Globe Advisor is moving, click here to see

Advisor Context

photo: stable

Strategies for riding out volatile markets

Investors who prefer peace of mind have options for smoother-performing securities


Date: May 06, 2015

For thrill seekers, it’s been a fun time to invest. For the rest of us, not so much.

High market volatility has sent markets up, down and sideways with little in the way of explanation or warning.

Conventional investor wisdom is to grin and bear it: Look to your long-term investment horizon, buy quality stocks and stick with your strategy. But for those with shorter-term needs, or those just sick of looking at what the market’s ups and downs are doing to their portfolios, what can they do?

One thing they can consider is taking a low-volatility investment approach with holdings that don’t necessarily rise and fall with every shudder in domestic and international markets.

It’s an approach that RBC Dominion Securities Inc. vice-president and portfolio manager Barbara Reid is taking with many of her clients this year.

The Burlington, Ont.-based high-net-worth advisor predicted that 2015 was going to be a roller-coaster year for the markets and advised her clients to shift into securities that could ride out turbulent times more smoothly.

One approach she takes is to look at what big-money players such as hedge funds are targeting for shorting. For instance, U.S. investors have taken aim at Canada’s big six banks, viewing them as a way to play the country’s weakening economic fortunes in the wake of oil-price and interest-rate cuts.

Ms. Reid’s solution is to invest in places the large investors can’t, specifically companies with good fundamentals that don’t have stock floats big enough to attract big-money wagering.

It is a philosophy she used in 2011 when volatility ruled and the TSX produced negative returns for the year. That meant buying stocks such as Pizza Pizza Royalty Corp. This time around, she has set her sights on the likes of The Keg Royalties Income Fund, DH Corp., and, once more, Pizza Pizza. Not only are the above stocks thinly traded and hard to short, they feature decent dividend payouts to investors.

For investors who want less volatility in their holdings and may not have a high-net-worth portfolio that can allow them to buy individual “shock absorber” low-volatility stocks, there are also specialized fund products that can do the trick.

John DeGoey, a vice-president and portfolio manager with Hamilton-based Burgeonvest Bick Securities Ltd., recommends that people consider “low vol” ETFs from the likes of BlackRock Canada (iShares MSCI Canada Minimum Volatility Index ETF) and Bank of Montreal (low-volatility Canadian and U.S. equity ETFs).

These low-cost funds attempt to lessen market volatility by screening out the most volatile of stocks in a particular index. Investors may give up some potential upside but may be rewarded by more gentle dips when markets fall.

“You basically get only 80 per cent of the volatility with a similar return,” Mr. DeGoey says. “If you can get comparable returns with somewhat less risk, that is a win on a cost-adjusted basis.”

While they may provide investors with a little more comfort in uncertain times, they are no proof against severe market corrections, the Toronto-based portfolio manager added. “Let’s not kid ourselves. If markets drop by, say, 20 per cent, these are still going to drop by 15 or 16 per cent, as well.”

While some investors choose a strategy of loading up on dividend-paying stocks in volatile times, this carries its own risk, he adds. Investors end up compromising the tenet of diversification, since dividend payers tend to be larger, established companies. “So what you are doing is making a decision, possibly conscious, or even unconscious, to avoid smaller and growing companies because they are not paying dividends.”

For Mr. DeGoey, the question is not so much whether investors attempt to deal with volatility but what they do should markets go through a big correction. Panicking and selling after equities fall, like some did after the 2008 crash, will do far more harm to portfolio values than any attempts to adjust investments to deal with current conditions.

Peter Lochead, a London, Ont.-based financial advisor with CIBC Wood Gundy, noted that markets have had a good run over the past three years and that he would not be surprised by a 10-per-cent correction. “It is certainly in my opinion long overdue for a bit of a breather.”

Mr. Lochead is a big believer in “weatherproofing” portfolios, something that he thinks investors should consider, given the surprising strength of markets today. “If you are overweight in equities, which I think that a lot of investors are because the markets have been very good, then you start to trim them back now, not start to add to them now.”

He advises investors to consider rebalancing portfolios to defensive stocks or indexes that do better in challenging markets and to shift into shorter-term bond and mortgage holdings. “You are not going to make big money on it, but you are also going to preserve your capital so that you can get through the potential downturn.

“I’m not calling for a downturn here but one thing I have learned in 35 years in the business is that nobody knows when that will happen.”

Advisor Context

Having two advisors usually not better than one Top books for investors, recommended by the pros