With volatility now the new normal, investors are seeking out investment opportunities with a more tactical
With volatility now the new normal, investor attitudes to risk are shifting. Investors are seeking out investment opportunities with a more tactical tilt, and advisors are under pressure to educate investors on the benefits of staying the course through turbulent times.
Larry Berman, chief investment officer and partner at ETF Capital Management, expects continued ups and downs and challenges for investors moving forward in 2019.
“The market should be relatively stable but I do expect the volatility, the uncertainty of the late cycle, and the fact that liquidity is drying up, to play an important role,” Berman says.
For Berman, the adage "diversification is key" holds true as the market continues to wrestle with trade risks, interest rate hikes and a less than stable geopolitical landscape.
"Asset allocation is by far the most important component of the bottom-line return for end clients - it’s more important than security selection," Berman says. "It's not what stocks or bonds you're picking, it’s what your asset mix is."
When asked how best to navigate the current environment, Berman highlights the BMO Tactical Dividend ETF Fund, which BMO GAM is now offering in an ETF. It uses a strategy that provides investors with stability, income, and superior risk-adjusted returns, Berman says, complementing any portfolio in the current market conditions. The fund's approach adjusts to the market conditions: it becomes defensive when markets are risky and offensive when the environment creates opportunities.
For Berman, using ETFs for asset allocation is vital to the fund’s strategy because they allow for increased efficiency in tactical shifts, enabling the portfolio manager to change exposures in a single trade. “Flexibility is an integral characteristic of the fund, as dividend strategies often make or break an investment,” Berman says. “A well-crafted strategy is vital to help improve yields and mitigate potential downsides.”
Given that it takes on less risk than many other investments in the market - as measured by the fund’s standard deviation versus its peers - the BMO Tactical Dividend ETF Fund has less sensitivity to an economic downturn. For Berman, the ETF's ticker ZZZD, paints an accurate picture of how the fund behaves.
"I've taken on the branding of managing ‘sleep at night’ portfolios because of how we focus on minimizing the risks," he says. “The fund is structured to help investors manage risks in times of downturns while still enabling them to capture growth.”
A guiding principle of the fund is the concept of the Efficient Frontier which was developed by Nobel Laureate Harry Markowitz.
"The math of that model is beautiful — you can build a portfolio that can generate the highest return as possible given your universe with the least amount of risk," Berman says.
Giving clients the confidence to stick to a plan through times of volatility is often an advisor’s biggest challenge. The average investor has access to more investment news and market ‘noise’ than ever before. Investors are overloaded with information, which, in many cases, only increases their anxiety levels. Creating strategies to keep investors on track by reducing volatility when it comes to their investments is one of the most important things a modern advisor can do.
"I understand the investor anxiety and psychology of sticking with a position — it is the hardest thing for an average investor to do,” Berman says. “If I can build a portfolio that delivers investors a good dividend yield in any period mitigate downside risk, then that is definitely going to help them hold on through turbulent times and sleep at night."
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
Commissions, management fees and expenses all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss.
BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and a separate legal entity from Bank of Montreal.
®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.