A stock market crash threat is boosting the appeal of alternative investments designed to outperform equities in volatile times.
Investors seeking to dodge the threat of a stock market crash may opt to give up some potential upside in share-price appreciation to guard against the risk of a deep loss. Alternative investments worth considering include selected funds and real estate investment trusts (REITs) that are not highly correlated to the stock market and offer a possible refuge from the perils of riding the ups and down of equities.
Buffeted by threats from the coronavirus, supply chain disruption for manufacturers and quarantines that have idled workers and hurt many businesses, the stock market endured a correction in late February, defined as a dip of at least 10% from the highs for the major indexes. Specifically, the Dow Jones Industrial Average dropped 12% and the S&P 500 slid 11% last week.
From the Dow’s all-time high on Feb. 12, it tanked 14.07% through Friday, Feb. 28. In turn, the S&P 500 plunged 12.95% from its intraday all-time high on Feb. 19. As for the NASDAQ Composite, it cratered 12.92% by the close of trading on Feb. 28 from its intraday all-time high on Feb. 19.
Investors Looking to Evade Stock Market Crash Eye Alternative Investments
Market corrections are far from the norm, since the latest is only the 10th for the S&P 500 during the past 20 years. Among those corrections, only two have fallen into bear market range to reflect at least a 20% plunge since its latest peak.
The correlation between the onset of the coronavirus, also known as COVID-19, and the market’s decline could serve as a precursor to further erosion in the price of equities. The coronavirus that originated in Wuhan, China, has spread to 81 countries, caused 93,123 infections and taken 3,198 lives as of March 3.
Concern among central bank leaders about the coronavirus possibly causing a recession spurred a conference call on March 3 led by U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell with G7 finance ministers and central bank governors. The G7 finance leaders issued a joint statement after the call that indicated they are monitoring the spread of the coronavirus, its impact on markets and weakening economic conditions closely. But they opted not to carry out a coordinated rate cut as an economic stimulus.
“Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks,” according to the statement. “Alongside strengthening efforts to expand health services, G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase.”
Fed Cuts Rates to Counter Economic Slowdown
After stocks fell following the market’s open on March 3, the U.S. Federal Reserve Bank’s policy-making Federal Open Market Committee approved a half percentage point federal funds target rate cut to a range of 1% to 1.25% due to the coronavirus. The Fed announced it wanted to support its goals of achieving maximum U.S. employment and price stability.
“The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy,” according to the Fed’s statement.
The 10-year Treasury note yield fell briefly below 1% for the first time ever on March 3. Since bond prices move in the opposite direction of yields, investors bid those prices up as they bought bonds to escape the ravages of stock market drops.
For investors who may feel shell-shocked by the market’s loss of $3.18 trillion in value in just five trading days for the week of Feb. 24-28, alternative investments offer exposure to assets that tend not to fall much when equities sink. A fund that features pork bellies may not appeal to many people, but it is a tasty choice to Keith Dorson, president of Wise World Investment Planning, of Chandler, Arizona.
Alternative Investments Offer Cover from Stock Market Crash Threat
“People probably will have bacon regardless,” Dorson told me in a phone interview. In addition, the market has needed a correction for a long time, so the drop is “a blessing in disguise” to let a little steam off the pressure cooker, he added.
“It is the forces of thrust and lift and drag and gravity that make things fly,” Dorson said. “In the last couple of years, we’ve had a lot of lift and a lot of thrust, but to keep the market in progress, or the aircraft flying, we need both drag and gravity to keep things balanced. You need all four to stay in flight.”
Alternative investments can shine when the market dives, but they also can underperform in other years. Two of the best years for USA Mutuals’ Navigator Fund occurred in 2008 and 2002, Dorson said.
In 2008, the Navigator Fund rose 8.97%, trouncing the S&P 500, which sank 37%. Another year when the Navigator fund soared took place in 2002, when it hit 17.83%, compared to a drop of 21.28% for the S&P 500. However, the fund has underperformed the S&P 500 for the past 10 years, 5 years, 1 year and year to date during the longest and biggest bull run in market history.
Alternative Investments Counter Threat of Stock Market Crash
“Past performance doesn’t guarantee future results, but we still have to make wise decisions moving forward,” Dorson told me.
The Navigator Fund uses a trading strategy that seeks to allocate exposure levels in the U.S. stock market tactically. Specifically, it invests in long and short equity stock index futures, primarily on the S&P 500 Index. But other equity indices may be used occasionally, too. The fund’s investment methodology, based on the portfolio manager’s proprietary quantitative indicators and models, begins with a top-down analysis of a broad array of fundamental and statistical data relating to the stock market.
This data can be classified into five distinct categories: market valuation; investor sentiment; market intervals; monetary environment; and macro factors that may impact U.S. stock indexes. An assessment of these five categories determines the amount of the fund’s long or short equity allocation. The fund takes short positions by using futures contracts.
Stock Market Crash Threat Boosts Interest in Hedge Strategy
The second alternative investment that Dorson likes is the Catalyst/Millburn Hedge Strategy Fund (MVXIX). That fund is aimed at preserving capital with reduced volatility and earned a 5-star rating from Morningstar for the latest three-year period ended Dec. 31, 2019, based on risk-adjusted returns among 238 funds in the multi-alternative category.
However, the fund is not intended for income investors who are seeking dividend yield. With minimum investment requirements of $2,000 and $2,500, the fund is accessible even to people who only have modest amounts of money to invest.
The fund trades a diverse portfolio of global equity, currency and interest rate investment instruments, along with futures contracts on commodities in the energy, metal and agricultural sectors. Plus, the fund may invest in more than 125 markets, as well as long/short futures.
“Both the Navigator Fund and the Catalyst Millburn Hedge Strategy have the ability to be both long and short,” Dorson said. “They decide to be bullish or bearish as the markets and winds of change require. In a word, they both tactically allocate to what is working and avoid what is not. They both enjoy a multi-strategy approach. Don’t tell the winds what direction to blow, just adjust your sails as needed.”
Investors interested in the Catalyst fund can buy shares in it three different ways. MBXAX offers A Shares with a low minimum initial investment and a traditional front load that requires paying a fee immediately to buy shares in the fund. MBXIX is a no-load version that Dorson recommends.
Warehouse REIT Offers Shelter from Stock Market Crash Threat
A warehouse REIT that Dorson has favored is Industrial Property Trust Inc., which acquires and operates distribution warehouses that are leased to corporate customers. IPT seeks to acquire properties that produce rental revenue from corporate customers. However, that fund currently is not open to new investors.
That REIT invests in warehouses that help to supply trucks with merchandise to serve online shoppers, Dorson said. The investment admittedly lacks the glamor of “high-tech darlings” but it can be a profitable investment that is not strongly correlated to the major stock indexes, he added
For investors interested in a warehouse REIT that is accepting new capital, Blackstone offers one. Dorson said he plans to replace Industrial Property Trust with the Blackstone REIT.
“It is time to be a little more tactical,” Dorson said. “In the 1990s, you could use a simple strategy like buy-and-hold, since everything was going up. However, now, because of the volatility and artificial intelligence, algorithms and the automated trading, you need to do your homework. The buy-and-hold strategy is no longer as effective. You can still get rewarded, but you can’t just buy anything off the shelf and expect it to work.”
An investor still needs a long-term strategy, but short-term tactics can help during volatile periods, Dorson said.
“A lot of what we call enhanced income vehicles were created for wealth preservation purposes,” said Hilary Kramer, host of a national radio program called “Millionaire Maker” and head of the GameChangers advisory service. “That’s why they’re restricted to accredited investors or people with professional guidance. Your needs change when your primary concern shifts from creating wealth to squeezing more income out of what you have. If you’re in that category, private REITs are a great place to start.
“Look at the yields and lockup periods. A fund like Blackstone REIT or CIM Income NAV, for example, might not pay more than 5% a year, so if you’re locked into that investment for decades, the opportunity costs can stack up over time.”
For individual investors who seek a little diversification, sticking to publicly traded REITs or REIT funds is a great place to start, Kramer said. Investors can lock in most of the return or those that require lockup periods, but the public REITs and REIT funds are liquid enough to give flexibility for shareholders to sell if they find anything better, she added.
As an investor’s wealth accumulates, he or she can consider trying private funds, Kramer continued. This category should never become a big percentage allocation, even for multi-millionaires, but putting a modest investment in alternative assets will help smooth out the rough spots when everything else seems to be sinking in unison, said Kramer, who also leads the Value Authority advisory service.
Bob Carlson answers investing questions from Paul Dykewicz in an interview.
Alternative investment funds are intended to protect investors from big losses in a declining stock market, said Bob Carlson, chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.
But the annual performance of alternative investment funds recently has not been impressive, said Carlson, who also heads the Retirement Watch advisory service. During last week’s correction, the alternative funds did not perform much better than the major indexes, he added.
Without much better returns than those, Carlson said the way alternative investments currently are performing doesn’t really make the case for adding them to a portfolio.
Stock Market Crash Threat Gives Niche to Dividend Investments
Bryan Perry, who leads the Cash Machine advisory service, said he expects market volatility to remain high for at least the next few weeks until spread of the coronavirus slows. The best strategy is not to panic and to collect the 8-9% dividend yields paid on recommendations in his service, Perry added.
“This is a worldwide medical crisis, something that all the money the central banks can throw at it can’t remedy,” Perry opined. “The proactive measure by the Fed and other central banks is one half of the equation to stabilize the market. The other is progress on containment of the coronavirus. Until that part of the equation begins to get answered, we need to stay strapped in for a continuation of a very bumpy ride ahead.”
Despite the falling value of the major market indexes in recent weeks, Perry predicted the long-term health of the bull market remains intact and the current correction will pass in time. Patience and tactical investing could be the best approaches for investors seeking to wait out the market’s coronavirus-related ills.
Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. Endorsements for the book come from Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Dick Vitale and others. Follow Paul on Twitter @PaulDykewicz.