SERVING UNIQUELY SUCCESSFUL FAMILIES
Investing Themes of 2020

Investing Themes of 2020

How investment moves this year have impacted portfolios

Shifting away from High Yield

2019 was an incredibly prosperous year. As we began 2020, we felt it was prudent to take some risk off the table and preserve gains. We chose to reduce exposure to High Yield lower quality bonds which tend to "act like" equities in volatile markets. We replaced these positions with a combination of Long Term Treasuries and Gold, aiming to provide increased portfolio stability, given these assets are historically much less correlated to the equity markets.

We anticipated some volatility in 2020, but we could never have guessed that a global pandemic would erupt within 3 months. Through March we experienced the steepest economic decline since the Great Depression, with equity markets falling by over 30%. During that period, the High Yield space generally tracked the performance of the overall equity markets, declining double digits. Meanwhile, through all the uncertainty, demand for Long Term Treasuries and Gold went through the roof as investors around the globe flocked to the relative safety of these assets compared to equities; this demand naturally led to a sharp increase in prices for both Long Term Treasuries and Gold across the board in the first quarter.

Given the strong outperformance of Long Term Treasuries in general through the end of March, we felt there was not sufficient upside potential to warrant continuing to maintain exposure to this asset class. As such, we exchanged the Long Term Treasuries for Short Term Treasuries; our goals were to first preserve any gains that may have been earned during the "run-up" in the first quarter, and second to continue to support overall portfolio stability with high quality Fixed Income.

We still maintain our exposure to Gold across all of our investment strategies. We believe its role in portfolios as a "diversifier" to both Equity and Fixed Income is key during periods of volatility like we have experienced so far this year.


Avoiding "Zombies"

Following the steep decline in the equity markets through March, businesses around the world were struggling to cope with the various health and economic roadblocks hindering global activity. It became abundantly clear rather quickly that some industries had been utterly crippled by the economic standstill, requiring external monetary intervention to keep themselves afloat. We began referring to such companies barely maintaining their solvency as "zombies".

Through research, we found that US Mid and Small Cap in particular were the most "zombie-infected" industries. As such, we executed various tactics to shift our exposure away from broad-based indexing and towards actively managed ETFs within these spaces. With this environment, we feel security selection is paramount to achieve excess return. Active ETFs are managed similar to mutual funds, but their ETF structure allows for potential decreased internal costs and greater tax efficiency for the shareholders; these traits make such vehicles an attractive option for investors.

By utilizing actively managed ETFs, we believe we are able to better navigate the "infected" industries to avoid "zombies" and find companies with the opportunity to flourish in this strange new world. 


Targeted exposure to Emerging Markets

With the global spread of COVID-19, we felt Emerging Market economies were more susceptible to prolonged periods of volatility. As such, we felt it was prudent to exchange our broad-based emerging markets exposure for globally-focused actively managed ETFs.

We believe that shifting from strictly Emerging Markets to Global upgraded the quality of the underlying equity positions and slightly increased our domestic U.S. bias. Similar to the US Mid/Small Cap "zombies", we felt it was critical to pursue active management within this space, in lieu of broad-based indexing, to target specific regions and companies that may do well through all this turmoil. 

 

Investments mentioned may not be suitable for all investors. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance is not a guarantee of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected.  Investors should consider the investment objectives, risks, charges and expenses of an exchange traded product carefully before investing. The prospectus contains this and other information and should be read carefully before investing. The prospectus is available from your investment professional.