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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.
Recession risks and markets: Can we avoid a COVID hangover?Continue reading
Fintech market overview: The intersection of disruption and dispersionContinue reading
By design and by default: Industry consolidation gathers steam across IndiaContinue reading
Thematic investing: Long-term thinking for a short-term worldContinue reading
The allocator’s landscape: Three areas of attention for 2023Continue reading
EM equity in 2023: Will the longest bear market in history continue?Continue reading
Recession risks and markets: Can we avoid a COVID hangover?
Current earnings forecasts and asset prices suggest overly optimistic expectations for the global economy and markets in 2023, according to Equity Portfolio Manager Dan Pozen.
Fintech market overview: The intersection of disruption and dispersion
In the latest episode of WellSaid, Portfolio Manager Matt Lipton and Global Industry Analyst Matt Ross join host Thomas Mucha to discuss their outlook for fintech in today's environment, exploring the recent pullback in the sector, disruptive fintech innovations, potential regulation, and much more.
By design and by default: Industry consolidation gathers steam across India
Equity Portfolio Manager Murali Srikantaiai sees increased industry consolidation in India as a largely positive trend from which some equity investors can (and should) seek to benefit.
Thematic investing: Long-term thinking for a short-term world
With economic conditions expected to remain volatile in the coming year, members of our Investment Strategy team suggest that thematic allocations may help reduce the importance of the cycle to portfolio returns.
The allocator’s landscape: Three areas of attention for 2023
Natasha Brook-Walters, Co-Head of Investment Strategy, discusses downside mitigation given the shifting equity/bond correlation, the impact of cyclical and macro volatility, and opportunities to position for long-term change.
EM equity in 2023: Will the longest bear market in history continue?
We explore three key considerations for EM investors in today’s challenging environment and highlight potential winners and losers in 2023.
2023 Equity Outlook
In our 2023 Equity Outlook, we offer a range of fundamental, factor, and sector insights as we look to 2023.
Equity allocation ideas after a year of factor extremes
Members of our Fundamental Factor Team discuss the role of defensive allocations as a complement to growth and value, the improved stock-picking environment, and the need for macro stress tests, among other topics.
Fintech outlook for 2023: The trends separating the winners and losers
Our fintech investors delve into high-conviction ideas for the year ahead — including embedded finance, buy-now-pay later, and digital assets — and highlight the power of incumbency amid today's increased volatility and dispersion.
Inflation, rates, and volatility: The best defense is a good offense
Insurance Strategist Tim Antonelli shares his latest multi-asset views for insurers, including the need to balance defensive portfolio strategies with continued income and return generation.