Don’t Go—Here’s How You Might Hedge the Equity Risk

This promises to be the kind of week when financial advisors prove their value. Monday’s pullback and market volatility overall is unnerving clients, many of whom may be ready to take their 2019 equities gains and bolt, even if just for a while.

It’s easy to understand why going away this May has appeal—which is why your clients are smart to work with an advisor. If your clients’ investment objectives depend upon the long-term growth of equities, they need you to make the argument for staying in the market.

Big Gains Have Historically Followed Big Losses

Timing the market is a risky strategy because market-timers often miss the market’s best days. Even a handful of days can make a difference in investment returns, as shown below.

Here’s what’s especially relevant for this May.

It's not unusual for a year's best gains to occur within days and weeks of the year's deepest losses. The table below takes the point to the extreme—three of the S&P 500’s largest daily percentage gains over the last 20 years took place within days and weeks of deep drawdowns.

Historical performance data just doesn’t support an overall plan to sit out part of the year. Since 1928 the S&P has gained, on average, about 5% from November through April while adding less than half of that—2%—from May through October, according to FactSet data.

In the shorter 10-year period shown below, the S&P outperformed from November to April just half of the time or five out of the last 10 years. (Of course, with the 2008-2009 global economic crisis and the quantitative easing that was implemented in response, some would argue that the previous decade was an anomaly.)

Your Potential De-Risking Options

In and of itself, "Sell in May and go away" is less relevant to mutual fund investors, who seek to build wealth by remaining invested over market cycles, let alone calendar years.

Advisors know all of this. But, let’s say that you agree with your client that it’s time to de-risk—even if it means surrendering any potential for further equity gains from May through October.

Let’s look at your potential options. You could move your clients to:

• Cash/money markets, which currently offer low yields, far less than the historical 2% cited above during the May-October period over the last 10 years.
• Short-term or intermediate-term fixed income to provide some return, but again well below 2%.

These options do little to mitigate the risk of market timing. They still require you to pick the top (when to exit equities in May) and when to buy back in. Few succeed at getting both decisions right.

We suggest you have another option—don’t leave equities, hedge them using Calamos Hedged Equity Fund (CIHEX). CIHEX seeks to hedge equity downside, dampen volatility and still provide exposure to equity markets in the event of a May to October rally.

The graph below compares the May to October performance of cash and short-term fixed income over the last 10 years. Investors sitting out six months of the year missed significant S&P gains.

Now here’s how CIHEX—whose May to November performance history starts in 2015—would have been the better alternative for those seeking to de-risk. When the S&P moved, CIHEX participated.

In summary, for clients with long-term investment objectives, we don’t advocate portfolio moves triggered by the month of the year. However, in those instances (and this year may prompt more of them) when the instinct is to “go away,” CIHEX is a long-leaning equity alternative to getting completely out of the market.

Financial advisors, for additional information talk to your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.

Click here to view CIHEX's standardized performance.