Measuring duration in equities

The latest research from Zenith Investment Partners shows that considering equity duration can be a powerful tool in constructing investment portfolios.

Quan Nguyen, head of equities at Zenith, said duration was the length of time required for cashflows from an asset to fully repay the initial investment.

“In the case of equities, we measure duration through dividend yields,” Nguyen said.

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“For example, if a stock has a dividend yield of five per cent p.a. it would take 20 years for its dividends to fully repay an investor’s capital. This represents a duration of 20 years.”

Long duration equities were expected to deliver a higher proportion of future cashflows in the distant future, while short duration equities did the same for the near future.

The other significant characteristic for long duration equities were that they were more sensitive to interest rate movements, and as a result have benefited from the recent decline in Australian interest rates.

Zenith’s 2019 Australian Shares – Large Companies Sector Report looked at the duration of stocks in the Australian equity market, to help advisers understand equity duration.




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