equal, we believe a high yield is better than a low yield in this environment, as asset classes withhigher yields often come with an embedded option on price appreciation as they mean revert tomore normal valuations. Rob Arnott, Head of Research Affiliates, recently offered up a similarperspective, in a recent interview:
“We’re drawn to higher
-yielding assets not because we want higher income but because we believe that yield is the best predictor
of future total returns. That’s why our investment process starts with the building blocks model, which
estimates long-term forward total returns from current yields and projected growth rates. Not surprisingly, our models often emphasize income-oriented asset classes; these sectors currently offer spreads over Treasuries, that, when adjusted
for bond quality, are better than historical norms.”
Asset allocation at Broyhill combines this type of disciplined portfolio construction with a broadinvestment palette. Our objective is simply maximum total return, commensurate with the existing risk profile of markets. Today, this approach has resulted in the broadly diversified portfolioillustrated below, which generates an annual yield of 5.1% and provides a balanced mix of incomegeneration, growth potential and inflation protection.
Given the challenges facing the global economy today and the elevated level of starting equity valuations, fixed income securities serve as the foundation of our asset allocation framework.However, unlike most yield-starved traditional fixed income assets, the great majority of ourexposure is invested in structured credit and mortgage-related securities with an average yield of 7.2% today. Our attraction to the asset class, as we
ve previously discussed, is predicated on theincreasingly obvious recovery in residential real estate. Home prices are rising alongside of recordaffordability, while delinquencies are dropping and new households are now forming faster thanhomes are being built. The current stabilization in the domestic housing market is also consistent with the historical experience of dozens of major housing busts across OECD countries in terms of average duration and average decline in real home prices.