Whether you’re ready or not, we’re well into Q4. What moves do you need to make in order to position your clients’ portfolios for today’s uncertain landscape?
Orion Advisor Solutions Chief Investment Officer Rusty Vanneman recently presented during a S&P Dow Jones Indices webinar about the growing range of strategies for advisors to consider as you recalibrate client portfolios to account for what has become a consistently volatile market.
Here’s a recap of the webinar that breaks down where industry thought leaders think advisors should turn their investment focus heading into 2020.
Rusty Vanneman, CLS Investments
With the current volatile landscape in mind, Vanneman outlined how advisors may use tactical buffer strategies to lock in potential gains for their clients while protecting on the downside.
The reasons why investors would want their advisors to use a tactical strategy with an emphasis on downside risk management are:
- They don’t have the stomach to tolerate losses.
- They’re concerned with the sequence of returns, especially if they’re nearing retirement and can’t afford a loss on their portfolios even over an intermediate term.
- They understand that downside risk strategies seek to limit the impact of large stock market declines and are comfortable with a little extra risk when the market trend has been positive.
“When it comes to the sequence of returns,” Vanneman says, “it’s really important for many investors to limit loss in their portfolios.”
For example, it would take a little over four and a half years to recover from a 20 percent loss in your portfolio, assuming a 5 percent return.
To protect against such losses, CLS Investments uses a tactical strategy called the protected equity strategy and we use our proprietary Shelter Fund, which is built with an emphasis on buffer equities ETFs.
Here’s how the protected equity strategy works in different markets:
- Flat or Rising Market: The protected equity strategy is entirely invested in diversified stock ETFs, which approximate overall market volatility.
- Declining Market: The protected equity strategy will begin to move out of the growth-seeking assets and will start moving into either buffered equity or low-volatility ETFs while the rest of the strategy will remain invested in diversified stock ETFs.
- Severely Declining Market: The diversified equity strategy will still remain invested in the buffered equity or low-volatility ETFs and also begins investing in cash in an effort to limit the downside risk of major stock market declines.
Vanneman says that CLS decided to use defined outcome ETFs in the middle of their strategy to protect portfolios because they are basically a lower volatility ETF that emphasize loss protection, can still participate in upside returns, and complements and helps diversify the portfolio.
For example, the S&P 500 Power Buffer ETF had a relative risk and beta half of that of the overall market from August-September 2019, according to Morningstar data, while capturing a 2.5 return (a .538 upside) compared to the market’s 4.645 return.
“We believe that investors and tactical strategies do expect loss prevention,” he says. “While the strategy is primarily built around trying to prevent severe losses, really any sort of loss prevention is desired by investors.”
So, advisors can deliver a unique client experience heading into 2020 by using a flexible, tactical asset allocation strategy with buffer ETFs to help investors stay the course and reach their ultimate objectives.
Low Volatility Investing
Jason Sangekar, Magnus Financial Group
Sangekar talked about how advisors can go defensive and how his firm decided to rebalance and de-risk equity allocations across all model-based portfolios using low volatility investing.
With growing concern that the 10-year bull cycle is coming to an end, equity indexes reaching all-time highs, and the valuation multiple trending above historic averages, Magnus Financial Group looked to move toward more diversification and reduced correlations.
Like buffer strategies, low volatility investing is designed for greater drawdown protection. It uses a rules-based approach to target low volatility factors, such as standard deviation, in order to lower volatility, lower beta, and lower downside capture. The only drawbacks are a lower up-capture, higher turnover, and sector concentrations.
With that strategy in mind, Magnus decided to decrease allocation in U.S. domestic large-cap growth and international (especially Europe) developed markets, and instead chose to re-allocate to:
- Private real assets (non-correlating features)
- Institutional infrastructure, agriculture, timberland
- Emerging markets short duration debt (U.S.)
- Short-term debt instruments of sovereign and corporate issuers of emerging markets
- Ability to enhance overall income of the portfolio in the current low interest rate environment
- U.S. large blend low volatility
- Broad domestic U.S. equity market exposure
- Tactically adjusted low-volatility constituents
Sangekar says that investors tend to want to jump around continuously in order to find the best performing asset class every year, which can make consistent returns a challenge. But it takes a greater return to recover a loss of principal, making it important to add a defensive posture to portfolios during volatile periods.
“Unforeseen events like economic and geopolitical disruptions emphasize the importance of time horizon,” Sangekar says. “Our firm’s goal is for our clients to be long-term investors and not day-traders.”
And low volatility investing can provide that much-needed stability and confidence.
Matt Pierce, Wealth Consulting Group
Moving away from the topic of volatility, Pierce from Wealth Consulting Group focused in on how advisors can take advantage of shifting consumer preferences for “doing good” through ESG investing.
“Consumers more than ever care about what they’re putting both in and on their bodies, the environmental and social impact of their consumption habits, and the supply chain of those products,” Pierce says. “This trend is only accelerating. ESG investing and changing consumer habits are two sides of the same coin.”
Pierce outlined that both current dollar value of assets invested in ESG products and the projected amount of assets “are eye-popping and grab headlines.”
Millennials and women are leading the charge and are looking for the right advisors to help them do it. Ninety percent of millennials want to allocate to responsible investments in the next five years, and women are twice as likely to consider sustainability alongside return when investing.
But, according to InvestmentNews data and Financial Advisor magazine, respectively, two out of three adult children and 70 percent of widows fire advisors after they inherit mostly due to differences in investment goals.
“If you’re not talking about ESG, your competition is,” Pierce says, “and it could likely be the reason investors select a different advisor.”
ESG investing is showing quantifiable good being done, and does not mean sacrificing returns or increasing risk.
A University of Hamburg and Deutsche Asset Management meta-study of over 2,000 academic ESG performance studies found that 88 percent of companies with robust sustainability practices demonstrate better operational performance and cash flows, 90 percent demonstrate that prudent sustainability practices have a positive influence on investment performance, and, on a whole, companies with high ESG ratings tend to have a lower cost of capital.
So, Pierce challenges: “If you’re not sacrificing on performance, if the message is resonating with a larger and growing segment of our clients and prospects who are more conscious than ever of both their consumption and investment dollars, what is the downside at the beginning to incorporate ESG into our practices and portfolios?”
How CLS Can Help in 2020
CLS Investments offers innovative investment solutions, market-leading insights, and premier portfolio management services to help advisors and investors achieve financial success.
Let us help you make 2020 your best year yet. Contact us today!