As 2021 kicks off, the traditional stock-and-bond portfolio faces unique challenges: Ultra-low yields in bond markets and an equity market that hovers near record highs despite lingering economic questions.
Amid this backdrop, investors may want to consider more defensive equity strategies. In a recent investment brief, Reaves’ portfolio managers put the market environment in context, and explained why their focus on essential service infrastructure may be complementary to existing equity allocations:
“With interest rates hovering near historic lows – and central banks confirming their intentions to keep them there – the need to reassess risk in portfolios has never been clearer. At current yields, the probability is low that many fixed income investments will outperform inflation unless rates decline even further. Amid this backdrop, reducing the risk in the equity portion of investment portfolios may also be prudent with stock markets near record high levels. This likely means complementing existing equity strategies with more defensive ones that strive to produce attractive long-term returns but with lower volatility and better downside protection.
Reaves’ Long Term Value Strategy1 may serve as a valuable, defensive complement. When an adviser allocates to this strategy, they are increasing their weightings in companies and sectors that have defensive characteristics and a history of performing well when equity markets have below average returns.2”
The investment brief explains how Reaves defines essential service infrastructure and makes a case for why Reaves’ strategies may provide investors a defensive complement to their equity allocation. For a deeper understanding of Reaves’ approach, and how it may benefit a stock and bond portfolio, we encourage you to give it a read.
Disclosures:
Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. 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.
1Reaves’ 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.
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 LTV ERISA Composite does not reflect all of the Reaves’ assets under management. The LTV ERISA Composite ended on 12/20/19.
Beginning December 2019, Reaves LTV Strategy is represented by the LTV SMA Wrap Composite. This composite contains those LTV discretionary portfolios with wrap (bundled) fees. Wrap accounts are charged a bundled fee which includes the wrap sponsor fee, as well as, Reaves’ investment advisory fee. Due to compliance requirements, the net-of-fees calculation is computed based on the highest annual fee assigned by any wrap sponsor who utilizes this portfolio in an investment wrap program (300 basis points from 1/1/03 through 12/31/16 and, effective 1/1/2017, 250 basis points). The LTV SMA Wrap Composite performance consists of money-weighted, time-weighted returns and it includes the reinvestment of all dividends and other earnings. The inception date of the composite is December 2002; however, the composite was created in January 2013. This composite has been managed in a similar manner to the LTV ERISA Composite which ended in December of 2019. The LTV SMA Wrap Composite does not represent all of Reaves’ assets under management.
2During all 5-year rolling return periods when the annualized return of the S&P 500 Index has been less than 10.0%, the Reaves LTV Strategy ERISA Composite (1/1/1978-12/20/2019) has outperformed the index 90% of the time.
Rolling returns reflect the total returns from both capital appreciation and dividends on a continuously held investment over a number of consecutive periods, calculated monthly.
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.
Past performance is no guarantee of future results.
All investments involve risk, including loss of principal.
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.
