Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

1st Quarter | 2022

Market insights and analysis


Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.


Last fall I wrote a couple of articles about how the financial industry and press may have been premature in reporting on the death of so many industry strategy favorites (you can read them here and here). The 60/40 balanced portfolio, value investing, hedge fund, and momentum strategies were all discussed.

As I pointed out, many of these investments are risk-managed strategies. They were being compared to an all-equity, S&P 500 portfolio. I opined that while these strategies might be in a coma, waiting for a bear to break out of its 11-year-long hibernation and revive them as well, they were still very much alive.

With the big decline that occurred in the first quarter, perhaps now is as good a time as any to check out the performance of these risk-management standard-bearers. As we will see, some sat up, wide-awake from their hospital beds, while others still barely have a pulse.

In last year’s article, I referenced Vanguard’s Wellington Fund as a good representative of the balanced approach. The Fund is the financial industry’s oldest 60% stock, 40% bond balanced fund, having been created in 1929. In the first quarter, it gained 2.74% through February 19, the day the S&P 500 topped out. It then tumbled to its quarterly low on March 23 with a year-to-date loss at that point of 23.18%. For the quarter, it fell 13.82%.

These numbers compare well to the S&P 500 (SPY), which rose 5% to February 19, fell to a then year-to-date loss of 30.3% on March 23, and ended the quarter down 19.5%.

While the S&P 500 did outperform the balanced fund as it moved to its February top, it also fell much more than its balanced counterpart and ended the quarter 28.87% lower.

Verdict: Balanced is still alive.

Value investing has really been down and almost out during the 11-year bull market run. Its obituary has been published many times over the last decade. The Warren Buffet approach of buying stocks that are selling below their book or intrinsic value has definitely been out of vogue as its polar opposite, buying growth stocks, has become more popular.

How did the approach do in the first quarter? The S&P 500 value index ETF (IVE) failed to outshine the S&P 500 (SPY) or its S&P 500 growth stock alternative (IVW). It was up only 0.9% by February 19, which was reduced to a loss of 36.7% by March 23’s low. It completed the quarter down 25.3%.

This is worse than the performance of the S&P 500 and considerably worse than the growth stocks selected from the S&P 500 represented by the IVW ETF. Growth was up 8.7% at the top, down 25.3% at the bottom, and finished the quarter down 14.5%.

Now, this time around, the decline may have been too short in duration, and there may have been no time for bargain hunting. Value investing makes sense and has a very long history, but on this decline, I’d have to say:

Verdict: Value investing—not fogging the mirror.

Momentum investing (also known as trend following) continues to be one of our favorite risk-management strategies. We’ve offered our momentum-investing Evolution strategy since the mid-1990s. There are many ways to do momentum investing, but the Invesco S&P 500 Momentum ETF (SPMO) approaches it on a 12-month-return factor basis, so it should be a good example of the methodology.

At the market top, SPMO was up an S&P 500-beating 7.7%. At the bottom, it was down 25.5%. It finished the quarter at -13.74%. So it outperformed at the bottom and finished the quarter almost 6% ahead of the Index.

Verdict: Momentum investing—very much alive.

One of the strategies I discussed in the 60/40 balanced strategy discussion last fall was using high-dividend-paying stocks as a substitute for bonds. This was recommended in an article I cited. Here was my response to that recommendation:

I don’t think you can substitute high-yielding stocks for bonds in a portfolio. Bonds are there for crisis and uncorrelated periods. Stocks—dividend-yielding or otherwise—remain volatile, and they provide little in the way of protection from market downturns. …

The “dividend aristocrats” are the cream of the crop when it comes to dividend-paying stocks. These stocks have raised their dividends each year for at least 25 years. An ETF that tracks the group has been around since 2005. The SPDR S&P Dividend ETF (SDY) tracks those stocks making the grade from the S&P 1500 Index. It should provide the perfect vehicle to test the authors’ theory.

So let’s see how bonds and high-dividend-paying stocks compared during the latest downturn. SDY was up 0.7% on February 19, while the iShares Core U.S. Aggregate Bond ETF (AGG) had gained 2%. Then SDY fell to a year-to-date return of -35.7% on March 23 and finished the quarter down 25%. The comparable returns for AGG were +0.9% by March 23 and +3.1% at quarter’s end.

Verdict: High-dividend stocks are no match for bonds when it comes to risk management. They’re down and out.

Hedge funds are the closest to what we do here at Flexible Plan. Before I started the firm, I had formed and been a manager for one of the first hedge funds in the Midwest, Levitech Associates. My purpose in forming Flexible Plan was to bring some of the tactical strategies available to hedge fund investors to the mutual fund world.

Back in 2009, an ETF was formed to offer a portfolio of hedge fund strategies all under one roof. According to its description on, the IQ Hedge Multi-Strategy Tracker ETF (QAI) “uses a mash-up of hedge fund replication sub-indexes to emulate the returns of a multi-strategy ‘fund of funds.’”

Hedge funds are dead too, right? Well, not as risk-managed investment vehicles. QAI was up 0.6% on February 19 and down just 13.2% by March 23. It completed the quarter down 7.5%

Verdict: Multi-strategy hedge fund investing is very much alive and well.

These are just a few of the industry’s risk-management strategies that had been given up for dead during the 11-year bull market. Most of those not discussed here—such as market-neutral, long-short, and managed futures—came back to life to do what they were designed to do: manage risk when the bear comes out of hibernation and once again stalks the financial markets. A few—such as value, small-cap, and international investing—continue to leave us wanting.

In the first quarter, our average account was down just over 5% after maximum fees. We had 144 (97%) E*Trade Strategic Solutions strategies that outperformed the S&P 500 and 112 (76%) that outperformed the average balanced fund.

Here are the results of some of the QFC strategies favored by our clients for the same time period used in our analysis above (all results are after maximum fees and fund fee credits*):

Verdict: FPI is alive and kicking.

I’ll end as I did in November because the truth underlying my comments is timeless and has to be remembered as the market attempts to return to its old heights:

Unless the business cycle ceases to exist and the human emotions of fear and greed disappear, the current market environment will change. “Buy and hold” will suddenly be out of favor, and active management will be the answer.

All of the risk-management strategies that have been declared dead and buried will have their time in the sun once more. Rallies begin in the debris of the last market collapse, and rallies end in exhaustion and emotional excess. From that exuberance, the next downturn will inevitably begin. It’s a cycle, and we must prepare for both halves of that cycle.

When the present cycle ends, we will realize that all of these risk-management strategies are not dead. History has taught us that when many think that the bear is dead, it is not. It is actually just hibernating.

All the best, wishing you safety and good health,


*Results assume a $150,000 investment, at which level FPI no longer bills separately for its services. Third-party fees may continue to be billed by FPI. In such circumstances, FPI is solely paid as a subadvisor to the funds used in the strategies. Smaller investments in the strategies could experience FPI billings of up to 0.14% per quarter for FPI client services apart from its subadvisory services. FPI provides other non-QFC strategies upon which the fees may differ.

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