Our last few portfolio updates have shared a recurring theme; we have taken gains in growth assets and moved to slightly more defensive positioning recognizing that we are likely later in the economic cycle. While we certainly appreciated the extra downside protection at the end of 2018, it was a very fast recovery, and we have continued to experience a large growth environment in the stock market. We believe our central bank’s more accommodating monetary policy will continue to support growth assets for some time to come.
Our views that we are later in the cycle have not changed but we recognize that there may be some upside left in this ten-year bull market. In the past, when presented with this type of conundrum, we may have turned to active management. This style of investing involves a team of portfolio managers making active decisions about what companies to invest in. We could select a manager to focus on growth companies but with a mandate to select those with strong balance sheets and solid earnings growth with the goal of gaining exposure to growth stocks that might hold up better in market downturns. One of the downsides to this approach is that it is a more expensive way to invest. Also, data has shown that it is very difficult for an active manager to consistently beat their benchmark so it can be difficult to justify the additional expense.
Enter factor investing. Said simply, it is an investment approach that targets specific drivers of returns. Factor investing has been around for decades. It is similar to active management; however, data and technology allow us to take advantage of these strategies at a much lower cost. Our investment committee has decided to make a small reduction to large value stocks via a passive index fund and reallocate to the iShares Edge MSCI USA Quality Factor ETF. This fund tracks a benchmark but screens for companies with a high return on equity, stable earnings growth, and low debt. At the end of the day, it is companies earning money that drives the returns of the stock market. The goal of this change is to continue to participate in strong companies’ abilities to earn profits while avoiding some of the higher-risk players, all while not increasing the underlying expenses in the portfolio.
As always, feel free to contact us with any questions or concerns. We wish you a delightful start to autumn.
The foregoing content reflects the opinions of Connecticut Wealth Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.