Time to consider defensive equity strategies
Investors might need to consider repositioning their portfolios through diversification into defensively oriented stocks which are typically associated with sustainable dividend pays, according to Legg Mason’s subsidiary QS Investors.
After a relatively strong year which saw equity markets surpassing record high several times, the coming year might turn out to be more “turbulent, yet potentially profitable” as long as investors would prepare their equity allocations respectively.
The warning signs for investors that had recently emerged and could potentially spark more volatility included recurrent tensions in US-China relations, further uncertainty around Brexit, soft economic data and an inversion of the two and 10-year segment of the US yield curve in August which might herald lower equity market returns, given the latter stages of the protracted expansion, the firm said.
“While an inversion in the yield curve is typically associated with recession, it is key to note that historically, an inversion in the US yield curve has preceded a recession by an average of 14 months and in multiple cases the period between one (the inversion of the yield curve) and the other(recession) has been closer to two years,” the firm said.
Therefore, investors would need to embrace two conflicting objectives: how to maintain equity market participation while limiting vulnerability to a late-cycle correction or negative market shock for capital preservation.
“Defensively oriented stocks can lower overall portfolio volatility and dampen drawdowns while allowing for equity market participation,” QS Investors noted.
“Dividends typically become a larger and more stable component of total return in low return environments and lower volatility profiles may mitigate drawdowns during periods of market turbulence.
“Defensive equity income strategies may help investors prepare their equity allocations for a turbulent, yet potentially profitable 2020.”
The performance of Legg Mason QS Investors Global Equity since inception
Recommended for you
Almost 70 per cent of asset managers are planning to control costs via product rationalisation, according to a global survey by Northern Trust, as they seek to offer clients a best-in-class experience.
Fund managers should work collaboratively with data providers to minimise greenwashing risks in their products as a positive ESG score can be a “gamechanger” for a fund’s demand with advisers.
Asset manager Janus Henderson has made two acquisitions in the ETFs and emerging markets space as it takes strategic steps to meet client needs.
Self-reporting issues to ASIC could lead to a reduced charge for a fund manager but it may not exempt them from enforcement action altogether, according to ASIC chair Joe Longo.
