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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
The market outlook is without question a challenging one, and there is no quick fix and no single “bridge” that will get asset owners where they need to go. But I believe there are effective incremental steps that can be taken to help improve a portfolio’s return potential, including the following ideas.
To demonstrate the potential benefit of defensive investing, Figure 1 illustrates a hypothetical strategy that captures 95% of the return of the S&P 500 in up months but only 85% in down months. Not surprisingly, the strategy adds value when the S&P 500 falls, including during bear markets (shaded areas). But it also holds its own in bull markets, when it might be expected to struggle. After all, even in a bull market there are ups and downs, and a strategy that can limit downside can leverage the power of compounding to improve results over time.
Asset owners with a traditional equity portfolio (growth, value, core) may miss out on factors related to defensiveness, such as price stability (e.g., low volatility) and earnings stability. One idea for filling this gap is “compounders” — equity strategies focused on companies with high and stable free-cash-flow yield and the potential to grow modestly but steadily over time, all in the pursuit of high-single-digit or low-double-digit returns. This category includes portfolio managers we think of as “core compounders,” based on the way they pick companies, as well as listed infrastructure and listed real estate strategies.
High-single-digit or low-double-digit returns could represent significant alpha in the next decade. In addition, valuation could be a tailwind for some defensive approaches, given the category’s weak COVID-era performance. Some of these strategies (e.g., listed infrastructure) may also offer the benefit of inflation hedging, which could add to their appeal in the current environment. Lastly, it is possible that in some scenarios, fixed income will be a less effective hedge against an equity market sell-off than it has been historically, which could make defensive equities all the more attractive.
I define thematic investing as trying to capture structural trends that will change the world over a period of five to 10 years (or more) in ways the market hasn’t fully recognized. Today, fintech, energy infrastructure, and emerging market development are among the themes I’m most excited about.
Opportunistic investing is about taking advantage of market dislocations or negative investor sentiment, which can create massive tailwinds when fundamentals (and sentiment) inflect — a process that often plays out over a shorter cycle (three to five years) than thematic. Opportunistic investors seek to “monetize” a longer time horizon by being a liquidity provider when the market is shying away from a region, asset class, or approach. Given that there is ample liquidity today, I see fewer of these opportunities at the moment, but Japan may fit the bill and China could soon as well.
Both thematic and opportunistic investments can potentially benefit from tailwinds that aren’t reliant on the business cycle or economic growth, which means they are less dependent on the state of the broad capital markets and may add some diversification to a portfolio. Success factors include identifying the right themes or opportunities and then finding the related securities that are most attractive at any given point in the cycle.
Small-cap value: Strong past, bright future?Continue reading
Thematic investing focus: The future of foodContinue reading
Navigating the new global economy in 2023Continue reading
China equity in 2023: Year of the stock pickerContinue reading
Health care outlook for 2023Continue reading
Monthly Market Snapshot: November 2022Continue reading
Pivoting from innovation and growth to stability and valueContinue reading
Small-cap value: Strong past, bright future?
While equity markets have had a challenging recent past, history teaches us that there may be several reasons to be optimistic about small-cap value.
Thematic investing focus: The future of food
The global food system has reached a tipping point and change is coming, creating investment opportunities aided by demographic, policy, and innovation tailwinds.
Navigating the new global economy in 2023
This executive summary distills the points of view of several of our 2023 Outlook authors. Discover the risks and opportunities they see as we enter a new economic and market regime.
China equity in 2023: Year of the stock picker
Despite the potential risks of investing in China equity, Equity Portfolio Manager Bo Meunier believes there are attractive opportunities for patient, discerning stock pickers.
Health care outlook for 2023
Looking ahead to 2023, members of our health care team see meaningful innovation, supportive valuations, and a benign political and regulatory backdrop across biopharma, medical tech, and health care services sectors.
Monthly Market Snapshot: November 2022
Pivoting from innovation and growth to stability and value
In a more volatile world, stability may take priority over innovation, and that, explains Multi-Asset Strategist Adam Berger, would tend to favor value stocks over growth stocks.
China internet: Identifying opportunities amid stormy seas
Uncertainty in the Chinese internet company space has been elevated over the past few years. We believe that investors may benefit from tactical approach, rather than broad-based industry exposure.
What’s next for infrastructure?
Portfolio Manager Tom Levering and Global Industry Analyst Tim Casaletto explore the outlook for infrastructure assets in 2023 across each of the key areas.
Semiconductor industry faces near-term headwinds, long-term growth
Global Industry Analyst Eunhak Bae analyzes short-term headwinds and long-term opportunities in the semiconductor industry.
Reality bites: Are equity markets too upbeat?
Cautious on global equity risk, Global Investment Strategist Nanette Abuhoff Jacobson suggests that investors favor higher-quality stocks and take a look at high-quality fixed income.