Paul Farrell had an interesting article up on Marketwatch about a possible evolution of Lazy Portfolios.In the article Farrell cited a version of a lazy portfolio put forth by Jeremy Siegel using WisdomTree funds. What I think is evolutionary is someone at Farrell's readership level allowing for the possibility that something new could be better.
As a hasty generalization it seems like a lot of the financial journalism luminaries are slow to embrace new things.
Per the article, Siegel's portfolio is as follows;
- Total Dividend Fund DTD 15%
- Earnings Index Fund EXT 15%
- DEFA Fund DWM 20%
- High Yield Equity Index DHS 10%
- DEFA HighYield Equity Index DTH 10%
- Intl Energy Sector DKA 10% client holding
- Intl Consumer Non Cyclical DPN 10% this one is very heavy in healthcare stocks
- Low P/E Index Fund EZY 10%
I wrote about a funky version of a lazy portfolio about six weeks ago. The intention with that post was not to come up with something I will use but to illustrate that a lazy portfolio can draw in from many different places.
I should note that I have been a big fan of WisdomTree's dividend ETFs right from the start, they seem like an obvious way to add value but I am not so sure about the earnings ETFs just yet.
The laziness I put out was as follows;
- iShares Dividend DVY 25% client holding
- Rydex Small Cap 600 Pure Value RZV 15%
- WisdomTree DEFA High Yielding Equity DTH 25%
- BLDRS Emerging Market ADRE 5% client and personal holding
- DB Gold ETF DGL 5%
- iShares TIP ETF 20% client holding
- Advent Claymore Convert Fund AVK 5% client holding
To be clear, I don't have this mix for anyone it is just an academic exercise.
Generally I am not a fan of the concept but that might just be a quirky bias on my part. I don't think the bias is because of what I do for work as this blog gives away just about all the process, (as I think of it) but not really the names, for do-it-yourselfers can learn a little bit more.
That Farrell allows for WisdomTree having a place at the table might mean that some folks who would not have otherwise looked at these funds now will and I view that as a positive.
10 comments:
I've become a collector now of lazy ports. Interesting that this is now a generic designation..or for all I know has been for quite a while. Some of these etfs I didnt even know existed. Very low volume in the ones I checked. Surprisingly bid-ask spread not too bad...but in some cases I think the specialist has phony goosed up bids.
One of the problems with dividend yields and the Wisdom Tree ETFs is that they have lost some predictive importance since the SEC instituted rule 10b-18 in 1982 - providing a safe harbor for firms conducting repurchases from stock manipulation charges.
Dividends are only one way of returning capital to shareholders. Share repurchases are another such method (see MSFT), and since they are not taxed like dividends, it can be argued they are a more efficient way of returning profits. Buybacks represent about half of all shareholder payouts, and have increased steadily since the early 1980's.
A longer diatribe can be found on these two posts of mine:
http://worldbeta.blogspot.com/2007/02/better-dog.html
http://worldbeta.blogspot.com/2007/03/spending-it-getting-creative-and-payout.html
to know whether your comment about bid ask spreads is true or not you need to study where trades are executed. I just wrote an article about this for TSCM. if the spread was $0.40 but every trade is executed within a penny or two of the mid point then the spread does not matter.
Mebane while your statement is clearly correct it is interesting that you make your point with what might be the posterchild for mega cap underperformance (other than GE maybe).
your point about 10-b 18 is lost on me I did some corporate buyback for two companies once upon a time. other than the perception of painting the tape I do not see what you mean by predictive importance.
Are you say dividend paying stocks don't out perform? they've got a bunch of research that says otherwise.
Please elaborate and please dumb it down. thank you
My take is dividend yields are not as predictive of future stock returns as they once were. Mebane, has anyone asked Siegal about?
I view BRK.B as a lazy portfolio of well run companies. They don't pay out dividends, not sure about share buybacks. Tom in Indy
http://www.faculty.idc.ac.il/kobi/repurchase.pdf
The above academic paper is worth a read - it shows how the dividend yield process has changed in the past 20 years. The SEC rule I mentioned just made it easier for companies to buy their own stock.
Yes, there is plenty of research that shows that high dividend yield companies outperform. But this outperformance has been declining (see Dogs of the Dow for an example)
The predictive power of dividends (ie high dividends results in excess stock returns) has declined in this period since 1980, while the predictive power of payout yield has not (dividends + share buybacks).
All this means is that companies have found other ways of handing cash back to shareholders - and that is what matters, not the route(dividends vs. buybacks vs. debt repayments, etc, etc).
And it also means that WisdomTree is basing their business on an outdated and incomplete concept, while others (Epoch Partners for one) are evolving.
Buy backs look good, but often times companies are issuing tons of stock or options to employees and simply buying back the new shares from employees. Companies are essentially overpaying employees and then getting treated well in the press for buying back stock. This is crazy and absurd IMO.
Dividends are real money being returned to the owners of the company. One day in the not so distant future I suspect dividends will be properly regarded again. You can disagree with me if you like, but so did a zillion people during the Nasdaq bubble and many of them lost their shirts.
thank Mebane.
So you are saying that dividend weighting still outperforms but not by as much as it used to? Fair enough.
The comment that came in 3:12 makes a good point that buybacks can be very vague.
It may be right that buybacks plus dividends is better but it still amuses me that you used MSFT as the example.
The authors find the best measure is net payout yield which includes share issues.
Net Payout Yield = $ spent on dividends + $ spent on share repurchases - $ raised through new share issues
Therefore, the effect of buybacks would only be positive if they outweighed the new share issues.
Priest also includes paying down debt as a measure of returning cash to shareholders.
"Net Payout Yield = $ spent on dividends + $ spent on share repurchases - $ raised through new share issues"
It is not enough to look at the above formula IMO. You must also look at
$ raised through new share issues/$ spent on share repurchases
Frequently they will buy back more than they issue, but they are still issuing 40 to 75% of the money spent on repurchases which is just a method of obfuscating a major give away IMO. If the ratio was below 10% of repurchases I would agree with you but over that it is just a major give away (or theft IMO).
Otherwise your argument would have a lot of credibility IMO, but the large percentage of funds going to employees (select executives) is nothing more than theft from the shareholders IMO.
BTW I am a free market guy and I think the market will work eventually and dividends will be back in vogue. It just might take a while for others to recognize this (but not for me).
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