As the market continues to be volatile, stable, high-quality businesses are more expensive than usual. To combat that, investors can find yield by making smart picks within shaky sectors.
“Low-volatility, high-quality business models are receiving a valuation bump and many of them are selling at the high end of where they’ve traded on a historic basis,” says Peter Hardy, vice-president and client portfolio manager at American Century Investments in Kansas City, Missouri. His firm manages the Renaissance U.S. Equity Income Fund.
To accommodate for that, Hardy says he looks for low-volatility businesses within cyclical or volatile sectors.
For instance, his team has changed allocations based on market events. “We were overweight [utilities] in our income portfolio going into 2016; as those companies have outperformed, we’ve reduced our weight. One of the names in the portfolio, Westar [Energy], was taken out by Great Plains Energy, and so we removed [it].”
As utilities became increasingly expensive, Hardy went underweight in the sector and is now overweight energy. “A big weight for us would be Schlumberger, the highest-quality business in the oil services sector. Their earnings are cyclically depressed and their dividend yield, while only at 2.44%, is attractive.”