DIVERSIFICATION AND COMMITMENT
Two keys to positive, long term performance with lower volatility are diversification and commitment. Diversification, assessed more objectively through correlation analysis and other valuations metrics, can be achieved through the use of various types of investments across different asset classes. Commitment, sometimes subjective and influenced by human behavior, is typically shown by a willingness to hold an investment or group of investments through both peaks and valleys over a long period of time.
Market performance since the Great Recession and more recently, the 2015 Correction focuses our attention on these two aspects of investment management. It is also the reason Clearview Wealth Management maintains an allocation to a category of investments we define as “Hybrids”.
HYBRIDS – ROLE AND COMPOSITION
Hybrids play a unique role in a portfolio by behaving differently (uncorrelated) than bonds and traditional equity investments therefore enhancing diversification and complementing long-term portfolio returns. This uncorrelated asset class is comprised of four distinct subgroups and uses investments that are publicly traded and liquid.
HEDGE FUNDS – Investment strategies that include short selling, the use of futures, options, derivatives and arbitrage that seek to achieve absolute returns. Absolute return refers to attempts by a manager to achieve a return on an asset irrespective of the direction of the wider market. This is in contrast with relative returns where the performance of an investment is compared with a market benchmark or index. Absolute return funds aim to make money for investors in both rising and falling markets.
ALTERNATIVE INCOME – US and non-US speculative grade or high yield junk bonds that are rated below investment grade at the time of purchase. This investment strategy has a higher risk of default, but pays a higher yield than investment grade bonds to attract investors.
INFRASTRUCTURE – Defined by Merriam-Webster dictionary, a system of public works of a country, state, or region; also: the resources (as personnel, buildings, or equipment) required for an activity. Investments grouped in this category include oil/gas pipelines, utilities, public works, toll roads, international airports, and selected logistic centers (ports/docks/rail).
HARD ASSETS – Commodities or raw materials used in the production of foodstuffs and in manufacturing industries. Commodities include oil, metals, grains and cereals, soft commodities such as
sugar, cocoa, coffee and tea and vegetable oils such as palm oil, soy bean oil and sunflower seed oil. Exchange-traded commodities are quoted in specific lots of a specific quality for specified delivery.
PERFORMANCE – THE LONG AND THE SHORT
During the months leading up to the bottom of the Great Recession in the middle of March 2009, Hybrid category investments performed as expected relative to the other asset classes of fixed income and equities. Performance was lackluster when compared to the steady positive performance shown by the S&P 500 since the Great Recession but Hybrids again showed their strength during the 2015 Correction. The Table below illustrates these fluctuations during the 2015 Correction and will hopefully reinforce the value hybrid investments can play during market cycles and shorter term corrections.
CONCLUSION – THE CASE FOR HYBRIDS
When used together with investment grade fixed income and traditional equity investments, hybrids have the potential to make positive contributions to the long term performance of a portfolio. There will be times it becomes easy to criticize the category and/or a specific investment but long term, the Investment Team believes the Hybrid asset class represents an opportunity for favorable risk adjusted returns.
Portfolio Recap The 2nd quarter was marked by very low equity market volatility and steady, positive performance across all major indices. Our diversified approach to managing investments continued to focus on limiting downside equity risk through a bias for value-oriented, high quality, dividend paying domestic and international equities. In the short term, volatility and potential for loss has been further mitigated by allocating fewer investment dollars to US Small Cap stocks. They have experienced significant gains over the past several years and in our opinion, have been richly valued for quite some time. This is why we reduced our positions in the latter half of 2013, well in advance of Fed Chair Janet Yellen’s remark about the category valuations being stretched. Hybrid investments, led by preferred stock, global bonds and energy infrastructure, had a strong quarter validating our belief the asset class can perform well during strong equity markets. Our consumer-focused emerging market investments slightly under-performed during the quarter but exceeded our expectation on a risk-adjusted basis. Despite headwinds created by the Federal Reserve’s plan to stop tapering and end Read on! →
May 2014 Newsletter If you can identify with a May 1st deadline, you are likely dealing with a rising college student. For those who are not aware, May 1st is the date by which decisions must be made to accept the “college of their choice.” As we approach Memorial Day weekend, most families are deep in the throes of final exams, final concerts, graduations and the associated parties to celebrate the accomplishments of their graduates. This is indeed a time for celebration. However, if you look a bit deeper, it is also likely a time of angst as parents worry they haven’t accomplished everything necessary before their child leaves for college. There are the obvious things, like packing and paying the tuition when it comes due. There are also some essentials you may not have thought about, which need to be discussed before your child leaves the nest. Not only will it help make your life easier in the long-term, but it can go a long way toward clearly setting expectations and laying a good foundation for your young adult’s Read on! →
Portfolio Recap As the 1st quarter of 2014 came to a close and the 2nd quarter began, the US stock market remained near record highs. Talk by the Federal Reserve of ending (tapering) their quantitative easing program sooner, questions around whether corporate earnings can support valuations and recent geopolitical events in the Ukraine, all contributed to increased volatility and concerns over how much longer the current 6 year bull market will continue. Through all of this, your portfolios showed resiliency and experienced steady, positive performance. Our diversified approach to managing investments continued to focus on limiting downside equity risk through a bias for value-oriented, dividend paying domestic and international equities. In the short term, volatility and potential for loss has been further mitigated by allocating fewer investment dollars to small cap and emerging international, both of which carry more risk than other areas in the equity markets. Small cap has also experienced significant gains over the past several years further motivating a reduction because we believe the prospect for significant future appreciation has diminished. Hybrid investments, led by preferred stock, Read on! →
Assuming you wouldn’t hand over your house key to a stranger on the street, why turn over critical financial decisions to someone you don’t know very well? If you decide to hire a financial adviser based solely on “feel,” rather than their experience, expertise, and disciplinary background, you might as well have handed over the key to the next passerby. While personality, style and overall “fit” should play a role in choosing a financial adviser, make sure and do your research using a few key documents to fully understand the adviser’s business practices and avoid the regret that comes with making the wrong decision. Every year at this time, advisers across the country are reviewing and revising their Firm Brochure Part 2A Form ADV, Firm Brochure Supplement Part 2B Form ADV, Privacy, Confidentiality and Proxy Voting Disclosures. These documents describe the firm’s business practices, its key employees and their credentials. They also serve as annual updates to the various regulatory agencies that oversee the financial services industry. For individuals seeking an adviser or considering a change to a current relationship, Read on! →