|Forbes.com, Fall, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with forbes.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.|
Structurally, the markets are built to miss discrete opportunities. Here’s why: Much of the money that’s passively invested in index funds and exchange-traded funds moves on sentiment.
Unfortunately, sentiment is not logical. It’s emotional. And with respect to emotion, who is feeling very good about Europe right now? Italian equities anyone?
The slacking demand from index funds for anything European has put pressure on equities there–as they should perhaps. Except there are many companies with the now unfortunate circumstances of being headquartered in Europe while doing very little business there.
They are, in my opinion, the babies that have been thrown out with the bath water. And since stock yields run inversely to stock prices, by investing in these companies, you can capture what I sometimes call the Pessimist’s Premium. Right now, the pessimist’s premium is running at about 1.5 extra percentage points of yield.
This is good stuff. Right now, Chevron (CVX) is yielding 3.1%. A CVX comparable in Europe is French energy company Total, S.A. Current yield: 4.4%. Putting dividend growth aside, the difference is material.
As a benchmark, consider that investments growing at 4.4% will double about seven years faster than investments growing at 3.1%.
So, as a strategy for bulking up on yield, consider taking profits in Exxon Mobile (XOM), Procter and Gamble (PG), 3M (MMM), Pfizer (PFE), and Chevron (CVX) and “swap” them for these shares: Total SA (TOT), Unilever (UL), Leggett & Platt (LEG), Novartis (NVS), and Royal Dutch Shell (RDSA).