Hi all, the Doctor is back again, with some more “prescriptions” for you! My previous diagnosis can be found here and here. Remember, we are not giving personal investment advice as we do not know your individual financial situation. Before investing, you should make sure you fully understand the products, their benefits and risks.
I have had a portfolio of International and Australian shares for many years – some via ETFs, some via managed funds and some via direct shares.
My portfolio has served me well over the years, GFC volatility aside (which I rode down as well as back up) and I’d like to keep this portfolio intact.
But… I’m looking for some downside protection. Oil price volatility, European political uncertainty, the impending US election… I’d like to ‘hedge’ my stock portfolio, put it in ‘neutral’ for a while.
I am sitting on unrealised gains (less than I used to have admittedly). And if I sell, while getting me out of the market and ‘de-risking’ the portfolio (objective accomplished) it also realises capital gains, forcing a tax liability this year. That I’d rather not do – preferring to be as tax efficient as possible until I really want to sell down.
See my dilemma? Is there anything you’d prescribe?
Bear Not Wanting to Hibernate
Dear Bear Not Wanting to Hibernate,
The current environment is certainly volatile and unsettling. Your concern is echoed by our Chief Economist, David Bassanese here.
Over the last three months, Australian shares have sold off -2.7%, unhedged international shares -5.1%. Oil is off, China is slowing which can impact share markets as well as commodities… so yes, I see your dilemma.
We face these poor outlooks from time to time in equities. Until the outlook becomes favourable, wanting to protect capital without selling out of holdings and realizing gains (and incurring other transaction costs) – putting the portfolio ‘in neutral’ for a while as you said, is natural.
Thankfully there are tools you can use, designed just for this purpose.
BetaShares has three products that are designed to move in the opposite direction to the market. In the case of the BEAR Hedge Fund (ASX ticker: BEAR) a 1% fall (rise) in the broad Australian share market on any given day can be expected to produce between a 0.9% to 1.1% rise (fall) in the Fund’s value (before fees and expenses), while the Australian Equities Strong Bear Hedge Fund (ASX ticker: BBOZ and US Equities Strong Bear Hedge Fund (ASX ticker: BBUS) can be expected to produce a larger 2%-2.75% rise (fall) in the opposite direction to the Australian market and the hedged S&P 500 (US market), respectively.
Put simply, for every -1% that the S&P/ASX 200 goes down, BEAR is expected to go up approximately 0.9% to 1.1%, before fees and expenses. And vice versa – if the S&P/ASX 200 goes up 1%, BEAR is expected to go down approximately -0.9% to -1%.
The behaviour of BEAR can provide a nice hedge against the impact of market movements on your Australian equity portfolio (of course, the closer the make-up of your portfolio is to that of the S&P/ASX 200, the better the hedge). Any value-add that your managed fund or portfolio has over the market is not hedged away – just the market movement is put in neutral (approximately). As your share portfolio is untouched you will still get the benefits of any dividends and franking credits on it.
If you’re looking for a stronger hedge for your Aussie shares, or if you’re looking to hedge your international exposure, then you may want to consider the two Strong Bear Hedge Funds (ASX: BBOZ for Australian shares, ASX: BBUS for U.S. shares). These funds are very similar to BEAR, but a stronger hedge at 2-2.75 for 1 . A short S&P 500 exposure is not a perfect hedge for an international portfolio, but generally the US has tended to lead the way, and the US makes up around 50% of most international equity portfolios, so it can be considered a good approximation.
An advantage of the Strong Bear Funds is that the hedge ratio, as mentioned above, is approximately 2-2.75 to 1, so for every $1 invested in these funds, they can be expected to move in the opposite direction to $2-2.75 invested in the S&P/ASX 200 and S&P 500 (hedged – no currency exposure). More bang for your buck, while leaving any value add from your managed funds untouched. Of course, because these funds provide magnified short returns they will need to be monitored very carefully and can be a lot more volatile than BEAR.
So between BEAR, BBOZ and BBUS even the most grumpy bear can put their hibernation plans on ice and avoid selling out of the market if that better suits their objectives. When you think the outlook has brightened you can sell your bear fund exposure, reverting back to your original portfolio.
Please note: The Funds’ strategies of seeking returns that are negatively correlated to market returns is the opposite of most managed funds. Also, gearing magnifies gains and losses and may not be a suitable strategy for all investors. Investors in geared strategies should be willing to accept higher levels of investment volatility and potentially large moves (both up and down) in the value of their investment. Geared investments involve significantly higher risk than non-geared investments. Investors should seek professional financial advice before investing, and monitor their investment actively. An investment in any of the Funds should only be considered as a component of an investor’s overall portfolio. The Funds are actively managed and do not track a published benchmark.