Excess Capital Yield Undergirds Investing in Today’s Market

Excess Capital Yield Undergirds Investing in Today’s Market

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James Dorment

James Dorment, CFA

Head of Fundamental Research and Portfolio Manager

David Zujkowski

David Zujkowski, CFA

Head of Fundamental Analytics

We believe Voya’s large cap value discipline, which focuses identifying companies with attractive excess capital yield, is a more dynamic and effective valuation mechanism to drive a value strategy, particularly in today’s market uncertainty.

Risk assets under pressure

The first five months of 2022 have seen major shifts in the geopolitical/economic landscape and asset prices. Risk assets are under pressure from geopolitical disruption, inflation, economic slowdown and restrictive monetary policies. While the general outlook for stocks remains constrained, U.S. large cap value stocks have fared relatively well (Figure 1).

Figure 1. Financial assets have pulled back under geopolitical and inflationary stress
Month-end and year-to-date percent total returns, as of 05/31/22
Month-end and year-to-date percent total returns, as of 05/31/22

Source: Voya Investment Management; data are sourced from third-party providers that Voya considers to be reliable though Voya cannot guarantee the accuracy of third-party data. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

Finding potential in the value space

Excess capital yield (ECY) works in tandem with traditional valuation measures to provide a clearer and more holistic view of a company’s ability to create value. ECY quantifies the “dry powder” available to a company to supplement value creation through dividend growth, share repurchases, accretive M&A and organic investment; the result is a more consistent, less volatile relative performance profile than those obtained using conventional valuation measures. Voya Investment Management’s large cap value discipline considers ECY on a sector-relative basis and aims to construct a diversified portfolio with a higher yield than the benchmark.

Identifying an investment edge

We believe ECY generates better returns and risk efficiency than traditional value metrics and can help Voya’s large cap value discipline identify stocks with potential to withstand current conditions and thrive in the future. Back-testing indicates that ECY affords more deeper insight into a company’s earnings potential, and thus potentially generates better risk-adjusted returns than traditional value metrics (Figure 2).

Figure 2. R1000V ex- financials, REITs and utilities — cap-weighted performance, Jan 2007–Dec 2021
Figure 2. R1000V ex- financials, REITs and utilities — cap-weighted performance, Jan 2007–Dec 2021

Source: FactSet, analysis by Voya Investment Management, data from 01/31/07 through 12/31/21. The analysis excludes real estate investment trusts (REITs) and utilities since neither sector aspires to generate excess cash, making the ECY metric less applicable. Past performance is no guarantee of future results.

Excess capital is king

There’s an old saying in investing that “cash is king,” particularly in volatile markets where risk aversion is the prevailing sentiment. We take that axiom a step further to say that “excess capital is king.” In today’s market, where concerns about rising interest rates and high inflation rule the day, companies that aren’t profitable ― and as a result, need to tap into capital markets via debt or equity ― are under tremendous pressure. By contrast, those companies that can self-fund and grow their business by generating excess capital, aka “dry powder,” have been able to perform much better. We believe such companies will continue to be rewarded by investors looking for more certainty in the potential of the equities in which they invest.

ECY: dynamic and flexible

The presence of ECY can skew a company’s risk-reward potential, amplifying the upside potential and mitigating the downside risks associated with stock selection. The success of ECY is linked to two key features:

1. Alpha: ECY historically exhibits stronger, more consistent factor performance than traditional valuation measures.

2. Framework: the components of ECY provides analysts with insights into what levers a company has at its disposal to generate future earnings.

In our view, a value-oriented strategy should be both dynamic and flexible: capable of accounting for differences across businesses and market regimes, and complementary to the approaches of fundamental analysts. The success of the Voya Large Cap Value strategy is a direct result of its triangulation of ECY with other relative value measures and qualitative, differentiated insights from our experienced team of sector analysts. To learn more about ECY and Voya’s large cap value discipline, see our insight, Excess Capital Yield: A Better Framework for Value Investing.


1 Volatility = annualized standard deviation of quintile spread returns.

2 Sharpe ratio = (portfolio return quintile 1 minus portfolio return quintile 5)/annualized standard deviation of quintile spread returns.


Past performance does not guarantee future results.

The principal risks are generally those attributable to investing in stocks and related derivative instruments. Holdings are subject to market, issuer and other risks, and their values may fluctuate. Market risk is the risk that securities or other instruments may decline in value due to factors affecting the securities markets or particular industries. Issuer risk is the risk that the value of a security or instrument may decline for reasons specific to the issuer, such as changes in its financial condition.

The Voya Large Cap Value strategy employs a quantitative model to execute the strategy. Data imprecision, software or other technology malfunctions, programming inaccuracies and similar circumstances may impair the performance of these systems, which may negatively affect performance. Furthermore, there can be no assurance that the quantitative models used in managing the strategy will perform as anticipated or enable the strategy to achieve its objective.

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