How can investors achieve returns in a sideways market? At Legg Mason’s Global Investment Forum on May 1, 2012, Steven Bleiberg, president and CEO of Legg Mason Global Asset Allocation, provided a brief economic overview and suggested strategies for institutional investors.
Global economic growth has been modest in the aftermath of the 2008 financial crisis, with the U.S. and Japan exhibiting stronger recoveries and Europe lagging behind. On a brighter note, Bleiberg pointed out that, in the U.S., business lending is picking up and consumer credit numbers are no longer falling. “I think these are positive signs for economic growth,” he said.
However, finding yield today is a struggle for investors. “Stocks are not expensive; they’re just not in the top quartile anymore,” Bleiberg said, adding that he views their performance outlook as average. And, in the current environment, bond yields are also weak. “We don’t see a compelling reason to overweight stocks; however, bond yields are still too low to make a long-term commitment.”
So what can investors do now to participate in world markets while also minimizing downside risk going forward?
Bleiberg suggested a dynamic risk management strategy, which involves changing the mix between risky and risk-less assets as market volatility rises and falls. To avoid trading the underlying assets themselves—which could incur significant transaction costs—investors can overlay the strategy with futures (in which the buyer pledges to purchase an asset at a predetermined future date and price) or put options (which give the owner the right to sell an underlying security at a specified price and time).
From a protection standpoint, Bleiberg likened it to purchasing home or life insurance. “You’re buying insurance against a catastrophic event,” he explained—in this case, the prospect of a significant decline in portfolio value.
The downside is that such portfolio insurance isn’t cheap. “The reason people have balked at it over time is the cost,” Bleiberg said, adding that with other types of insurance—even if they’re never used—people typically don’t view them as bad investments.