The Brexit vote ushered in a huge spike in volatility, and knocked the market back to “correction” territory for the second time this year. Although it is never comfortable to experience a sudden market retreat, it is very helpful to embrace the “stress test” by keeping your eyes open; to see what is working and what is not, and to make any necessary adjustments for the next reversal.
During both the 6-week correction starting in January, and the 2-day Brexit vote flash crash, we were very pleased to witness a variety of strategies within our portfolios that performed very well and helped to mitigate the declines in core equity holdings. We rely on these diversification tools to help generate a better risk adjusted return during difficult or choppy times, and to provide clients with more confidence to stick with their investment plan.
Here are a few of the strategies that we believe provided a much needed “calm during the storm” and, in our opinion, should be considered essential components of an overall risk management approach:
Managed Volatility Strategies: There are a number of strategies that invest in price movement trends of currencies, equities, interest rates, and commodities. If managed well, volatility – in either direction- is exactly what is needed to generate positive returns.
Domestic Real Estate Investment Trusts (REITs): The appeal of steady dividend income derived from a wide range of real estate assets allows REITs to often behave very well during sharp stock market declines. The actual dividend income puts capital back into the portfolio.
Dividend-paying consumer staple stocks: Shares of the diversified health care, food & beverage, and consumer products showed significant strength. Sales from these companies are considered to be less levered to the economic cycle, and their dividends have been very steady and in most cases rising.
Utilities: Customers rarely fail to pay their electricity and water bills during periods of economic crisis. Plus, utilities have dividend-payout mandates that provide for very consistent, and often rising, income streams. This trade is very crowded at the moment, but utilities generally exhibit great resiliency.
Buying at the bottom: In every correction there are overreactions, investment positions that are sold off excessively, or for reasons that are temporary. It is very important to be prepared to add to quality investments at attractive prices; to set up future returns and to “pull forward” the recovery of the portfolio.
Each of these items is part of our diversification and risk mitigation approach. There are risks associated with these asset classes, including market, liquidity, and management risks. So it is important to do your homework and to make sure that any participation in these securities is well within your investment objectives and risk tolerance.
To that point, It is also beneficial to identify the actual risk that you carry in your portfolio. One tool that we use to do this is a software program called Riskalyze that measures and “scores” portfolio risk levels. Feel free to call if you would like to see your portfolio through the eyes of Riskalyze.
There are risks involved with investing, including possible loss of principal and lack of liquidity. The investment return and principal value will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost. Past performance does not guarantee future results. This is neither an offer to sell nor a solicitation of an offer to buy. The offering is only made by the prospectus . Investors should consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. Prospectuses may be obtained from your advisor and should be read in full.
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