The Dollar is dominant in 2016. Or maybe it’s crude oil.
Investors are in disagreement on what’s driving markets this year, but they can agree on one thing — a commonality to the day-to-day returns in disparate markets. For a U.S. Dollar-based investor, knowing the direction for any of the S&P 500, Crude Oil, or the Dollar’s value in foreign exchange trading has been sufficient to hazard a good guess on the direction of the others.
Recently, even high-yield bonds have exhibited similar daily behavior to the other “risk assets” — equities, commodities and currencies. Collectively, these factors add up to a one-dimensional opportunity set for U.S. Dollar-based investors.
Fortunately, there have been exceptions to this year’s unidimensionality. At home, the investment-grade fixed-income markets — Treasury securities in particular — have followed a different course from “risk” asset returns. This means balanced portfolios that hold investment-grade bonds have enjoyed relatively better stability.
Certain foreign equity markets have displayed a significant degree of independence as well: the United Kingdom and Australia, for example. In addition, the Canadian equity market, which has been a standout performer in 2016 for a U.S. investor willing to take the currency risk.
The challenge for many investors is how to incorporate positions such as these, which may not be present in “structural” balanced portfolios. One possible solution is to include tactical strategies as an active “sleeve” in the portfolio.
Tactical strategies can operate in a multi-dimensional space, with many seeking to capture opportunities in global markets and / or stability in fixed income markets. Even with the increased interconnection among factors driving daily markets, tactical strategies provide flexibility in managing risk.
A tactical approach can be added individually, or strategies can be combined to provide additional defense against downside commonality. The question is not whether Dollar or crude oil are dominant — but do your portfolios occupy a multi-dimensional space? If not, maybe it’s time to consider adding a tactical strategy to your clients’ portfolios.
The views and opinions expressed in this article are for informational purposes only, not for the purpose of providing investment advice, are those as of the date of the article and are subject to change over time or at any time. The investment strategies discussed are not appropriate for every investor and investors should review with their advisors the appropriateness of any investment strategy. Manifold Fund Advisors, LLC makes no guarantees on the completeness or accuracy of information provided herein.
The asset allocation, diversification and other strategies discussed in this article do not ensure a profit and cannot protect against losses in a declining market.
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