Low volatility strategy looks like a stock, works like a bond

Dividend-paying equities and preferred stocks hedged with broad market put options

Dec 9, 2013 @ 12:11 pm

By Jeff Benjamin

+ Zoom

Income-seeking investors migrating into equities to escape low bonds yields face a new challenge: living with the volatility that comes with stocks.

Peter DeCaprio, portfolio manager and principal at Crow Point Partners, has been working for more than a year on an equity income strategy that tamps down wild price swings.

Even though the Crow Point Hedged Global Equity Fund (CGHAX) is technically defined as a long-short equity fund, it is designed to be used as an alternative to traditional bond portfolios.

“We've all been watching the trade move away from fixed income because the yields have gotten so low, so we're using global equities to replicate income and bond-type volatility,” Mr. DeCaprio said.

Crow Point Partners has about $1 billion under management, but less than $10 million in the year-old fund.

Mr. DeCaprio acknowledges that a lot of advisers will be reluctant to rush into a relatively new fund with a small pool of assets.

“We're a small fund and we're not on any wirehouse platforms,” he said. “But the story itself resonates really well with advisers who have clients with 30% or 40% allocated to bonds.”

The strategy is relatively fundamental. The portfolio is made up of mostly non-U.S. dividend-paying equities and preferred stocks. And those individual positions are hedged with broad market put options.

The dividends provide the income that bond investors are seeking, and the downside protection from the put options keeps the volatility at a level that makes the portfolio feel like a bond fund.

“We're trying to give bond investors an alternative that will not expose them to the risks of the yield curve,” Mr. DeCaprio said.

Even though the fund derives its income from dividends, the strategy is not to load up on the highest-yielding stocks, because the goal is to establish stability and predictability in the income stream.

“We have stocks in the portfolio yielding anywhere from 2% to 14%,” he said. “You have to balance pure yield with total return potential, and you need to buy healthy companies that can sustain their dividends.”

The fund is targeting a gross dividend yield of between 5% and 7%, and over the past 11 months the fund's net dividend yield was 4.2%.

Since the start of the year, the fund has gained 4%, which does not get a lot of attention against research screens comparing it with a 29.1% gain by the S&P 500, or a 13.2% gain by the long-short equity fund category as tracked by Morningstar Inc.

But Mr. DeCaprio is quick to point out the fund is not being managed to stack up against equities, particularly in the middle of such a momentum-driven market.

The fund's performance looks much better when compared to the 2% decline this year by the Barclays U.S. Aggregate Bond Index.

“It's a bond alternative, and that probably means nothing to the guys whose portfolios are designed around the momentum market,” Mr. DeCaprio said. “But there still are people out there who want low-volatility income strategies.”

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

Building a practice for tomorrow's tomorrow

Advisers: it is time to take a long view of your practice. Check out some tips and strategies on how to do it (and why) with Tom Stefaniak of Pinnacle Wealth Management.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.

Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry

Mandated contributions to Roth accounts would likely only be partial, as opposed to having a full repeal of pre-tax accounts.

E*Trade acquiring custodian Trust Company of America

Discount broker buying second-tier custodian for $275 million.

Another thousand Dow points higher, and investors yawn

Market milestones keep falling like dominoes, with 51 records broken so far this year.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print