The Problem:
Yield is scarce and often comes with traditional asset class risks.
Our Solution:
Capture a Distinctive Yield Source
The Problem:
Yield is scarce and often comes with traditional asset class risks.
Our Solution:
Capture a Distinctive Yield Source
Incremental & Adaptable – Especially important in today’s low yield environment
I’m looking for additional cash flow, but the fixed-income opportunity set is not compelling.
How can I generate return on my cash position in a world of money market yields under 1%?
I’ve incurred losses in my equity portfolio. I want to sit tight and wait for it to recover, but I need more income than stock dividends alone are offering.
Volatility Yield Strategy
Investors looking at the landscape today are demanding creative thinking to address a critical need that is sorely lacking: yield. With zero interest rates, ballooning central bank balance sheets, and global economic headwinds, the lack of yield opportunities is likely to be with us for some time.
Sagewood Asset Management offers an options-based portfolio overlay that aims to capture a unique source of yield. It’s called the Volatility Yield Strategy (VYS).
VYS seeks to generate an income stream by exploiting a perceived inefficiency in the pricing of volatility in the options marketplace. This inefficiency has typically endured over time and through multiple market environments. VYS is designed as an overlay strategy, so no cash is needed at initiation. Instead, an investor’s existing portfolio of cash and/or investments can be used as collateral.
Yield Opportunity in Fixed Income Is Epically Low
No matter where you look across the fixed-income complex, yield curves are flat and interest rates are low.
Fixed Income Yields | Current vs. 10 Years Ago*
Current US Treasury
Current US Investment Grade
US Treasury 10 Years Ago
US Investment Grade 10 Years Ago
Note: “Current” is November 16, 2020 and “10 Years Ago” is November 16, 2010. Data from Bloomberg: “Current US Treasury” I25 Mid YTM US Treasury Actives Curve 11/16/20 Yield, “US Investment Grade” BS76 Mid Yld USD US Corporate IG BVAL Yield Curve 11/16/20 Yield
%
10-Year Treasury Yield
%
10-Year Investment Grade Bonds
We think this is scant compensation for a 10-year investment.
In this environment, yield-starved investors may be tempted to reach further in duration or in credit quality for added yield. However, that adds disproportionately more risk than yield.
Furthermore, the outlook for fixed income offers little in the way of hope. Given where interest rates are, there is an asymmetry of risk. Interest rates have far more room to rise than fall, and rising interest rates would drive bond prices down.
We believe VYS is a compelling overlay to a fixed income portfolio. It has the potential to increase portfolio yields with no cash outlay and no interest-rate risk.
Cash Offers Little
For investors holding cash positions, and who are looking for safety of principal, there is virtually no yield to be had.
US 3-Month T-Bill
October 1980 – October 2020
Yield (%)
Source: Bloomberg – USGG3M Index
US 3-month T-bill yields are negligible, as shown in the chart. Even with inflation in the very low range of 1.5% to 2% , cash is assured of losing purchasing power.
We believe VYS may be a compelling overlay for a cash portfolio. It requires no cash outlay and it appears to offer attractive risk characteristics along with the opportunity to boost the yield by as much as 3x.
Dividend Yields on Stocks
%
S&P 500 Index Dividend Yield
%
S&P 500 Index Volatility
We believe VYS may be a compelling overlay for a stock portfolio. While you’ll need to contact Sagewood directly for actual performance, modeled net-of-fee results indicate an annualized return of 0.66%3 , one-third the dividend yield of stocks, with a volatility that is 80% lower, and it requires no cash outlay.
1The annual CPI as published by the Federal Reserve Bank of St. Louis has ranged from a low of 0.12 to a high of 3.16 over the 10 years from 2010 through 2019. https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
2Source: Bloomberg – SPX Index 12 Month Dividend Yld Gross from 4/16/2019 through 4/16/2020, SPX Index annualized standard deviation from October 2007 through June 2020.
3Modeled Strategy net of fee return from October 2007 through June 2020, annualized.
Income from a Diversified Portfolio
With fixed income, equity, and cash yields so low, investors with diversified portfolios are searching for other sources of income.
We believe VYS may be a compelling overlay on a diversified portfolio for any investor looking for an incremental source of yield.
Have questions? Ready to talk?
Contact Sagewood at
[email protected] or (212) 231-8770
Want to learn more?
Meet the Sagewood Team
The team at Sagewood Asset Management offer a yield-oriented strategy in an overlay. Sagewood’s strategy aims to add yield to fixed income, equity, cash or diversified portfolios, without incurring the idiosyncratic risks of equities or fixed income.
