Most Model Portfolios Are Melting Down, But Buying These Bear Market Winners Can Still Give Clients a Reason to Cheer

There’s no shelter from the nightmare. At least $6 trillion in paper wealth has vanished from stock and the bond market hasn’t provided its traditional comfort . . . those allocations are down another $4 trillion.


Correlations no longer seem to matter in a world of high inflation, rising interest rates and a gnawing sense that the Fed’s free money created a bubble that will leave nothing but hot air and dot-com-style wreckage behind.

And it can feel like there’s no place to hide when none of the usual strategies is working. Clients get frustrated if you can’t point to something in the portfolio that can not only hold up in the headwinds but keep pushing ahead.

Those investment wild cards exist. tracked a few visionary asset managers have developed them to help weather extreme conditions like the worst spring in nine decades . . . what’s now a longer and more severe slump than the COVID crash itself.

They’re making money. Some are making a lot of money, while others are at least eking out enough to help you show you added a little value when it’s time for that quarterly client meeting.

Under normal conditions, they’re unlikely to rise to the top of a lot of automated screens. And when the world melts down, they tend to get forgotten in the noise.

There are thousands of investment models in the Morningstar Direct database. On average, despite all the hype about dynamic allocations and risk management systems, that entire universe didn’t even make enough last quarter to cover the aggregate fees, leaving retail investors in the lurch.

Since then, the market mood has gotten even gloomier. We doubt that if we ran the YTD numbers today they’d show even a sliver of upside here, more than a third of the way through the year.

“We believe the Federal funds rate will rise to 4%, which, combined with continuing inflation, stubborn supply chain issues, and Ukraine-war related uncertainty, will result in a rough ride for the stock market in the months ahead,” says Gary Shilling, president of A. Gary Shilling & Co, Inc., a New Jersey based registered investment adviser and economic consulting firm.

So What Does It Take To Make Money?

When you visit you’ll be convinced that it’s still possible to make money right now. The Wealth Advisor’s list of Top 40 Model Portfolios and SMA Strategies that turned in positive results during the first quarter.

Look closely and you’ll see some common themes. Dividends, especially in the energy sector. Inflation hedges. Precious metals. Real estate and liquid alternatives. 

But were there other hidden factors that enabled these model strategists to do well in a time of market mayhem? We talked to several managers to learn their secrets.

Wisconsin-based iSectors had five models that made the Top 40. According to CEO and Chief Investment Officer Vernon Sumnicht, it was all about minimizing correlations with broad market indices and being in the right sectors at the right time.

iSectors reallocates monthly, relying on proprietary algorithms that conduct extensive analysis of a wide range of current economic and market factors. And when conventional correlations converge, Sumnicht isn’t afraid to think outside the style box.

“Late last year, this analysis recommended increasing allocations to traditionally non-correlated sectors like precious metals, commodities, energy, basic materials and REITs, all of which did well during the first quarter of 2022,” he says.

Traditional Value Creates A Cushion

It’s not enough to beat the broad market. Telling clients that they only lost 13% when the benchmark did worse is not going to make them happy.

According to Marta Norton, Chief Investment Officer for the Americas at Morningstar Investment Management, a common thread driving strong performance among these strategies was their managers’ emphasis on finding high-quality companies whose stocks were selling at a discount.

“Over the past few years, growth stocks generally dominated the markets,” She explains. “But the downturn that occurred in the first quarter was driven primarily by the selloff of growth stocks, particularly among giant technology and communications companies.”

But Morningstar had the resources to look elsewhere. While growth-oriented portfolios retreated alongside their peers, Norton’s team also manage specialized dividend, smaller-cap and “tortoise” strategies that are geared to keep grinding ahead when less defensive postures hit a wall.

Other full-spectrum management complexes have their share of silver lining strategies. Invesco beat everything else in our universe with a focused MLP portfolio, combining as many hot spots as possible (dividends, defense, commodities) to deliver a staggering 21% return last quarter.

They beat the S&P 500 by 27 percentage points. While that’s an unusual spread for a portfolio designed to generate regular passive income (yield is above 7% right now), this is exactly the kind of satellite allocation that gives clients something to smile about when everything else looks broken.

BlackRock did well with strategies focused on Canada . . . land of oil and other inflation-hedging commodities like gold.

Boutiques Get A Day In The Sun

Other giants were remarkably absent from the But several more focused boutique managers made the cut with some combination of adroit defensive strategies and a keen focus on loss prevention.

Whether the solution revolved around deep value stock picking or fancy algorithms that pull the plug on risk instruments to limit drawdown, we have to salute Donoghue Forlines and Schafer Cullen for their dividend portfolios, Brinker Capital and Clark for finding the right liquid alternatives, and Flexible Plan’s dynamic reallocation program for living up to its promises.

Many of these strategies are promoted as bond replacements, which is handy in a season when the Treasury market is dead money even before you factor in inflation. Their returns aren’t usually noteworthy . . . they rarely show up on automated screens.

But they’re designed to be extremely consistent. That’s comforting when the usual safe havens stop working.

Let stocks be stocks. They’ll come back in time. However, if you’re looking to find a viable income stream for your clients that reduces or eliminates exposure to the Treasury market, there’s probably something here to intrigue and maybe even encourage you.

It’s tough out there. We get it. But a few asset managers actually have what it takes to  help . . . if you know where to look.

Jeff Briskin contributed reporting, text and insight.

Want to learn more about these and other strategies in our Model Portfolios and SMA Strategists Selection Guide? Check out our Realtime Model Dashboard HERE  or download the guide HERE.


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