Dampening market swings
Since many of the world’s major economies, such as the United States, Japan and the U.K., cannot fix their debt problems, market volatility is here for a while, notes John Wilson, portfolio manager at Sprott Asset Management.
“The math is pretty much set in terms of their ability to grow out of these issues,” he said. “So they are going to address them the same way they’ve generally always done so — with central banks printing money.”
The manager took over the Sprott Opportunities Hedge Fund at the start of March after serving as chief investment officer at Cumberland Private Wealth Management. He also oversees two recently launched funds — the Sprott Enhanced Equity Class and the Sprott Enhanced Balanced Fund.
In addition to owning companies that will be successful in any environment, Wilson focuses on portfolio protection. Recently, this has come in the form of buying put options on the S&P 500. Wilson buys during calm periods, then sells when volatility flares up, allowing him to dampen the market’s swings and minimize drawdowns.
“I have been able to do that cheaply because volatility is so low. It has allowed me the freedom to go and buy the equities I really like because I worry less about the next crisis drawdown,” Wilson said, noting concerns such as Europe falling apart this summer, a hard landing in China or another U.S. fiscal crisis emerging.
He notes that these crises are arriving a little bit faster every time as the market figures out what needs to be fixed. But as the European Central Bank’s short-term loans to euro banks this year demonstrated, the market has realized that national solvency issues remain.
“I would struggle to be purely long in the market right now,” Wilson says. “I don’t think just riding it out is going to work.”