June 17, 2020 -
Downside Protection When You Need it Most
Blair Setford, Director of Product Management at Counsel Portfolio Services, speaks with special guest Anthony MacGuinness, of Irish Life Investment Management (ILIM), sub-advisor for the Counsel Retirement Portfolios.
Anthony is ILIM’s Head of Quantitative Strategies & Deputy CIO. ILIM manages the Defensive Global Equity Strategy and the Global Low Volatility Strategy for the Counsel Retirement Portfolios.
In this audiocast, Blair and Anthony discuss the performance of the Retirement Portfolios and the key strategies that provided downside protection during the market downturn.
Here are a few highlights:
- Two key strategies and how they protected during the initial downturn in the markets
- Equity valuations following the rise in the markets over the past few weeks, and what this means going forward
- ILIM’s outlook for equity markets in our current environment and the importance of having downside protection for investors in their portfolios
To access the full transcript, click here.
Blair Setford (00:00):
We're joined today by Anthony MacGuinness, of Irish Life Investment Management, ILIM, who are our sub-advisors on the counsel retirement portfolios. As expected, the retirement portfolios did their job during the downturn. They protected against some of that equity drop in the markets, and they have participated in the upside. And Anthony, there's the two key strategies within the counsel retirement portfolios, the defensive global equity strategy, as well as the global low volatility strategy. Let's start with the global defensive equity strategy, and first how it protected during the initial downturn in the markets in February and March.
Anthony MacGuinness (00:48):
Morning Blair, and hello to all you listeners. So initially, we saw markets hit the higher end 19th of February then we saw case numbers increase globally and obviously lockdowns and restrictions happen across markets. So that led to precipitate at the start of the fall in equity markets. And by the 28th of February, we had reduced our weighting to 71% in the global defense of equity portfolio. And that was really due to markets falling through their kind of longer term moving averages. After that initial leg down in markets, we also saw earnings deteriorate. So ILIM, we're looking at companies, looking at the impact of the lockdown across various jurisdictions and the restrictions in terms of manufacturing and sales, retail sales feed through, so that saw earnings fall.
Anthony MacGuinness (01:38):
So we actually saw the initial leg down being due to momentum or technical factors, but then actually fundamental factors feed through to the second wave of reduction in equity. So that was going from 71% down to a low of 37% equity weighting within the portfolios. That would have happened around the 26th of March. That kind of coincided with the bottom of the market and at that point, interestingly, as you listeners will be aware, there's a number of factors in the defensive global equity portfolio, valuation being one, technical factors being another, macro factors being the third. And with that dramatic fall in equity markets, and also the interest rate quotes that have happened, the evaluation components looked somewhat positive at that point.
Anthony MacGuinness (02:28):
So with market starting to recover on the back of a significant economic stimulus coming through in terms of the monetary quantitative easing programs, and that inspired both the Fed and the ECB, in fact, at the peak they were running at around 7 trillion, annualized that compares to about 3 trillion, annualized at the peak during the global financial crisis. So this is absolutely unprecedented economic and monetary stimulus. We started to see markets rebound on the back of that liquidity and monetary support. And with that, we saw momentum, the technical group start to improve within DSE. So we saw a slow increase in the equity weight, at that low of around 37% to a rate of 50% neutral position. And we held at that position for a couple of months.
Blair Setford (03:19):
So over the last few weeks, we've seen its rapid rise in markets. And the signals, as you said, has started to turn positive. And more recently on the technical side, we seen some things happen that have boosted the weight now up into the mid 80s, in terms of the equity exposure. Can you just elaborate on that a little bit?
Anthony MacGuinness (03:43):
Yeah. We've seen this continued strength coming through on the back of a strong, technical, strong momentum drivers here in the markets. So as I said, from the lows equities are now up 35%. In terms of valuation terms, the market is now trading, S&P is probably trading at around 24 and a half times four turnings, that's versus a long run average about 18 times valuation. So a significant boost in terms of equity market valuations, significant recovery in the market from the bottom. And that leads to positive momentum or positive technicals. So we've actually now increased back above our long-run moving averages, which saw us increase our equity way back up to that 85% position at this point.
Blair Setford (04:34):
Let's turn our attention to the global low vol strategy for a minute. These are the stocks that you would anticipate falling much less than the markets. And that certainly held up in that low vol strategy through February and March.
Anthony MacGuinness (04:51):
Yeah. So we saw strong participation in terms of the type of behavior we would expect to see from the low vol strategy. It delivered protection on the downside and the initial fall of markets. So from the February 19 high, we have seen during the initial down move that the strategy outperformed the market by about 2.5%, but actually has then subsequently kept reasonable pace with the market recovery since that kind of trough in markets around the mid March level up until mid April into May.
Anthony MacGuinness (05:27):
So really what was driving that was the more defensive positioning within the portfolio. So we saw the strategy actually having a lower volatility composition, lower BITA composition, so that means that we're buying companies that have more defensive characteristics, over weighting sectors such as consumer staples, telecoms. And actually we had an overweight on gold mining companies, which actually benefited from a spike in gold, which obviously added to the defense of characteristics of the strategy. So that helped when we had that initial move down in markets.
Anthony MacGuinness (06:05):
Then and during the subsequent recovery, we did see that very strong while, while some of the lower BITA, lower vol companies that we held, might have been an detractor in terms of capturing all of the upside participation in that move upwards. Some other elements within the portfolio did help, in particular having a position in the energy sector, which obviously got very badly beaten up, related to oil price tensions within OPEC at the same time as COVID occurring. However, we saw some easing of that tension in terms of oil prices slowly recovering from the lows. And that actually helped in terms of strategy participate quite strongly in the recovery that we saw initially in market.
Anthony MacGuinness (06:51):
So on balance has actually performed quite well, right through this cycle, both adding protection on the downside, as I said about 2.5% versus the global market during that initial sell off, and then actually keeping reasonable pace with the market over the first leg of the recovery thus far.
Blair Setford (07:13):
Anthony, let's just talk about the ILIM outlook then, what does the team think in terms of the most likely path at this point?
Anthony MacGuinness (07:22):
From our perspective, we do see equity markets as trading rich at this point. So markets at this point, as we said, are trading at expensive levels, and that is a concern for us in terms of possible future volatility. And therefore we would certainly see within the retirement portfolios, definitely merit in having that downside control element to the funds, both in terms of diversification, in terms of the mix of strategy and assets that they hold, but also within those assets, trying to manage volatility and downside. Because again, the retirement portfolios are trying to manage that sequence of return risk, whereby the order of returns as they impact an investor, not are significantly more in retirement where there's no secondary income source. Very different if you're in the early stages of accumulation in your retirement savings, events like February and March can actually be super beneficial when you have a massive long-term view and you've got contributions regularly coming in.
Anthony MacGuinness (08:26):
But when you're actually drawing income from your assets to sustain your spending today, that can have a significant impact when you have market volatility, as we have had, because to sustain that level of income, it's actually eating up quite a significant portion of your overall retirement part. So therefore trying to manage that volatility, manage that downside risk is extremely important. And we do believe that there is the capacity for further leg down, potentially. Over the long-term we still like equities, but over the short to medium term, and in particular for those customers that need to draw income from their asset pools, we will be cautioning them to be defensive because there's definitely the potential for additional volatility or a second leg down in markets. We may not see the lows that we have seen, I think the monetary policy portion is very firmly in place. The Fed and the ECB have come in with significant stimulus packages and will likely come again if needed. But that's not to say that we wouldn't see the potential for further volatility into the second half of the year.
Blair Setford (09:33):
This type of scenario has been a real good example of why investors want to have the retirement portfolios in their holdings or amongst their holdings, particularly if their savings are going to be their sole retirement income in the future. Because protection from this type of equity downturn is exactly what they're designed for. Anthony, thank you for joining us today. I really appreciate your insights on the counsel retirement portfolios. Thank you.
Anthony MacGuinness (10:06):
Thank you very much, Blair.
We're joined today by Anthony MacGuinness, of Irish Life Investment Management, ILIM, who are our sub-advisors on the counsel retirement portfolios. As expected, the retirement portfolios did their job during the downturn. They protected against some of that equity drop in the markets, and they have participated in the upside. And Anthony, there's the two key strategies within the counsel retirement portfolios, the defensive global equity strategy, as well as the global low volatility strategy. Let's start with the global defensive equity strategy, and first how it protected during the initial downturn in the markets in February and March.
Anthony MacGuinness (00:48):
Morning Blair, and hello to all you listeners. So initially, we saw markets hit the higher end 19th of February then we saw case numbers increase globally and obviously lockdowns and restrictions happen across markets. So that led to precipitate at the start of the fall in equity markets. And by the 28th of February, we had reduced our weighting to 71% in the global defense of equity portfolio. And that was really due to markets falling through their kind of longer term moving averages. After that initial leg down in markets, we also saw earnings deteriorate. So ILIM, we're looking at companies, looking at the impact of the lockdown across various jurisdictions and the restrictions in terms of manufacturing and sales, retail sales feed through, so that saw earnings fall.
Anthony MacGuinness (01:38):
So we actually saw the initial leg down being due to momentum or technical factors, but then actually fundamental factors feed through to the second wave of reduction in equity. So that was going from 71% down to a low of 37% equity weighting within the portfolios. That would have happened around the 26th of March. That kind of coincided with the bottom of the market and at that point, interestingly, as you listeners will be aware, there's a number of factors in the defensive global equity portfolio, valuation being one, technical factors being another, macro factors being the third. And with that dramatic fall in equity markets, and also the interest rate quotes that have happened, the evaluation components looked somewhat positive at that point.
Anthony MacGuinness (02:28):
So with market starting to recover on the back of a significant economic stimulus coming through in terms of the monetary quantitative easing programs, and that inspired both the Fed and the ECB, in fact, at the peak they were running at around 7 trillion, annualized that compares to about 3 trillion, annualized at the peak during the global financial crisis. So this is absolutely unprecedented economic and monetary stimulus. We started to see markets rebound on the back of that liquidity and monetary support. And with that, we saw momentum, the technical group start to improve within DSE. So we saw a slow increase in the equity weight, at that low of around 37% to a rate of 50% neutral position. And we held at that position for a couple of months.
Blair Setford (03:19):
So over the last few weeks, we've seen its rapid rise in markets. And the signals, as you said, has started to turn positive. And more recently on the technical side, we seen some things happen that have boosted the weight now up into the mid 80s, in terms of the equity exposure. Can you just elaborate on that a little bit?
Anthony MacGuinness (03:43):
Yeah. We've seen this continued strength coming through on the back of a strong, technical, strong momentum drivers here in the markets. So as I said, from the lows equities are now up 35%. In terms of valuation terms, the market is now trading, S&P is probably trading at around 24 and a half times four turnings, that's versus a long run average about 18 times valuation. So a significant boost in terms of equity market valuations, significant recovery in the market from the bottom. And that leads to positive momentum or positive technicals. So we've actually now increased back above our long-run moving averages, which saw us increase our equity way back up to that 85% position at this point.
Blair Setford (04:34):
Let's turn our attention to the global low vol strategy for a minute. These are the stocks that you would anticipate falling much less than the markets. And that certainly held up in that low vol strategy through February and March.
Anthony MacGuinness (04:51):
Yeah. So we saw strong participation in terms of the type of behavior we would expect to see from the low vol strategy. It delivered protection on the downside and the initial fall of markets. So from the February 19 high, we have seen during the initial down move that the strategy outperformed the market by about 2.5%, but actually has then subsequently kept reasonable pace with the market recovery since that kind of trough in markets around the mid March level up until mid April into May.
Anthony MacGuinness (05:27):
So really what was driving that was the more defensive positioning within the portfolio. So we saw the strategy actually having a lower volatility composition, lower BITA composition, so that means that we're buying companies that have more defensive characteristics, over weighting sectors such as consumer staples, telecoms. And actually we had an overweight on gold mining companies, which actually benefited from a spike in gold, which obviously added to the defense of characteristics of the strategy. So that helped when we had that initial move down in markets.
Anthony MacGuinness (06:05):
Then and during the subsequent recovery, we did see that very strong while, while some of the lower BITA, lower vol companies that we held, might have been an detractor in terms of capturing all of the upside participation in that move upwards. Some other elements within the portfolio did help, in particular having a position in the energy sector, which obviously got very badly beaten up, related to oil price tensions within OPEC at the same time as COVID occurring. However, we saw some easing of that tension in terms of oil prices slowly recovering from the lows. And that actually helped in terms of strategy participate quite strongly in the recovery that we saw initially in market.
Anthony MacGuinness (06:51):
So on balance has actually performed quite well, right through this cycle, both adding protection on the downside, as I said about 2.5% versus the global market during that initial sell off, and then actually keeping reasonable pace with the market over the first leg of the recovery thus far.
Blair Setford (07:13):
Anthony, let's just talk about the ILIM outlook then, what does the team think in terms of the most likely path at this point?
Anthony MacGuinness (07:22):
From our perspective, we do see equity markets as trading rich at this point. So markets at this point, as we said, are trading at expensive levels, and that is a concern for us in terms of possible future volatility. And therefore we would certainly see within the retirement portfolios, definitely merit in having that downside control element to the funds, both in terms of diversification, in terms of the mix of strategy and assets that they hold, but also within those assets, trying to manage volatility and downside. Because again, the retirement portfolios are trying to manage that sequence of return risk, whereby the order of returns as they impact an investor, not are significantly more in retirement where there's no secondary income source. Very different if you're in the early stages of accumulation in your retirement savings, events like February and March can actually be super beneficial when you have a massive long-term view and you've got contributions regularly coming in.
Anthony MacGuinness (08:26):
But when you're actually drawing income from your assets to sustain your spending today, that can have a significant impact when you have market volatility, as we have had, because to sustain that level of income, it's actually eating up quite a significant portion of your overall retirement part. So therefore trying to manage that volatility, manage that downside risk is extremely important. And we do believe that there is the capacity for further leg down, potentially. Over the long-term we still like equities, but over the short to medium term, and in particular for those customers that need to draw income from their asset pools, we will be cautioning them to be defensive because there's definitely the potential for additional volatility or a second leg down in markets. We may not see the lows that we have seen, I think the monetary policy portion is very firmly in place. The Fed and the ECB have come in with significant stimulus packages and will likely come again if needed. But that's not to say that we wouldn't see the potential for further volatility into the second half of the year.
Blair Setford (09:33):
This type of scenario has been a real good example of why investors want to have the retirement portfolios in their holdings or amongst their holdings, particularly if their savings are going to be their sole retirement income in the future. Because protection from this type of equity downturn is exactly what they're designed for. Anthony, thank you for joining us today. I really appreciate your insights on the counsel retirement portfolios. Thank you.
Anthony MacGuinness (10:06):
Thank you very much, Blair.