Strategies for de-risking portfolios

After another bout of volatile markets last month, experts are developing more defensive strategies to remove risk from portfolios and prepare for the end of this record-long bull run.

“We believe we’re in the late-cycle phase and we’re flirting with the end-of-cycle recession,” said Andres Rincon, director of ETF and equity derivatives strategy at TD Securities. “However, at this moment we still believe that growth is in play and, as such, defensive growth is still the name of the game.”

Rincon was speaking at BMO’s ETF roadshow in Toronto on Thursday. He and other experts offered macro outlooks and strategies to suit the times. They also discussed defensive positioning and how to remove risks while not missing out on remaining growth.

“Even though I do think we’re late in the cycle right now, it’s still going to be very pro-growth for the next two years,” said Alfred Lee, director, portfolio manager and ETF strategist at BMO Global Asset Management.

Lindsay Patrick, director of global ETF strategy at RBC Capital Markets, discussed covered calls as a way to maintain equity exposure, albeit more defensively. While interest rates are rising and political risks remain around U.S.-China trade and Brexit, a still-expanding global economy makes equities worth holding, she said.

“I’m overweight North American equities in my portfolio,” she said. “But for those investors who are concerned about a sustained rise in volatility, or if you think we may be closer to the end of the economic cycle, then consensus suggests that switching some of your beta positions into covered call positions may make sense.”

She likes the North American financial sector, with Canadian banks benefiting from exposure to the U.S. market. The overall Canadian market will be a positive one to watch over the next six months, she said.

Uncorrelated assets are another way to find returns outside traditional asset classes, Patrick said. She pointed to infrastructure, where there’s massive global demand as well as support from populist governments. In the U.S., with a Democrat-controlled House of Representatives, infrastructure spending could be a rare area of bipartisan consensus, she said.

While Patrick was focused on North America for equities, she said she’s looking elsewhere for fixed income.

“I believe the global active fixed income ETFs are a good place to look for alpha,” she said.

Finally, Patrick said the era of global policy uncertainty—with risk from populist movements and U.S.-China relations—means there’s a need for cash.

“For the first time, I’ve added a cash position into my portfolio,” she said. “You need to have cash in the event bonds and stocks go down at the same time—positive correlation of assets, which is a real risk, I think, looking ahead.”

Active investors can also use cash for short-term trades amid more bouts of volatility, she said.

As for how this decade-long bull market could end, she raised the risk of an overheating economy forcing the Fed to move faster than markets expect.

“That is a situation that equity markets and fixed income markets alike do not enjoy and do not perform well in,” she said.

Lee said it’s a good time to have a simple portfolio.

“Staying defensive and staying true to your asset allocation mix is going to be key,” he said. “I think it’s going to be very easy for investors to get lulled into over-allocating in equities. Do not forget about fixed income—I think fixed income is going to be very key in this market.”