Market insights and analysis

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

3rd Quarter | 2021

Market insights and analysis


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

By Jerry Wagner

While the stock market has tumbled since making a new high on February 20, giving back all of its 2020 gains, I want to provide you with some good news. Accounts here at Flexible Plan Investments, Ltd. (FPI), are weathering the storm very well.

Most of our more than 145 risk-managed strategies have outperformed the S&P 500 over the last week, month, and three-month periods ending March 6, 2020. For example, as of that date, more than 90% of our strategies had bested the index’s year-to-date loss of 8% and its decline of more than 5.5% over the last three months, with about 40% and 60% of the strategies still showing profits for the respective periods. This is after maximum advisory fees and applicable fee credits.

Better still, as of Friday (March 6), more than 95% of our 50 QFC strategies had outperformed the S&P 500 over the last three months, with more than 75% gaining in value. All or a part of the FPI portion of the fees on these strategies are subject to fee credits. In addition, each comes with two levels of risk management: (1) that derived from the active trading within each of the FPI subadvised Quantified Funds employed, and (2) each strategy’s dynamic allocations among those funds.

On Friday, our Classic accounts moved 100% into bond and money market investments. As the market fell on Monday, March 9, these accounts actually rose in value. And if you had been in the QFC version of the Classic strategy since the latest stock market top, you would have seen a reduction in equity market exposure even earlier, avoiding as much as 8% of the losses experienced by the non-QFC version of the strategy.

QFC Market Leaders accounts also moved to their minimum equity exposure level (20%) on Friday. Like QFC Classic, the QFC Market Leaders accounts have been reducing their stock market exposure since the market top on February 20.

Like the Classic example, most of the QFC versions of our popular strategies outperformed the non-QFC versions. The QFC versions of Self-adjusting Trend Following, Select Alternatives, Systematic Advantage, Political Seasonality Index, Managed Income, Fixed Income Tactical, and Fusion 2.0 posted mostly superior returns during the one-week, one-month, year-to-date, and three-month periods. And that’s before considering the QFC fee advantage!

Among our most recent turnkey, multi-strategy offerings, it wasn’t just Fusion 2.0 that excelled. QFC Multi-Strategy Core easily outpaced our single-strategy offerings, Market Leaders Strategic and Lifetime Evolution, for all periods—for example, adding 1% to 5% to the returns during the decline from the market top.

I am also happy with the QFC Multi-Strategy Explore offerings. The two equity versions (Equity Trends and Special Equity) have both outperformed the S&P 500 for the last week, month, and three-month period ending March 6, 2020—and the two alternative strategies (Low Volatility and Low Correlation) are both showing profits year to date and for the last three months, after maximum fees.

Most of our multi-strategy portfolios have ridden out the market volatility because of the dynamic strategies used within our funds and the liberal use of bonds and gold to combat the market volatility. As the following chart demonstrates, bonds and gold have soared during these turbulent times, while equities have tumbled (data through March 9, 2020).

I would be remiss if I didn’t pass on some more good news about both the economy and the virus. With regard to the economy, it is important to note that while stocks have declined, there is no evidence of a recession in the numbers being reported.

February employment numbers were at record levels and unemployment claims remain very low. ISM reports on the manufacturing and non-manufacturing (service) parts of the economy were solid and growing last week.

The current dividend yield of the S&P 500 is now more attractive against the yield on the 10-year government bond than it was at the height of the financial crisis over 10 years ago.

While it is true that widespread shutdowns of parts of the economy may lead to a reduction in the rate of economic growth, we start from a very high level, and a downturn can certainly still be avoided. This is most likely to happen if people take a realistic perspective on the coronavirus.

Experts are saying that at least 85% of the population that catches the flu will get a very mild case of influenza, much less than we normally experience at this time of the year.

Of the remaining 15%, not all of them will catch the virus. While the coronavirus is more contagious than normal influenza, it is estimated to be less contagious than the measles, more in line with the SARS virus (up to 37% of those exposed).

When you factor in age and underlying conditions to the percent infected on a best and worst case basis, we are talking about a mortality range of between one person and 10 people per 1,000 people in the country for the coronavirus. That compares to about 1 to 3 people per 1,000 for the normal influenza. Of course, these numbers are for each flu season. So, unless there is an effective treatment or vaccine developed soon, the number of deaths ultimately attributable to this virus could be substantial.

By focusing on these statistics instead of the scary headlines and panic, the economy and the stock market will be so much better off. If instead of the hysterics and toilet-paper riots, we can focus on simple personal hygiene and judicious social distancing, as well as using the bulk of our money and energy to protect the elderly with underlying conditions and the immunocompromised, the ones really at risk here, even these losses to the population can be reduced.

One final note: While our returns to date have been very good relative to equities, realize that we are just doing what we are employed to do: providing dynamic risk management to your investments. In doing so, we don’t try to predict the market direction. After all, who can predict a black swan like a pandemic?

Instead, we want our clients to start with a diversified portfolio of strategies that is robust in the face of any market turndown. It should contain all of the uncorrelated asset classes of equity, bonds, and gold. It also should be dynamically managed to provide an additional line of defense beyond that provided by simple diversification in a conventional buy-and-hold portfolio.

Such a portfolio should be scientifically designed and managed with the quantified discipline to capture opportunity and avoid as much risk as possible. But it will not be perfect in achieving either.

It will look great in times like these, but it will also lag when the market finally moves higher again. Right now, all of the indicators I watch suggest we are at an extreme, and, in some cases, historic, oversold level. A bounce higher would normally be expected here.

Be prepared for that and the fact that we may get whipsawed or linger in defensive positions while the market, country, doctors, and patients work through this difficult time. In no event should you abandon the approach that has been put in place to protect your portfolio in times like these. As I have repeatedly said, risk is always with us.

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