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Expanding Horizons: Taking a Global Perspective on Dividend Yield

The Big Picture


OCTOBER 8, 2013

Contact Information
Jim OShaughnessy, Chairman, CEO & CIO Jim.OShaughnessy@osam.com

os am .c om

OShaughnessy Asset Management (OSAM)


Founded in 2007
Based upon the principles outlined in What Works on Wall Street 33 staff, 11 Partners $5.8 billion AUM Dedicated to determining the best factors for future results from historical data

Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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An Unprecedented Environment
Generating yield has become more difficult than at any point in the last 140 years:
Historical Yield on a Hypothetical Balanced Portfolio (60% Equity / 40% Bond)
(1/1/1871 to 6/30/2013) 10 9 8 7 6

Balanced Portfolio Yield

Historical Avg. Yield 4.36%

5 4 3 2 1 0

Equity Contribution to Yield

Bond Contribution to Yield


1981 2001
1971 1991 2011

2.03%
(Jun-2013)

Source: Global Financial Data, OSAM Calculations. The Bond component is represented by 10-Year U.S. Treasurys. The Equity component is represented by the S&P 500 Index. Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

1961

1871

1881

1891

1901

1921

1931

1941

1951

1911

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A Survey of Income-Generating Options


Across most asset classes, current yields are below historical averages and are charting new lows.
Global and global high-yielding equities are the only asset classes trading above their historical average yield.
Historical Yield Ranges on Income-Producing Assets
20% 18% 16% 14% 12% 10% 8% 6%

Average

Jul-2013

4%
2% 0%

Cash 3-month T-bills


Start: End: Jan-1920 Jul-2013

U.S. Municipals Investment 10-year Grade Treasurys Credit

High Yield Debt

Preferreds

MLPs

REITs

S&P 500

Top Dividend Yield (U.S.)


Jan-1963 Jul-2013

MSCI World

Top Dividend Yield (Global)


Jan-1970 Jul-2013

Oct-1790 Jul-2013

Jan-1950 Jul-2013

Apr-1915 Jul-2013

Jan-1987 Jul-2013

Dec-1992 Jul-2013

Apr-1996 Jul-2013

Dec-1971 Jul-2013

Jan-1871 Jul-2013

Jan-1970 Jul-2013

Source: Global Financial Data, Morningstar EnCorr, Compustat, MSCI Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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The Path of Least Resistance


Current U.S. Debt/GDP has not been this high since the post-WWII era By 1980 the Debt/GDP ratio had fallen to 34% yet there were fiscal surpluses in only 8 of those 35 years Inflation played a major role in reducing the Debt/GDP ratio to manageable levels
Fiscal Imbalances and Inflation
100% 90%

(19512011)

16%

Debt/GDP Ratio

80% 70% 60% 50% 40% 30%

12%

Debt/GDP Ratio
8%

Inflation

4%

Inflation

0%

Source: Global Financial Data Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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Interest Rate Increases Could Result in Significant Price Declines


U.S. Treasury Yield Curve
Current Yield Curve (Feb 2013) Average Yield Curve (1940-2013)
7

One Percent Rise in Yields

6.34
6

5.46 5.11 4.75

-63.5% -32.4%

-21.3%
3 Resultant price decline if interest rates rise

-19.6% -9.1%
3.10

-8.9% -4.9%
1.89

-2.0%
0.77 0.25

-1

3mo

1Yr

2Yr

3Yr

5Yr

7Yr

10Yr

20Yr

30Yr

* Bloomberg as of 2/28/13 Source: Bloomberg, Global Financial Data, OSAM Calculations


Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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Inflationary Periods Damage Bond Returns


16

Bond Bear Market


14 (19511981)

Bond Bull Market


(19812011)

U.S. Small Stocks


12

14.5 12.3 10.9 10.7 9.8 4.7 4.6 4.3 4.0 2.4 1.8 1.6

Global High Yield Stocks U.S. High Yield Stocks Emerging Markets Stocks U.S. LT Govt Bonds U.S. Small Stocks U.S. LT Corp. Bonds U.S. Stocks World ex U.S. Govt Bonds World ex U.S. Stocks U.S. Int. Govt Bonds U.S. Municipal Bonds T-bills Inflation

18.4 13.9 12.0 11.4 11.2 11.2 10.8 10.0 9.6 8.8 7.5 4.8 3.0

U.S. High Yield Stocks World ex U.S. Stocks

10

Emerging Markets Stocks U.S. Stocks

T-bills World ex U.S. Govt Bonds

Inflation U.S. Int. Govt Bonds U.S. LT Corp. Bonds U.S. LT Govt Bonds U.S. Municipal Bonds

Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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Real Assets: Not the Diversifier You Thought They Were


MLPs and REITs have become increasing more correlated with equity markets:
Rolling 3-Year Correlations with the S&P 500 Index 1.0 0.9 0.86

0.8
0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.70

0.0
-0.1

Alerian MLP Index

FTSE NAREIT All Equity REITs Index

Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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Not All Geographic Markets are Equal: Dividend Policy


Trends in dividend policy have reduced the opportunity set of dividend-paying companies in the U.S.:

Percentage of Companies Paying Dividends by Region


Worldscope Stocks (5/1/1987 to 12/31/2012) 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35%

United States

Europe

Asia Pacific ex Japan

Japan
9

Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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Not All Geographic Markets are Equal: Yield


A broad perspective allows diversification of exposure to monetary policy across the globe Just as different investment factors come in and out of favor, regions exhibit different yields depending on position in the economic cycle and interest rate regimes

Limiting the portfolio to a particular region arbitrarily restricts a strategys ability to seek out high-quality yield worldwide
Median Yield of Dividend Payers by Region
Worldscope Stocks (6/1/1986 to 12/31/2012) 5%

4%

3%

2%

1%

0%

United States

Europe

Asia Pacific ex Japan

Japan
10

Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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Dividend Yield is More Effective in Global Markets


All U.S. Stocks
(1/1/1970 through 12/31/2012)

All MSCI Stocks


(1/1/1970 through 12/31/2012)

Sharpe Ratio: 0.74

17.5%

Sharpe Ratio: 0.54

0.48

Best Decile Dividend Yield

U.S. All Stocks Universe

10.7%

Annualized Return

12.8%

Best Decile Dividend Yield

MSCI All Stocks Universe

Base Rates
Base rates are a batting average for how often a strategy beats its benchmark over certain rolling time periods.

Best Decile Dividend Yield vs. U.S. All Stocks Universe

1-Yr 56%

3-Yr 71%

5-Yr 69%

10-Yr 69%

Best Decile Dividend Yield vs. MSCI All Stocks Universe

1-Yr 70%

3-Yr 85%

12.8%
5-Yr 85% 10-Yr 96%

0.30

All investments carry a certain degree of risk, including the possible loss of principal. Dividend yield is one component of performance and should not be the only consideration for investment. Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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Have Dividend Stocks Become Expensive Recently?


Price-to-Earnings Ratios
(Bloomberg, Factset 6/30/2013)

21.0

The highest dividend-yielding stocks in the U.S. are 37% more expensive than their global counterparts.

19.0

16.3

15.0

14.7

14.3

13.9

5.0

Japan

Top Dividend Yield U.S.

United States

MSCI AC World

Asia ex Japan

Europe

Top Dividend Yield Global

Emerging Markets

Investment characteristics and performance are based on OSAM's Separately Managed Accounts. Should OSAM have another product or investment vehicle with a similar name, investment characteristics and performance may differ. Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

12.5

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Does Geography Matter in a Globalized World?


As U.S. corporations move to take advantage of higher growth prospects around the world, revenues have become increasingly global in nature 46 percent of S&P 500s 2011 revenues are from foreign sources. The correlation of domestic and international indices has increased significantly over the past 15 years.
Percentage of Non-U.S. Revenues for S&P 500 Companies 1.00 47.9% 0.90 46.6% 46.3% 46.1% 0.80 0.70 0.60 0.50 0.40 0.30 0.20 Rolling 5-Year Correlation: S&P 500 / MSCI EAFE
(Dec-1974 to Dec-2012)

43.8%

41.8%

43.3%

43.6%

45.8%

0.10
1974 1977 1979 1982 1984 1987 1989 1991 1994 1996 1999 2001 2003 2006 2008 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011
38%

0.00

Source: S&P Indices

Source: EnCorr, Factset

Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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OSAM Research Key Findings: Value


Value outperforms the market, with less risk:
Annualized Excess Return*
(1/1/1963 through 12/31/2012)
0.80 8.0%

Sharpe Ratio
(1/1/1963 through 12/31/2012) 0.73

6.2%

4.4%

3.6%

0.70

6.0%

2.6%

0.63

4.0%

1.2%

0.58

0.60

2.0%

10
0.0%

0.53

-0.1%

1
-2.0% -4.0%

5 Decile

0.50

0.44

0.40

-6.0%

-3.7%

U.S. All Stocks Universe (0.34) 0.23

-1.9%

-6.0%

0.30

-8.0%

(U.S. All Stocks Universe: 11.1%)

-10.0%

-12.0%

-9.6%

0.10

0.12

0.20

0.35

0.00

10

0.00

Base Rates*
Decile 1 10

1-Year

3-Year

5-Year

7-Year

10-Year

1
-0.10

5 Decile -0.13

82% 28%

96% 15%

99% 5%

100% 1%

100% 0%

-0.20

VALUE COMPOSITE FACTORS Price-to-Sales, Price-to-Earnings, EBITDA-to-Enterprise Value, Free Cash Flow-to-Enterprise Value, Shareholder Yield
* Versus U.S. All Stocks (1/1/1963 through 12/31/2012)

Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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OSAM Research Key Findings: Financial Strength


Financial Strength outperforms the market, with less risk; lowest Financial Strength underperforms with higher risk:
Annualized Excess Return*
(1/1/1963 through 12/31/2012) 2.3% 2.4% 2.1% 2.2%
0.60

Sharpe Ratio
(1/1/1963 through 12/31/2012) 0.50 0.51 0.50 0.47

3.0%

0.50

2.0%

1.1%

0.2%

0.41

1.0%

0.0%

1
-1.0%

5 -1.3% Decile
0.30

0.33

0.34

10

0.40

U.S. All Stocks Universe (0.34) 0.25

-2.0%

0.0%

-3.0%

-2.7%

0.20

-4.0%

(U.S. All Stocks Universe: 11.1%)

-5.0%

-5.6%

0.10

0.17

-6.0%

Base Rates*
Decile 1 10

1-Year

3-Year

5-Year

7-Year

10-Year

0.00

66% 20%

80% 11%

89% 5%

95% 0%

98% 0%

5 Decile

FINANCIAL STRENGTH COMPOSITE FACTORS External Financing, Debt-to-Cash Flow, Debt-to-Equity, 1-Year Change in Debt
* Versus U.S. All Stocks (1/1/1963 through 12/31/2012)

0.03 10

Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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OSAM Research Key Findings: Earnings Quality


Earnings Quality consistently outperforms the market, with less risk; lowest Earnings Quality underperforms with higher risk:
Annualized Excess Return*
6.0%

Sharpe Ratio
(1/1/1963 through 12/31/2012)
0.60

4.6%

(1/1/1963 through 12/31/2012) 3.1% 2.8% 0.56

4.0%

0.51

1.8%

1.3%

0.50

0.50

2.0%

0.1%

0.1%

0.44

10
0.40

0.41

0.0%

1
-2.0%

5 -1.7% Decile
0.30

U.S. All Stocks Universe (0.34) 0.23

0.34

-4.0%

-2.8%

0.32

(U.S. All Stocks Universe: 11.1%)


-6.0%

0.20

-7.0%

0.10

-8.0%

0.16

10
0.00

Base Rates*
Decile 1 10

1-Year

3-Year

5-Year

7-Year

10-Year

1
-0.10

5 Decile -0.04

81% 19%

87% 11%

95% 5%

100% 4%

100% 0%

EARNINGS QUALITY COMPOSITE FACTORS Current Accruals-to-Assets, Change in Operating Assets, Total Accruals-to-Total Assets, Depreciation-to-CapEx
* Versus U.S. All Stocks (1/1/1963 through 12/31/2012)

Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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A Generational Selling Opportunity


Yield (%) on the 20-year Treasury Bond
(January 1, 1926 June 30, 2013)

September 1981 high: 14.82%

15
14

13
12 11 10 9 8 7 6 5 4 3 2 1 0

Source: August 2013 http://www.osam.com/commentary.aspx Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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A Generational Selling Opportunity


Annualized Real Returns for All Rolling 40-year Periods, 20-year Treasury
350.00

(January 1, 1900 June 30, 2013)

300.00

312

250.00

200.00

200
150.00

Prior to 2008, this number would have been zero

Number of observations:
100.00

50.00

47
0.00

38

Returns (%)

<0

03

34

4+

Source: August 2013 http://www.osam.com/commentary.aspx Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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A Generational Selling Opportunity


Rolling Real Cumulative 40-year Returns for the 20-Year U.S. Treasury (%)
(January 1, 1900 June 30, 2013)

500

450
400 350 300 250

200
150 100 50 0 -50 -100

Source: August 2013 http://www.osam.com/commentary.aspx Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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A Generational Selling Opportunity


Bond-Stock Real Cumulative Over- and Underperformance (%) All Rolling 40-Year Periods
(January 1, 1900 June 30, 2013)

500

0
-500 -1000 -1500 -2000 -2500 -3000 -3500 -4000 -4500 -5000 -5500

U.S. Long Bonds have only twice outperformed U.S. Stocks on a real cumulative basis since January 1, 1900. The maximum outperformance occurred for the 40 years ending March 2009:16.04%

Source: August 2013 http://www.osam.com/commentary.aspx Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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A Generational Selling Opportunity


Rolling Real Cumulative 20-year Returns for the 20-Year U.S. Treasury (%)
(January 1, 1900 June 30, 2013)

550 500 450 400 350 300 250 200

150
100 50 0 -50 -100

Source: August 2013 http://www.osam.com/commentary.aspx Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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A Generational Selling Opportunity


Bond-Stock Real Cumulative Over- and Underperformance (%) All Rolling 20-Year Periods
(January 1, 1900 June 30, 2013)

Highest real rolling cumulative outperformance, U.S. Long Bond - S&P 500 for 20 years ending March 2009: 119.43%
100 0 -100 -200 -300 -400 -500 -600 -700 -800

-900
-1000 -1100 -1200

Source: August 2013 http://www.osam.com/commentary.aspx Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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A Generational Selling Opportunity


Rolling Real Cumulative 10-year Returns for the 20-Year U.S. Treasury (%)
(January 1, 1900 June 30, 2013)

250

200

150

100

50

-50

-100

Source: August 2013 http://www.osam.com/commentary.aspx Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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A Generational Selling Opportunity


Bond-Stock Real Cumulative Over- and Underperformance (%) All Rolling 10-Year Periods
Highest real rolling cumulative outperformance U.S. Long Bond - S&P 500 135% for 10 years ending August 1939
(January 1, 1900 June 30, 2013)

March 2009 Real Cumulative 113% above S&P 500

200

100

-100

-200

-300

-400

-500

Source: August 2013 http://www.osam.com/commentary.aspx Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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A Generational Selling Opportunity


Long Bond Outperformance of U.S. Equities (January 1, 1900 June 30, 2013)

For all rolling:

Number of Times Outperforms

Total Number Observations

Percent of the Time

Maximum Real Cumulative Advantage

For Rolling Period Ending:

10-year
periods

165

957

17.24%

135%

Aug-39

20-year
periods

54

837

6.45%

119%

Mar-09

30-year
periods

717

0.84%

162%

Sep-11

40-year
periods

597

0.34%

16%

Mar-09

Source: August 2013 http://www.osam.com/commentary.aspx Past performance is no guarantee of future results. Please see important disclosure information at the end of this presentation.

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General Legal Disclosure/Disclaimer and Backtested Results


International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in emerging markets can be more volatile.
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this presentation, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for any portfolio. Gross of fee performance computations are reflected prior to OSAMs investment advisory fee (as described in OSAMs written disclosure statement), the application of which will have the effect of decreasing the composite performance results (for example: an advisory fee of 1% compounded over a 10-year period would reduce a 10% return to an 8.9% annual return). Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, individualized investment advice from OSAM. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that any account holdings would correspond directly to any comparative indices. Account information has been compiled solely by OSAM, has not been independently verified, and does not reflect the impact of taxes on non-qualified accounts. In preparing this presentation, OSAM has relied upon information provided by the account custodian and/or other third party service providers. OSAM is a Registered Investment Adviser with the SEC and a copy of our current written disclosure statement discussing our advisory services and fees remains available for your review upon request. The risk-free rate used in the calculation of Sortino, Sharpe, and Treynor ratios is 5%, consistently applied across time. The universe of All Stocks consists of all securities in the Chicago Research in Security Prices (CRSP) dataset or S&P Compustat Database (or other, as noted) with inflation-adjusted market capitalization greater than $200 million as of most recent year-end. The universe of Large Stocks consists of all securities in the Chicago Research in Security Prices (CRSP) dataset or S&P Compustat Database (or other, as noted) with inflationadjusted market capitalization greater than the universe average as of most recent year-end. The stocks are equally weighted and generally rebalanced annually. Hypothetical performance results shown on the preceding pages are backtested and do not represent the performance of any account managed by OSAM, but were achieved by means of the retroactive application of each of the previously referenced models, certain aspects of which may have been designed with the benefit of hindsight. The hypothetical backtested performance does not represent the results of actual trading using client assets nor decision-making during the period and does not and is not intended to indicate the past performance or future performance of any account or investment strategy managed by OSAM. If actual accounts had been managed throughout the period, ongoing research might have resulted in changes to the strategy which might have altered returns. The performance of any account or investment strategy managed by OSAM will differ from the hypothetical backtested performance results for each factor shown herein for a number of reasons, including without limitation the following:

Although OSAM may consider from time to time one or more of the factors noted herein in managing any account, it may not consider all or any of such factors. OSAM may (and will) from time to time consider factors in addition to those noted herein in managing any account.

OSAM may rebalance an account more frequently or less frequently than annually and at times other than presented herein.
OSAM may from time to time manage an account by using non-quantitative, subjective investment management methodologies in conjunction with the application of factors. The hypothetical backtested performance results assume full investment, whereas an account managed by OSAM may have a positive cash position upon rebalance. Had the hypothetical backtested performance results included a positive cash position, the results would have been different and generally would have been lower. The hypothetical backtested performance results for each factor do not reflect any transaction costs of buying and selling securities, investment management fees (including without limitation management fees and performance fees), custody and other costs, or taxes all of which would be incurred by an investor in any account managed by OSAM. If such costs and fees were reflected, the hypothetical backtested performance results would be lower. The hypothetical performance does not reflect the reinvestment of dividends and distributions therefrom, interest, capital gains and withholding taxes. Accounts managed by OSAM are subject to additions and redemptions of assets under management, which may positively or negatively affect performance depending generally upon the timing of such events in relation to the markets direction. Simulated returns may be dependent on the market and economic conditions that existed during the period. Future market or economic conditions can adversely affect the returns.

Contact Information
OShaughnessy Asset Management 6 Suburban Avenue Stamford, CT 06901 Phone: (203) 975-3333 info@osam.com enhanced-dividend.com