Early this week, the S&P 500 Index1 retouched its record high set before the pandemic and quarantine sent stocks into bear market territory for the first time in 11 years.
While markets have swiftly rebounded, the economy has not. Fiscal and monetary stimulus have buoyed markets and offered a near-term safety net for businesses and the unemployed, but the global economy remains on unstable footing. Unemployment is high, and consumers and businesses remain cautious about the future. Changes in consumer behavior during and after the pandemic could also present permanent headwinds to some industries.
Beyond a still fragile economy, November’s presidential election could present yet another source of volatility for stocks. Against this backdrop, we believe investors should assess the ability of their equity strategies to withstand market downturns.
Buoyant markets have erased memories of the prior decade but the 8½-year period from September 1, 2000 through February 28, 2009 included two bear markets and a cumulative loss of -43.5% for the S&P 500 Index. Brutal indeed. Reaves’ Long Term Value Strategy2 was up 20.2% during the same time period by staying true to its process and investing in defensive, essential service infrastructure companies.
As part of a recent Q&A that focused on our Firm’s unique approach to essential service investing, Reaves’ CEO Jay Rhame explained how our strategies have provided consistent downside protection and what that has meant to long-term returns:
“The consistency of our downside protection comes by design. The types of companies we buy are naturally defensive investments. They provide non-discretionary, essential services with lower risk of earnings declines, even in recessions. Investors flock to these sectors in times of uncertainty. At Reaves, we take it a step further by doing all we can to understand the potential downside risks of each stock being considered for the portfolio. Our mantra has always been that if we accurately assess the amount of risk we take on, the upside will take care of itself … The focus on appropriate risk-taking has meant that Reaves has performed well in times of stress for the broad market.”
To read more about Reaves’ strategies, including the strategic role they provide within an equity portfolio and the Firm’s focus on essential service investing, download the full Q&A.
Disclosures:
Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently owned “S” corporation organized under the laws of the State of Delaware.
The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.
1 The S&P 500 Index (“S&P 500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The typical Reaves portfolio includes a significant percentage of assets that are also found in the S&P 500. However, Reaves’ portfolios are far less diversified, resulting in higher sector concentrations than found in the broad-based S&P 500.
2 Reaves performance data is the Reaves LTV ERISA Composite and, unless otherwise noted, all data is net of fees. The Reaves LTV ERISA Composite reflects the dollar-weighted return of all corporate ERISA pension accounts with assets of at least $1,000,000 under management for all periods presented (the minimum was $900,000 during the period 08/31/10-06/22/12). Returns are time-weighted and include the reinvestment of all dividends and other earnings, net of commissions. The returns also reflect the deduction of advisory fees which are described in detail in our Form ADV Part 2A. The LTV ERISA Composite does not reflect all of the Reaves’ assets under management. The LTV ERISA Composite began on 1/1/78 and ended on 12/20/19.
Reaves’ Long Term Value Strategy (Reaves LTV Strategy) seeks a high risk-adjusted total return. The strategy tends to be invested in relatively larger companies with strong balance sheets, good cash flow and a history of dividend growth. Core positions are accumulated in financially strong, high-quality companies and generally have the following characteristics: strong management, above industry-average growth rates, large/mid-market capitalization and low price-earnings multiples.
Past performance is no guarantee of future results.
All investments involve risk, including loss of principal.
All data is presented in U.S. dollars.
Important Tax Information: Reaves Asset Management and its employees are not in the business of providing tax or legal advice to taxpayers. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.
