With investor eyes on the FOMC and growing concerns about the potential negative effect a sustained rise in US interest rates may have on US equity market performance, new research from global index provider FTSE Russell and Pacer Advisors highlights historical trends of high free cash flow companies in a rising rate regime.
The top 100 highest yielding free cash flow companies in the US large-cap Russell 1000® Index outperformed the broad index by nearly 13% in periods of rising rates and by nearly 3% in periods of falling rates between December 31, 1991 and September 28, 2018.
Michael Mack, portfolio manager, Pacer Advisors:
“Having free cash flow means a company is able to fund itself and is therefore not reliant on the markets for funding. Given that most high free cash flow companies are self-funding and have strong balance sheets, it is not surprising that they have historically outperformed the broad market during periods of rising rates.”
Source: FTSE Russell & PACER Financial. Increasing interest rate periods analyzed were 10/15/93-10/7/94, 1/18/94-6/12/96, 10/5/98-1/20/00, 6/13/03-6/12/07, 12/30/08-4/5/10, 7/24/12-12/31/13 and 7/8/16-6/29/18. Declining interest rate periods analyzed were 12/31/91-10/15/93, 11/7/94-1/18/96, 6/12/96-10/5/98, 1/20/00-6/13/03, 6/12/07-12/30/08, 4/5/10-7/24/12 and 12/31/03-7/8/16. Past performance is no guarantee of future results. You cannot invest directly in an index. Historical returns shown are hypothetical and not related to an actual high cash flow index or ETF. Returns shown may not represent the results of the actual trading of investable assets. Free cash flow yield measures a company’s total free cash flow relative to its enterprise value. This is an internal statistic and does not constitute investor yield. The strategies discussed are for educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategy will be effective.
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