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.
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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.
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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.
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We also looked at the likelihood of each asset generating a negative outcome, and again cash corporates tend to fair well.
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We also looked at the chance of beating a 10% return bogey (post-Lehman era), and once cash corporates look fairly attractive.
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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.
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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