SocGen: the 5 Best Risk Adjusted Yield-based Investments
Here’s an interesting perspective from SocGen on yield based strategies. I thought I’d pass this along for your own research (via Bloomberg):
Economic slowdown in developed, emerging markets will force another round of monetary easing, pushing yields at long end across all asset classes even lower, Societe Generale strategists including Guillaume Salomon and Georgios Oikonomou write in note to clients.
Best risk-adjusted, yield-based expected returns:
* Buy investment grade, high yield bonds; U.S. non-investment grade corporate bonds have best risk/reward
profile, have been lagging S&P 500 recovery* Buy U.S. mortgage-backed securities given very low volatility, excellent Sharpe ratio
* Finance long gilt (in GBP) by short JGB (in JPY) as gilts offer higher carry than JGBs
* Buy emerging market bonds because of much higher yield than developed countries; best carry-to-volatility ratios in Argentina, Egypt, Peru
* Buy quality income stocks as high div. yield is not enough as cos could cut dividend
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
Follow Me:
9 Comments
Cullen, thanks for this excerpt. SocGen has been spot-on on their macro calls in the recent past, so anything coming from their desk is always worth considering.
I tried searching for the complete article on Bloomberg but wasn’t able to find it. Can you pls post the link to the original article?
came to me via email. Sorry.
The calls make quite a lot of sense to me.
Can you translate #3 and 5 into a bit plainer English?
3. Buy GBP/JPY … Fx trade. Don’t bother if you’re a retail investor, since you will never get “the carry” due to markups. Esp. dangerous if you don’t know what they mean!
5. Buy dividend stocks with strong balance sheets (e.g. issues investment grade bonds) and low dividend payout (100%!).
“and low dividend payout (100%!).”
something went wrong with the html, should read
“and low dividend payout (less than 60%) … some stocks have greater than 100% payout!”
A good ETF for #5 high quality dividend paying stocks is VIG, an ETF from Vanguard. I would stay away from #3.
Thanks all!!
Just trying to keep it real for the retail investor
Not sure about #3 as the reasoning is lame. Long UK Govt Bonds/ Short Japanese Govt Bonds because UK bonds offer a higher yld than Japanese bonds? The performance of that trade will be more dependent on the direction of the respective currencies, which will likely overwhelm any yield carry. Of course, you could hedge the currencies, but that cost would wipeout the yield carry by definition.