Advisers are taking defensive tack

Some are turning more to alternatives amid volatility

Apr 28, 2008 @ 12:01 am

By Andrew Coen

Recent market volatility, and concerns over credit quality and availability, have caused many financial advisers to become more defensive in their portfolio strategies. Since anticipating "a tsunami of a correction" since the middle of last year, Presidium Retirement Advisers Inc. has encouraged investments in precious metals, natural resources and real estate investment trusts, according to Rick Canipe, its chief compliance officer. Presidium of Charlotte, N.C., manages $420 million in assets for individuals and defined contribution plans. Since June, Lenox Advisors Inc. has instituted a defensive strategy that involves incorporating more asset classes and increasing allocations to alternative energy, emerging markets, hedge funds and private real estate investment trusts. For the first time since 1999, the New York wealth advisory firm, which manages $1.5 billion in assets, has increased its bond allocation to 30%, from 20%. Lenox says that it expects to keep its defensive strategy in place for the next two to three years. "[Investors] should be playing a little bit more on defense now than on offense," said Lenox partner Tom Carstens, who said clients are receptive to his defensive approach.

Using exchange traded funds or small- and mid-cap asset allocations is one way to minimize exposure during a bear market, according to John M. Nowicki, president of LCM Capital Management Inc., which also has increased its exposure to fixed-income investments.

"We try to match the market on the way up and outperform on the way down," said Mr. Nowicki, whose Chicago-based firm manages $40 million in assets.

Investors and advisers planning a more defensive strategy should remember that markets can change quickly. After the stock market crash of October 1987 and the 2001-02 recession, for example, markets quickly rallied, said mutual fund consultant Geoff Bobroff, president of East Greenwich, R.I.-based Bobroff Consulting Inc.

However, if this economic downturn is persistent, conservative investing might be a more prudent option, he said.

During the recession earlier this decade, investors moved into money market funds, and principal-protected funds were stuck with low returns once the market began to rebound in 2003, Mr. Bobroff said.

Rather than instituting an all-out defensive strategy, he is urging clients to examine their entire portfolio and carefully reallocate.

"You can be on the wrong side of the story when the market does correct itself," Mr. Bobroff said. "So much of it depends on the duration of this market decline."

If the decline persists, product providers are ready. In February, online brokerage Foliofn Inc. of Vienna, Va., launched three bear market target date stock baskets designed to increase in value as the broad market declines. They comprise a variety of inverse mutual funds and ETFs.

"When the markets are going up, investors feel aggressive, and when the markets are going down, investors feel defensive," said Geoff Considine, strategic adviser at Foliofn. "I think people are now defensive."

Another money manager stepping forward with new defensive products is Portfolio Management Consultants Inc., the investment arm of Chicago-based Envestnet Asset Management.

Later this year, Portfolio plans to roll out a retirement income platform that will give advisers and clients the choice of using either variable annuities or managed assets, according to chief investment officer Brandon Thomas.

Portfolio, which manages $45 -billion in assets, also will be adding non-correlated ETFs to its enhanced-portfolio-strategies platform sometime in the third quarter in response to adviser demand.

"We're getting requests from [advisers] for strategies and products that are a bit more defensive in nature," Mr. Thomas said. "We definitely have seen a lot of increased demand for these types of products."

E-mail Andrew Coen at


What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Why does social media matter for financial advisers?

Social media is a reflection of who you are. But who are you as a financial adviser? Debra Bednar-Clark of DB+co offers some solutions to enhance your practice.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Regulators showing renewed interest in cracking down on investment fees

SEC, Finra targeting high-fee share classes, 12b-1 fees and failure to give sales load discounts and waivers to investors.

Tax update: Brady says sales tax deduction in final bill

Taxpayers will be able to deduct state income taxes or state sales taxes in addition to property levies — up to a $10,000 cap.

Critics say regulation hasn't curbed overly rosy projections for indexed universal life insurance

They say rule didn't go far enough and more stringent measures may be necessary.

Broker, retirement groups make last-minute pleas to change tax legislation

Pass-through provisions are target of groups representing employee-model brokerage firms, as well as retirement plan advisers.

House and Senate reach tentative compromise for tax overhaul

Lawmakers still need to get a cost analysis of their agreement, so it's not yet definite, according to a source.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print