A key challenge for most investors is meeting return bogies, but as Citi notes in the following 6 slides, generating a 10% return in this low-yield environment is still possible (aside from riding short-squeezes in #N/A P/E stocks) as long as you have the intestinal fortitude for the kind of leverage required…
How to Earn 10% in a Low Yield Environment?
Although less acute than early in the year, a key challenge for at least some investors is meeting return bogies.
How Much Leverage is Needed to Earn 10%?
We looked at how much financial leverage is needed to earn 10% for select assets. Required leverage is certainly higher than the historical norm, but variations across the markets are extraordinary.
How Risky are Levered Positions?
With respect to what could happen to levered positions in a tail scenario (defined as the single worst monthly performance during the post-Lehman period), we find that the most resilient assets tend to be cash corporates.
We also looked at the likelihood of each asset generating a negative outcome, and again cash corporates tend to fair well.
We also looked at the chance of beating a 10% return bogey (post-Lehman era), and once cash corporates look fairly attractive.
And the Winner Is…
For various risk metrics we rank each asset relative to the overall group (from 1 to 13, with 1 being the best). Using the average score for our overall ranking, we find that corporates are compelling.
So there it is, levered loans is the most 'efficient' way to gain 10% on a risky/levered basis – oh aside from the fact that The Fed, just yesterday,. announced it plans to introduce new loan underwriting standards for just that business…
Source: Citi
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