaking at just above 140, the red line fell to just over 135. This fall represents a relative loss for High Yield compared to the Other index.
However, the High-Yield index has rallied back to take the red line very close to the recent peak. In other words, investors who had held their ground in recent months made a sensible decision.
Other sectors might perform better from here
But going forward, it follows from Table 1 that my usual broker-based sector forecasts suggest that the future might not be as good as the long-run trend in Chart 1 indicates. With exuberance at +1.1% (over-priced by 1.1%), the High-Yield index is very close to fair pricing. The forecast yield is good at 5.1%, excluding franking credits, but the forecast capital gains (adjusted for exuberance) are only +3.6%.
Table 1: 12-month-ahead sector forecasts of exuberance, yield and capital gains
On the other hand, the other sectors are quite cheap (-3.1%) and the adjusted capital gains are very strong at +15.1%. The ASX 200 is close to a simple average of these two aggregated sectors since they are now similarly sized (58:42).
These relativities in forecast capital gains and yield forecasts explain in part why my latest Hybrid Yield-Conviction portfolio system selected five of the 12 stocks from the ‘Other’ sectors – Santos (STO), CSR (CSR), Sydney Airport Holdings (SYD), Transurban Group (TCL) and Tatts Group (TTS). Except for CSR, I hold these ‘other’ stocks in my portfolio that I last rebalanced in March.
Of course, the August reporting season may tell a lot about the appropriateness of this allocation when it comes to my next six-monthly rebalance in September.
The offshore view
For my own SMSF, I am considering raising my investment in overseas equities – specifically in an unhedged ETF representing the S&P 500 (IVV). I first invested in IVV in early December 2014 – an allocation of 18% – and raised my stake to 38% in March, based on my analysis and expectations of a weak Australian dollar.
My early December 2014 tranche has made a capital gain of about 15% in just under eight months and the March tranche has gained about 6.5% in five months. My latest analysis suggests my raising my stake in IVV even further – and that work does not take into account certain reputable forecasters pencilling-in end of year forecasts of 62c to 70c – would greatly add to my gains if these currency forecasts are even remotely correct!
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