The best offence? Money managers talk defensive strategies for dealing with Trump

Market reaction to U.S. President Donald Trump’s proposed policies has been relatively muted, with stock indexes in Canada and the U.S. continuing to trade close to record highs. But the possible effects of tariffs and other policies have many Canadians concerned and looking for ways to protect their investments.

“Whether we like it or not, we’re going to be in for tough times,” says John De Goey, portfolio manager at Designed Securities Ltd. in Toronto.

Although this cautious outlook applies to the Canadian economy, he says it may well be true for the U.S. economy, too – and for Canadian and U.S. stocks, depending on which tariffs take effect, how long they last and how other countries retaliate.

Mr. De Goey says his message to clients is simple: a storm is coming, and it’s important to be as prepared as possible.

In response to these risks, he says investors should reduce exposure to both U.S. and Canadian stocks. He has gone so far as removing clients from North American equities almost entirely, shifting allocation to alternative investments that provide relatively stable high single-digit returns and aren’t correlated to the broader market.

One defensive tactic for protecting portfolios is the use of exchange-traded funds designed to outperform in challenging times. These include low-volatility ETFs, which invest in assets that fluctuate in value less than the overall market, and alternative funds that use techniques such as options and derivatives to provide downside protection.

Mr. De Goey says low-volatility and alternative funds can make sense, although he notes low-volatility funds “simply go down less in times like this.” Meanwhile, inflationary pressure can lead to outperformance in “real” or “hard” assets such as real estate, energy and gold.

Some advisors are more sanguine about the Trump administration’s likely impact on markets.

“While geopolitical developments and major events can create short-term volatility, they rarely cause lasting damage,” says Stan Wong, portfolio manager and senior wealth advisor at Scotia Wealth Management in Toronto.

He says maintaining a long-term perspective is critical, especially in the face of short-term volatility. When President Trump introduced tariffs in 2018, he notes, markets initially pulled back but then rebounded quickly.

Mr. Wong says diversification remains key to managing risks.

“A balanced portfolio – incorporating equities, bonds and alternative investments – helps mitigate risk,” he says, noting defensive sectors such as utilities, consumer staples and health care have historically performed well during economic uncertainty. And holding a cash reserve provides flexibility to take advantage of market pullbacks.

Mr. Wong says low-volatility or alternative funds can be useful tools for managing risk in uncertain market conditions, but he notes these funds don’t always provide the downside protection investors expect.

Rather than relying on low-volatility strategies, he says, investors may benefit from a more balanced approach that combines both defensive and growth-oriented investments.

Given the potential for pro-business policies under the Trump administration – such as tax cuts and deregulation – Mr. Wong says sectors such as financials, industrials and energy could see upside.

Chris Thom, portfolio manager with Moat Financial in Vancouver, says he’s taking a “multi-pronged approach” to being defensive.

That includes looking for companies with wide economic moats that can’t be replaced by U.S. competitors. He cites the example of Canadian heavy oil producers that are needed for U.S. refining operations.

Mr. Thom also uses options trading as part of his client portfolios. That includes selling cash-covered puts to generate returns and enter stocks at lower prices, selling covered calls on stocks with less distance between the strike price and current share price, and using hedging strategies to reduce or eliminate downside if the market starts to decline.

He says option strategies can deliver equities-like returns with lower risk, noting in today’s volatile and uncertain market, option prices are elevated, which makes these strategies even more attractive.

Meanwhile, some advisors believe it’s a mistake to take action in response to disruptive events such as Mr. Trump’s return to the White House.

“Investing always comes with risk,” says Jason Pereira, senior financial planner at Woodgate Financial Inc. in Toronto. “The best thing you can do is make sure you have the asset allocation that exposes you to a level of risk you can tolerate and not try to make tactical decisions.”

He points out that markets – and the future in general – are unpredictable. While it’s tempting to think we can make decisions to take advantage of a situation, those decisions are just as likely to go wrong.

“Trump is a perfect example of this,” Mr. Pereira says. “One tweet can send the market going in either direction. You can react by making the wrong bet just as easily as the right one.”

He says if an investor’s asset allocation fits their risk tolerance, there should be no need for special defensive strategies, including low-volatility and alternative funds designed to provide downside protection.

“There is no free lunch,” he says. “Anything that claims to mitigate downside risk comes at the cost of forgone returns. The key is to have the right asset allocation for your [risk] tolerance level.”