By Harvest ETFs
After nearly two years of a global pandemic, capped by surging inflation, the Russian invasion of Ukraine has added an unprecedented level of geopolitical uncertainty to our world.
“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, Paul MacDonald, Harvest ETFs CIO and Portfolio Manager, recently spoke with financial advisors about the importance of quality investments. He offered some context and definition of quality in line with Harvest’s unique philosophy. He explained some of the strategies at work in Harvest ETFs that protect against volatile times and outlined how these short-term shocks fit in a longer-term macro-outlook.
“Our view remains that you want to be diversified and you want to own quality,” MacDonald said. “How do you measure quality though? 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, MacDonald emphasized that supply chain issues, inflation, and interest rate transitions are arguably the biggest volatility risks at the moment. He noted that 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.
MacDonald’s 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 is another core element of the Harvest philosophy at work in Harvest’s equity income ETFs. Using an active covered call strategy, Harvest’s 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, MacDonald explained. While we’re seeing broad market rotations away from growth stocks towards value stocks and areas like cyclicals at the moment, he emphasized that we’re still seeing positive earnings growth from most companies, though 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.
MacDonald also likes 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.
Resilience, diversity, and income applied to a baseline focus on quality is MacDonald’s approach to current environment. 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.
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