Page 19 - Investment Advisor July/August 2023

pORTFOlIO pERspECTIvEs

By Dinah Wisenberg Brin

How to Invest for a recession

Morningstar’s Christine Benz says, “There’s no need to get fancy.”

s many economists and market said, “the best ballast, the best category hold its ground in a recessionary
strategists forecast a U.S. reces- for a weakening economic environ- environment, according to Benz. On the
A sion in the next 12 months, cli- ment, will be that high-quality bond other hand, she noted that she wouldn’t
ents may be looking for ways to keep portfolio. Very plain vanilla. I wouldn’t be surprised to see yields taper down.
their portfolios on an even keel in rough necessarily dabble in lower-quality “And, of course, if you’re buying any
waters. Christine Benz, Morningstar’s bonds if I’m looking for ballast. That short-term security — cash or short-
director of personal finance and retire- high-quality fixed-income portfolio term bonds or anything like that — that’s
ment planning, recently offered insights with a heavy dose of government bonds the risk you face, that you’re having to
on the firm’s website about how inves- is going to be your friend in a reces- see your bonds mature or see your CD
tors can add ballast to their portfolios in sionary environment.” mature and you’re having to reinvest
a recession. “You don’t need to get fancy. In fact, I in a lower-yield environment. That’s a
Stocks haven’t done so well in past would look for the cheapest product that consideration, I think, for people who
recessions “because stocks tend to you can find. A total bond market index, might say, ‘I love cash today,’” Benz said.
respond to the economic environment, for example, would have a healthy dose “Just be careful because you do face
especially if the company is selling dis- of Treasury bonds and other govern- reinvestment risk,” although inflation
cretionary goods or services, [and] peo- ment-related bonds, which would tend tends to cool in a recession, and “that’s
ple pull back in recessionary times,” to perform pretty well in a recessionary less of a headwind for you as a cash
she said in a talk with a Morningstar environment,” Benz said. investor then when inflation is as high as
colleague. Stocks posted losses in five of Current high yields have made cash it has been over the past year and a half
the last eight recessionary periods, Benz accounts appealing, and cash should or so,” she explained.
noted, adding, “We probably wouldn’t
want to over-rely on the equities to be
great performers.” Vanguard Changes Managers, Plans Fee Hikes
So what does do well in recessions? vanguard announced advisory management changes recently to two equity
“Bonds are the star of the show in reces- funds — vanguard growth and Income Fund and vanguard u.s. growth Fund —
sionary environments, especially high- including the removal of its in-house vanguard Quantitative Equity group (QEg)
quality bonds. I wouldn’t put too much as an advisor for the funds. vanguard expects to increase the expense ratios for
faith in lower-quality bonds, which will both funds as a result of the changes.
tend to be very much beholden to what’s For the growth and Income Fund, the restructuring of the investment advisory
going on in the economic environment,” arrangements is expected to increase the fund’s expense ratios to 0.37% for Investor
Benz said, according to a transcript. shares and 0.27% for Admiral shares, from 0.32% and 0.22%, respectively. The u.s.
“When we looked at the category that growth Fund’s expense ratios are expected to change to 0.35% for Investor shares
had the best performance during reces- and 0.25% for Admiral shares, from 0.33% and 0.23% respectively. The expected
sionary periods, high-quality bonds, expense ratios for both funds exclude performance-based adjustments.
especially Treasury bonds, really deliv- The mutual fund giant added Wellington Management Co. as an advisor to the
ered,” she said. In all recessions that growth and Income Fund and will increase the portion of the u.s. growth Fund
Morningstar examined, “bonds came advised by Wellington Management. Following the advisory changes, the growth
through with flying colors and had posi- and Income Fund will switch from an exclusively quantitative stock selection
tive returns, and they also exhibited a approach to using a mix of quantitative and fundamental approaches.
negative correlation with equities.” Current advisors los Angeles Capital Management and D. E. shaw Investment
That’s one reason why Morningstar Management will continue to use their quantitative investment processes, and
considers a balanced portfolio a good Wellington Management will conduct fundamental security analysis. The u.s.
idea in various market environments, growth Fund will be managed by Wellington Management, Jennison Associates
Benz added. For investors seeking sta- and Baillie gifford Overseas. —Dinah Wisenberg Brin
bility in 70% equities portfolios, she

July/August 2023 InvesTmenT ADvIsor 17