Defensive Strategies

Why defensive strategies have a place in any portfolio.

Investments that systematically manage downside risk have two main benefits:

Greater flexibility to match a portfolio to an investor’s risk tolerance.

An objective to mitigate drawdowns, which stress out clients and prompt them to make bad long-term decisions.

The traditional way to manage downside risk is through diversification across asset classes such as stocks and bonds. This method, called strategic asset allocation, is one of the most effective risk management tools in investing. Systematic risk management strategies like tactical trend-following or multi-factor equity can supplement traditional risk management by targeting additional ways to buffer against downside risk.

Source: Morningstar. The indices shown are for informational purposes only and are not reflective of any investment. As it is not possible to invest in the indices, the data shown does not reflect or compare features of an actual investment, such as its objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, or tax features. Past performance is no guarantee of future results. 

There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

[3] During the 2008 financial crisis, the CP High Yield Trend Index displayed much better drawdown characteristics, recovering 12 months sooner than the Morningstar US High Yield Bond Index.

Tactical High Yield: A Rising-Rate Solution for Pension Funds

Inflation puts investment grade bond portfolios at risk, especially when interest rates are already low. Tactical trend following in high yield credit has potential to capitalize on high yield’s historical resilience in rising rate environments, while managing the downside associated with added credit risk.

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Analysts and Anomalies

Analysts’ price targets and recommendations contradict stock return anomaly variables. Using an index based on 125 anomalies, we find that analysts’ annual stock return forecasts are 11% higher for anomaly-shorts than for anomaly-longs. Anomaly-shorts’ return forecasts are excessively optimistic, exceeding realized returns by 34%. Recommendations also tend to be more

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Anomalies and News

Using a sample of 97 stock return anomalies, we find that anomaly returns are 50% higher on corporate news days and are 6 times higher on earnings announcement days. These results could be explained by dynamic risk, mispricing via biased expectations, and data mining. We develop and conduct unique tests

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Important Risk Information

Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.

© 2024 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.




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