Last week on the AdvisorShares Alpha Call I had a chance to talk with Tim Gramatovich from Peritus Asset Management. During the call Tim posed the argument for rates not going higher as many believe but staying where they are or even going lower—maybe even to 1.5% on the ten year US Treasury.
If he turns out to be right then yields on things like money markets and fixed income proxies are going to stay frustratingly low and four basis points from a money market or 65 basis points for a two or three year note is frustrating to advisors and their clients.
This backdrop creates the bullish argument for equities that provide investors 2, 3 or 4% from dividends or 6-7% from MLPs and maybe more from mortgage REITs. This is an important point because pound for pound those vehicles probably yield more than most fixed income proxies but they also take on equity beta or something much closer to equity beta than what investors are typically looking for from the fixed income-ish part of their portfolios.
Equity beta, or equity volatility, is great on the way up, it’s on the way down that it is “bad.” The difficulty that advisors face, and of course do-it-yourselfers, is remembering that equities will go down again and that the frustration that fixed income causes now will turn into gratitude in the next big downturn when investors again see the difference between equity beta and fixed income beta.
Whatever your favorite 4% yielding low beta stock is, it should be expected to go down to some degree. In a down 50% world a stock that only goes down 20% looks pretty terrific in at equity beta context but an investor is very unlikely to feel good about a 20% drop in a fixed income holding.