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Posts Tagged ‘Bonds’

Don’t buy bonds, buy stocks that pay gd dividends

In Financial competency on 05/05/2012 at 6:25 pm

Don’t buy bonds. Don’t focus solely on dividend yield, and avoid highly leveraged firms is the message that BlackRock gave investors a few weeks ago when it spooke to BT. Relevant exceprts from BT article from yonks ago I rediscovered.

Michael Steinhardt, whose hedge funds returned more than 20% a year for almost three decades, also doesn’t believe in bonds

“Bonds are no place to be,” Steinhardt, 71, who is now chairman of New York-based WisdomTree Investments Inc., said in an interview today on Bloomberg Television’s “Money Moves” with Carol Massar. “Equities are cheap by historic standards. Equities that pay high dividends relative to bonds, relative to the stock market, I think that’s a good place to be.”

http://www.bloomberg.com/news/2012-04-12/wisdomtree-s-steinhardt-says-bonds-are-no-place-to-be-.html

And so does Abby Joseph Cohen, senior U.S. investment strategist at Goldman Sachs. In mid-April, she  said equities will give better returns than bonds in the mid-to-long term as companies look to emerging markets for growth.

“You need to go back to the late 1950s to see a situation which equities were priced as attractively as they are now relative to bonds,” she said in a Bloomberg Radio interview. “1958-1959 was a period in which investors were very concerned about the economy and the yields on many equities exceeded the yields on fixed income at that point and — as you know — we moved into a multidecade bull market in equities.”

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HIGH dividend yields should not be the sole focus in assessing equity returns over time, said Stuart Reeve, managing director and portfolio manager at BlackRock.

According to Mr Reeve, data collated over the last 31 years has indicated that more than 90 per cent of long-term equity returns can be jointly attributed to both dividend yield and dividend growth drive.

Generating long-term equity returns successfully thus requires identifying companies with attractive yields that are competitively advantaged and have the ability to sustain business growth.

To ensure a company is able to invest and grow its business, Mr Reeve stressed the need to factor in cost and cash available to a company to fund these developments.

‘That is so often a question that people do not ask in this space. What is the cost of growth? In different industries, it is different,’ he emphasised.

‘In a more stable industry, where the rate of change of the industry dynamic is not significant and not very fast, and you are competitively advantaged, your cost of growth tends to be relatively low.’

Identifying a company with low growth costs has its merits as it enables the company to reinvest and grow its business, with the company better positioned to commit some of that cash back to shareholders in the form of a dividend stream.

Investors should also exercise patience in order for results to materialise.

‘You must be willing to buy these investments at fair value and let the yield and growth compound for you and deliver great returns with lower volatility over medium to long-term horizons,’ said Mr Reeve.

Investors should also steer clear from companies which are leveraged to the tilt, he cautioned, citing the significant correlation between high leverage and cuts to dividends.

The focus on equity investment comes on the back of BlackRock chief executive Larry Fink’s message urging investors to scrap the inadequate 60/40 portfolio mix of stocks and bonds.

Mr Fink personally advocated a 100 per cent investment in equities owing to valuations and higher returns than bonds.

‘Virtually every investor has to find ways to achieve better returns than they’ll get in cash or government bonds for the foreseeable future,’ said Mr Fink. [ BTW, Kapito, a co-founder and president of the firm, told CNN Money last month that he has about 70% of his investment portfolio in dividend-paying global stocks. ]

BlackRock, the world’s largest asset manager with assets under management totalling US$3.51 trillion as at Dec 31, 2011, has increasingly set its sights on growing in Asia.

Bond funds are not BONDS

In Investments on 01/11/2011 at 6:43 am

There is an ad from a very reputable fund manager advertising its Asian bond fund. If you find the idea of buying into a bond fund attractive, read u/m which I posted some time ago on the difference between buying a bond fund and a bond.

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In search of safe and non-volatile returns, retail investors globally have invested heavily in bond funds, often thinking they are as safe as investing in individual bonds: with the added advantages of diversification (of interest rates, maturities, and default risks); and lower investment costs.

Sadly, they are not the same.

When you invest in a bond, you know the interest rate and the duration (maturity date) of the bond. When interest rates go up, the value of a bond goes down. But you will  get the promised interest and if you  hold the bond until it matures, you will  get your principal back. Bit like a fixed deposit.

You will only lose your principal if you decide to sell it before it matures.

But a bond fund doesn’t work that way because it invests in many bonds, hundreds, possibly thousands. There are many different interest rates and maturities (durations).  So you don’t have a defined interest rate or a maturity date. You have an average interest rate and average duration for all the bonds in the fund.

This may seem an esoteric difference, but believe me, when interest rates rise you will regret not knowing the difference earlier.

You could lose serious money because for any percentage point change in interest rates, the value of the fund will change by the amount of the duration. This sounds complicated but the following illustration will make clear the inconvenient truth.

If the fund holds bonds with an average duration of 10 years, and 10-yr interest rates go up by one percentage point in the capital markets, the value of your fund will drop by 10%. If the fund before the interest rate rise was worth $100m, after the rise, the fund is only worth $90m. BTW, the longer the average duration in the fund, the bigger should be the loss. If the average duration was 40 yrs, the loss would be 40%. Buying shares is safer neh?

Going online to complain to Tan Kin Lian or protesting at Hong Lim Green claiming that you have been cheated is a waste of time. It’s yr fault.

So think twice about investing in a bond fund, if you want safe, steady returns. It may not work out that way.

Finally, came across this interesting quote. “People would rather overpay for bonds than underpay for stocks,” says David Kelly, a strategist for J. P. Morgan Funds. “It’s a function of years of very miserable stock returns. And just a general fog of gloom over the country right now.”

Bond funds are not BONDS

In Investments on 30/08/2010 at 5:43 am

In search of safe and non-volatile returns, retail investors globally have invested heavily in bond funds, often thinking they are as safe as investing in individual bonds: with the added advantages of diversification (of interest rates, maturities, and default risks); and lower investment costs.

Sadly, they are not the same.

When you invest in a bond, you know the interest rate and the duration (maturity date) of the bond. When interest rates go up, the value of a bond goes down. But you will  get the promised interest and if you  hold the bond until it matures, you will  get your principal back. Bit like a fixed deposit.

You will only lose your principal if you decide to sell it before it matures.

But a bond fund doesn’t work that way because it invests in many bonds, hundreds, possibly thousands. There are many different interest rates and maturities (durations).  So you don’t have a defined interest rate or a maturity date. You have an average interest rate and average duration for all the bonds in the fund.

This may seem an esoteric difference, but believe me, when interest rates rise you will regret not knowing the difference earlier.

You could lose serious money because for any percentage point change in interest rates, the value of the fund will change by the amount of the duration. This sounds complicated but the following illustration will make clear the inconvenient truth.

If the fund holds bonds with an average duration of 10 years, and 10-yr interest rates go up by one percentage point in the capital markets, the value of your fund will drop by 10%. If the fund before the interest rate rise was worth $100m, after the rise, the fund is only worth $90m. BTW, the longer the average duration in the fund, the bigger should be the loss. If the average duration was 40 yrs, the loss would be 40%. Buying shares is safer neh?

Going online to complain to Tan Kin Lian or protesting at Hong Lim Green claiming that you have been cheated is a waste of time. It’s yr fault.

So think twice about investing in a bond fund, if you want safe, steady returns. It may not work out that way.

Finally, came across this interesting quote. “People would rather overpay for bonds than underpay for stocks,” says David Kelly, a strategist for J. P. Morgan Funds. “It’s a function of years of very miserable stock returns. And just a general fog of gloom over the country right now.”

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