CIOFORUM
as a ratio, such as “debt to equity”. A firm’s total assets always equal
its debt plus equity. This is a basic (though sacred) accounting formula that is pounded into the heads of aspiring CPAs everywhere.
The beta of a firm’s equity basically comes from its debt-to-equity ratio.2 The value of a firm’s equity is the market value of its
outstanding stock. The value of a firm’s debt is basically the book
value of all its outstanding bonds.
The higher a firm’s debt to equity
(more debt, less equity), the higher the beta of the firm’s stock (all
other things held constant). Less debt relative to firm equity results
in a lower beta.
by definition flawed since they are oversimplifications of the real
world. Further, research has evolved the CAPM quite significantly in
the five decades since its birth in the halls of academia.
But despite
all its flaws, the many investing lessons we continue to learn from
this simple, yet elegant model continue to help investors earn
superior risk-adjusted returns. And as always, Mercer Advisors continues to stay at the very cutting edge of scientific developments in
finance to ensure that everything we do in your investment portfolio is always academically validated, institutional caliber, and implemented in the most cost-effective manner possible.
How does Mercer Advisors invest in low-beta stocks?
NOTE: We welcome your feedback and questions. Feel free to send us
an email at CIOForum@merceradvisors.com.
Mercer Advisors invests in low beta stocks either directly or through
institutional-class mutual funds.
For example, many clients own
the AQR U.S. Large Cap Defensive Style Fund (AUEIX) and AQR
International Defensive Style Fund (ANDIX). Both seek to invest in
stocks with lower-than-average betas.
AUEIX has returned +2.34%
YTD and ANDIX has returned +1.70% YTD,3 despite a volatile start
to the year.
This is not to say that advisors and clients should abandon the Capital Asset Pricing Model and load up exclusively on low-beta stocks.
Diversification is still critical in any investment portfolio and that
includes investing across many different types of stocks. It’s also
important to remember that the CAPM is only a model; models are
Eye on the Week Ahead
There’s plenty of information available this week. Reports on
producer prices, retail sales, industrial production, and the Fed’s
announcement from its latest meeting are sure to have some influence on the equity markets.
3/15: Producer Price Index, Retail Sales, Business Inventories,
Housing Market Index
3/16: Consumer Price Index, Housing Starts, Industrial Production, FOMC Meeting Announcement
3/17: Job Openings and Labor Turnout Survey (JOLTS)
3/18: Consumer Sentiment
D
COVim si
Sources: J.P.
Morgan Asset Management, Bloomberg, FactSet, Broadridge/Forefield. The statistical formula for beta is: b1 = – = – x rim 2Formally, a firm’s equity beta is defined as: bE = bA + – (bA – bD) 3As of close of business on March 11, 2016.
sm
E
s2
m
1
Market/Index
DJIA
NASDAQ
S&P 500
VIX
Russell 2000
MSCI EAFE
MSCI ACWI
Euro/USD
10 Year Treas.
Oil (WTI)
Gold
52-week High
18351.36
5231.94
2134.72
53.29
1296.00
1956.39
443.98
1.17
2.48%
61.83
1277.50
52-week Low
15370.33
4209.76
1810.10
10.88
943.10
1471.88
351.25
1.05
1.66%
26.21
1049.40
Prior Week
17006.77
4717.02
1999.99
16.86
1081.94
1628.83
387.33
1.10
1.88%
35.92
1277.50
3/11/16
17213.31
4748.47
2022.19
16.50
1087.56
1644.94
391.75
1.12
1.98%
38.50
1264.75
Week Change
1.34%
0.69%
1.19%
-2.14%
0.57%
1.03%
1.19%
1.37%
10 bps
7.18%
-1.00%
YTD Change
-0.53%
-4.91%
-0.56%
-9.39%
-4.00%
-3.73%
-1.55%
2.71%
-29 bps
3.94%
19.32%
1-year Change
0.20%
-0.92%
1.30%
-2.19%
-9.25%
-6.59%
-4.10%
5.77%
-13 bps
-20.07%
9.98%
Source: Bloomberg
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The information provided above is for educational purposes and should not be considered as investment advice. For investment advice and financial planning specific to you, talk to a qualified professional at Mercer Advisors.
Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all
investment-related services. Mercer Advisors Inc.
is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. ©2016 Mercer Advisors Inc.
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.