In several discussions with potential clients, that want a defensive portfolio because they believe the economy is likely going into a recession or just want to protect capital from large swings, we constantly highlight the fact that government bonds yield so little these days that a defensive portfolio today is most likely to deliver negative expected real returns after fund costs. The $17trn worth of negative yielding bonds have effectively killed the strategic defensive portfolio.
The Stronghold EUR portfolio offers a tactical approach to asset allocation only taking risks in equities when the volatility structure allows it. On the other hand, the portfolio will go ultra-defensive in a 2008 crisis repeat where correlations across everything rose dramatically offering little diversification effects. Many clients then say why would I be in negative yielding assets if that scenario happens? Our view is that -1% over 12 months is better than potentially -20% due to excessive exposure in equities during a recessionary period.
The key risks for the Stronghold EUR portfolio at this point are significantly higher rates which would create losses in the bond part of the portfolio. The portfolio also has unhedged USD exposure through its exposure to minimum volatility equities and should the USD suddenly drop in value this will have a negative impact on performance. A rapidly changing volatility structure could also create losses in the portfolio as the model cannot predict changes but only react intelligently after the fact.