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
Perpetual has seen AUM rise 6 per cent in the last quarter but the departure of a longstanding JOHCM fund manager led to outflows of $2.2 billion from his strategy.
Global fixed income fund Bentham Global Opportunities has been added to several major platforms, enabling it to be accessed more easily by financial advisers.
Following yesterday’s news about First Sentier Investors closing four investment teams, a second global asset manager has announced it is closing its only dedicated Australian fund.
As ASIC chair Joe Longo pushes firms to prepare for the upcoming mandatory climate disclosure regime, what skills are necessary if firms are looking to expand their ESG teams?
