Global Income Edge’s Conservative Portfolio has held tough in one of the worst market reversals in years. And it should continue to protect value if the global economy worsens, as it is designed to weather just such a downturn.  This is based on my study of the Great Depression at Georgetown University and on various macro-economic analyses I’ve done that show which companies prosper despite broad downturns.

Since our August launch, the losses (not including dividends) of the Standard & Poor’s 500-stock index and the Nasdaq Composite have been 5.10% and 6.41%, respectively. Our Conservative Portfolio lost under 2%. And that doesn’t include dividends. The S&P dividend yield is 2%, while our portfolio offers an annual dividend yield above 6%.

 The companies that performed the best in our portfolio during this recent market upset were in the utility, health care and real estate sectors. In fact, U.S. energy utility Southern Company has gone on a tear since our launch, having appreciated by as much as 8%. Southern has seen its industrial business improve and its new power plant development projects receive favorable rulings from regulators. The company offers a dividend yield of 4.6%.

Then there’s HCP, a real estate investment trust that owns or holds interests in $22 billion worth of properties, including hospitals, senior housing, nursing facilities and properties occupied by biotech and drug companies. HCP stock has more than held its own—up by nearly 4% since the GIE launch.

 HCP is just the kind of cash cow we knew would weather downturns.  It generates $1.7 billion in income annually, and as we recently reported, quarterly revenues have risen by a factor of five over the past decade, and operating income has doubled. That growth has helped fund steady dividend increases for 29 years.

 And while 79% of companies in the Russell 3000 Index were down by 10% or more during this last correction, the Conservative Portfolio’s holdings either increased, held steady, or had losses that were less than 2% to 3% on average (not including dividends).

 In fact, telecom holdings Verizon Communications and AT&T and global energy utility National Grid all held up well, losing less than 2.5% during the market downturn. The one company out of the 10 holdings in the portfolio that had outsized losses of 10% was Kinder Morgan, which we think is an overreaction to the decline in oil prices and short-term global growth issues.

 Playing into our investment thesis for the Conservative Portfolio is the increasing demand for infrastructure investment. According to a recent report by Bain & Company, crumbling infrastructure in developed countries and a surge of infrastructure building in developing economies will mean 4% annual growth on infrastructure investment “well into the second half of this decade, pushing total investment to $4 trillion.” Further, the consultants believe that utilities and oil and gas infrastructure will account for 40% of this investment.

 Given the worldwide demand in energy, telecom, health care and real estate, each of the firms in the Conservative Portfolio should become even more valuable in time, while paying substantial dividends.

The Reason for the Fall
The recent market correction was a long time coming, as year after year analysts have argued that the market was overvalued. I’ve also often written that it was only a matter of time before there would be a major correction, and I’ve said that it was even more likely given the announced withdrawal of the Federal Reserve stimulus (ending this month) that has fueled the U.S. bull market and kept asset prices inflated.

 And one of the major obstacles to improved global growth or a sustained recovery has been that many corporations are hoarding money and not investing in their businesses and not paying higher wages or investing in their people. That’s why it shouldn’t have been a surprise that growth would slow around the world when U.S. stimulus slowed down. Now, as everyone can see, concerns about a slowdown in global growth are depressing the world’s stock markets.

 International Monetary Fund Chief Christine Lagarde says the global economy is facing “the risk of a new mediocre, where growth is low and uneven.” This month she told an audience at Georgetown University, “Six years after the financial crisis began, we see continued weakness in the global economy. Countries are still dealing with the legacies of the crisis, including high debt burdens and unemployment. In addition, there are some serious clouds on the horizon: Low growth for a long time is one.”

 Then there’s the issue of the strong dollar, which sounds good, but in the current world economy could hurt the U.S recovery or corporate earnings growth. A stronger dollar makes U.S. exports more expensive to foreign customers, and that could cut into the sales and profits of many U.S. companies. That, in turn, could harm or stop the recovery. And the strong dollar could lead to price deflation, which could also harm the recovery, as cheap goods from overseas force U.S. companies to lower their prices to be competitive and cut into earnings, which could cut into wages, hiring or consumer spending.

A strengthening dollar was not a big issue when U.S. exports were a small part of corporate earnings, but now more than 40% of profits for Standard & Poor’s 500 firms come from overseas. And these profits from higher-growth emerging markets have offset lower growth in the U.S. and other developed economies.

 GIE’s Aggressive Portfolio, which is focused on growth as well as income, was more hurt by the market turmoil, as expected, and is down more than 10%. These investments are much more sensitive to the ups and downs of the markets. But we believe that when the global recovery happens and we witness substantial growth, the Aggressive Portfolio will outperform market averages. In fact, in the next few weeks we’ll be introducing new stocks to the Aggressive Portfolio, as we believe this downturn has created some opportunities. There have been overreactions to specific stocks we’ve had an eye on.

An Era of Low Rates
Our high-dividend-paying stocks look particularly good given that the end of low interest rates is not yet in sight. The U.S. economy would have to deliver better than 3% GDP growth annually before we’ll have an enduring recovery. And until then, it’s unlikely the Federal Reserve will raise rates given continued global economic weakness.

 In fact, the Federal Reserve has signaled that because of the possible impact to U.S. corporate earnings from a slowing global economy, it may delay future rate increases so as not to harm the recovery. This of course means that high-quality income investments will continue to be difficult to find in the U.S. and around the world.

 Part of our investment thesis is tapping into the growth of emerging markets. And though growth in various emerging-markets countries around the world has been revised downward, many of their economies are still growing more quickly than developed economies such as the U.S. That’s why there’s still no better alternative than having exposure to various companies around the world that can offer diversification and offset low growth in any given country—the kind of companies that make up the majority of our Global Income Edge portfolios.