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Quality Is an All-Weather Investment Strategy

Market expectations of the path of inflation and interest rates changed abruptly at the end of March. While much still feels uncertain about where rates, inflation, and the economy will go from here, quality stock investing proves a boon in any market environment.

Real GDP in the U.S. over the first quarter slowed to 1.6% compared to 3.4% in Q4 2023. Concerns of economic resilience alongside rising inflation led to increased market volatility at the end of April.

Despite the recent slowdown in the economy, Sean Kaukas, CFA, VP, and Portfolio Consultant for Natixis Investment Managers Solutions, believes that growth remains sustainable.

“The consumer, which tends to make up roughly 70% of GDP growth… has remained very resilient,” Kaukas explained in a recent webcast hosted on the VettaFi platform.

The nominal purchasing power of consumers remains elevated compared to pre-COVID levels. Additionally, stable household balance sheets as of last September indicate sustainable consumption looking ahead.

Greater clarity from the Fed regarding rates in the next six months will also likely have a knock-off effect on mortgage rates and spread compression.

How to Think About Investing in Q2 and Beyond

When constructing equity portfolios, most investors look to value/growth and size to determine strategies to include. Natixis believes that cyclicality and inflation actually provide better ways to model past performance and future potential.

Charting out cyclicality and inflation into quadrants creates four different economic environments. A high growth and inflationary environment creates reflation that favors cyclical stocks. Falling growth and high inflation lead to stagflation and favor defensive positioning. Declining growth and low inflation create a hard-landing scenario. Meanwhile, falling inflation and increasing growth lead to a soft landing that favors cyclical growth stocks.

For advisors and investors who prefer to invest for any outcome, quality stocks offer opportunities.

“If you prefer diversification or more neutral positioning, or maybe an all-weather position in your portfolio, we think that quality is actually a great way to accomplish that,” said Kaukas.

Quality Offers Performance and Defensive Positioning

The quality factor meaningfully outperformed in the last two years over other factors. That’s according to Michael Buckius, CFA, President, CEO, and CIO of Gateway Investment Advisers. Looking further back, quality stocks offered noteworthy upside return capture while mitigating downside performance.

Gateway Investment Advisers, a wholly-owned affiliate of Natixis, brings considerable options investing experience to the table when constructing their quality strategies.

“We believe that building portfolios using a quantitative process that focuses on high quality, diversified portfolios creates a durable investment profile in the market,” Buckius explained.

Gateway utilizes options overlays to enhance income and risk-adjusted returns. The current environment of ongoing volatility creates a prime opportunity for options strategies such as the Natixis Gateway Quality Income ETF (GQI).

See also: “Under the Hood: The Natixis Gateway Quality Income ETF (GQI)”

Heightened volatility benefits those strategies that sell options due to higher pricing. This, in turn, creates greater premiums and, therefore, income potential for options writers.

“When the market is struggling… there’s a nice counterbalancing effect from higher cash flow to help offset that,” said Buckius.

When screening for quality, GQI’s strategy considers S&P 500 companies with high cash flow generation, profitability, and earnings quality. Companies must also demonstrate efficient capital usage as well as strong balance sheets with low levels of leverage.

The strategy diversifies across sectors with a portfolio of approximately 100 companies. It pairs quality stocks with the options overlay to create high monthly, reliable income for investors.

GQI is actively managed and fully transparent, with an expense ratio of 0.34%.

For more news, information, and analysis, visit the Portfolio Construction Channel.

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