MEDIA RELEASE: In the current market of lower future returns and high inflation, there are options for investors to minimise losses and still access returns, but they require a different approach, according to Talaria Capital Co-Chief Investment Officer, Chad Padowitz.

Padowitz believes the performance of equity markets in August was a sharp reminder that they remain in difficult territory, because they are caught between the rigours of managing inflation and vulnerable earnings whilst still not having adjusted to reflect this in valuations.

“As financial theorist William J. Bernstein said, ‘Human beings are not very good at taking losses.’ If you believe the market can fall further, it makes sense to avoid being in assets that move in the same direction as the market and with the same or greater magnitude,” Padowitz says.

“One way to do this is to be in cash, but that’s not going to help investors get a return. The question then becomes: how to you construct a portfolio for these times that minimises losses and still delivers a return?”

As an example, Padowitz says Talaria’s current focus on the healthcare sector is partly driven by the principle of recouping their investment sooner rather than later.

“Many global companies in the healthcare sector are delivering returns, paying healthy dividends with no or low net debt, and remain strong investments in the future through billions of dollars being put into research and development,” he says.

“They are also typically on a price-earnings ratio of 10 to 12, well below the growth companies that dominate the indices, with less price volatility.”

Padowitz says high-yielding assets may also fit the bill, and that investors would be well-served by focusing on income as a component of returns.

“In our world, income is not just interest on cash and dividends but also option premium.

“This is generated by selling put options to enter stock positions which generates a premium for the potential buyer, regardless of whether the stock is ultimately bought.

“This all then creates a downside buffer to first loss, more consistent income, reduces portfolio volatility, and diversifies the sources of return,” he says.