D. DAVID JILEK, RMA, CAIA®
Vice President and Chief Investment Strategist
Gateway Investment Advisers, LLC
CLARICE AVERY, CFA®
Natixis Investment Managers – U.S. Distribution
As the equity bull market lumbers through its ninth year, the chance of larger pullbacks in stocks is increasing. Equity valuations are stretched, while fixed income yields are still low and set to rise. And with the Federal Reserve well down the path of monetary tightening, there is a lower likelihood that the next market slide would be nipped in the bud by an about-face to easy monetary policy. Volatility could reappear any time.
Where do investors turn when return expectations for stocks are diminishing and returns on fixed income are hampered by low interest rates that may rise over time?
Investors who preemptively increase their cash allocations based on the downside risks of the equity market could potentially lose out on any upside equities have left. As Chart 1 shows, the longest bull market in history topped 12 years, and even if the total return for the current bull market were to double, it still wouldn?t be the highest returning bull market in history. So stocks may still have room to run. That said, each day brings us closer to the beginning of the next bear market.
Some investors have taken on more international equity exposure, where valuations look more attractive than they do in the US. But this could be risky, as history shows that when US equity markets decline, international markets tend to fall even further (Chart 2). Investors who pursue potentially greater opportunities outside the US may be surprised by the additional level of risk they are adding to their portfolio and the degree to which that risk is tied to US equity market risk.
Other investors may be increasing their allocation to core fixed income. But even if yields don?t rise significantly, with the starting yield on the 10-Year US Treasury Note at 2.33% as of 9/30/17, returning to core fixed income isn?t likely to get investors closer to their financial goals going forward. (Bond prices fall as yields rise.) In fact, according to the most recent Natixis Institutional Investor Survey, 53% of respondents indicated that they are increasingly using alternative investments as a fixed income replacement.1
The Gateway Solution
Gateway Investment Advisers offers a different solution that investors have relied on for 40 years*: low-volatility equity strategies utilizing options to lower volatility and reduce risk. Gateway Low Volatility U.S. Equity Fund?s managers invest in a stock portfolio that seeks performance similar to the S&P 500® Index, then sell index call options to create cash flow. Writing covered call options effectively trades potential (unknown) upside in the equity markets for (known) call premium. They also buy index put options to cushion the Fund against a severe market decline. Gateway Low Volatility U.S. Equity Fund maintains a consistent strategy, regardless of prevailing market conditions.
The result is a portfolio that aims to make it easier to stay invested for the long run by reducing the impact of severe equity market downturns, while still participating in equity market advances. The Gateway strategy can help address three common investment objectives:
- Equity market exposure with lower volatility to help smooth the ride
- Potentially lose less when the stock market declines
- Diversification for fixed income portfolios
Gateway Low Volatility U.S. Equity Fund may be particularly attractive for investors who are approaching retirement and want to retain exposure to stocks, but with less risk of loss. It may also be used as a complement to passive or actively managed stock funds due to its resilience in down markets.
And with bond yields still at record lows across the globe, relying on fixed income investments alone may not be sufficient to meet a conservative or risk-averse investor?s financial goals.
No one knows how long this bull market will last, but Gateway Low Volatility U.S. Equity Fund can help investors plan ahead.
*The U.S. Gateway Fund began operations in 1977 and changed its investment strategy to the current strategy in 1988.The Gateway Low Volatility U.S. Equity Fund was launched in Canada by Natixis Investment Managers Canada LP on September 17, 2015.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
The views and opinions expressed may change based on market and other conditions. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.
1 Natixis Investment Managers, Global Survey of Institutional Investors conducted by CoreData Research in September and October 2017. Survey included 500 institutional investors in 30 countries.
S&P 500® Index is a widely recognized measure of U.S. stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large cap segment of the US equities market. You may not invest directly in an index.
The MSCI EAFE Index (Net) is a free float-adjusted market capitalization index designed to measure large and mid-cap equity performance in developed markets, excluding the U.S. and Canada. The Index includes countries in Europe, Australasia, and the Far East.
The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index that covers the U.S.-dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, government-related, corporate, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities sectors.
A call option is an agreement that allows an investor to purchase a security at a specific price within a predetermined time period.
A put option is an agreement that allows an owner of a security to sell an amount of said security at a specific price within a predetermined time period.
Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Options may be used for hedging purposes, but also entail risks related to liquidity,market conditions and credit that may increase volatility. The value of the fund?s positions in options may fluctuate in response to changes in the value of the underlying asset. Selling call options may limit returns in a rising market. Real estate investing may be subject to risks including but not limited to declines in the value of real estate, risks related to general economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrowers.