Author: John Gerard Lewis, Gerard Wealth
Covestor model: Stable High Yield
Having launched on July 7, 2011, there are no annual performance data yet available for our Stable High Yield model. But since we’re just a month away from its first birthday, we think it’s fair to use a measurement proxy of 11 months.
The thesis of the portfolio was and continues to be the achievement of average historical equity returns during a period of stock market lethargy. Given our 11-month return of 10.8% through June 4, 2012, and the depending-on-who-you-ask-somewhere-around-10% average annual return of stocks, the strategy has clearly worked. Of course, not every year delivers this average return, and we have had our down months as well.
Still, we’re further gratified that it was conceived amid our expectation that the stock market, as of last summer, might remain dead in the water for some time.
Unfortunately (or, well, fortunately for purposes of comparative performance), it did worse. Failing to even tread water, it sank 5.5%*, meaning our model has outperformed the stock market by more than 16%.
Now, notwithstanding that not one personal-finance magazine has failed to announce that most mutual fund managers don’t beat the market indexes, in periods of market torpidity it’s not so hard to do. In fact, a short-term fixed-income portfolio can rather effortlessly do so.
But merely outperforming the stock market and achieving equity-like returns are two different things. A bank certificate of deposit yielding 1%, bought last July, has scorched the stock market by about 6%. But it has returned only about 1% to its owner, substantially trailing the inflation rate. Our model, on the other hand, has returned 10.8% for those who have held since inception, and it has done so without taking significant risk.
One would expect high reward to usually come with high risk, and most of the other nine models (which, of course, interchange from day to day) have Covestor risk ratings of 4 or 5. A rating of 5 is the riskiest, and a rating of 1 is the least risky.
Our portfolio is an exception among the top performers, with a risk rating of 1. That’s all most potential subscribers would need to know, but more arcane financial metrics bolster the solid return/low risk accomplishment.
Our model’s beta, or measure of volatility, is 0.30, meaning that it is 70% less volatile than the S&P 500. And while its total return is significantly influenced by high dividends and interest, it is, nonetheless, also influenced by moves in the stock market.
About 48% of the price activity within the model is explained by the movement of the S&P 500, according to the R-Squared metric reported by Covestor.
Stable High Yield thus adds price appreciation to its intrinsic high yield in good stock markets. During aimless markets, which is a generous depiction of the past year, prices of the model’s components generally declined less than the overall market did, but the model still benefited from the high yields of its holdings.
It’s quite satisfying that the strategy has been successful, and we perceive no reason to strategically alter it. The stock market looks no less inauspicious than it did a year ago.
*As measured by the S&P 500.