It's been a miserable couple of years for value-driven investors left in the shadow of Big Tech. But while cheap, reliable stocks lagged in the boom times, they can now play a more suitable role in client portfolios while the Fed works its magic.
Until overnight interest rates plunged to zero and even longer-term Treasury yields dropped below ambient inflation, dividend stocks were essentially orphaned.
They weren't growing fast enough to compete with the FANG and friends. And while they were relatively steady fundamental performers, bonds still had the edge in terms of safety. Returns were too low and risk was just a little too high to earn a space on retail investor screens.
But here we are now, with value managers like Minneapolis Portfolio Management Group eager to help advisors pivot their clients' assets in a dramatically disrupted world.
You can learn more now by reaching out to MPMG via our VIP Messenger. And if you'd like to do a little more due diligence first, start the research process on the TAMP Dashboard.
MPMG is an old-school bottom-up shop. They don't chase stocks beyond their comfort zone and they don't force their holdings to conform to any artificial sector grid.
As a result, they truly do collect the best entry points their methodology allows. You know the routine. If you buy low, you're in a much better position to sell high or simply enjoy the ride over the long term.
For MPMG, that means beating the S&P 500 by 0.9% annualized since 1995. Of course, the last few years have been overshadowed by go-go growth funds, which have outpaced the Russell value universe by a stunning 71% to 8% overall return between 2018 and now.
However, these "dull" stocks don't need to compete with Big Tech to be worthwhile. I'm thinking of strategies like MPMG as bond surrogates.
Treasury bond holders are in a terrible position. After all, Jay Powell is going to run the Federal Reserve for the foreseeable future. The election didn't change that.
This is a real problem for the traditional 60% stock / 40% bond portfolio, where the bonds effectively serve as ballast, paying a few percentage points in annual interest while promising to return your initial capital in full when they mature.
No risk. Minimal real returns. We usually accept the terms because the 60% stock allocation does most of the long-term work.
Stocks simply make more money than bonds. Unfortunately, they’re also a lot more volatile.
The problem is on that other side that Jay Powell effectively controls. We don’t have anything against Powell.
He’s doing heroic work supporting the markets while we all recover from the pandemic. On that level, the Fed is every investor’s friend.
But because the Fed’s support takes the form of massive bond buybacks, Powell’s flood of free money has pushed Treasury prices beyond rational levels.
And since rising prices depress the associated yields, these securities now pay less income than any sane investor would tolerate.
All government debt now carries a lower effective interest rate than ambient inflation. In other words, while you’ll get your money back when those securities mature, it will buy less than it does now.
Buying bonds today is a guarantee that you will lose purchasing power throughout the holding period. You’re locking in a slight but significant loss.
And if 40% of your portfolio follows that best-case-scenario math, your stocks need to work even harder just to keep up with the minimal inflation we see now.
If the Fed’s heroic efforts erode the value of the dollar, inflation picks up and your bonds will do even worse. So much for “safety.”
Powell said it again last month: Interest rates will not rise until inflation trends well above 2% for an extended period of time. We don’t anticipate Treasury debt becoming interesting again to retail investors before 2022 at the earliest.
However, you don’t need to play the Fed’s game. Banks and insurance companies need to buy Treasury bonds to meet regulatory capital requirements. Your clients are not banks.
What they need from their portfolios is a good long-term growth profile and current cash flow to smooth the rough patches when selling stocks would only lock in a loss.
When bonds mature, don’t buy new ones. Roll that money over into high-yield dividend stocks or value portfolios that pay an appreciable yield.
MPMG carries roughly a 3% yield right now. That's what Treasury debt normally provides. In the absence of positive real bond yields, where else are your clients going to go?
Remember, Johnson & Johnson and Microsoft formally have better credit ratings than the federal government. If they default, we all have bigger problems to worry about.
Johnson & Johnson even pays more than ambient inflation . . . and unlike bonds, there's always the chance that these stocks will gain value over your holding period.
World-class companies have management teams constantly working to enhance shareholder returns. Not all succeed, but there's a better shot here than with bonds.
Think of these stocks as bonds with no guaranteed return when they mature. But over a long enough holding period, the dividends can more than compensate investors for substantial volatility along the way.
MPMG does the work. They've been doing it for decades. Maybe you have your own favorite value manager who hasn't gotten a lot of love lately.
Either way, Treasury is trash for the foreseeable future. Find something else to fill that 40% of the vanilla portfolio in the meantime.
You can learn more now by reaching out to MPMG via our VIP Messenger. And if you'd like to do a little more due diligence first, start the research process on the TAMP Dashboard.
