Author: John Gerard Lewis, Gerard Wealth
Covestor model: Stable High Yield
The Stable High Yield model is designed with the goal of achieving returns that, even during extended, flat or down markets, approximate the average annual historical return of stocks. Through September 4, the 12-month return for the S&P 500 is 19.7%, while the return of Stable High Yield is 17.1%.* Is the model succeeding in its mission?
By some measures, it has slightly trailed the overall stock market, as measured by the S&P 500, during select periods over the past year. This is mostly attributable to the market’s 10% rise since June 1, 2012.
In addition to the aforementioned 12-month comparison, the summer rally has caused the S&P 500 to return 6.8% vs. 4.3% for the model over the past 90 days, and 1.0% vs. 0.7% during August.*
But keep in mind that the goal of the Stable High Yield model is not to keep pace with the market’s gyrations. In fact, it is designed to ignore the market’s gyrations. The intention of its design is to deliver performance that, over a minimum of 12 months, approximates the market’s historical – but not concurrent – return.
Therefore, periods during which the market far exceeds its historical average annual return of about 10%, we expect that the model will likely trail the market. This is because the components of the portfolio are intrinsically not bull-market participants. Moreover, nearly 40% of the portfolio is in near cash equivalents made up of short-term bonds, so when the bull runs, our model is going to lag, and that’s what is happening now.
But neither, theoretically, are the components bear-market participants. Being “stable” means not running with the bulls or the bears. Indeed, we believe that in a down market our model’s stock prices would notionally remain relatively stable but still throw off returns that, over at least a 12-month period, continue to approximate the market’s historical return.
Our model’s mission is thus to avoid the ups and downs of the overall stock market while returning the historical stock market return. And although the model has trailed the market a bit over the selected periods cited above, it has nonetheless returned 14.4% since its inception date of July 11, 2011* vs. 3.3% for the S&P 500. We therefore do believe the model is thus far successful.
*Performance discussed is net of fees.
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Covestor believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.