Staying invested to achieve long-term goals

Throughout history, financial markets have experienced notable volatility spikes, often causing investors to seek defensive assets like cash and high-quality bonds, among others.

Nevertheless, historical evidence indicates that staying invested during market volatility — by managing downside risk through strategic asset selection like income-generating equities and diversification — may be crucial for achieving long-term goals. Since 1988, the S&P 500 has averaged a 14% intra-year drop but ended the year positively 75% of the time¹.

This year, we have seen the S&P 500 drop by 12% from 19 February to 15 April, and the MSCI All World Index fall 9.1% over the same period². With uncertainty likely to persist, where then can investors look to take a more defensive approach when seeking investment opportunities?  

Why equity premium income strategies may work in the current market environment

Investors may consider a total return strategy to remain invested in equities, rather than trying to forecast market directions. This approach may help in buffering a degree of losses during downturns and potentially result in higher lows and lower highs.

Such a strategy is typically implemented through option overlays. By selling call options³, the strategy may generate additional income while maintaining equity exposure, though it may potentially involve foregoing some capital appreciation.

During periods of volatility and market sell-off, the strategy may provide elevated levels of income by selling options. The option premiums collected, along with the dividends from the equity portfolio, may potentially help in managing downside risk.

Such strategies present an alternative to fixed income by providing yield less correlated to interest rates.

These strategies are designed to be highly liquid and aim to combine equities with options to strike a balance among yield, capital growth, and risk. They seek to present opportunities for income while staying invested in equity markets, by adopting a more defensive approach compared to a traditional long-only portfolio.

The diversified strategy also has the potential to participate in broader market rallies or strive for total returns in choppy markets.

The two building blocks underpinning the strategy:

• An active equity portfolio driven by a bottom-up fundamental research process.
• An options overlay that helps to generate income by selling out-of-the-money-index-level call options.

The result is an equity income strategy that has the potential to present higher income and provide a buffer against price fluctuations when needed by potentially foregoing some capital appreciation.

Our key strategies⁴ are:

Conclusion

Given the expectations of a volatile market, an income-oriented, high-yielding strategy may add portfolio resilience and allow investors to hold on to their equity exposure³.