Small value equity is currently valued -31% below its 10-year average, while growth, momentum, low volatility, and other popular factors exceed the bubble valuation threshold of +30%. Small value equity is primed to soar as global interest rates normalize and valuation multiples revert back to long term levels, especially as the coronavirus epidemic appears to act as a market reversion catalyst.
Short duration BB-B bonds continue to exhibit top ranked risk-return. To illustrate the extent of this anomaly, we’ve compared the ICE BofA BB-B 1-3Y index to every market index within the Morningstar Direct database.
A pain trade appears imminent for investment grade bonds, where the market delivers the maximum amount of pain to the most investors of an extremely popular asset class.
A loan fund’s size and investment opportunities are negatively correlated. This makes capacity constraint a key factor, allowing for high conviction focus on quality opportunities.
Short duration bonds have a Trojan horse. Long maturity bonds often masquerade as short duration. With a minor price change, a short duration bond with a long maturity can become long duration, revealing far more risk than originally indicated.
Equity has a credit blind spot. 95% of Russell 3000 companies issue debt, 75% of which is sub-investment grade. Equity investors study stock price movements but often ignore credit market signals.
Smart yield still exists. Short duration BB-B corporate bonds are providing high yield, downside protection, and interest rate protection in an ultra-low yielding environment. Yet the bonds remain largely overlooked by the industry.
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