Terry Smith, UK-based CEO of Tullett Prebon AND Fundsmith, LLP (obviously a man of prodigious energy) has written an interesting piece in the FT commenting on the attraction of owning less volatile stocks. He is highlighting the Low Beta Anomaly, a weakness in the theory behind efficient markets which predicts more risky investments need to generate a higher return (to justify their higher risk). In practice, they don’t. The tortoise out runs the hare as the more volatile, momentum-driven names are ultimately overtaken by the superficially boring companies that experience reliable growth. Part of the problem is the use of volatility as risk. If you’re not investing with borrowed money, the fact that stock prices move in value more than the underlying businesses they represent isn’t always a bad thing.
Given interest rate policy designed to relentlessly transfer real wealth from savers to borrowers should they invest in bonds, relying more on equities is sound advice. Although investments that generate income didn’t generate much return during the fourth quarter as we approached the Fiscal Cliff, so far in 2013 the bounce back has been quite breathtaking. Of course the S&P500 is up 4% as I write, but MLPs are up 9%, almost double their entire 2012 return. No doubt their rising prices render them slightly less attractive, although Kinder Morgan (KMI) announced earnings yesterday and continues to see double-digit earnings growth to the benefit of its stockholders as well as MLP investors who own Kinder Morgan Partners (KMP). Perhaps MLPs have a little more ground still to make up after a positive but by no means spectacular 2012. The underlying fundamentals of the sector remain solid.