In the face of record inflation, the Virtus Real Assets Income ETF (VRAI) has done extraordinarily well, up 19% year-to-date, and significantly beating the S&P 500, which is up 14%. On top of this, the ETF generates compelling income of 3%, well above the 10 Year US Treasuries at 1.5%.
Investing in real assets is a winning strategy in an inflationary environment because tangible assets such as real estate, natural resources and infrastructure have intrinsic value. VRAI is the first ETF focused on real assets. Additionally, because of VRAI’s focus on income-generating real assets, VRAI also generates attractive income.
In terms of ETF construction, VRAI is designed to be one-stop solution for real asset exposure. VRAI consists of 90 US-traded companies, equally divided between real assets, natural resources, and infrastructure. Companies are filtered based upon market capitalization and selected based upon dividend yield. All stocks are equally weighted to ensure portfolio diversification.
Finally, in terms of costs, VRAI is very competitively priced at 55 bps (0.55%). This stands stark contrast to most energy and real estate ETFs and mutual funds, which typically cost over 100 bps (or 1%).
For more information on the investment case, check out this research piece produced by Virtus
n.b. This is sponsored content and not FINSUM editorial
The market is seeing some of the highest volatility since the pandemic and before that, you have to go back to the taper tantrum, but how should investors respond? While the most obvious answer is to ‘buy the dip’, the question remains where. Investors should look to industries whose fundamentals haven’t shifted in the most recent months or are less susceptible to the ongoing volatility shifts. This value tilt means leaning towards financials and commodities. Moreover, investors should steer clear of those exactly susceptible to current volatility spikes. Technology and emerging markets are easy stay-aways because inflationary pressures are going to hurt growth stocks and supply constraints will bottle up developing economies for the foreseeable future.
Finsum: More advanced hedging strategies should be considered in equity markets given the volatility, but still tilt toward value.
Hedge funds have made it clear they are gonna short those not meeting ESG criteria, but the broader market is still willing to short Tesla because the bottom line means more. Despite all of its sustainability credentials investors are making bets against Tesla. Bill Gates took a big short position apparently, and Tesla CEO Elon Musk chirped back on Twitter, saying it's incompatible with their environmental concerns. All of this happens as Musk secured $44 billion to buy Twitter Inc. This isn't the first time Tesla is no stranger to short-sellers as sharks swarmed the brand for years as they thought they couldn't ramp up production to meet the actual demand. Tesla’s stock skyrocketed nonetheless.
Finsum: Short positions on these public favorites can be extremely risky poisons, there have been lots of strange rallies in the internet era.
Congress continues to look for ways to fund the $1.85 trillion bill that aims to spend on social and climate policy. While they have already considered objectives that would align the U.S. with the G20’s global minimum tax rate, the current bill will also affect wealthier individuals’ retirement vehicles. Congress will put limits on large accounts for individuals or couples with $10 million dollar retirement balances. The newest Build Back Better bill also eliminates the ‘backdoor’ Roth IRA by minimizing rollovers and conversions. The date for the former rule change isn’t until Dec. 31, 2028 but the backdoor loophole is set to close Dec. 31st of this year in the current bill.
FINSUM: Substantial changes to savings and retirement could be coming in the upcoming legislation, and investors should be aware of how these changes could affect their retirement vehicles.
The European Stockxx 600 was up .5% on Friday driven by earning releases in the banking sector. That trend followed around the globe as Asia-Pacific’s Taiex index boosted 2% and Wallstreet’s S&P was up 2%. It was strong financial earnings in U.S., and semiconductors in the East pushing the Taiex. All of this happens as inflations concerns continue in the U.S. as consumer prices rose 5.4% on the year, but the Euro areas are seeing the opposite results as monthly inflation was negative in France. The common price thread is definitely in energy prices as Brent crude hit $84.40 a barrel.
FINSUM: The trickling earning reports have generally exceeded expectations. That trend looks to continue, and global portfolios are not only diverse but are outperforming.
Monetary policy is diverging in emerging markets with some countries keeping policy rates low and others beginning to tighten, and investors are beginning to make a ruling. Countries like Russia, Columbia and South Korea all experienced currency appreciation due to tighter policy, and certain investment classes are being rewarded. Bond markets are signaling a yield curve inversion in Russia, pricing in future rate hikes, but this has been okay for oil exports. While at the other end, Turkey saw its yield curve climb and its currency—the lira—perform poorly in October. There were mixed signals from Brazil, where the fiscal policy signaled lots of public spending. The monetary policy started to tighten to curb inflation, and as a result, markets punished the Brazilian real.
FINSUM: There are diverging schools of thought globally as to how to respond to the combination of the world’s energy crisis and the lingering Covid-19 pandemic.
Calling bond prices stubborn would be an understatement, and the bears have been continuing to pull investors out of the bond market in the mass exodus of outflows. The tides could be starting to shift, and the reasons are on opposite ends of the spectrum. Investing yield curves and recession indicators are flashing, which means investors will flock back to the bond market as a safe asset when equities fall. On the other side of things, if inflation is being driven by supply-side factors more than the Fed thinks, then inflation will fall dramatically, and less tapering will be needed to get there. This means bond prices could rise as yields fail to. Broad bond exposure is still a good idea with volatility rising.
Finsum: It’s been rough in the bond market the last few months, but there are economic reasons that could turn around.
The past can inform the future. We can all learn by revisiting two extended periods value stocks underperformed on a huge scale and compare them with the current era when disruptive tech stocks have, once again, been outperforming value.
The Nifty Fifty
The first period (when value stocks underperformed growth stocks on a huge scale) can be highlighted in the years leading up to 1972 when an extended bull market had taken a group of growth securities to extraordinary levels. They were iconic companies known as the “Nifty Fifty” and included technology companies of that era such as IBM, Texas Instruments, and Xerox as well as a host of other companies including Walt Disney, Coca-Cola, and McDonald’s, which had been considered “one-decision” stocks that did not fall in stock price. But in the following two years, many of them lost two-thirds of their value. When thinking about today, it is also interesting to note the collapse of the Nifty Fifty happened amid rising inflation and an oil shock caused by the Arab oil embargo.
The Dot.com Darlings
The second period occurred in the years leading up to 2000, when a group of so-called “dot.com darlings” such as Cisco, Sun Microsystems, and Microsoft, several of which had achieved extraordinary price/earnings valuations of 100X earnings or more, then crashed even more spectacularly, brought down by the weight of excessive valuations.
The Fabulous FAANGS + Microsoft (FANMAG)
Over the last decade, we have had another group of innovative companies that have captured the imaginations of investors, and with the help of zero interest rate policies, helped lead equity markets to all-time highs.
What Happens Next
Growth investing always feels better, easier. Value investing requires the ability to look wrong for a while.
Over the last decade, value investing did not prove to be as profitable as paying up for technology stocks. Articles in the financial press even reported, not that long ago, that value was dead, dying, or at the very least compromised.
But we believe that if you look at the metrics differently—if you focus not just on price to book value, but instead on earnings-based enterprise multiples—then you see a different story. While value metrics such as price to book have performed poorly, value-oriented companies with low enterprise multiples have performed better. Looking back over the last 50 years, the resurgence of value should be reassured. And while it’s hard to know for sure, we believe we could be in the midst of that resurgence today, as rising inflation and the prospect of higher interest rates, once again, appear to be wreaking havoc with highly valued, speculative growth stocks.
So, Lesson #1 is that price matters. Don’t give up on value investing. Stay on the Bus!
If the past is indeed prologue, this time is not different, but simply a normal period of underperformance for an investment approach that has handily beaten its growth counterpart for much of the last century, albeit in a very lumpy manner. (Of course, past performance is no guarantee of future results.)
Lesson #2 is simple enough: Don’t forget Lesson #1.
A list containing all recommendations made by Tweedy, Browne Company LLC within the previous 12 months is available upon request. It should not be assumed that all recommendations made in the past have been profitable or that recommendations made in the future will be profitable or will equal the performance of the securities in this list.
Tweedy, Browne Company LLC’s 100-year history is grounded in undervalued securities, first as a market maker, then as an investor and investment adviser. The firm registered as an investment adviser with the SEC in 1975 and ceased operations as a broker-dealer in 2014.
This article contains opinions and statements on investment techniques, economics, market conditions and other matters. There is no guarantee that these opinions and statements will prove to be correct, and some of them are inherently speculative. None of them should be relied upon as statements of fact.
Any discussion of sectors, industries, or securities herein is informational and should not be perceived as investment recommendations. Securities discussed herein were not necessarily held in any accounts managed by Tweedy, Browne.
Current and future portfolio holdings are subject to risk. The securities of small, less well-known companies may be more volatile than those of larger companies. In addition, investing in foreign securities involves additional risks beyond the risks of investing in securities of U.S. markets. These risks include economic and political considerations not typically found in U.S. markets, including currency fluctuation, political uncertainty, and different financial and accounting standards, regulatory environments, and overall market and economic factors. Force majeure events such as pandemics and natural disasters are likely to increase the risks inherent in investments and could have a broad negative impact on the world economy and business activity in general. Value investing involves the risk that the market will not recognize a security’s intrinsic value for a long time, or that a security thought to be undervalued may actually be appropriately priced when purchased. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Diversification does not guarantee a profit or protect against a loss in declining markets. There can be no guarantee of safety of principal or a satisfactory rate of return.
Diversification does not guarantee a profit or protect against a loss in declining markets. There can be no guarantee of safety of principal or a satisfactory rate of return.
Price/book (or P/B) ratio is a valuation measure calculated by dividing the market price of a company’s outstanding stock by its book value (total assets of a company less liabilities) and then adjusting for the number of shares outstanding. Stocks with negative book values are usually excluded from this calculation.
Price/earnings (or P/E) ratio is a valuation measure that compares the company’s closing stock price and its trailing 12-month earnings per share.
The Managing Directors and employees of Tweedy, Browne Company LLC may have a financial interest in the securities mentioned herein because, where consistent with the Firm’s Code of Ethics, the Managing Directors and employees may own these securities in their personal securities trading accounts or through their ownership of various pooled vehicles that own these securities.
Past performance is no guarantee of future results.
Vanguard is expanding their model portfolio selection for their ‘LifeStrategy’ brand on two fronts an MPS Classic and MPS Global. The MPS will have a total of five model portfolios which will be based in index funds giving a variety of risk preference choices to investors. The least risky models have a 20% equity exposure while escalating all the way to 100%. The MPS will definitely favor UK investments in both bonds and equities, but the global funds will be strictly a market cap weight. Vanguard is hoping the development of more model portfolios will deepen their relationship with financial advisors, by giving them better options to suit their end clients needs.
Gold had one of its biggest runs last August, but gold stocks and ETFs have been the real…see the full story on our partner Magnifi’s site
BNY Mellon is one of the biggest asset managers with $2.3 trillion in AUM, and they are expanding their offerings by building model portfolios designed for the UBS Wealth Management USA clients. They will be particularly designed to deliver more reliable results during business cycles and geared toward meeting income-generation goals with clients. The range of portfolios will come in three different income varieties: stable, strategic, and a growth hybrid. They view this as a natural evolution of their business at BNY and they are well suited to deliver models to UBS to meet income goals.
Finsum: More investors are looking for income products and models are rapidly trying to adapt to this demand.