By J. Keith Buchanan, CFA, Portfolio Manager, GLOBALT Investments

The underlying theory. Harry Markowitz, known to many as the father of modern wallet theory, could have dated back to something seventy years ago. He would later become a Nobel Prize winner for a lifetime of work understanding and articulating the theory that the allocation of resources to a combination of equity, bond and liquidity exposures is necessary to meet risk and equity objectives. desired return from an overall portfolio.

Correlation is what matters. However, one of his most interesting lessons was that the average return and average risk of securities is not quite adequate for building effective portfolios in practice due to a behavioral element that introduces irrational uncertainty. In practice, asset returns are not normally distributed around an average with different levels of covariance or risk. Equities and fixed income don’t always balance perfectly. In times of economic stress, correlations between asset classes increase by less correlated at more correlated (meaning they move more in the same direction than in opposite directions) which in itself is confusing. When things get scary, that is, when allocators need to be able to rely on negatively or at least less correlated assets to cushion returns, that’s exactly when those correlations increase, exposing the portfolio at a downside risk rather than providing potential protection to allocators. thought they had. When a high and immediate level of fear sets in, investors sell everything.

When stocks and fixed income securities are not “diversified”. We’ve seen times like this in the past, of course. During 2018, as the market feared central banks would make a mistake by prematurely withdrawing homes, the S&P 500 index and the iShares 20+ Treasury Bond ETF, two major market indicators that theoretically reside in the opposite ends of the risk / reward spectrum, both posted negative returns over the year. The most recent episode of pervasive fear took place in the spring of 2020, when the coronavirus pandemic took hold of all aspects of our lives. At the height of the fear in March, the S&P 500 Index lost -12.6% in just seven trading days. During the same period, the iShares 20+ Treasury Bond ETF lost more than -15%, underperforming actions.

Species almost always remain uncorrelated. In times of stress, animal spirits overwhelm rational thought processes. People sell what they want at the start. Then they sell what they can. These are the times when liquidity delivers its value in spades as a viable component of investor portfolios. When fear is at its highest, cash provides an asset class whose performance attributes do not correlate with the rest of global asset prices.

Cash can also be used for duration management. In addition, because cash is a fixed income instrument with zero duration, we also use our cash position in concert with the rest of our fixed income portfolio as a means of continuing duration exposures without changing the weighting or position. composition of the traditional portion of fixed income securities as a whole. Approaching our bond allocation in this holistic way gives us the flexibility to remain nimble when market conditions demand it.

At GLOBALT, we use cash as an active management tool. With almost no correlation to the equity and long-term debt markets, liquidity is a valuable and necessary active tool for our team to help our clients achieve their overall portfolio goals. We don’t use cash as a residual catch-all that just builds up when we sell assets without good buying opportunities. Cash offers a unique risk / reward combination that we actively “buy” compared to other less attractive asset classes. More importantly, the risk / reward profile of cash is more attractive when we see the risk of asset class correlation spikes due to the downward changes Markowitz warned about two generations ago in his foundational work.

GLOBALT has been an SEC registered investment adviser since 1991 and, as of July 10, 2013, remains a registered investment adviser through a separately identifiable division of Synovus Trust NA, a nationally chartered trust company. This information has been prepared for educational purposes only, as general information and should not be construed as a solicitation to buy or sell any security. This does not constitute legal or professional advice and is not tailored to the investment needs of a specific investor. The registration of an investment advisor does not imply a certain level of skill or training. Due to rapidly changing market conditions and the complexity of investment decisions, additional information may be needed to make informed investment decisions, depending on your individual investment goals and specifications. ‘adequacy. Investors should seek personalized advice and should understand that statements regarding the future prospects of the financial market may not come true as past performance does not guarantee and / or indicate future results. The content may not be reproduced, distributed or transmitted in whole or in part by any means whatsoever without the written permission of GLOBALT. For authorization, as well as to receive a copy of GLOBALT’s ADV Part 2 and 3 Forms, contact GLOBALT’s Compliance Officer, 3400 Overton Park Drive, Suite 500, Atlanta GA 30339. You can get more information ” information on GLOBALT Investments and its advisers by accessing the Public disclosure of the Investment Advisor website.

The opinions and certain comments contained in this document reflect the judgment of the author as of the date indicated.

The investment products and services provided are offered by Synovus Securities, Inc. (SSI), a registered broker, FINRA / SIPC member and SEC registered investment advisor, Synovus Trust Company, NA (STC), Creative Financial Group, a division from SSI. Trust services for Synovus are provided by STC.

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