Positioning For A Recession

"...I have been following your and Paul's blogs...based on what you have been saying, there is a high risk of recession (vs. others stating the exact opposite). What sort of approach would you take in the face of a recession?"

An excellent question (as are all questions)! Thank you.

Let me start by saying that we all want asset prices to go up (especially those that we are invested in) because it lifts the value of our net worth and gives us confidence in the future. 

A great many in the investment advice world (who believe in being fully invested at all times) will focus on the long-term nature of investing to suggest that it is best to just ride out the cycle and in time, asset prices will once again start to rise and in the meantime dividend and interest payments will cushion the downside.

To this, I cannot disagree.

However, if we can find ways to take advantage of what we believe will be lower asset prices (of those assets that we want to own) in the future and add value and reduce risk to our client portfolios, then we also think that in our clients best interest (and ours because we do invest in the exact same models as our clients) that we should do so.

Our fixed income model will likely be (initially) weighted to have longer duration (a longer average term to maturity) than the index. If and when the recession cycles through its term, we can adjust accordingly to take advantage of yield curve shifts (flattening first, then steepening eventually).

We think that stock markets historically are vulnerable to significant price corrections in a recession, so we would continue to maintain under-weight holdings in our global equity model until we felt that valuations had returned to more reasonable levels.

In the meantime, we also have our tactical model, where we can look for opportunities outside of the mainstream market's where individual company circumstances are not being impacted by the macro-economic cycle and where we are almost fully-invested (at the moment).

This represents a great deal more work (fundamental research) for us (than just telling our clients to wait it out), but in the end, is that not what they are paying us for?

If our assessment is incorrect and a recession does not occur?

We (at High Rock) are a discretionary portfolio management company and can act quickly and efficiently on behalf of our clients (silmultaneously) should we determine that the economic climate has changed (and valuations are more reasonable as a result) and we need to return to a more fully-invested situation.

To date, within our more conservative view, we are ahead of our benchmark index in returns (after fees and costs) for ourselves and clients (accross all of our portfolio combinations) and we are prudently taking less risk to get there, so right or wrong on our macro-economic outlook, we are still getting better risk-adjusted performance (portfolios have less volatility).

What makes you sleep better at night?

Waiting it out?

Or having managers working hard to find the safest way to continue to get growth?

There is an alternative.

Feedback, any and all questions...

scott@highrockcapital.ca

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bianca@highrockcapital.ca