Chief Operating Officer & Portfolio Manager explains how his team is allocating assets and what advisors should do as market downturn stretches into 3rd day
Tall Oak Capital Advisors have been preparing their clients for this most recent downturn. Since the start of the year the London, On. based advisory firm has been hedging client portfolios against what they saw as high valuations in mega-cap technology stocks. Those stocks have led market growth for much of the year—buoyed in large part by investor euphoria around AI—but Tall Oak has taken a more cautious approach.
“We’ve been hedging more on the tech side knowing that those valuations were quite high, and there was a risk of exactly what’s happening right now,” says Mehendi Kamani (pictured), Chief Operating Officer and Portfolio Manager at Tall Oak. “Markets expected that rates would come back down, but we’ve been saying that rates are going to stay higher for longer. Until there is a deep recession and inflation comes under control, expect rates to stay up. If you follow that logic, you see that [US stocks] are pretty expensive, even though earnings are expected to be lower next year.”
While Kamani and his team are hedging on the stock side, they’re using higher rates to shorten the duration on their fixed income allocations. He sees a range of “great” bonds offering around 5.5% yields over two-year periods, which can offer clients a degree of returns while we wait for stock valuations to normalize.
Kamani and his team have additional registrations and tools that allow them to pivot and tweak client portfolios with some precision, but he believes that any advisor can take this market downturn as an opportunity to assess the positions their clients are in.
Liquid alts may be due some consideration. The asset class proliferated in popularity while fixed income yields were near-zero, but Kamani thinks advisors should compare those products to what’s now available on the bond market.
“I would suggest that perhaps every advisor ask, ‘now that rates are higher on traditional bonds, does it still make sense to hold these, are they warranted for the risks I’m taking,” Kamani says. “And one of those risks that you’re taking is that even though it is a liquid alt, there may still be illiquid securities within its portfolios.”
Kamani doesn’t see an inherent problem with alternatives, and believes they can be helpful in a portfolio, but as the investment landscape shifts he thinks advisors can reassess what their clients hold.
While advisors consider their asset allocation, they should also be communicating. The Tall Oak team, Kamani explained, has spent much of the summer reaching out to clients and outlining why they’ve taken the decisions they have. He highlights that often clients will focus on a topline rise or drop in a major market index like the S&P 500, and advisors can show them how their specific asset allocation has performed compared to that index. Clients may be calling now, having read the news about three days of down markets, only to find out they weren’t as exposed to the biggest losers. Showing that to clients can go a long way in demonstrating an advisor’s value.
“These are opportunities to rebalance an asset allocation strategy,” Kamani says. “If you’ve done the front-end work, to know your client and understand their risk tolerance, then you can make that update. At this point, the biggest risk is that you chase things that have done well or abandon things that haven’t done well. Right now, you have an opportunity to rebalance, and if you do that consistently as an advisor I think you have a greater opportunity of generating better returns for your clients.”
