Dallas County Living Well Magazine Spring 2014 | Page 37

4 Reasons to Own Equities Now

Courtesy Hodges Capital

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Earnings Yield Disconnect

s of March 8, 2013, the S&P 500 is expected
to earn about $110 over the next 12 months.
With the S&P 500 trading around 1500, the
index trades at a multiple of about 13.5
times earnings. If we take the inverse of this

we get about a 7.5% earning yield. Where else can you bet
that type of return? Ten year treasury notes yield about 2%,
corporate bonds yield about 3.25%. We believe your clients
should be overweight equities until we see the discrepancy
between the two asset classes shrink.

Increasing Equity Demand
Net New Cash Flow to Equity Funds Related to Global Stock Price Performance

1997-2011

Net new cash flow to equity funds is plotted as a six-month moving average.
The total return on equities is measured as the year-over-year change in the MSCI All Country World
Daily Total Return Index.
Sources: Investment Company Institute and Morgan Stanley Capital International.

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Due to exorbitant amounts of fear in the market, we
saw six straight years of equity outflows totaling $479
billion by the end of 2012. In comparison, investors
have added $745 billion to bond funds since 2009. However, a shift has occurred since the first of the year in
investor sentiment and almost $29 billion has been in-

vested in equities over the first two months of the year.
Also note the consistency of this developing trend: we
have witnessed domestic equity inflows seven of the
last nine weeks. Equity demand should only intensify
when the Fed ends its bond buying effort and interest
rates rise.

Established in 1974, the Wilshire 5000 is built to represent the entirety of the stock market including the NYSE,
the AMEX, and the NASDAQ––totaling about 5000 holdings
(hence the name). You can see what it has done since then.
A smaller number of names lends itself to more dollar concentration on each individual stock. More dollar concentration means higher stock prices.

excess returns in equities in just about every type of stock
market. However, such opportunities do come in various
forms at different points throughout a market’s cycle and
require in-depth research. In most cases, this means going
straight to the source for information in an effort to truly
understand what’s going on in the underlying, unique businesses. These efforts require the time intensive analysis of
financial statements, interviewing of management teams,
visits with customers and suppliers, as well as an acute
awareness of the competitive landscape.

Liquidity

Performance
While many of you may be adverse to equities due to
the substantial corrections in 2000, 2002 and 2008, equity
investing has still turned out to be a profitable investment
over the long run. If you were invested in the S&P 500 from
1990 to the end of 2012, you would have made 355% on your
money, or almost 8% annualized.

Summary
We at Hodges Capital Management believe that opportu