I rather enjoyed a recent column on the Seeking Alpha web site by frequent contributor, Richard Kang. Through the inspection of drawdown and other analyses, Mr. Kang suggested that an adequate level of defense may best be achieved through a sector rotation approach; that is, the idea that one can adequately protect his/herself from market downturns by investing across world markets is likely to prove false.
I don’t think that Mr. Kang is suggesting that emerging markets, Europe and Asia don’t have place in one’s portfolio. Far from it! Yet it is imperative to understand that there are greater diversification and defensive benefits from economic segments like utilities and infrastructure.
Traditionally, the utilities sector has been a popular place for yield-seeking and safety. The S&P Utility Index (XLU) fared better on the downside than most economic segments, and continues to shine on the upside.
This is not to suggest that Utilities always shine… the sector has many periods of underperformance. Nor does it suggest that you will escape a bear market with XLU… as it fell as hard as the broader market’s S&P 500 index in the 2000-2002 bear. Nevertheless, the utilities sector is more likely to keep you out of trouble than a pan-geographic approach across Europe, Asia and Latin America.
I think the most fascinating “find” is that of “infrastructure” serving as a defensive move. When one considers that a fair amount of stable income is generated from port creation, water services and airport construction, it becomes easier to see “infrastructure in this light.
However, the SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII) did fall 5.7% from top-to bottom form 2/27-3/5. It’s hard to regard the drawdown here as inconsequential. Richard Kang makes the case, however, that the rapid reversal and the general outperformance of "infrastructure" during sideways markets has made the sector more attractive as a defensive position.
Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.