Staying Home


Geopolitical tensions continue to boil with the Russian invasion of Ukraine shocking an already inflationary global commodities market. Rumors of progression in ceasefire negotiations have boosted markets today but regardless, the economic fallout from the sweeping sanctions will likely last for some time. In our last note we outlined from a high level what the market behavior was during past episodes of similar geopolitical turmoil. We also reiterated why having operating cash set aside and being able to ride out volatility is essential to long term investing. But just as important is understanding what you own and making sure the assets are fundamentally strong.

The current geopolitical driven volatility underscores why we build our portfolios the way we do, sticking to our espoused investment philosophy of owning domestic, large-capitalized, ‘proven enterprises’ which have strong balance sheets. Not only has this niche rewarded shareholders with strong growth in recent cycles, but the risk mitigation and sustainability of the investments are really what matters. Venturing into emerging and international markets may be more exotic but owning them comes with inherent risks that we don’t believe investors are often compensated for. There will be periods where these markets outperform but when stress ensues, especially of the geopolitical nature, its these pockets that tend to experience systematic risk. A timely example is the Russian central bank closing down the Moscow stock exchange last week and threatening to shut off capital outflow to foreign investors after prices began to plunge.  If your claim on the cash flows from an investment is contingent on permission from a potentially hostile foreign government, do you really own the asset? What’s more is that the typical market-cap weighted emerging market fund has over 30% of its assets invested in Chinese companies which have a history of enacting similar capital controls. Russian assets on the other hand only make up ~ 2.2% in these same funds but when these holdings are likely to experience a liquidity crunch it is significant exposure.

Conversely, our domestic companies have track records of not only surviving through past episodes of economic stress, but of returning cash to shareholders by paying dividends and diligently buying back stock at depressed levels to come out stronger on the other side. These multinationals also have foreign exposure built into them as over 30% of S&P 500 companies revenue in 2020 was sourced from outside the United States. And while our domestic regulatory system is not without faults, it is vastly superior to any overseas jurisdictions. All of this does not mean domestic markets are immune to volatility, but that they are built to weather the storm and serve shareholders first.

We think the fallout from Russia/Ukraine will persist for some time and when that passes we will likely be grappling with the changing central bank policy which was our central focus coming into this year. Even so, our investment strategy will remain the same which is to have one to two years of operating cash on hand, over weighted to large-capitalized domestically oriented companies that grow their dividends, and no emerging markets or international pure play funds.


Commentary Disclosures: Covington Investment Advisors, Inc. prepared this material for informational purposes only and is not an offer or solicitation to buy or sell. The information provided is for general guidance and is not a personal recommendation for any particular investor or client and does not take into account the financial, investment or other objectives or needs of a particular investor or client. Clients and investors should consider other factors in making their investment decision while taking into account the current market environment.

Covington Investment Advisors, Inc. uses reasonable efforts to obtain information from sources which it believes to be reliable. Any comments and opinions made in this correspondence are subject to change without notice. Past performance is no indication of future results.

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Covington Investment Advisors, Inc.
301 E. Main Street
Ligonier, PA 15658
Phone: 724-238-0151
Fax: 724-238-0148

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