A Different Approach

by Royce Medlin

A Different Approach

At Clear Rock, we believe it is important to invest a portion of our clients’ assets in a category we call Diversifying and Opportunistic investments.

Global economies and markets are more connected than ever, making it difficult to achieve true diversification with a traditional portfolio of stocks and bonds. During the last market downturn, investors who thought they had ample diversification learned a hard lesson when stocks and bonds fell in tandem, taking some balanced portfolios down as much as -30% in value.

Allocating a portion of the portfolio to investments that behave differently than traditional stocks and bonds can mitigate exposure to market downturns.  Diversifying and Opportunistic investments also add to potential portfolio return, not only by reducing drawdowns, but by participating in recovering asset values after a market dislocation.

Diversifying investments take the form of alternative asset classes such as:

  1. Strategies that take both long and short positions in stocks and bonds.
  2. Multi-alternatives that blend return enhancing strategies to create a low risk profile equal to or lower than bonds.
  3. Private equity investments that take advantage of longer time horizons and a premium on illiquidity.
  4. Managed futures which invest in price trends in stocks, bonds, commodities and currencies that are agnostic to the direction of the market, either up or down.

Opportunistic investments typically take a contrarian view, looking to take advantage of dislocations in markets that are temporary or transitory in nature.  These often provide the strongest upside potential but are also the most difficult to identify.

Examples include investments that can be:

  1. Negatively impacted by commodity prices such as MLPs and energy stocks.
  2. Undervalued real estate prices accessed through REITs.
  3. Adverse currency and stock movements that may create opportunities to invest in particular emerging market countries with strong fundamentals.

Including investments beyond traditional stocks and bonds creates greater diversification, enhanced returns and reduced risk.