Flexible Strategic, Tactical Portfolio Strategies to Help Financial Advisors

As financial advisors consider how to position themselves for the remainder of the year and beyond, they may consider dynamic strategies that can better adapt to prevailing trends.

In the recent webcast, Why This Recovery is Just Getting Started –Tactical Flexibility is Key, Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, outlined the current markets, with U.S. large-caps leading risk assets and hovering around all-time highs. Large-cap growth has driven up the broad U.S. equity valuations to their highest levels in 15 years, and investors may find a better value in overseas markets. The strong earnings beats in Q2 have helped lift up U.S. earnings expectations, with an increasing number of upgrades in the U.S.

Only a handful of company stocks has led U.S. equity outperformance. While stock markets are at all-time highs, over three-quarters of Russell 3000 stocks remain well below their 52-week highs, notably those in the energy, financial, utilities, and real estate segments, which have been underperforming. Furthermore, U.S. equities account for 60% of global equity returns since the market bottom while performance leadership in the U.S. is concentrated within the top 10 contributors.

Meanwhile, with 10-year yields ticking higher off rising inflation expectations due to the aggressive fiscal and monetary policies, fixed-income assets like inflation-protected securities have attracted more attention. At the same time, long-duration nominal bonds declined in response to the perceived dip in real rates. Overall, the yield on the standard 60/40 stock/bond portfolio has decreased significantly to all-time lows, providing scarce income potential from traditional stocks and bonds.

Looking ahead, Bartolini also warned of political risks ahead as the contentious presidential election is right around the corner. Current probabilities highlight the potential for partisan gridlock, or a continuation of the status quo, once again in Congress, since neither party is predicted to control both houses. Specifically, the probability of a Democratic-controlled Congress has fallen as the GOP odds of Senate control have increased. Meanwhile, as depicted by the implied volatility of the CBOE Volatility Index or VIX curve, election-related volatility expectations have grown from an already elevated starting point.

On the economic front, Gary Stringer, President and Chief Investment Officer, Stringer Asset Management, underscored the improving conditions as we look to the long road toward recovery. For example, business surveys continue to show improvement, and new orders continue to improve and suggest increased capital investment and higher earnings expectations in the months ahead. Additionally, he expects to see more progress on the jobs front as well, notably, both weekly initial and continuing jobless claims, which are also important leading indicators, have advanced recently.

In this type of environment, Stringer argued for a focus on U.S. health care, home builders, internet, natural resources, transports, and quality, along with global low volatility and quality for an equity portfolio. Additionally, fixed-income investors should focus on short and intermediate-duration high-quality bonds and fallen angels. Alternatives like active non-traditional fixed income, convertible bonds, preferreds, and put option overlay strategy could also be used to manage risks further.

Stringer also highlighted their three layers of risk management, including strategic, tactical, and a cash indicator methodology, to better help financial advisors manage downside risk and maintain upside exposure.

“We manage risk within our strategic, long-term allocations based on diversification across low-correlated assets and a focus on areas where we find more attractive relative values,” Stringer said. “We manage risk tactically over the short-term by investing across a broad array of themes and asset classes, including cash.”

Stringer Asset Management also focuses on the Cash Indicator, a combination of the VIX Index and TED Spread. The Cash Indicator offers a well-defined methodology to get out of the way during outlier events and back in when the markets begin to normalize. Importantly, the CI takes the emotion out of the decision making process. Currently, the Cash Indicator has continued to decline to more normal levels following this spring’s turmoil. At these levels, the CI suggests markets are functioning properly.

“Our Cash Indicator methodology acts as a plan in case of an emergency. This approach is analogous to the multiple safety systems in a modern automobile, which includes an airbag. Each of these systems work together to potentially help smooth the ride for our investors,” Stringer added.

Jonathan Bernstein, Vice President, Sales & Marketing Director, Stringer Asset Management, explained that a methodical, rules-based investment strategy could help investors better manage market turns and continue to enjoy upside potential.

“Investors tend to fall short of achieving the opportunities and returns presented by the financial markets. The impact of investment errors caused by the constant market noise, media-hype, and uncertainty of real-world economic and market events may not be realized for years. We have dedicated our careers to refining our investment processes to avoid those emotional pitfalls and help you realize your financial goals,” Bernstein said.

Bernstein explained that within their strategic and tactical allocations, they maintain specific biases that should benefit clients over the long-term. The strategic allocations use market factors that they think perform best over the long-term. Conversely, the tactical allocations allow them to take advantage of short-term opportunities and manage risks in real-time. Additionally, the strategies are implemented by primarily utilizing ETFs for diversification, specificity, and cost control.

Stringer Asset Management offers a range of model portfolio options to help clients achieve varying results, including growth strategy, moderate growth strategy, conservative growth strategy, income with growth strategy, and income strategy.

Financial advisors who are interested in learning more about positioning for the rest of the year can watch the webcast here on demand.