Revisiting Asset Allocation With Markets Under Stress

The uncertainty caused by the onset of the global pandemic in early 2020 led to weeks of extreme volatility for financial markets and a nearly 20% decline in the S&P 500 Index in the first quarter of 2020. Now, just two years later, investors are confronting another stressful market environment and a new set of concerns including inflation north of 7%, several potential rate hikes by the Federal Reserve, and the outbreak of war in Eastern Europe.

Major stock and bond markets reacted negatively to these developments in the first two months of 2022 with the S&P 500 Index falling by -8.0% and the Bloomberg Barclays U.S. Aggregate Bond Index retreating by -3.2%. The 10-year U.S. Treasury note yield peaked at 2.05% in mid-February before pulling back to 1.83% at month’s end.

Volatile market periods are challenging for many investors and can sometimes lead to poor decisions such as selling near market bottoms. This is one of many reasons why we have always believed defensive equities deserve a place in investors’ portfolios. While 40% exposure to bonds in traditional asset allocation models has historically served a role in dampening portfolio volatility, that bond allocation faces formidable headwinds today due to the onset of inflation.

Returns from fixed income investments are likely to be disappointing if rates continue higher. The table below displays the cumulative returns of the Bloomberg Barclays U.S. Aggregate Bond Index in the six rising rate environments since 2001.

2021.12 Reaves Blog Revisiting Asset Allocation With Markets Under Stress-01

Sources: eVestment, U.S. Federal Reserve
For more information, please see our disclosures.


Given prospects for low returns, are fixed income allocations too high?

This is where defensive equities could play a role for investors. By taking a portion of a diversified portfolio’s fixed income allocation and investing it in stocks with defensive characteristics, investors may be able to improve their returns relative to the traditional 60/40 mix, while only slightly altering the portfolio’s risk profile.

We believe our investment strategies deserve consideration in the current market environment. Our own brand of defensive equities – essential service infrastructure stocks – have not only provided defensive characteristics but also may serve as an alternative to bonds in rising rate environments – the key risk facing bonds today.

The table below puts this in perspective, again showing the returns of the Bloomberg Barclays U.S. Aggregate Bond Index alongside the returns of our flagship strategy in each of the rising rate environments that have occurred in the past 20 years.

2021.12 Reaves Blog Revisiting Asset Allocation With Markets Under Stress-02

Sources: eVestment, U.S. Federal Reserve,
*For the period 7/31/20 to 2/28/22, Reaves’ LTV Strategy’s data (gross and net) is represented by our LTV SMA Wrap Composite; and for the period 12/31/77 to 10/31/18, Reaves’ LTV Strategy’s data (gross and net) is represented by our LTV ERISA Composite, which ended 12/20/19.
For more information about our composites, please see our disclosures.


While these tables help tell the story of the potential risk facing fixed income allocations, and how defensive strategies may help, we encourage you to gain further perspective by reading our investment brief, Rethinking 60/40: The Case for Defensive Equities.

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Disclosures and Definitions:
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.

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.

The Bloomberg Barclays U.S. Aggregate Bond Index is an index comprised of approximately 6,000 publicly traded bonds including U.S. Government, mortgage-backed, corporate, and Yankee bonds with an approximate average maturity of 10 years.

The 10-Year U.S. Treasury Note (UST) is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-Year U.S. Treasury Note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. The U.S. government partially funds itself by issuing 10-Year U.S. Treasury Notes.

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. Gross-of-fees returns are considered “pure” gross-of-fees returns and are presented before the bundled wrap and custodial fees. 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 time-weighted returns and it includes the reinvestment of all dividends and other earnings. The inception date of the composite is January 2003; 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.

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:
2022 © Reaves Asset Management (W. H. Reaves & Co., Inc.)


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