Winning Ugly: Bear Market Compels Investors to Assess Downside Protection

U.S. equities’ precipitous slide into bear market territory can make anyone wince when they peek at their investment returns. But long-term investors would be wise to open their eyes wide and take a sobering assessment of their portfolio’s downside capture during these periods.

When heavy losses occur the ability to avoid falling as much as the broader market can have a large effect on a portfolio’s long-term return. Think of it as “winning ugly.” By falling – but not falling as far – a portfolio can get back to pre-crisis levels quicker and start compounding returns again.

The value of winning ugly has probably been easy for many investors to forget. After all, the recent market rout just ended the longest equity bull market run in U.S. history. However, if investors want to be prepared for what markets might bring next, we suggest a simple strategy: think about the bare essentials.

Essential Service Investing: The Backbone of a Modern Economy

Fixed income, and, potentially, alternative investments, can provide ballast for portfolios when equity markets fall. But defensive strategies within the equity allocation can also play a valuable role in protecting against the downside and improving long-term performance.

Within equity markets, some of the best defensive opportunities are stocks of companies that operate in essential-service industries such as electric, gas and water utilities, or broadband and wireless communications networks. The non-discretionary services these companies provide form the very foundation of a modern economy. As such, they are the last things individuals and businesses cut spending on, making them the most economic resilient companies.

In periods of economic upheaval, stocks of these companies tend to outperform due to the stability of their earnings streams. We’ve seen this trend in previous bear markets and are beginning to see it again. As of March 17, 2020, the utilities sector was down 11.5% this year, compared to a 21.7% drop for the S&P 500.1,2

At Reaves, we’ve focused on essential service industries for 42 years. As the table below representing our Long-Term Value strategy’s3 performance shows, that focus has helped us weather previous market downturns. As our longer-term track record shows, our ability to win ugly in uglier periods such as these has led to relative outperformance over much longer time horizons. We believe the recent market environment underscores the value of utilizing a strategy focused on essential service industries within a broader portfolio.

Time Period Reaves Long-Term Value Returns S&P 500 Returns

12/1980 – 07/1982



09/1987 – 11/1987



06/1990 – 10/1990



07/1998 – 08/1998



09/2000 – 09/2002



11/2007 – 02/2009



05/2011 – 09/2011




To learn more about our strategies and the value of investing in essential service companies, read more in an interview with Reaves Asset Management CEO and Portfolio Manager Jay Rhame. Available below.

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

1Wall Street Journal, 3/17/2020.

2The S&P 500 Index 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 Index.

3Reaves performance data is the Reaves Long Term Value ERISA Composite and, unless otherwise noted, all data is net of fees. The Reaves 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 ERISA Composite does not reflect all of Reaves’ assets under management. Reaves’ ERISA Composite ended on 12/20/19.

Reaves’ Long Term Value 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 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.

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.



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