Ease exposure to REITs, utilities

When global economies are on shaky ground, investors tend to prefer low-volatility stocks.

Not even the Federal Reserve could stave off a market rally at the end of third-quarter 2014. Many analysts predicted the central bank’s ending of its quantitative easing program would dampen stocks.

But that didn’t happen.

In part, that’s because the Bank of Japan implemented stimulus around the same time, and the European Central Bank was considering how it could boost growth, says Peter Hardy, vice president and client portfolio manager at American Century Investments in Kansas City, Missouri. His firm manages the Renaissance U.S. Equity Income Fund.

Still, he adds, “there will be continued interest-rate sensitivities for broad asset classes [this year], including stocks and bonds.”

He points out some of the economic sectors that are most sensitive to interest rates are the also some of the highest yielding for investors.

Many investors to drop REITs and utilities during the sell-off in the summer of 2013, but “as interest [fell] in 2014, those sectors [were] the biggest beneficiaries—in third quarter of last year, REITs were up about 25% and utilities were up more than 22%, and the broad market was up well below that level.”

Since those areas have historically been sensitive to interest rate movements, Hardy expects they’ll continue to be, “given that they’re beneficiaries of low rates.” As a result, he sold those securities last year based on their price strength, and re-deployed the assets into areas where there’s been relative stock weakness.

At that time, he says, his weighting in the financial sector dropped by “a pretty sizeable 3% to 4%” from about 30%. That’s because that sector could also be negatively affected when interest rates eventually rise.

This year, Hardy plans to “underweight more market-sensitive business models, where […] sensitivities could lead to higher degrees of volatility.”