From the Author:
Q&A with Ben Emons In Mastering Stocks and Bonds, you look at the relationship between stocks and bonds. What is the main message for the reader?
In this book I demonstrate how to use fixed income analysis to select stocks. I show how yield curve, carry and roll down and credit spreads can help pick stocks. I demonstrate "stock picking" can identify opportunities in bonds. The central message of the book is a stock investor can benefit from using bond analysis, and a bond investor can take advantage of stock picking. The result is an improved risk and return profile of a stock and bond portfolio.
You speak in the book about "crossover return." What precisely is meant by "crossover" and how would that benefit investors?
The crossover return between stocks and bonds is about correlation. In today's environment, stock and bond prices are highly correlated because of central bank policy, capital flows and market volatility. There is more need for active management than ever before. Investors may have yet to appreciate bond returns have at times equity characteristics, and stocks returns may resemble bonds. The crossover return between stocks and bonds is where opportunity resides for investors in today's market place.
Can you give us a sneak peek into the case studies that you feature in your book?
Throughout the book I use real time examples of specific stocks and bonds to explain the analysis and demonstrate results. For example, to apply fixed income to stocks, I look at the utility sector. Utilities have traditionally stable dividend payout ratios and positive free cash flow. By applying fixed income analysis, some utility stocks have value from a fixed income point of view. I explain what "carry" means in fixed income, the return an investor gets from earning yield or coupon over holding cash. Carry is also applicable to stocks, especially those with stable dividend yields or high earnings or free cash flow yields. By comparing the different yields with where companies borrow in capital markets, "equity carry" can be calculated. It is another factor in the list of indicators whether a stock has value or not.
I look across industries and identify high carry stocks that were either under or overvalued. An investor can apply this in practice by simply looking in the Wall Street Journal and see what dividend or cash flow yields companies pay and how much carry could be earned as an incremental return in the portfolio. On the other hand, I also look at balance sheet, price to book or earnings multiples and capital structure analysis for opportunities in bonds. Often companies that issue a lot or little debt have an imbalance in their capital structure. It means that either the company's debt or equity is over or undervalued.
I look at Apple versus IBM as examples of companies that have borrowed debt or bought back stock. The capital structure can show a bond of a company has value even when the stock has a low Price to Earnings multiple. The final chapter of the book shows a comprehensive portfolio analysis by using a large set of U.S. blue chip stocks and bonds. The results show that a fixed income and stock approach improves portfolio's risk and return.
The main conclusion is investors should actively use fixed income analysis on stocks, and stock picking on bonds. The crossover return analysis will provide more insight into valuation and present investable opportunities.
What audience do you think Mastering Stocks and Bonds is targeted to? Will this also be of interest to people that are not experienced investors?
This book is for experienced and less experienced investors. The content is a practical application of analysis applied to bonds and stocks, and is not highly quantitative. The book takes an educational tour on stocks and bonds, and shows how each can be used to the benefit of each other. Investors get practical examples they can use by simply picking up the Wall Street Journal, and compare companies' stocks and bonds to determine opportunities. The material can also be applied to investors who solely invest in mutual or closed end funds or exchange traded funds (ETFs). I also show the crossover return between stocks and bonds can be found in the convertible bond market, equity linked notes and subordinated debt. The book is for practitioners but can also be suited for students in finance, economics and social studies.
Can you tell the reader a bit about your background and how it got you to writing this book? How long have you been in the fund management industry?
I have worked in financial markets since 1994 and have been mostly focused on trading and managing bonds. Early on in my career I have also been involved in stocks, and have always been passionate about the stock market ever since I was 16-years old and witnessed the 1987 crash. I have been since 2001 in the fund management business, mainly in California. Prior I have worked at an investment bank in London and Amsterdam, predominately trading bonds and fixed income derivatives. I have also experience with fixed income and macroeconomic research. My years of experience in markets led to me to think of how I could find value in the crossover between stocks and bonds, and how that could be applied in practice. I noted especially the last five years bonds and stocks were appreciating in value at the same time. That got me to the idea to use fixed income analysis on stocks and equity analysis on bonds to see which has most
Can you offer any advice or guidelines for investing that professional investors can use to best manage their own portfolios?
I am a proponent of active management. Investors should always look for opportunities in individual securities or funds. This book is about active portfolio management and securities selection but the analysis could also be applied to investors that purchase index funds. My advice is to look at markets and securities globally because nowadays companies derive half of their earnings in other parts of the world. An active approach does not mean excessive or frequent trading. It means you keep a good eye on what is changing in markets which will quickly show opportunities. This book should help investors to find opportunities without necessarily relying on complicated models or spreadsheets. I would say: read chapters and look right away at financial sites or newspapers to see the opportunity. Actively searching will also help better diversify risk and mitigate hype around a particular stock or bond that may prove to be the wrong decision. Have fun reading and picking stocks and bonds!
About the Author:
Ben Emons is a Portfolio Manager and published author. He specializes in fixed income portfolio management and has over twenty years of work experience in international financial markets. He holds an MBA from the University of Southern California, Marshall School of Business, USA, as well as a Master's degree in international finance from the University of Amsterdam, The Netherlands.
Ben has been a frequent guest on CNBC, Bloomberg Television and Radio, TheStreet.com and Internal Business Times TV. He has been interviewed and quoted in major newspapers and magazines, and has published articles in PRMIA Risk Magazine, Reuters, Financial Times, Bloomberg BusinessWeek, and StockMarketWatch.com
Ben has produced a variety of webinars specifically for PRMIA and has spoken at numerous CFA conferences throughout the world. He is very active on social media via blogs, Twitter, and LinkedIn.
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