Now that the first half of 2011 is over I wanted to step back and look at the performance of the sectors in the income investor dashboard. Lets look at the YTD performance of the dashboard and see if it offers any insights. Below are the 1H 2011 total returns (including dividends) for the dashboard.
Starting with the global equity indices, the US market outperformed the Europe, Emerging Market, and All World indices. This was an unexpected result based on the predictions at the beginning of 2011. Markets have a funny way of confounding the consensus. As for the second half, my personal opinion is that the US market is still better positioned than the markets represented in the EFA, EEM, and ACWI indices. Europe is not even close to end in dealing with its sovereign debt issues and emerging markets are working real hard to fight inflation. Not many people have noticed that the yield curves in the big emerging markets like Brazil, India, and China have flattened significantly or have inverted (Brazil). This means slowing growth for emerging markets. Of course, Europe and the US are also experiencing slowing growth. The US market just seems to be the least negative out of these markets. The big question for all these markets is will growth come back in the second half? A focus on dividends is still the way to go with all of this uncertainty.
The dividend ETFs had a great 1H 2011 outperforming the S&P500 significantly. There is definitely a search for yield among investors and also corporate balance sheets are very strong thus supporting good dividend growth. I expect this continue in the 2H of 2011 and I think is a multi year theme. Great for income investors. The high yield sector ETFs also had a good first half with all but REM and PFF outperforming the S&P500. REM is a terrible proxy for mortgage REITs. A simple equal weighted portfolio of the true mortgage REITs would have outperformed the S&P500 as well. I’ll post on this at a later time but REM will probably be coming off the income investor dashboard. IYR, the US REIT ETF, had the best performance among the high yield sectors but seems over priced now. The MLP sector also had a decent first half despite the mini tax panic the hit the sector and looks well positioned for the second half.
Maybe the most surprising results of the 1H of 2o11 was the performance of bonds in particular that of muni bonds. The amount of fear and panic generated in this sector in the 1H was almost deafening. Interest rates were supposed to explode to the upside because of the deficits or inflation. Munis were going to collapse because of the state’s fiscal conditions. The bond vigilantes were going to decimate the bond market. And the last straw was supposed to be the end of QE2. Well, for all the fear mongering bonds did very well. Munis lead the way, even outperforming the S&P500. High yield bonds and corporate bonds also had decent performance particularly if you consider risk adjusted returns. Bonds, in particular, government bonds and interest rates are probably the most misunderstood part of the investment landscape. I expect bonds to do well in the 2H of 2011 with the fed keeping rates on hold for the next 6 months at the minimum and probably longer. Long term munis look to be the most undervalued bond sector.
Overall, a diversified portfolio of dividend and high yield equity sectors and higher yielding bonds with a healthy dose of cash to take advantage of opportunities would have done quite well in the first half of the year. Better than a portfolio of the standard market indices. I think such an income oriented portfolio will do well in the second half as well.
Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.