The Manager's Commentary - May 2010
The Tortoise and the Hare
In the month of May the S&P 500 was down 8.2%, high yield corporate bonds were down 3.5%, and investment grade corporate bonds were down 0.6%. This was the fourteenth worst month for the S&P 500 in the last thirty one years and 6 of those fourteen down months have happened in the last 2 years.
Clearly we are living in an era of increased volatility and the graph above provides such evidence. Interestingly, this fifteen year graph also highlights the relative long term benefits of investing in investment grade corporate bonds1 (yellow line) and high yield corporate bonds2 (white line) versus the S&P 500 (red line). While the destination is virtually the same, the corporate bond indices have experienced far less volatility than the stock market.
If we breakdown the component parts of the total return (price appreciation and interest/dividends) you’ll find that the coupon provided 95% and 117% (yes, there was a negative price return) of the total return for investment grade and high yield corporate bonds respectively. However, dividends provided only 25% of the total return for stocks. Avoiding stating the obvious, timing is far less important when it comes to investing in corporate bonds compared with stocks. As they say in the bond biz “cash is king”.
Currently the investment grade index is trading at a price of $106 and generating current income of 5.7% while the high yield index is trading at $95 and generating current income of 8.9%. What this suggests, from our historical exercise, is that the investment grade market is currently expensive while the high yield market is cheap.
As of the end of May we have completed our first year in business and would like to thank those early advisors/investors for their business. While happy with our first year, milestones are meant to be broken and while we are proud of what we have accomplished, we are focused on what can be accomplished.
Matthew Shandro
May 31st, 2010
1 Bank of America/Merrill Lynch U.S. Corporate Master
2 Bank of America/Merrill Lynch U.S. High Yield Master II Index