Market insights and analysis

By Jerry Wagner

A song by the Motown group Martha and the Vandellas kept running through my mind during 2022. The 1965 creation of the Holland–Dozier–Holland Hitsville production team, “Nowhere to Run” rose to number eight on Billboard’s Hot 100 chart and number five on Billboard’s Hot Rhythm & Blues Singles chart. It has been used in countless movies since its release. The original music video of the song was shot to the throbbing beat of the Funk Brothers at the Ford Mustang plant here in Detroit.

In summing up investing in 2022, the recurring verse from the song says it all:

Nowhere to run to, baby,
Nowhere to hide.
Got nowhere to run to, baby,
Nowhere to hide.

Investors that used asset-class diversification alone to manage risk saw the strategy severely disappoint. Unfortunately, most investors have been taught by their advisers that creating a portfolio of equity, bond, and alternative asset classes will be enough to carry them through even the roughest waters in the financial markets. Yet this time around, as the following chart illustrates, most of these asset classes declined substantially.

The broad major stock market indexes registered double-digit losses for the year. Style boxes of growth and value (the components most advisers still use in constructing portfolios)—whether large cap, mid cap, or small cap—declined. The perennial favorite of this group, large-cap growth, lost almost 30%, as did Technology stocks. In both developed and emerging markets, stocks fell substantially, spending much of the year in bear market territory.

I wake up feeling sorry I met you,
Hoping soon that I'll forget you.

Bonds fared no better. They fell across the yield curve from short to long maturities, regardless of quality. Even inflation-protected bonds lost more than 12%. Long-term Treasury bonds, sporting a maturity of 20-plus years, fell over 30%—right in line with the more than 30% loss of the NASDAQ 100 Index.

It's not love I'm a-running from.
It's the heartbreak I know will come.

Proponents of the popular 60% stock/40% bond strategy for portfolio construction also had a difficult year, since both asset classes performed poorly. While the strategy had proven itself durable for decades, the year ended with many in the financial profession declaring the strategy dead.

'Cause I know you're no good for me,
But you've become a part of me.
Everywhere I go your face I see.
Every step I take you take with me.

Expanding the portfolio to alternatives and sectors proved useful. Commodities gained as an asset class on raging inflationary pressures, but so few advisers make use of them. Gold disappointed many of its adherents. It did not advance in response to inflation; in fact, it declined initially in the face of a soaring dollar. Yet, when the year ended, gold had held on to its original value and helped reduce the losses in portfolios that used it. At the same time, in the sector arena, Energy stocks rose by double digits, but Consumer Discretionary and Communications Services tumbled over 35%. A misstep in your choice had dire consequences.

Another way of further diversifying a portfolio against risk is to add dynamically risk-managed strategies to the portfolio. Research has shown that these strategies tend to not move in the same direction or to the same degree as pure equity or pure bond strategies—or even combinations of them. Dynamically risk-managed strategies are what we have been offering at Flexible Plan Investments (FPI) since our founding in 1981.

How did our QFC strategies perform in 2022?

Let’s take a look at the 2022 performance of our Quantified Fee Credit (QFC) strategies, which offer two levels of dynamic risk management: (1) the management within the underlying Quantified Funds used in the strategies and (2) the allocation/rebalancing we do among the Quantified Funds within the QFC strategies. More than 80% of our assets under management are in QFC strategies.

On the equities side, it was a mixed bag.

In all, four non-QFC equity-only strategies outperformed the S&P 500, two after max fees. All but one outperformed the NASDAQ.*

At the same time, six QFC equity strategies failed to beat the S&P in 2022.* The only one to fail to outperform the NASDAQ 100 was the QFC Self-adjusting Trend Following (STF) strategy. This strategy, based on the Quantified STF Fund (QSTFX) (which was the Morningstar 2017 Top Performing U.S. Equity Mutual Fund and has been able to keep up with NASDAQ during its rally periods), disappointed in 2022. It got whipsawed by the numerous bear rallies that occurred during the year.

I note, however, that by splitting a QFC Self-adjusting Trend Following portfolio with our Volatility Adjusted NASDAQ (VAN) strategy, as I have recommended numerous times, an investor would have come close to performing in line with the less volatile S&P 500. Another way to participate in STF’s growth would have been to invest in QFC Diversified Tactical Equity, which outperformed the NASDAQ 100, again after maximum advisory fees. Both of these diversified options outperformed the QFC Self-adjusting Trend Following strategy by itself over the last three years.*

In the fixed-income arena, active management performed even better. Many of our strategies, across a wide range of targeted bond sectors (including tactical income, municipal bonds, and high-yield bonds), outperformed the Vanguard Total Bond Market Fund (VBTLX), which we use as a benchmark of the bond market environment. The top-performing QFC offering in this area (out of the three QFC bond strategies) was our QFC Managed Income strategy. After maximum fees, the QFC Managed Income strategy lost less than half of the Vanguard Total Bond Market Fund’s 2022 loss of 13.39%.*

QFC Fixed Income Tactical and QFC Government Income Tactical trailed Vanguard’s broad bond fund. But their underlying FPI-subadvised Quantified Funds did a good job of outperforming some of the nation’s best tactical bond managers in 2022.*

The following graph traces the price movements of the three Quantified bond funds (the Quantified Managed Income Fund, QBDSX; the Quantified Tactical Fixed Income Fund, QFITX; and the Quantified Government Income Tactical Fund, QGIT—all shown in shades of blue) for 2022 versus two index vehicles (the iShares 20+ Year Treasury Bond Fund, TLT; and the Vanguard Total Bond Market Index Fund, VBTLX) and three ETFs of Wall Street’s favorite bond managers (PIMCO’s Dynamic Income Opportunities Fund, PDO; Doubleline’s Strategic Opportunities Fund, OPP; and Guggenheim’s Total Return Bond Fund, GIBIX).

In the alternatives area, FPI offers three QFC strategies. The leader of the group was QFC TVA Gold. The worst was QFC Select Alternatives. All outperformed the Vanguard Balanced Index Fund (VBIAX) in 2022, which fell 12.11%.* This was the case even after maximum advisory fees.

Principled-investing strategies—which invest in funds that reflect biblically responsible investing (BRI) standards or environmental, social, and governance (ESG) values—continue to grow in popularity. FPI has historically offered two different principled-investing approaches: For A Better World (ESG-based) and Faith Focused Investing (faith-based).

Three years ago, we launched the subadvised Quantified Common Ground Fund (QCGFX), which invests in stocks and bonds of issuers that can be considered compliant with both ESG and BRI standards. This allowed us to create QFC versions of our principled-investing strategies, which qualify for our Quantified fee credits. In its first year of eligibility (2023), Morningstar compared the Fund to 370 U.S. mid-cap blend funds in overall and three-year performance. Based on this comparison, the Quantified Common Ground Fund received a 5-star rating for overall performance and a 5-star rating for three-year performance. The Fund also attained Morningstar’s 5-globe sustainability rating during the period.

Using a different allocation process among the funds, the QFC Faith Focused Investing profiles bested the QFC For A Better World options in 2022. Notably, all of the QFC Faith Focused Investing profiles (Conservative, Moderate, Balanced, Growth, and Aggressive) topped the Vanguard Balanced Index Fund (VBIAX) in 2022.* All but the Aggressive profile did so net of the maximum advisory fee. The QFC Classic versions of each were the worst performers among our principled-investing strategies, outperforming the NASDAQ 100 but falling short of the S&P 500.*

For 2023, we have decided to make the QFC Common Ground strategy available on many platforms, making it a suitable choice for investors looking for either ESG or BRI investments. It will follow the allocation methodology of the Faith Focused Investing strategy, which proved superior in 2022. It will be available as a QFC mutual fund portfolio and as a stock-based separately managed account (SMA).

FPI also offers five different QFC core strategies, each available in five different risk profiles. Each makes use of the actively managed FPI-subadvised Quantified Funds but follows strategies formulated for different dynamically risk-managed approaches. The top-performing QFC core strategies for 2022 were the QFC All-Terrain Conservative, Moderate, and Balanced profiles, as well as the QFC Lifetime Evolution Growth and Aggressive profiles. All of these easily outperformed the S&P 500 and other broad stock market indexes, even after maximum fees.*

The worst-performing QFC core strategies for 2022 were the QFC Evolution Plus Conservative and Moderate profiles, as well as the QFC Dynamic Fund Profile strategy’s Balanced, Growth, and Aggressive profiles, which use the traditional Markowitz mean-variance asset-class-allocation process.

Among our turnkey multi-strategy offerings—QFC Multi-Strategy Core, four QFC Multi-Strategy Explore offerings, and QFC Fusion 2.0—all of the QFC Multi-Strategy Explore strategies outperformed the Vanguard Balanced Index Fund (VBIAX) and the S&P 500 after maximum fees, except for the QFC Multi-Strategy Explore: Equity Trends offering. However, that strategy did outperform the NASDAQ 100 on the same basis.*

The Conservative, Moderate, and Balanced profiles of QFC Fusion 2.0 outperformed the respective profiles of QFC Multi-Strategy Core, while QFC Multi-Strategy Core proved best for the Growth and Aggressive profiles.* These strategies are designed to seek out the best-performing strategies without the benefit of hindsight.

As was the case in 2020, the downturn in 2022 demonstrated that dynamically risk-managed strategies can offer the opportunity for superior performance to traditional methods. Without these available alternative strategies, years like these can leave portfolio creators with

Nowhere to run to, nowhere to hide.

P.S.: When investors experience a severe market decline like in 2022, it is important that they retake their Suitability Questionnaire to ascertain whether their attitude toward market risk has changed. To obtain a new Suitability Questionnaire, please contact us or your financial adviser.

*Composite strategy performance for one year, three years, five years, 10 years, or since inception is available in our Weekly Strategy Performance here: https://www.flexibleplan.com/news/weekly-strategy-performance.