Three value stocks that can provide safety as interest rates rise

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Value strategies have held up better than growth strategies. But rather than focusing on indexes, investors might be well-served in diversifying with conservatively run companies selected by value managers with a global perspective.

Stocks have been on a rocky road this year, as investors have tried to anticipate every possible move by the Federal Reserve to combat inflation.

These are great companies and SPY has very low expenses. But its high concentration in tech-oriented stocks sets the stage for something many investors simply aren’t used to: tepid returns during a cycle of high inflation, rising interest rates and possibly a recession as the combination leads to slower spending by consumers.

For five years through 2021, the S&P 500’s average annual return was 16.6%. For the previous 10-year period it was only 2.9%. Yes, these are arbitrarily selected periods. If we go longer, for 20 years through 2021, the S&P 500’s average annual return has been 9.5%. During an interview, Brooker said that the rising interest-rate environment had been especially harsh for tech companies trading at high valuations because they tend to have “cash flow way out in the future that you are discounting today.”“Our preference in our portfolios is to hold companies that are producing cash today,” Brooker added.

For years, with interest rates near zero, Bank of New York Mellon and competitors were forced to subsidize the money market funds. Otherwise they risked “breaking the buck,” which would mean a decline in the share price and possibly a fund closure and massive losses. Brooker called the bank’s price-to-earnings valuation “undemanding.” Bank of New York Mellon’s stock trades for 9.9 times the consensus earnings estimate for the next 12 months among analysts polled by FactSet. This compares to forward price-to-earnings ratios of 11.3 for the S&P 500 banking industry group and 19 for the full S&P 500.

Brooker said that while U.S. investors are justifiably concerned about the validity of accounting for some Chinese companies, Jardine Matheson’s accounting is “above board, in our view.” He added that most of the company’s business exposure is in Indonesia.Shares of Jardines have a dividend yield of about 3.50%, with payments made twice a year.Exxon Mobil — the advantage of diverse assets Exxon Mobil Corp. XOM, +2.09% was the First Eagle Global Fund’s second-largest stock holding as of Feb.

 

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