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Is it Aristocrat-chopping time?

by Robert St George on Dec 17, 2013 at 14:31

Both the aristocrats and the S&P 500 stocks trade on an enterprise value of 9.4x their Ebitda. And the aristocrats are actually more attractive in terms of their net debt to Ebitda ratio of 1.3 compared with the S&P 500’s 1.6.

Now, the relatively lower gearing employed by the aristocrats does mean they are more likely to lag if US equities as a whole continue to rally.

Jackson is not unduly bothered by this, noting that the income growth from their progressive dividends should offset this through the long term.

Furthermore, he observes the low debt levels and defensive nature of the index have historically helped it outperform in bear phases. In 2011, for instance, the S&P 500 was flat but the aristocrats eked out a 4% gain.

Whether that pattern will hold, or May’s sell-off is the new paradigm, is uncertain.

‘The higher headline valuation on the underlying holdings may provide less downside protection in the event of a market correction and the shorter-term investor should be mindful of this,’ Jackson said. ‘However, we continue to favour the strategy for the more patient longer-term investor.’

Edward Fane, fund and research manager at Thesis, is more cautious about the aristocrats strategy. ‘There has been a cohort of companies in the US that has real longevity and consistency when it comes to paying dividends. ‘But we have never felt the US market needed to be approached in that way.’

In particular, Fane is reluctant to sacrifice growth for income, and to introduce the sector bias inherent in the aristocrats index.

For Peter Askew, senior multi-asset fund manager at T Bailey, the ability to invest in such narrow strategies is in fact an advantage.

‘We are all trying to identify where the value lies away from the wide index. It is a very broad market and people are going to want to move into more focused areas, whether that is equity income, value or growth.’

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