Legacy Navigator Allocation Update

In response to a deteriorating technical picture, the allocation to MSCI EAFE (Developed Ex-US) equities in our Legacy Navigator portfolio has been replaced by fixed income exposure across 7-10 Year US Treasuries (IEF), High Yield Bonds (ANGL) and US “Low Volatility” equities (USMV). (Owing to their substantial exposure to interest-rate sensitive sectors such as utilities and real estate, “Low Volatility” equities often have high correlation with fixed income.)

This follows a similar move with Emerging Market equities earlier in the year and is broadly reflective of the weakening global growth environment. Should this condition persist, defensive exposures such as fixed income and Alpha Seeker will likely benefit relative to growth- or beta-oriented positions. Over a decade since the last global recession, we may soon see how many of today’s investors have forgotten the lessons of history. Click chart below to enlarge

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Legacy Navigator allocation as of 8/19/19

July 2019 Commentary

STEEPEST VIX CURVE OF 2019 LIFTS ALPHA SEEKER PAST S&P IN JULY

Led by Alpha Seeker, all three TCM strategies posted strong returns in July as markets seemed to be on autopilot ahead of a widely-expected rate cut at the 7/31 Fed meeting.

2nd VIX future daily settlement / 1st VIX future daily settlement, 20 day average. Source TCM

One of the most important metrics in our Vol Dashboard, the steepness of the VIX futures curve (the difference between the prices of the first and second VIX futures) is an excellent indication of the strength and magnitude of the recent trend in the VIX.  In contrast to its stubborn flatness in Q1 while recovering from 2018’s end-of-year shock, since late March the VIX curve has returned to its more typical upward slope– the signature of a solid trend lower in VIX and a constructive environment for Alpha Seeker.  While risk assets in general also tend to do well during such periods, Alpha Seeker is set apart by its ability to profit in much the same from a steeply inverted VIX curve during stressed markets when risk assets are often declining.  This feature is easy to overlook while markets are rising.  On the day when there are no rising assets left to chase, its benefit will be invaluable.

FINDING YOUR BALANCE

Conceptually, an investment’s return is simply the result of its capture of the “ups” and “downs” of the market over a given period.  Over time, a portfolio is optimized by finding the mix of “up-capture” and “down-capture” appropriate for an investor’s risk tolerance while considering the full range of likely outcomes over a market cycle. 

Many investors assume that beating the market requires maximizing up-capture while stomaching the resulting volatility (down-capture). Recently, others have taken the opposite approach, advocating low volatility (reduced up- and down-capture) as the next “holy grail”.  As usual, the actual solution is more complicated than a single factor and does not lend itself well to the short attention spans of today’s typical investor.

Hypothetical growth of $1000 using historical capture ratios applied monthly to S&P 500. Source: TCM

Rather than a “bad day preventer”, the system at Thompson Cap was designed with entire market cycles in mind, seeking to produce a mix of up- and down-capture that leads to better outcomes over time.  While the ratios produced by Alpha Seeker and Smart Index have led to superior results in the few years since inception, the potential becomes even more compelling as the time frame is extended.  Applying historical capture ratios to past monthly returns of the S&P 500, the chart above compares theoretical outcomes of Alpha Seeker and Smart Index with the S&P 500 Low Volatility Index and an “aggressive” (1.2 Beta) equity portfolio over the two market cycles since 2000.  No strategy will be perfectly consistent, but the potential of even a slight improvement in risk management is obvious if only investors would choose not to surrender it.     

Alpha Seeker Roster Update

We’ve recently added two new tickers to the menu of available “long VIX” positions in Alpha Seeker: SH (ProShares Short S&P 500) and SDS (ProShares UltraShort S&P 500).   

Similar to the addition of UPRO and SPXL on the “short VIX” side, SH and SDS have very high correlation to long VIX exposures and will allow Alpha Seeker to better address the occasional lags between S&P and VIX performance.  As always, the ultimate goal is to improve outcomes. 

Please feel free to contact us with any questions.

Alpha Seeker Roster, Aug 2019

June 2019 Commentary

RATE CUT HOPES ERASE MAY’S MARKET LOSSES

All three TCM strategies posted their best month of the year in June as markets were soothed by a dovish Fed meeting that cemented expectations of a rate cut as early as July. 

While headlines crowed about the market’s best June in decades, it was in fact just enough to offset May’s steep losses– much like this year’s strong numbers are only the mirror image of the drop from last September’s high.  This is the latest episode in the pattern that has emerged since 2018, where the market has gone nowhere in a wide sawtooth, ebbing and flowing with the direction of monetary policy while ignoring fundamentals such as slowing earnings growth, recessionary economic data and inverted yield curves worldwide. 

As this tug-of-war becomes increasingly volatile, it remains to be seen whether stocks are right in discounting a mid-cycle slowdown like 2016 or whether there will be some “catching down” to a recession that’s about to begin.  In other words: will this easing cycle be more like the “insurance cut” in 1995 when stocks were already at all-time highs, or a “behind the curve” one that did little to stop the rout in 2008?  With a new earnings season upon us in July, we may soon know more. 

INVESTING WITH GUARDRAILS 

In response to increasing interest and in light of the turbulence of the past 18 months, we would like to take a moment to highlight our US Equity Smart Index strategy.  As a reminder, Smart Index is designed to improve the risk profile of S&P 500 allocations by systematically reducing exposure during volatile periods as indicated by our proprietary VIX dashboard. 

Smart Index sample account, net of 1.95% fee.

As the chart on the right shows, over the very volatile period since Dec 2017 Smart Index has done just that, outperforming the S&P 500 with lower volatility and smaller drawdowns.  For more information, see the Strategies and Documents sections on our website, or contact us to schedule a webinar.

Finally, we are excited to announce a strategic partnership with Little Harbor Advisors (“LHA”) to pursue development of an Alpha Seeker ETF as well as several principal-protected notes based on TCM strategies.  With our VIX expertise and LHA’s structuring know-how, we look forward to bringing truly unique and accessible exposures that will help advisors navigate difficult markets.  For example, a principal-protected version of Alpha Seeker compares very favorably to variable annuities, for both the investor and the advisor.  We will have more information on these products as we get closer to launch. 

Alpha Seeker Review June 2019

Recent developments in the volatility landscape and their historical context for Alpha Seeker. Download the presentation here