Advisors should look for portfolio managers who are asset allocators in light of today’s global economy, says Christine Hughes of OtterWood Capital Management.
“Take your cues from the bond market. Stress there means trouble for us,” she says.
Hughes, who spoke at an NEI Investment event today, uses an investment process that also includes sector selection. She looks at global supply and demand, as well as the sovereign debt crisis, to assess how much Canadian bank exposure she’ll include.
Read: Faceoff: Asset allocation
Next is stock selection, in which price and valuation, as well as a company’s cash flow and management strength, matter.
Most importantly, she maintains portfolios that can be liquidated in two days or fewer, even if it’s a small-cap fund in a tight capital environment.
“You can measure liquidity globally [through] currencies and bonds,” she says. “When there’s stress in the system, liquidity vanishes.”
Read: From asset allocation to risk allocation
She points to five tools to reduce risk in a portfolio.
1. Asset allocation (i.e. Shifting out of equities in bear markets)
2. Protective option strategies (i.e. Using put positions on commodities like gold bullion)
3. Short selling to hedge risk (i.e. Indexes, individual companies, or both)
4. Currency overlays to hedge risk (i.e. U.S.-dollar long positions)
5. Holding physical gold bullion (i.e. Proof of positions is critical because it protects purchasing power)
“I’ve always looked at myself as a guardian and protector of wealth,” she adds.
Read: Rethinking asset allocation
Hughes recently partnered with NEI, and her firm manages three of its funds: Northwest Macro Canadian Asset Allocation (asset mix ranges from 10% to 90% in either stocks or bonds); Northwest Macro Canadian Equity (50% to 100% stocks); and Ethical Balanced Fund (40% to 60% either stocks or bonds).