Making the Most of Difficult Markets

February 12, 2021

Over our 43-year history of managing equity portfolios, we’ve learned that the ability to weather a storm and outperform in difficult markets can ultimately define the client experience1. The Reaves Long Term Value Strategy2 has generated attractive returns for our clients over full market cycles by actively monitoring the risk of each holding, striving to avoid outsized losses, and aiming to stay fully invested.

By investing in essential infrastructure companies that provide critically important services to consumers and businesses, we believe the risk of suffering a permanent impairment of capital is reduced. We try to follow the maxim: avoid the losers and let the winners take care of themselves.

In a Q&A, Reaves’ CEO and Portfolio Manager, Jay Rhame, shared his thoughts on the defensiveness of Reaves portfolios, and how it has served clients through multiple different market environments. An excerpt of the conversation explains:

Since inception the Reaves Long Term Value Strategy2 has outperformed in 125 of the 173 months in which the S&P 500 Index3 has declined. To what do you attribute such consistent downside protection?

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. We have studied every bear market period since 1978 and our strategy has outperformed the S&P 500 Index every time. We are extremely proud to have preserved and grown our clients’ principal during the most extended period of market stress in our history which lasted 8 ½ years from September 2000 through February 2009.

Equity allocation is at the forefront of investors’ and advisors’ minds. How should investors who might be concerned about their exposure to a potential downturn, think about utilizing Reaves in their portfolio?

Our Long Term Value Strategy2 has achieved its historical returns with a beta4 of 0.6 meaning that we generally outperform during market downturns. When investors include us as a portion of their total equity holdings, our strategy usually helps to lower total portfolio risk. This is because so many of the stocks we own operate in the more defensive sectors of the market. The good news is that even during very strong bull markets, like we are currently experiencing, we have captured about 80% of the market’s upside moves. Our goal is to protect the downside without having to give up too much of the upside. 

If you would like to read more of this conversation with Jay Rhame, please click on the Q&A graphic below. 

Q&A with the CEO & Co-Portfolio Manager of Reaves Asset Management, Jay Rhame


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 In a previous blog, posted on April 6, 2020, Reaves explains and provides details about the outperformance of Reaves’ Long Term Value Strategy (as represented by Reaves’ LTV ERISA Composite) in difficult markets.

2 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.

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 began on 01/01/78 and 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.

Reaves identified 173 months from January 1978 through November 2019 in which the S&P 500 Index had a negative total return. The Reaves LTV Strategy (Reaves ERISA Composite) had a higher return than the S&P 500 Index in 125 of those 173 months.

3 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.

4 Period: Jan 1,1978- Dec 20,2019. Beta measures a stock’s volatility relative to the broad market. A stock with a beta higher than 1.0 has historically been more volatile than the market, while a stock with a beta lower than 1.0 has been less volatile.

Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account.

All investments involve risk, including loss of principal.
All data is presented in U.S. dollars.
Cash is cash and cash equivalents.
An investor cannot invest directly in an index.
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 own individual circumstances from an independent tax adviser.
Fees: Net performance reflects the deduction of advisory fees which are described in detail in our Form ADV Part 2A. 
Please contact your financial professional, or click the following links, for a copy of Reaves’ Form ADV Part 2A and Form CRS.
Additional information about Reaves  may be found on our website:  
www.reavesam.com.
2021© Reaves Asset Management (W. H. Reaves & Co., Inc.)

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