"We're Happy to Sit Out Rising Markets"

Morningstar Investment Management's Dan Kemp explains why he is happy to sit out opportunities for near-term returns

Dan Kemp 13 July, 2018 | 7:17AM
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For more than a year we have held reasonable defensive positions in our multi-asset portfolios. We've grown more defensive both among asset classes – being underweight stocks and overweight cash – and within asset classes.

Defensive may be a somewhat confusing term. We are defensive because, as valuation-driven investors, we believe the prospective returns of some riskier asset classes at present won't compensate investors sufficiently. In other words, we doubt the return is worth the risk today relative to history, because for us being more defensive entails avoiding the risk of the permanent loss of capital and maintaining flexibility to take advantage of future opportunities.

Importantly, the recent volatility in markets is not why we're defensive. We began moving to defensive positions more than a year ago, when we believed prices – especially those of U.S. stocks – began to depart from fundamentals. Just as trees can't grow to the sky, we believe prices will eventually come back in line with fundamentals. In fact, our defensive moves to date have prepared us well for this recent volatility and more – assuming there's more to come.

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About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA