As market volatility continues in mid-July, major equity indexes still manage to notch new highs. Advisors and investors concerned about peak markets should look to more selective, active strategies as well as high-conviction portfolio construction.
Investors continue their week-long rotation from AI and technology stocks into small-caps. The Dow Jones rose 700 points in trading on Tuesday, July 16, to close at a record high. Meanwhile, the S&P 500 also logged another record-high close, buoyed by interest-rate-cut hopes.
An increasing number of advisors and investors are moving out of overweight cash positions. However, concerns about market peaks could lead to costly hesitation.
“Clients who wait for stocks to decline before they buy could miss out on significant growth opportunities,” Natixis Investment Managers wrote in its recent Natixis Portfolio Playbook. “In the long term, equity markets have historically increased 70% of the time and decreased only 30%.”
Position Offensively in the Second Half
For those investors with an eye to ongoing market highs and concerns of peaks, Natixis suggests three different styles of portfolio construction.
For investors looking for a more offensive strategy, Natixis recommends a selective approach to equities instead of focusing on a sector or broad market. Strategies focused on individual security quality may offer opportunity.
Active management also offers diversification benefits and the potential for outperformance. When considering active equity strategies, Natixis recommends growth-oriented, small, and midcap strategies for diversified returns.
Bonds remain an investor focus on expectations and hopes of a September interest rate cut. Active management may also prove beneficial for fixed income.
“Look for managers who are discerning and evaluate the quality of every issuer, not just coupon rates and duration,” Natixis advised. The issuer also recommended that managers “strive to balance yield and total return potential with risk.”
Defensive Portfolio Positioning
Active management also proves valuable for those investors seeking a more defensive tilt to their portfolio. Quality and selection still matter when investing defensively, but Natixis recommends large-caps for equity portfolios.
“US large-cap strategies may sound like a counterintuitive strategy for defense,” the firm acknowledged. However, “strong balance sheets and strong earnings make them a solid choice for protection from other, more volatile asset classes.”
Within bonds, Natixis recommends extending duration. This allows for possible mitigation from drawdowns and asymmetrical downside risk from interest rates. It also allows cash flow from a more diversified bond portfolio than remaining hedged in short-duration and cash.
An Integrated Portfolio Solution for Advisors
Advisors looking for a portfolio plan to actively manage opportunities as well as risks would do well to consider model portfolios.
“Look for active managers with the flexibility to make tactical shifts in response to new opportunities and new risks presented by the market,” advised Natixis.
Seeking strategies that focus on tax awareness may help optimize tax implications for investors. Additionally, strategies that can mitigate capital-gains impacts allow clients to retain more of the income earned.
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