Total time: 6:29
Jessica McHugh: In today's podcast, Sage’s Director of Research Rob Williams provides a Q4 market review and outlook for our tactical ETF strategies. My name is Jessica McHugh, director of marketing communications at Sage. Rob, let's start with the fourth quarter. How would you characterize Q4 overall?
Rob Williams: Sure, thanks. Well, you know the fourth quarter brought a much more challenging environment than I think what investors had really been used to for the year. And indeed, for several years now, we've had much more smooth sailing than what they've been used to, I think, really the fears of a slowing global economy, you had rising rate fears, you had increasing geopolitical risk, and it all drove a pretty significant sell-off in equities and the riskier parts of the fixed income market.
0:45
Jessica: So in terms of Sage’s more equity-focused strategies, how did those fair in Q4?
Rob: Well our equity-oriented strategy suffered due to the overall drawdown in the markets. You know, most equities lost in the range of about 13% in the fourth quarter, globally, anywhere you went. Our strategy suffered from a relative standpoint to the indices in the fourth quarter as we had really less exposure to some of the more defensive equity sectors going into the quarter, such as consumer staples, utilities, health care -- sectors, you know, traditionally defensive or lower-beta. Like most investors, we thought after a strong uptick in U.S. growth that we had in the middle of the year, we thought it really would be a decent finished to the year but, you know, being a tactical manager, we did take steps into the year-end to insulate equity allocations against further volatility by increasing exposure to value and higher-dividend sectors, things that would be a little more defensive. We importantly, though, held off from selling out of equities aggressively given that we thought markets appeared to be oversold going into the end of the year, and we really expected some upside early in the year. And so far this has played out, and risk assets have really rallied in January.
2:05
Jessica: And what about Sage’s income strategies? How did those do, and what positions either helped or hurt returns in Q4?
Rob: Yeah, so let's look at fixed income for a moment. Unlike equities, fixed income was really a challenging place to be all year. While we were ahead of the benchmark much of the year in our core plus fixed income and our MAI, or multi-asset income, strategies, the risk-off tone in the fourth quarter hurt these because it hurt the higher-income sectors, things like corporate bonds, high-yield, preferreds -- the higher-yielding, lower-credit-quality parts of the fixed income market. Our equity strategies, however, we had taken steps to reduce risk and insulate against volatility as the year kind of rolled on. In our Core Plus, for example, we had already been lowering credit by mid-year and kind of rotating some of that exposure into mortgage-backed securities, sectors a little more stable to volatility. And we had exited a few of the higher-octane fixed income markets, like our bank loan position we got rid of early in the fourth quarter. But like equities we chose to hold off from de-risking too aggressively. We held on to high yield, we held on to preferred stocks really. And we did that because just like equities, we thought things were oversold. And we expected a pretty good rebound early in 2019. And this is also played out in the fixed income markets: the high-income sectors have bounced back significantly, gaining back most of what they lost in the fourth quarter, just in the first three weeks of the year. So the good news for fixed income, a little bit different for equities, we actually expect the return environment to be better than last year. Given that yields are higher, you can accrue income faster now in fixed income, and we think the Fed is likely done with raising interest rates.
3:49
Jessica: Okay. And then we have two more aggressive income strategies, multi-asset income and a tax-aware multi-asset income strategy. How did those do?
Rob: Yeah, so with respect to our more aggressive income strategies, the MAI and the tax-aware MAI, these also saw some drawdown versus their benchmark in the fourth quarter, again due to higher income, fixed income sectors. But also recouped most of the losses early in 2019. Because these strategies are built around the concept of yield versus volatility, in our view, they really weathered the fourth quarter well, and as we expected with only modest bosses, they generated attractive income. Given where yields are overall, they're higher now, you're getting better income generation, the strategies are very well diversified. That's how they're designed and the method that we use is specifically geared to limiting volatility, so we believe for conservative investors these more aggressive fixed income strategies are actually a really good place to be in when you're going to have higher volatility.
4:56
Jessica: Great. And then to wrap up, how is Sage generally positioned going forward? What is our outlook for Q1?
Rob: So from our perspective, the bad news going forward is we believe that risk markets will be characterized by higher volatility, and I think returns will be more difficult to come by. You know, the good news is this represents a better backdrop really for tactical strategies and defensively inclined managers, such as Sage. While we have fully participated in the early year rally, we would expect to be reducing risk further as the year progresses.
Disclosures
Sage Advisory Services is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This podcast is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.
