By Paul MacDonald, CIO, Harvest ETFs
After nearly two years of a global pandemic, capped by surging inflation, the past month has been dominated by Russia’s invasion of Ukraine and a wave of geopolitical uncertainty unleashed by the largest European conflict since 1945.
“What a crazy decade these past two years have been,” is a line making the rounds on social media at the moment.
In the midst of all this volatility, uncertainty, and tension, we believe it’s important to focus on quality investments. We should begin by understanding and defining quality within our unique philosophy at Harvest ETFs. We can then outline some of the strategies at work in our Harvest ETFs that protect against volatile times and how today’s shocks fit in a longer-term macro-outlook.
Be diversified and own quality
To begin, our view remains that you want to be diversified and you want to own quality. How do you measure quality though? At Harvest, we do it through financial metrics like variability of earnings, visibility into earnings, return on invested capital and others. What those metrics tell us is that large-cap companies have the ability to navigate tail risks.
While risks related to geopolitical tension are top of mind now, we should emphasize that supply chain issues, inflation, and interest rate transitions are arguably the biggest volatility risks now. In this uncertain environment, it’s important to prepare for volatility from a wide range of sources. The expectations for how much and how quickly interest rates will rise is also going to be volatile and will likely result in some sectors doing better at different times, more so than what we have seen in recent history. Volatility shouldn’t come as a surprise if we’re adequately prepared for it with an investment approach that focuses on quality & diversity.
Our focus on quality is a core element of the Harvest investment philosophy. That philosophy focuses on leading companies in specific sectors or mega trends as the best place for investors to be if they want long-term capital appreciation prospects and income across market cycles.
Income Generation and Covered Calls
Income generation is another core element of the philosophy at work in Harvest’s equity income ETFs. That is achieved through a covered call strategy, generating a premium by agreeing to sell up to 33% of a holding at a set price. Using an active covered call strategy, Harvest’s team of portfolio managers generate consistent and high yields on their ETFs. As well, the value of call options tends to increase when volatility and uncertainty increase. The premiums generated by the covered call strategy act as some downside protection by the premium received.
An income strategy and focus on quality is further strengthened by diversification. While we’re seeing broad market rotations away from growth stocks towards value stocks and areas like cyclicals at the moment, we are still seeing positive earnings growth from most companies. Although, that it is slowing somewhat from the highs we saw in 2021. Diversification, in an environment of slowing growth and widespread uncertainty, is key to smoothing out the volatility.
We especially like sectors and companies with resilience that have weathered storms before and have the demand tailwinds to grow in any economic condition. Top global brands like McDonald’s and Nike enjoy demand in all cycles and sectors like healthcare will consistently benefit from the sort of consistent spending only an essential good has.
Our approach boils down to resilience, diversity, and income layered over a baseline focus on quality. It’s an approach informed by decades of experience and the common sense idea that when the going gets tough, investors want to keep their money with the world’s best companies.
Paul MacDonald is the Chief Investment Officer and Portfolio Manager with Harvest Portfolios Group Inc. This article dated March 4, 2022 is re-published with permission from Harvest Portfolios Group Inc.
Commissions, management fees and expenses all may be associated with investing in HARVEST Exchange Traded Funds (managed by Harvest Portfolios Group Inc.) Please read the relevant prospectus before investing. The funds are not guaranteed, their values change frequently and past performance may not be repeated. All comments, opinions and views are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies. Tax, investment and all other decisions should be made with guidance from a qualified professional.