Back in August, Morgan Stanley Smith Barney (MSSB) published a note titled “Dangerously Close To Recession.” Since then, the wealth management firm has been advising clients to invest conservatively. They’re underweight global equities and commodities. And they’re overweight cash.
They continue to believe recession risks are high and the continue to advise clients to invest conservatively going into 2012.
More recently, however, they’ve been advising clients to overweight a more esoteric asset class: managed futures. Managed futures involve trading contracts on commodities, interest rates and currencies. The managed futures indices they watch are the Barclay BTOP 50 index and the CISDM Trading Advisor Index.
As an asset class, managed futures have low historical correlations to other asset classes, providing a considerable degree of portfolio diversification. We believe good risk management begins with portfolio diversification, but it doesn’t have to end there. Because managed futures have historically performed well during periods of adverse equity markets, we are adopting a tactical overweight allocation.
One reason why managed futures strategies outperform stocks in down markets is because they often involve short positions, which increase in value when the underlying asset’s price falls.
MSSB Chief Investment Strategist David Darst gave an exclusive presentation this morning, where he outlined investment strategies for 2012. Here’s the slide from his presentation that shows how managed futures crush stocks during tough times. (At Morgan Stanley’s request, we removed the slide from this post.)
For a comprehensive look at just how well managed futures outperform the stock markets, check out page 14 of Morgan Stanley Smith Barney’s latest issue of On The Markets.
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