New Client Assets in Today’s Market: A Blessing or a Curse?
Having started in the industry in 1984, you could say my timing was pretty good. Back then, US Treasury bond yields were at all-time highs and the S&P 500 was trading in the 160s. Putting new cash to work in the markets was a stress-free decision.
Today, it’s a vastly different story. Equity markets are trading near all-time highs and bond yields are still well below their historical averages. It’s difficult to get excited about putting new money to work. The chart below shows just how extreme the current environment is:
Source: FactSet. Data as of 12/31/17.
Surprisingly, the end of 2017 marks the S&P 500’s ninth consecutive up year. What makes this especially intriguing is that throughout history long runs in the S&P 500 like this are rare. The financial press debates, almost daily, whether or not this streak will continue – without clear consensus.
No one wants to be the last one in right before the market falls or miss out on the next big move higher. If you are wrong, the consequences can be costly and painful. We are in an eerily similar situation to the end of 2013 when the S&P 500 finished the year well above forecasts, up 32.39% for the year. Many thought this was the top. If clients exited the market at that time, they would have missed out on a cumulative return of over 60% through February 2018.
The same is true in the other direction. Imagine the pain endured by those who invested in S&P 500 at the top of the market in late 2007 only to watch their investments decline by over 50%.
The bond market has its own set of challenges. After one of the longest bull markets for bonds, we are finally seeing interest rates move higher. As of March 27th, 2018, the 10-year US Treasury is now yielding over 2.786%.
Given all the history noted above, it is easy to see why advisors have such a difficult time determining where to deploy new client capital in times like these. We believe we have a more consistent solution: an alternative to traditional equity and bond allocations that aims to adapt to all market environments; where even a small allocation can have a positive impact on the return and volatility profile of a client’s overall portfolio. To us, the key is knowing how to respond rather than trying to predict what is going to happen next.
It’s not an all or nothing call to action. Market movements extend over periods of time. For example, the three largest bear markets since 1970 (S&P 500 drawdowns greater than 40%) had an average drawdown period of about 20 months.
S&P Total Return Index Drawdowns
|Drawdown||Max Drawdown||Start Date||End Date||Drawdown Length (Months)|
That’s plenty of time to mitigate the damage by adapting to the changing market risk. With that said, this is no easy task. To be successful it is imperative to have a disciplined process to make tough decisions with confidence during a financial hurricane.
There are many questions that can arise when managing a multi-asset portfolio through a financial crisis. Questions like, “How do you identify when risk is changing? When do you make changes? What assets classes do you increase or decrease?” are just a few that immediately come to mind.
We constructed our Global Wealth Strategy portfolio to answer these very questions and take the stress out of trying to time investments. The portfolio is comprised of long-only ETFs. We never use leverage, nor do we use derivatives. We manage the portfolio using our risk-based investment process that is quantitative, rules based, and repeatable. We believe there is no room for subjectivity or emotion in investment decisions. The portfolio is designed to strive for growth in favorable market environments and aims to become defensive during market corrections and bear markets, reducing the stress of deploying new client assets.
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