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:

SP500-10-year-treasury-yield

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)
Period 1 -50.95% 11/2007 02/2009 16
Period 2 -44.73% 09/2000 09/2002 25
Period 3 -42.64% 01/1973 09/1974 21
Average 20.667

Source: FactSet

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.


THIS DOCUMENT HAS BEEN PREPARED BY PARITAS CAPITAL MANAGEMENT, LLC (“PARITAS”) SOLELY FOR THE PURPOSES OF PROVIDING SUMMARY INFORMATION REGARDING PARITAS AND ITS GLOBAL WEALTH STRATEGY (“GWS”) COMPOSITE. THE INFORMATION CONTAINED HEREIN IS NOT, AND SHOULD NOT BE CONSTRUED, AS AN OFFER OR SOLICITATION OF AN OFFER TO BUY ANY FINANCIAL INSTRUMENT. AN INVESTMENT IN ACCORDANCE WITH THE GWS COMPOSITE DESCRIBED HEREIN HAS NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (“SEC”), ANY STATE SECURITIES COMMISSION, OR OTHER ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OR THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL AND A CRIMINAL OFFENSE.

ANY REPRODUCTION, DISTRIBUTION, OR OTHER UNAUTHORIZED USE OF THIS DOCUMENT, AS A WHOLE OR IN PART, OR THE DISCLOSURE OF THE CONTENTS HEREOF, OTHER THAN TO THE RECIPIENTS FINANCIAL, TAX AND/OR LEGAL ADVISORS WITHOUT THE PRIOR WRITTEN CONSENT OF PARITAS IS PROHIBITED.

THE BENCHMARK INDEX REFERRED TO HEREIN IS A BLEND OF 60% MSCI ACWI INDEX AND 40% BARCLAYS US AGGREGATE BOND INDEX. THE INDICES INCLUDED TO SHOW RELATIVE MARKET PERFORMANCE FOR THE PERIODS INDICATED ARE NOT NECESSARILY STANDARDS OF COMPARISON, SINCE INDICES ARE UNMANAGED, BROADLY BASED AND DIFFER IN NUMEROUS RESPECTS FROM THE GWS COMPOSITE. MARKET INDEX INFORMATION WAS COMPILED FROM SOURCES THAT PARITAS BELIEVES TO BE RELIABLE. HOWEVER, PARITAS DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF SUCH DATA.

AN INVESTMENT IN ACCORDANCE WITH THE GWS COMPOSITE MAY NOT BE SUITABLE FOR ALL INVESTORS. THIS MATERIAL HAS BEEN PREPARED FOR INFORMATIONAL PURPOSES ONLY, AND IS NOT INTENDED TO PROVIDE, AND SHOULD NOT BE RELIED ON FOR, INVESTMENT, ACCOUNTING, LEGAL OR TAX ADVICE.

INVESTING INVOLVES RISK, INCLUDING THE POTENTIAL OF LOSS OF SOME OR ALL PRINCIPAL INVESTED. INTERESTED PARTIES ARE ENCOURAGED TO REVIEW PARITAS’ FORM ADV PART 2, AS WELL AS PERTINENT PROSPECTUS/PRODUCT DESCRIPTIONS TO CONSIDER SUCH RISK PRIOR TO INVESTING. THERE IS NO GUARANTEE THAT A DIVERSIFIED PORTFOLIO WILL ENHANCE OVERALL RETURNS OR OUTPERFORM A NON-DIVERSIFIED PORTFOLIO. DIVERSIFICATION DOES NOT PROTECT AGAINST MARKET RISK. STOCK INVESTING INVOLVES RISK INCLUDING LOSS OF PRINCIPAL. PAST PERFORMANCE IS NO GUARANTEE OR PROMISE OF FUTURE SUCCESS.

THE SHARES OF EXCHANGE-TRADED FUNDS (“ETFS”) MAY TRADE AT PRICES AT, BELOW, OR ABOVE THEIR MOST RECENT NET ASSET VALUE. EQUITY SECURITIES WILL FLUCTUATE IN PRICE; THE VALUE OF INVESTMENTS IN ACCORDANCE WITH THE GWS COMPOSITE WILL THUS FLUCTUATE, AND THIS MAY RESULT IN A LOSS. SECURITIES IN CERTAIN FOREIGN COUNTRIES MAY BE LESS LIQUID, MORE VOLATILE, AND LESS SUBJECT TO GOVERNMENTAL SUPERVISION THAN IN THE UNITED STATES. THE VALUES OF THESE SECURITIES MAY BE AFFECTED BY CHANGES IN CURRENCY RATES, APPLICATION OF A COUNTRY’S SPECIFIC TAX LAWS, CHANGES IN GOVERNMENT ADMINISTRATION, AND ECONOMIC AND MONETARY POLICY. EMERGING MARKET SECURITIES CARRY SPECIAL RISKS, SUCH AS LESS DEVELOPED OR LESS EFFICIENT TRADING MARKETS, A LACK OF COMPANY INFORMATION, AND DIFFERING AUDITING AND LEGAL STANDARDS.

AN INVESTMENT IN BONDS CARRIES RISK. IF INTEREST RATES RISE, BOND PRICES USUALLY DECLINE. THE LONGER A BOND’S MATURITY, THE GREATER THE IMPACT A CHANGE IN INTEREST RATES CAN HAVE ON ITS PRICE. SELLING A BOND BEFORE IT REACHES ITS MATURITY MAY RESULT IN A LOSS UPON ITS SALE. BONDS ALSO CARRY THE RISK OF DEFAULT, WHICH IS THE RISK THAT THE ISSUER IS UNABLE TO MAKE FURTHER INCOME AND PRINCIPAL PAYMENTS. OTHER RISKS, INCLUDING INFLATION RISK, CALL RISK, AND PRE-PAYMENT RISK, ALSO APPLY. HIGH YIELD SECURITIES (ALSO REFERRED TO AS “JUNK BONDS”) INHERENTLY HAVE A HIGHER DEGREE OF MARKET RISK, DEFAULT RISK, AND CREDIT RISK.

PARITAS CAPITAL MANAGEMENT, LLC IS A REGISTERED INVESTMENT ADVISOR WITH THE STATES OF CALIFORNIA, CONNECTICUT, MASSACHUSETTS, NEW JERSEY, NEW YORK, PENNSYLVANIA, AND TEXAS.

About the author: Douglas Hedley

Leave a Reply

Your email address will not be published.