Recession-Proof Your Portfolio

This column was originally published on RealMoney on Aug. 30 at 2:32 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

The debate about whether the stock market is going to buckle under the weight of an "imminent" recession seems to have intensified recently.

A reasonable reaction to take with your portfolio might be to sell everything and wait it out. Of course, the worst-case consequence of waiting it out with nothing but cash is that you are wrong and the market skyrockets without you.

I thought it worthwhile to explore a few things that might do well regardless of the U.S. economic cycle, beyond the standard recommendations of health care and staples stocks, although both those areas have merit. In searching out some ideas, I am looking for yield, low volatility, and a low correlation to the U.S. stock market.

Aussie and Swiss Solution

I have in the past written about some stocks or funds that have these attributes. One such stock is Macquarie Infrastructure Trust ( MIC).

MIC owns things like toll roads, airport parking lots and water utilities. These are all mundane businesses that generate the cash flow that allows MIC to pay a very healthy 6.5% yield. MIC's beta is 0.41, and it has a correlation to the S&P 500 of 0.173 , according to PortfolioScience.com. (Beta is a quantitative measure of a stock relative to the overall market; a beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile.)

MIC is not without risk.

It endured a sharp correction in the spring as 10-year Treasury yields were moving higher. (Recent performance, however, has almost made up for that correction.)

Another liability is headline risk. Macquarie Bank, the trust's parent investment bank, is in the news a lot, as it has been actively trying to buy the London Stock Exchange and other high-profile assets. Any perceived success or failure could impact MIC.

I believe the Rydex currency exchange-traded funds (ETFs) also offer some value in this discussion. Both the Swiss Franc ETF, CurrencyShares Swiss Franc Trust ( FXF), and the Australian Dollar ETF, CurrencyShares Australian Dollar Trust ( FXA), could do well in the face of a U.S. recession.

The franc stands to benefit from some safe-haven demand. The Australian dollar could do well if short rates in the U.S. go down to stave off a recession. This would put more of a spotlight on the yield differential that favors the Aussie.

Also, neither Switzerland nor Australia relies heavily on exporting to the U.S. for economic success. FXF has a 0.034 correlation to the S&P 500, while FXA's correlation is 0.171. FXF yields just less than 1%, but rates are expected to go up in Switzerland, and FXA yields about 5.5%.

Call-Writing Funds Plan

From the closed-end fund (CEF) world, one might also consider the many call-writing funds, which buy stock and sell either covered calls or index options (calls and puts) to generate income. The idea is that these will be less volatile than the stock market, and less sensitive to interest rates than bond funds.

These funds have had their share of feast and famine. Given that the context is defense against U.S. recession, a call-writing fund that owns foreign stocks may be a better way to go. Here are three that have done well of late.


Call-Writing Closed-End Funds
These offer low correlation to the S&P 500
Name Yield Discount to Premium Correlation to SPX Correlation to Bonds*
Evergreen International Balanced (EBI) 8.93% -0.81 0.095 0.046
Blackrock Global Opportunity (BOE) 8.75% 1.92% 0.23 0.011
ING Global Equity Dividend (IGD) 9.47% 2.76% 0.265 0.008
*bonds as measured by the Vanguard Long Term Bond Index Fund (VBLTX)

The Commodities Beat

An obvious idea would be gold, but I am trying to stay a little off the beaten path, so in the commodity complex is the iPath Dow Jones AIG Commodity Index ETN ( DJP).

The reason to choose this fund is that, unlike the other new commodity products, DJP has a heavier weight to agricultural commodities like corn, wheat and live cattle. Foodstuffs are more resistant to cycles than things like copper and oil. Economic slowdowns could create a drag on demand for industrial commodities, and although DJP does have 29% exposure to the energy complex, it also has 36% in the softer commodities.

Biotech Relief

Here's one last idea you may not expect because the beta is high and there is no yield: Genentech ( DNA), or even Amgen ( AMGN).

Good news from a biotech company, regardless of what is going on in the economy or the world, will lift the stock. I mention DNA and AMGN because both names' betas, at 0.470 and 0.502, respectively, have a low correlation to the market. A couple of other examples are Applied Biosystems ( ABI) and Millennium Pharmaceuticals ( MLNM).

Unfortunately, the biotech ETFs are highly correlated to the market; the above names are exceptions, but in a volatile world, there is a lot of risk with an individual stock. There are no shortcuts in picking a stock from this part of the market, but good news will lift these names a lot, even in an ugly market.

What I hope you take from this are the themes, as opposed to the specifics. No doubt there are other slices of the market that will also be relatively resistant to recession. These should be explored.

At the time of publication, Nusbaum was long Macquarie Infrastructure Trust, CurrencyShares Australian Dollar Trust and ING Global Equity Dividend for client and personal holdings, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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