Barita Insights: Weekly Newsletter July 10, 2020

Analyst Insights

As we enter the second half of 2020, there remains heightened volatility within the global economy. This volatility stems from the ongoing COVID- 19 pandemic that continues abound even as economies implement their phased reopening procedures. There has been failed attempts by some countries to reopen, as they had to re-implement short lockdown periods to reassess their reopening policies. In contrast, some have gone on to successful reopen the economy with little hiccups, but at lower productivity levels. This week we will utilize Barita’s Money IQ to enable us finding beauty in the chaos, as opportunities remain in this crisis.

 

Tactical, Strategic or Core-Satellite Strategy

Leveraging the knowledge of the Brain Trust, we always believe in investing holistically to ensure that one’s portfolio is adequately equipped to manage multiple market events. In doing this, one must be guided by their investment philosophy or strategy, as this will be your guiding compass through any market turbulence. Investment strategies are broken down into three main categories, namely, Tactical, Strategic or Core-Satellite. Tactical Investing is on the extreme end of the investing strategy spectrum for which it has multiple forms and variations. Tactical investing is an active management portfolio strategy that requires quick pivoting between investments to take advantage of market events. This strategy allows investors to take capitalize on opportunities that may arise due to underlying developments within the marketspace. Investors utilizing the tactical approach are agile, resolute and nimble. They can quickly adapt to take advantages of market conditions and are knowledgeable enough on how to take advantage of these market conditions. Strategic Investing is on the other extreme end of the investment strategy spectrum, which also has multiple forms and variations. Strategic investing is a passive management portfolio strategy that maintains targeted weightings for investments and periodically rebalances the portfolio at stipulated intervals. This strategy is viewed as a long- term strategy, as one’s investment decisions would be based on long-term convictions that do not vary with periods of volatility. Unless there is a material disruption in an investor’s thesis, they will maintain their resolve in their selected investments. The Core-Satellite Strategy is a hybrid of these two extremes. Core-Satellite is built on the idea that an investor will have long-term targeted investment allocations but also can actively capitalize on opportunities as they arise. The Core of one’s portfolio will be allocated to investments that are designed to be passively managed (Strategic). At the same time, the Satellite is the actively managed (Tactical) portion to select investments where an investor can utilize current market opportunities to generate higher returns than those of a passively managed portfolio. Additional benefits of using this strategy include minimizing costs, tax liability, diversification and volatility while providing an opportunity to outperform the broad stock market. A downside to this strategy, though is the lower ability to maximize returns on market disruptions as capital would have bee allocated to the Core of your portfolio.

 

Investing Through Market Disruptions

To begin developing your portfolio, understandings one’s goals, investment horizon and risk profile are essential to your strategy. Once these critical points are identified, you can commence your investment allocations and investment strategies. To showcase how an investment strategy is crucial to your investment allocation and your overall risk-adjusted returns, we will be utilizing a Core-Satellite approach in a COVID-19 environment with the S&P 500 as our performance benchmark. Let’s set the Core weighting to 60% of our overall portfolio, split evenly between an equity and a fixed-income exchange traded-fund (ETF). Thus, we have 40% worth of capital to allocate towards the Satellite component of our portfolio. If we started investing in January, as at July 10th, 2020, our equity ETF (SPDR S&P 500 ETF Trust) and fixed-income ETF (iShares iBoxx $ Investment Grade Corporate Bond ETF) would have a risk-adjusted return of –0.28% and +7.63% respectively, hence our Core would have a +2.21% gain. Now, we realized that due to the measures to curtail the spread of COVID-19, technology companies would be the primary beneficiaries from this stay at home order. As such we allocated the remaining 40% of our portfolio into a technology ETF (Invesco QQQ). The performance of our technology ETF as of July 10th, 2020, is +24.64%, hence the risk-adjusted return of our Satellite would be +9.86%. Therefore, our Core-Satellite Strategy yielded a gain of +12.07% which is currently above the year to date performance of the S&P 500 (year- to-date: -1.54%). This is just a simplified version of what your risk-adjusted returns would be, assuming no transaction costs and you obtained your allocations at the beginning of the year.

Domestically, the Core-Satellite approach can also be used when considering the disruption that has taken place within the capital markets. The Jamaica Stock Exchange entered bear market territory (defined as decrease of at least a 20%), and a lot of valuable stocks were oversold. Currently, stocks such as NCB Financial Group (NCBFG), Sagicor Group Jamaica (SJ), Wisynco Group Limited (Wisynco), and TransJamaican Highway Limited (Transjam)were significantly oversold and present entry points for investors. Also, companies need working capital to navigate through COVID-19 while also utilizing the opportunity to streamline technological integration into their operations. Investing in Barita’s FX Growth Fund, Capital Growth Fund, and FX Bond Fund as apart of your Core while buying oversold stocks as your Satellite would be a suitable means of allocating your portfolio to capitalize on this disruption. Speaking with a certified advisor to discuss your portfolio strategy is very important when “Investing Through Market Disruptions.”

Written by Haughton Richards, FRM, Senior Research Analyst

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Conclusions

To begin developing your portfolio...

To begin developing your portfolio, understandings one’s goals, investment horizon and risk profile are essential to your strategy. Once these critical points are identified, you can commence your investment allocations and investment strategies. One must be guided by their investment philosophy or strategy, as this will be your guiding compass through any market turbulence.

Our long-term outlook remains positive ...

Our long-term outlook remains positive given that the economy is most likely to recover on the back of the adaptive capacity of businesses, their embracing of technology, extensive support from multilateral entities and a potential vaccination against this virus.

Investors with a high-risk profile are also encouraged ...

Investors with a high-risk profile are also encouraged to increase their exposure to the developed countries in order to be the first to experience the benefits of a global economic recovery as Jamaica’s recovery is expected to lag behind a global recovery.

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