Defensive Alpha Strategy Status and Update

April 27, 2020

These are very unusual times in the markets, as we are experiencing the first government-mandated quarantine, which arguably has resulted in recession due to the COVID-19 pandemic.

The Defensive Alpha Portfolio was built to withstand times of market volatility. The portfolio adjusts from equity to cash during downward trends to be as defensive as possible.  It focuses on higher alpha stocks to take advantage of upward trends, all while keeping the weighted beta of the portfolio as close to 1 as possible.

What we experienced over the last couple of months in the market was not normal volatility. This was not volatility at all, but could be described as closer to a panic, and in some cases, irrational. The stock market went from pricing in an accelerating economy in January and February to pricing in a sharp recession in March, completely skipping the slowdown phase. In April, it is already pricing in an economic recovery. With this whiplash volatility, it was necessary to make temporary adjustments to the management of the DAP.

The Dynamic Asset Allocation model that we use to adjust the percentage of equity and cash in the DAP is based on current market conditions. The daily wild swings over the last couple of months prevented the DAP from adjusting as it normally would. Therefore, we have had to shift to a more defensive stance during these times. In some cases, we were not in as much cash as we would have liked, so that we were in position to take advantage of quick market reversals. The same can be said on the opposite side, that the equity percent for the DAP is not as high as we would like at certain times, so that we don’t get caught with too much equity as economic data releases push the markets lower in rapid fashion. In the present volatile environment, until the markets stabilize to become somewhat more efficient, we are staying as neutral as possible with the portfolio to be able to be in a position to protect assets, while also allowing for the opportunities to capture upside movements when available. As always, we will continue to look for stocks to replace current stocks in the portfolio that are not performing well, and be ready to increase equity or move into more cash as the market warrants.