For Discerning Investment Returns, Look to the S&P 500’s Aristocrats

Written by Nicholas Vardy, CFA.

SNAG Program-0791

Living in London, and with my office across the park from Buckingham Palace, I am near ground zero when it comes to British aristocracy.

Despite the royal location, I do not make it a daily habit to have tea at the Ritz Hotel with the local English gentry.

Instead, I prefer another kind of "aristocrat" when investing money for my clients and recommending stocks to my newsletter subscribers.

The "aristocrats" I like to rub elbows with are the kind you'll find in the S&P 500 Index, specifically those you find in the S&P Dividend Aristocrats Index.

Launched in 2005, Standard & Poor's developed the index as a way to mimic an investment strategy that some sophisticated dividend investors had been employing successfully for decades.

As its name implies, the Dividend Aristocrat's strategy is unabashedly elitist. It invests only in dividend stocks with the most noble and unblemished bloodline of ever-increasing dividends.

Specifically, to be a Dividend Aristocrat, a stock has to meet two requirements.

First, it must be a member of the S&P 500.

Second, it must have a history of at least 25 years of increasing annual dividends.

The current tally of S&P 500 companies meeting both of these requirements is 54.

And as you might expect, there are some very familiar, large-cap dividend stalwarts in the mix, such as AT&T (T), Procter & Gamble (PG) and Walmart (WMT).

Performance Fit for Royalty

The Dividend Aristocrat strategy is based on the premise that buying large-cap stocks with decades-long track records of increased payouts will deliver investors total returns that exceed those of just "buying the market" with an S&P 500 Index fund.

In fact, this is exactly what you get with the Dividend Aristocrats.

Year to date through Dec. 15, the S&P 500 Dividend Aristocrat Index has posted a total return of 11.95%.

By comparison, the S&P 500 Index has delivered investors a total return of 9.78%.

This performance gap between "commoner" stocks in the S&P 500 and the "noblemen" stocks in S&P 500 Dividend Aristocrat Index actually is both lengthy and consistent.

Over the past three years, the Aristocrats returned 21.4% while the S&P 500 has generated a total return of 20.4%.

That's not much of a performance gap, even though it is in favor of the Aristocrats.

But extend that performance back five years and 10 years, and the difference is pronounced.

The average, great unwashed stocks of the S&P 500 have a five-year average total annual return of 14.8% and a 10-year total return of 7.36%. In contrast, the Aristocrats have a five-year total average annual return of 17.4% and a 10-year total return of 10.3%.

That gap of 3% per year is remarkable.


Source: Indexology

Standard & Poor's just published a chart on the relative outperformance of the Aristocrats vs. the S&P 500 since 1990.

With that kind of record of outperformance, dumping a mainstream, S&P 500 Index fund in favor of a portfolio of Dividend Aristocrats is a no brainer for both my subscribers and my clients.


The Trend is Your Friend, Once Again

Written by Nicholas Vardy, CFA.

SNAG Program-0790

When it comes to clichéd wisdom, Wall Street is full of it.

Investment maxims such as "buy low, sell high" and "don't fight the tape" are all too common.

Yet perhaps the most pedestrian of proverbs is that "the trend is your friend."

For U.S. stock market investors, the long-term bull market trend launched in 2009 has certainly been friendly.

Trend-following investors have been able to buy an S&P 500 Index mutual fund, or an exchange-traded fund such as the SPDR S&P 500 (SPY), then ride the bull trend some 86% higher over the past five years.

It turns out being "dumb and long" the S&P 500 has trounced the greatest minds on Wall Street.

Ironically, employing a trend-following strategy elsewhere hasn't worked very well for Wall Street's so-called smart money.

That's especially true for some of the most sophisticated, algorithm-based investors engaged in managed futures funds, also known as commodity trading advisers (CTAs).

These funds rely on often-complex mathematical formulas that follow the trends in the commodities, currencies and fixed income markets.

In contrast to the U.S. equity market, where the trend has been the retail investor's friend, lasting trends in commodities and currencies have been as rare as, well, a happy Democrat in the White House.

The lack of volatility in global financial markets — and the skewing of the usual non-correlation between commodities, currencies, equities and bonds — has largely been caused by artificially low interest rates and central bank "money printing" interventions around the globe.

That's good for some markets like stocks and bonds.

But it's not so good for funds that seek to profit from a portfolio based on aggressive, non-correlated trends across a wide range of asset classes.

A Light at the End of the 'Algo' Tunnel

For CTAs, the recent strong trends in the commodity and currency space have finally translated into some strong performance.

Plunging crude oil prices, a rising U.S. dollar and the tumbling Japanese yen and euro have reinvigorated CTAs, putting them back on track for a terrific 2014.

Many CTAs had their best month in over a decade in November. Some CTAs saw strong double-digit percentage returns — a welcome change from the last five years.

The recent gains enjoyed by several big CTA firms like AHL and Winton suggest that there is a profitable light at the end of the tunnel for these algorithm-driven, or "algo," funds.



Written by Nicholas Vardy, CFA.

Untitled Document

November  2014

The "Ivy Plus" Investment Program gained 0.92% for the month.
The "Global Gains" Investment Program fell 1.48% for the month.
The "Double Your Dividends" Investment Program dipped 0.63% for the month.
The "American Alpha" Investment Program added 2.55% for the month.
The “Masters of the Universe” Investment Program gained 4.13% for the month.

U.S. Stocks and Commodities Head in Opposite Directions

The "Ivy Plus" Investment Program gained 0.92% for the month. The program is up 5.10% year-to-date, through November 30.

U.S. stocks- particularly large caps- bounced strongly this past month, with dividend payers leading the way.

Commodities went in the opposite direction, tumbling an eye-popping 8.51% as the price of oil plummeted. You saw the impact of this in commodities heavy emerging markets, which also ended the month down across the board.

Also notable was the weakness in high yield bonds, which were weighed down by their high exposure to the oil and gas sector.

Overall, the “Ivy Plus” Investment Program was a mixed bag, with the U.S. market continuing to trounce all asset classes, aside from domestic real estate.

The “Ivy Plus” investment program positions performed as follows:


Monthly Gain

YTD Gain







US Large Cap



US Mid Cap



US Small Cap



Developed Large Cap



Developed Small Cap



Emerging Markets



Emerging Markets Small Cap



Emerging Markets – Low Volatility



Private Equity



Business Development Companies (BDCs)



S&P 500 Equal Weight



S&P 500 Dividend Payers



Initial Public Offerings (IPOs)



Corporate Spin-offs






Fixed Income






US Treasuries



Foreign Bonds



Inflation Protected



High Yield Bonds






Real Assets






US Real Estate



International Real Estate















Hedge Funds






Global Macro



Hedge Fund Long/Short



Managed Futures



Hedge Fund Managers



Global Markets Continue to Lag


Why You Should Dump Your S&P 500 Index Fund

Written by Nicholas Vardy, CFA.

SNAG Program-0789

John Bogle has been a thorn in the side of active stock pickers ever since the 1970s.

As an evangelist of index fund investing, Bogle has been preaching for decades that on average, stock pickers can't outperform the market over the long term.

What's most annoying is that — unlike most investment gurus — he's been consistently right.

Over the past 25 years, only 38.6% of active funds have outperformed the broader S&P 500 on an annual basis.

And good luck with finding the fund that outperforms the S&P 500, year after year, over that time period, and in advance.

Active stock pickers' consistent underperformance is due to a combination of bad judgment, higher trading and management costs and just plain human hope and hubris — believing that their subjective insight works better than just, well, buying the market and calling it a day.

Bogle's own confidence in indexing must be reaching an all-time high in 2014.

While on average close to four out of 10 managers outperform the S&P 500 every year, this year that number has fallen to less than one out of 10.

If that holds, it just might be the lowest percentage ever.

Another couple of more years like this, and even the most ardent stock pickers will have a tough time believing they add value.

Truth be told, active stock pickers have had the deck stacked against them in 2014.

First, any stock picker invested in foreign stocks has had a millstone around her neck. The relentless "doom-and-gloomers" notwithstanding, the U.S. market has been one of the top-performing markets in the world in three out of the last four years.

Second, with small-cap stocks trailing U.S. large caps by over 10% this year, any active managers who invested in anything but the biggest stocks in search of value or better growth have had their heads handed to them.

Finally, sectors and investment themes have been going in and out of favor with unprecedented speed.

Last year, it was energy stocks that were hot. This year, these same stocks have collapsed while both high-risk biotech and low-risk utilities stocks have soared. There is little method to the madness of such rapid sector rotation.

Smart Beta Funds: A Better Mousetrap?

Being "dumb and long" in the U.S. index has trounced just about every active strategy out there.

But I'm here to tell you that there is even a better investment mousetrap.

As well as S&P 500 index funds have done in in the past 40 years, one group of funds has done even better.

In fact, as much as Bogle gets underneath the skin of active managers, it is "smart beta" or "alternative index" funds that give Bogle himself the woolies.

And for good reason.

"Smart beta" funds are like index funds in that they are passive.

The difference is that they are based on "alternative" indexes.

As it turns out, the index upon which a passive strategy is based makes all the difference.

And once you are willing to tweak the indexes, that is, how you define "the market," there are all sorts of different ways you can skin this investment cat.

A traditional S&P 500 Index weighs stocks by market capitalization. The bigger the company, the bigger the weight in the index.

That's why the top 10 stocks account for 17.87% of the S&P 500.

But it turns out you can construct an index using all sorts of other criteria: fundamentals, momentum or even by tracking companies buying back their own stock.

Let's look at the simplest "alternative" index strategy.


Why This Wounded Bear Could Become a Bucking Bull

Written by Nicholas Vardy, CFA.

SNAG Program-0788

Russia is a mess.

Plunging oil prices, a ruptured ruble, years of a corrosive "kleptocracy," Western economic sanctions and an unprecedented flight of capital have teamed up to wrestle the Russian bear to its back in 2014.

No wonder President Putin's bellicose blustering and military muscle flexing in East Ukraine via the annexation of Crimea now has rendered Russia an investment outcast.

Or has it?

If you're a regular reader of The Global Guru, you're likely already familiar with the concept of "buying when there's blood in the streets," attributed to 18th-century British nobleman and banking magnate Baron Rothschild.

The idea here is to buy into a stock market when that market is getting both literally and figuratively slaughtered.

Sure enough, this figurative slaughter of the Russian economy has now made it onto the cover of Britain's The Economist magazine.

And thereby, investors have just received what I consider to be my #1 contrarian indicator.

The Folly of the Headline

Last year, I wrote about the remarkable accuracy of the contrarian indicator of a cover story in The Economist.

This contrarian indicator works because by the time the success or failure of a company, a sector or a country reaches the cover page of a major publication such as The Economist, the story is no longer news, and it already is reflected fully in the price.

So, if a headline screams about a "wounded economy," my first inclination is to plant my own capital into that wounded tissue and then wait for it to bloom.

As it turns out, this "folly of the headline" is more than just a vague correlation or an unsupported thesis.

In fact, a 2007 academic study conducted by three finance professors at the University of Richmond put the magazine cover story indicator to the test as it applied to coverage of individual companies.

The professors looked at headlines from publications such as Business Week, Fortune and Forbes over a 20-year period to examine whether positive cover stories are associated with superior future performance and negative stories are associated with inferior future performance.

Unsurprisingly, positive cover stories tended to appear following periods of robustly positive performance, while negative stories followed periods of poor performance. Specifically, the companies that received the most positive coverage had, on average, outperformed the market by 42.7%. Those companies suffering negative coverage, in contrast, had underperformed by 34.6%.

What's more interesting is how these companies and their respective share prices outperformed after the cover stories appeared.

The essential conclusion of the study was that the most negatively portrayed companies managed to beat the market by an average of 12.4%, whereas the outperformance of the media darlings fell to just 4.2%.

What's the lesson for investors?

Negative cover stories arrive on newsstands just in time for a reversal of fortune.

The Best Way to Ride Russia

Given that my #1 contrarian indicator is splashed front and center on the cover of The Economist, my "blood in the streets" olfactory sense gets overrun by the scent of an imminent bull run in stocks pegged to the country's fortunes.

So, what is the easiest, most efficient way for investors to go long to tap a Russian market reversal?

One great way to do so is with an exchange-traded fund (ETF) that holds the biggest, most heavily traded Russian-based stocks — the Market Vectors Russia ETF (RSX).