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Market Update and Model Portfolio Reviews 12/31/2018

For the month of December, global equities resumed their slide from October.  Domestic equities fared worse than international equities, with domestic small cap equities entering into a bear market, and large cap stocks** narrowly avoiding a bear market, having their worst month since February 2009 and their worst year since 2008. For the month of December, large cap domestic equities** were down -9.03% and finished the year down -4.38%. Investment grade domestic bonds* continued their positive moves to end the month up 1.84% and narrowly squeezed out a positive return of 0.01% for the year.  All of the benchmarks and models closed out the month and year down.  On the year, nearly all models outperformed their global benchmarks and half of the models outperformed their domestic benchmarks.  For the month, five of eight models outperformed global benchmarks, while six of eight models outperformed their domestic benchmarks.  We will discuss the reallocation we conducted on December 20th on the next few pages, which we are terming, “Operation Twist”.  We will also discuss the Growth and Income Model’s relative performance with its benchmarks and some of the drivers that helped relative outperformance from the September 20th record high on the S&P 500 Index through year end.  Finally, we will discuss detractors from the Model portfolios’ relative performance to their benchmarks for 2018.  

DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. Measured by the Barclays US Aggregate Bond Index* - Morningstar. S&P 500 Total Return Index**. “domestic small cap equities” is represented by Russell 2000 Index. See “Model Disclosure” page for important disclosures and information – Period Measured 12/31/2017 – 12/31/2018. Performance presented net of highest advisory fee, updated 4/1/2018. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice or recommendation(s). The results do not represent actual trading and actual results may significantly differ from the theoretical results presented. Past performance is no guarantee of future results.

 Commence Operation Twist

The fourth quarter of 2018 will make for a great dissertation piece for students of the market, specifically the few days before and the day after Christmas.  The second longest bull market in modern history almost came to a technical end on Christmas Eve**.  On Christmas Eve, the S&P 500 Price Index was down 19.8% from its prior record high as of the September 20th close (a 20% drawdown from a prior high is generally accepted as a bear market).

 

Financial returns are a product of the cash you pay versus the cash you receive over a period of time.  Although obvious in hindsight, bad companies can be attractively priced for positive returns where great companies can be euphorically priced for bad returns. Through our Strategic and Tactical Allocation Models, we have a proactive process in place to embrace the opportunities that come from a market downturn. A bear market has been a soft mandate and a general target based on the math from historical bear markets that would trigger the rational of transitioning the portfolios from “Risk Off” to “Risk On” or “Neutral.”  The key word is “transitioning” versus moving 100% to a tactical “Risk On” or “Risk Off.”  We embrace this transitional philosophy because not every bear market is caused by the same event, nor do the losses that coincide with prior bear markets dictate the best time to tactically transition in the future.  We have envisioned that a 20% drawdown (a bear market) would be a reasonable target to begin transitioning 20% of the “Risk Off” portfolios to “Risk On.”  This would leave 80% to “Risk Off and 20% to “Risk On.”  The next transition target envisioned would be where domestic large cap equities had fallen by a total of 30% from their prior highs.  The transition envisioned at a 30% target would leave the Strategic Allocation tactically weighted with 60% to “Risk On” and 40% to “Risk Off”.  The last transition envisioned would be triggered by a drawdown of more than 30% from prior highs on large cap domestic equities.  This is because a 30% drawdown has been close to the average historical loss during bear markets, so a qualitative approach would likely dictate the final 40% to allocate to “Risk On.”  This is not intended to be an exhaustive rigid approach, but rather a framework for tactical changes within a strategically allocated portfolio.

 

On December 20th, we made the decision to move 10% of the model allocations to “Neutral” or “Market Weight” and left 90% allocated to “Risk Off.” We believe headline risk around geopolitical uncertainty, potential central bank policy error(s), and slower future growth assumptions were steamrolling investor sentiment too far too fast.  The second half of December generally coincides with lighter staffed trading desks and lighter trading volume, but this December was not a typical December.  We believe that the accelerated fall (additional decline) from December 19 through Christmas Eve was driven by:

  (1)  Lower liquidity due to the holiday season (widely accepted);

  (2)  A concentration of similar/common preprogrammed (algorithmic/robo) trading rules, for example, down momentum versus up momentum trend following factors, daily stop loss (stopped out) orders around 2%, etc.; and

  (3)  A short squeeze the day after Christmas due to margin requirements and having to buy back shorted positions (this demand to buy back shares during low liquidity periods can capitulate a price reversal more swiftly, thereby forcing margin calls).  

 

The point of this belief is to express that it was unclear at the time what specifically drove volatility the few days before and the day after Christmas.   Regardless of the catalyst, and given the market’s uncertainty regarding what was driving the current volatility, we resolved to not wait for what may or may not turn into a bear market in the short run, and we adjusted the portfolios to have some market weighted risk if we rebound from these levels.  If we do rebound, then we are okay with taking some risk back off the table.  If the slide continues (which we believe it will into 2020), then we stand ready to continue to add risk exposures as we work through the end of this business/economic cycle to the next one.  It was tough being “Risk Off” for the first three quarters of the year, but we believe this approach fared well during the mini collapse we saw in the fourth quarter, bringing many market participants back to their 2017 levels.  At the time we started to transition (Operation Twist) the portfolios on December 20th, the S&P 500 Price Index was off over 15% from its prior high. 

 

Since the start of 2017, we have invested with a view that we will have a recession and slowdown over the next one to three years.  We incorporated this view early and it has rewarded most of the portfolios relative to their benchmarks over the fourth quarter and now for the year of 2018. As we have previously noted, we take this approach in an attempt to lose less in down markets and provide more buying power at lower entry points (which seems synonymous with buy low, sell high).  The S&P 500 Price Index low of 2018 had not been seen since April 21st, 2017.  The year end close on the S&P 500 Price Index brought it back to its closing level on September 27, 2017.  With the December 30, 2016 Price Index close of 2238.83, two years later, the Index closed December 31, 2018 at 2506.85, or 12% higher since our Risk Off Positioning, or 5% higher if you measured to Christmas Eve. Currently, a bear market would be triggered if the Index were to reach a 2,344.60 price level.

DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. See “Model Disclosure” page for important disclosures and information – Multiple Periods Referenced. Performance presented net of highest advisory fee, updated 4/1/2018. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice or recommendation(s). The results do not represent actual trading and actual results may significantly differ from the theoretical results presented. Past performance is no guarantee of future results.

Operation Twist Chart Text for link 12-3

DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request.  See “Model Disclosure” page for important disclosures and information – Period Measured 9/20/2018 – 12/31/2018. “Long Duration Treasury Coupon Strips Exposure” is represented by using the Vanguard Extended Duration Treasury ETF (EDV). “Gold Exposure” is represented by using the SPDR® Gold Shares (GLD). “Long Dollar Currency Basket Exposure” is represented by using the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU). Alternative Capitalis, LLC has not been endorsed and is not affiliated with Vanguard / State Street Global Advisors (SPDR®) / WisdomTree Funds. Vanguard / State Street Global Advisors (SPDR®) / WisdomTree Funds does not endorse the use of this information presented herein nor endorse Alternative Capitalis, LLC. Performance presented net of highest advisory fee, updated 4/1/2018. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice or recommendation(s). Past performance is no guarantee of future results. The results do not represent actual trading and actual results may significantly differ from the theoretical results presented. Note that all eight models were rebalanced with this adjusted tilt and that the results have varied amongst the performance.  The Growth and Income Model portfolio was chosen to present because it tracks a traditional 60-40 Stock-Bond portfolio benchmark.

Monetary Policy Insights Using the Basic Phillips Curve Inputs: Wage Growth and Unemployment.

 

Notice that from the graph above that prior recessions have generally coincided with a reversal in wage growth to the positive side (green line), and unemployment reaching a low for that economic cycle and reversing direction for a pickup in unemployment. It must seem counterintuitive when one hears on the news how healthy the economy is, full employment, and rising wages…what could go wrong? These are lagging indicators (a leading indicator on employment would be weekly jobless claims), but it comes back to full capacity in the economy and the slowdown that tends to follow at, or past, full capacity (see our January 31, 2018 Monthly Review on Late Stage Business Cycle Indicators). A common saying in 2018 has been that business cycles don’t die of old age, but they do eventually succumb to some other ailment.  Concerns over a policy mistake (continued rate hikes) by the Federal Reserve has markets on high alert.  The Federal Reserve Bank (the U.S. Central Bank) has three core mandates for monetary policy:

 

 (1) Maximum Employment;

 (2) Stable Prices; and

 (3) Moderate Long Term Interest Rates.

We often discuss the impact of interest rates on financial assets because of the down stream implications for the economy and your investments. This video offers a brief overview of monetary policy.  In December, the Federal Open Market Committee (FOMC) moved their target interest rate for the fourth time of 2018 towards 2.50%.  The rate hike was generally expected, but the forward guidance for future rate hikes put the market on notice.  On both December 4th and 11th, the spread on the two-year Treasury and ten-year Treasury reached the current business cycle low of 0.11% (refer back to our March 31, 2018 review about Fed tightening and Yield Curve Inversion). This flattening of the yield curve put investors on edge, as history shows a high correlation of a recession after the yield curve inverts (meaning, the rate on the two-year Treasury is higher than the rate on the ten-year Treasury).   The two-year and three-year Treasury yield spread inverted on December 14th and the two-year and five-year Treasury yield spread inverted on December 17th.  These two spreads inverting have been the predecessor of the last three recessions along with the more often noted 2-10 year Treasury yield spread inversion.   With this said, what is the Fed to do? The graph above pulls in two key variables of the Phillips Curve, which continues to be an input to monetary policy decisions (target interest rates). Wage growth and unemployment currently imply that continued rate hikes are warranted using the two basic inputs to the Phillips Curve. We continue to sound the alarm about rising rates given the historically high corporate and public debt levels.  Monetary tightening may have to pause as the effects of fiscal stimulus from tax cuts wear off. We went nine years of almost “free money,” to encourage borrowing (increasing debt levels) and an extra jolt of fiscal stimulus to keep the economy “strong.”  We continue to believe that the reversal of this extraordinary environment will lead to the ailment that finally succumbs this economic cycle.

DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. See disclosure pages for important – Period Measured 12/31/1964 – 12/31/2018. U.S. Bureau of Labor Statistics, Civilian Unemployment Rate [UNRATE] / U.S. Bureau of Labor Statistics, Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private [AHETPI], Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, January 5, 2019. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice or recommendation(s).

Model Portfolios Attributions Summary for 2018

 

The 2018 Naughty and Nice List: Areas where we believe we did well, areas where we believe we did not…

From Worst to Best

 

Detractors:

  • Large Cap Bank Sector Exposure – Held because of the ability to mitigate rising interest rate risk.  Detractor becomes more pronounced the more conservative the Model portfolio.

  • Increasing our Large Cap Value tilt in the second half of the year (See Growth or Value in our 7-31-18 Monthly Review).  This was relative value decision between style boxes (Growth vs Value) where they both nearly tracked the same performance through year end.

  • Combination of hedged and unhedged Sovereign bond debt – We would have preferred to take profits at the beginning of 2018, the rising dollar was the largest driver of the poor performance.  The broad rise in the dollar helped capitulate the fall in international equities throughout the year, hurting emerging markets the most. 

  • Convertible Bond Exposures.

  • Mid Cap Stock Exposures.

  • Emerging Market Equity Exposure added in November (See, Maybe Time to Dabble Into EM Equities (with caution)? in our 10/31/18 Monthly Review).  This is a loss over a short period.  We felt comfortable taking on the risk given how poorly the asset class had performed through the year to October month-end, and had nice relative outperformance compared to the S&P 500 Total Return Index from November 1st to year end. The philosophy of a continued drawdown in markets would not impact the asset class remotely as roughly as Large Cap Equities, given the hammering it took for the first 10 months of the year.

  • Gold Exposures, except for the fourth quarter where returns were positive due to investor appetites for safe haven exposures.

Noteworthy positions and moves that lead to non material results (a good thing in a down-market):

 

Positives:

 

  • Long the Dollar To a basket of Developed and Emerging Currencies such as the Euro, Australian and Canadian Dollar, Peso, Pound, and Chinese Renminbi (Similar exposure to a long trade weighted dollar index, but actively managed).

  • Non Agency Mortgaged Backed Securities Exposures.

  • Exiting Floating Rate Bank Loan Exposures and Replacing with Direct Treasuries Bonds with Maturities less than a year out (Rotated April 30, 2018 – See “A Trade Off Between Bank Loans & Treasuries). 

  • Two Closed End Funds – Which we exited on May 31, 2018. 

DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. Measured by the Barclays US Aggregate Bond Index* - Morningstar. S&P 500 Total Return Index**. See “Model Disclosure” page for important disclosures and information – Period Measured 12/31/2017 – 12/31/2018. Performance presented net of highest advisory fee, updated 4/1/2018. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice or recommendation(s). The results do not represent actual trading and actual results may significantly differ from the theoretical results presented. Past performance is no guarantee of future results.

Disclosure WARRANTIES & DISCLAIMERS

There are no warranties implied. Alternative Capitalis, LLC (“RIA Firm”) is a registered investment adviser located in Massachusetts. Alternative Capitalis, LLC may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Alternative Capitalis, LLC’s presentation is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of Alternative Capitalis, LLC’s presentation should not be construed by any consumer and/or prospective client as Alternative Capitalis, LLC’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the presentation. Any subsequent, direct communication by Alternative Capitalis, LLC with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Alternative Capitalis, LLC, please contact the state securities regulators for those states in which Alternative Capitalis, LLC maintains a registration filing. A copy of Alternative Capitalis, LLC’s current written disclosure statement discussing Alternative Capitalis, LLC’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Alternative Capitalis, LLC upon written request. Alternative Capitalis, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Alternative Capitalis, LLC’s presentation or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. This presentation and information are provided for guidance and information purposes only. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This presentation and information are not intended to provide investment, tax, or legal advice.

Model Disclosure

Alternative Capitalis, LLC is a registered investment adviser. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Model Performance Disclosure: The performance shown represents only the results of Alternative Capitalis, LLC’s model portfolios for the relevant time period and do not represent the results of actual trading of investor assets.  Model portfolio performance is the result of the application of the Alternative Capitalis, LLC’s proprietary investment process.  Model performance has inherent limitations. The results are theoretical and do not reflect any investor’s actual experience with owning, trading or managing an actual investment account. Thus, the performance shown does not reflect the impact that material economic and market factors had or might have had on decision making if actual investor money had been managed. Model portfolio performance is shown net of the model advisory fee of 1.25%, the highest fee charged by Alternative Capitalis, LLC.  This reflects a change from Alternative Capitalis, LLC highest fee charged to a client(s) account from 1% to 1.25% annually.  April 1, 2018 model performance to most recent date presented adjusts for the higher 1.25% annual fee. Model portfolio performance is shown net of the sample trading costs based on our Custodian’s, TD Ameritrade Institutional, trading costs. Performance does not reflect the deduction of other fees or expenses, including but not limited to brokerage fees, custodial fees and fees and expenses charged by mutual funds and other investment companies. Performance results shown include the reinvestment of dividends and interest on cash balances where applicable. The data used to calculate the model performance was obtained from sources deemed reliable and then organized and presented by Alternative Capitalis, LLC.   The performance calculations have not been audited by any third party. Actual performance of client portfolios may differ materially due to the timing related to additional client deposits or withdrawals and the actual deployment and investment of a client portfolio, the reinvestment of dividends, the length of time various positions are held, the client’s objectives and restrictions, and fees and expenses incurred by any specific individual portfolio. The performance calculations are based on a hypothetical investment of $100,000 for both the model and benchmarks presented. On July 23, 2018, we corrected previously reported month end performance reports to account for transactions costs (trading fees) related to rebalancing model portfolios.  The month end reports effected ranged from 2-28-2018 to 5-31-2018.  Prior reports accounted for transaction costs related to trading fees.  The four reports have been corrected and updated on Alternative Capitalis, LLC website (www.altcapitalis.com).  2-28-2018 had the largest variance in incorrect performance reported with an average of 9 BPs (“basis points”) (0.09% or 9/100 of 1.00%) of overstated positive performance in the models and ranged as high as 15 BPs to as low as 2 BPs.  A comparison chart of the variances in reported performance can be provided upon request.   Benchmarks: The performance results shown are compared to the performance of the performance of a blended ETF (exchange-traded-fund) portfolio comprised of the following two ETF’s symbols, SPY & AGG, are described below.  The benchmarks used are investable ETFs and their performance calculation is inclusive of the highest fee charged to a client(s) account, 1.25% annually.  This will reduce the total return of the investable benchmark by the annualized rate of 1.25%.  The ETF symbol SPY (SPDR® S&P 500® ETF Trust) which seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the "Index").  Visit https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY for more information about the ETF. The S&P 500® Index results do not reflect fees and expenses and you typically cannot invest in an index.  The ETF symbol AGG (iShares Core U.S. Aggregate Bond ETF). The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market. (the "Index"). Visit https://www.ishares.com/us/products/239458/ishares-core-total-us-bond-market-etf for more information about the ETF. The index composed of the total U.S. investment-grade bond market results do not reflect fees and expenses and you typically cannot invest in an index.  The benchmark is blended representing a weighting of a percentage (%) to SPY and percentage (%) to AGG based on the respective model weights below.  Unless otherwise indicated, the benchmarks are not rebalanced to maintain their original weighting over the period measured.  Instead, they are comprised of the starting allocation and will shift given the prevailing market environment over the period measured.  Return Comparison: To benchmark the results, the ETF (exchange-traded-fund) symbol SPY (SPDR® S&P 500® ETF Trust) which seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the "Index").  The S&P 500 was chosen as it is generally well recognized as an indicator or representation of the stock market in general and includes a cross section of equity holdings. In addition, the ETF symbol AGG was chosen as a benchmark. The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market.  The total U.S. investment-grade bond market was chosen as it is generally well recognized as an indicator or representation of the bond market in general and includes a cross section of debt holdings. For each respective model benchmark the performance measurement weightings are as follows to SPY / AGG %: 20/80, 30/70, 40/60, 50/50, 60/40, 70/30, 80/20, 90/10 % respectively for Ultra Conservative, Conservative, Moderate, Balanced, Growth & Income, Growth, Aggressive, Ultra Aggressive. OPTIONS TRADING RISK DISCLOSURE: Options Trading – Both the purchase and writing (selling) of options contracts –involves a significant degree of risk not suitable for all investors.  Investors should carefully consider the inherent risks and financial obligations associated with options trading as further detailed in the Options Clearing Corporate booklet “Characteristics and Risks of Standardized Options.” 233 Harvard St, #307, Brookline, MA 02446 is Alternative Capitalis, LLC’s client facing address. All books, records, receipts, correspondence (mailing address) and day to day operations are located at 1565 West St, Wrentham, MA 02093.

Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. The results presented before 12/31/2016 for model performance assume that the weights initially held on that date were held at the unset of any performance presented before 12/31/2016.  This assumes results based on discretionary models that are not purely quantitative or rules based. Global Benchmarks: The performance results shown are compared to the performance of the performance of a blended ETF (exchange-traded-fund) portfolio comprised of the following three ETF’s symbols, VT, BNDX & BND, are described below.  The benchmarks used are investable ETFs and their performance calculation is inclusive of the highest fee charged to a client(s) account, 1.25% annually.  This will reduce the total return of the investable benchmark by the annualized rate of 1.25%.  Additionally, the ETF’s that lack the track record to cover the entirety of the period presented have been backfilled with index data that Alternative Capitalis, LLC deems appropriate as a proxy of the chosen ETF’s hypothetical track record.  Below is the summary of backfilled data and time period:

 

 

 

 

 

 

 

The ETF symbol BNDX (Vanguard Total International Bond ETF). The Vanguard Total International Bond ETF attempts to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). Visit https://investor.vanguard.com/etf/profile/BNDX for more information about the ETF. The ETF symbol VT (Vanguard Total World Stock ETF) seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets.  Visit https://investor.vanguard.com/etf/profile/VT for more information about the ETF. The ETF symbol BND (Vanguard Total Bond Market ETF). The Vanguard Total Bond Market ETF attempts to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and attempted to track the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009. Visit https://investor.vanguard.com/etf/profile/BND for more information about the ETF.  The benchmark is blended representing a weighting of a percentage (%) to BND, percentage (%) to VT and percentage (%) to BNDX based on the respective model weights below.  Unless otherwise indicated, the benchmarks are not rebalanced to maintain their original weighting over the period measured.  Instead, they are comprised of the starting allocation and will shift given the prevailing market environment over the period measured.  Return Comparison: To benchmark the results, the ETF symbol BNDX (Vanguard Total International Bond ETF) attempts to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). The Vanguard Total International Bond ETF was chosen as it is generally well recognized as an indicator or representation of the global bond market, ex-U.S. bonds, and tracks an investment-grade, non-USD denominated bond index, hedged against currency fluctuations for U.S. investors.  The ETF symbol VT (Vanguard Total World Stock ETF) seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets. The Vanguard Total World Stock ETF was chosen as it is generally well recognized as an indicator or representation of the global stock market and tracks a market-cap-weighted index of global stocks covering approximately 98% of the domestic and emerging market capitalization. The ETF symbol BND (Vanguard Total Bond Market ETF) attempts to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and attempted to track the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009. The Vanguard Total Bond Market ETF was chosen as it is generally well recognized as an indicator or representation of the U.S. Domestic bond market, and tracks a broad, market-value-weighted index of U.S. dollar-denominated, investment-grade, taxable, fixed-income securities with maturities of at least one year. For each respective model benchmark the performance measurement weightings are as follows to BND/VT/BNDX %: 66/20/14, 57.8/30/12.3, 49.5/40/10.5, 41.2/50/8.8, 33/60/7, 24.7/70/5.3, 16.5/80/3.5 and 8.2/90/1.8 % respectively for the Ultra Conservative, Conservative, Moderate, Balanced, Growth & Income, Growth, Aggressive and Ultra Aggressive Global Benchmarks. DRAWDOWN ASSUMPTIONS: Domestic Benchmark -36.90%, Global Benchmark -41.00%, and Growth & Income Model -18.00% (see “Third Party Disclosures” page).  Limitations of the assumptions include, but are not limited to, backfill index bias, time period bias and assume no changes to the model presented over the drawdown period.  An advisory fee of 1.25% is also included in the calculation for the model and benchmarks over the drawdown period.  Transaction fees for the model over the drawdown period are excluded as positions are assumed to be held constant.  The benchmark drawdowns use the as calculated drawdowns over the periods measured from 10/9/2007 to 3/9/2009 for the domestic benchmark and from 10/31/2007 to 3/9/2009 for the global benchmark.  The Growth & Income Model uses third party software to present a hypothetical drawdown in which calculations of the current holdings were not available during the drawdown period relative to the benchmark.  There is no guarantee as to the accuracy of the third party drawdown assumptions nor should one draw any conclusions as to the accuracy and likelihood of the data presented. The Growth & Income Model drawdown assumption is based on a third party report dated September 24, 2018 (This report is available upon request).

 
The results do not represent actual trading and actual results may significantly differ from the theoretical results presented.

Explanations & Disclosures Continued:

Third Party Disclosures

Hidden Levers


IMPORTANT: The projections generated by HiddenLevers regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Assumptions on rates of return and standard deviation used in this analysis are based on historical return data for each security and asset class. Past performance is no guarantee of future results. Results may vary with each use and over time. You cannot invest directly in a benchmark or index. Index results do not reflect fees, expenses, or sales charges incurred when making investments. Methodology Used to Generate this Report: Definitions: Beta - Beta measures the relationship between an investment and a major market index (the S&P 500 is used in this report). A beta of 1.0 means that a 1% rise in the S&P 500 could lead to a 1% rise in the investment, while a beta of -0.5 means that a 1% rise in the S&P 500 could lead to a 0.5% drop in the investment. The beta for an investment is determined by using regression analysis to measure the relationship between the returns of the investment and the returns of the S&P 500. HiddenLevers uses 10 years of data to measure the beta for an investment. For investments with less than 10 years of history, all available historical data is used. Cross Correlations - HiddenLevers measures the correlation between every pair of investments in the portfolio. The correlation results can vary between 1 and -1, where a correlation of 1 means that two investments move together perfectly over time, and a correlation of -1 means that two investments move in opposite directions over time. Expected Return - This is the 5-year total return of the portfolio based on the stress test scenarios selected for the report. The system takes the weighted average of the economic scenarios to calculate a one-year return, which is then compounded to determine the five-year return. Lever - HiddenLevers tracks different levers (economic indicators) like CPI, US GDP Growth, and oil prices, and uses movements in these levers to define economic scenarios. Lever Impact - The lever impacts section describes the impact of different economic levers on the portfolio as a whole. An S&P lever impact of 1.0, for example, means that a 1% rise in the S&P 500 is projected to lead to a 1% rise in the portfolio. HiddenLevers similarly measures the impact of a range of economic levers on the portfolio. Maximum Drawdown (MDD) - this is measured as the largest percentage drop in a position during the timeframe of measurement. Click the + sign on the Risk Measures box to see the timeframe of measurement for Max Drawdown in the top right hand corner of the box. Scenario - A scenario is a representation of a major macro-economic or geopolitical event which has the potential to impact investment returns. HiddenLevers models scenarios as a set of up-or-down movements in any of the economic indicators (levers) in the system. Scenario Impacts - Using HiddenLevers' stress testing model, an upside and downside impact are projected for the portfolio in each scenario. Most scenarios are modeled with multiple potential outcomes, with both positive, neutral, and negative outcomes considered. The best and worst projections are derived from running the different scenario outcomes against the portfolio in HiddenLevers model. The scenario-based stress testing model is discussed in detail in the Method section below. Sharpe Ratio - The Sharpe Ratio is the a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such calculations. It was developed by Nobel laureate William F. Sharpe. The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. HiddenLevers calculates the Sharpe ratio by subtracting short term (1M) T-bill rates from the portfolio's annualized total return, and then dividing by the portfolio's volatility (annualized standard deviation). Stress Test Risk/Reward - The Stress Test Risk/Reward compares the portfolio's potential downside risk against the 5 year expected return of the portfolio. Downside Risk: This is the maximum downside calculated across all of the scenarios included in the report. 5 Year Expected Return: HiddenLevers first calculates the expected return for the portfolio by calculating the one-year weighted average expected return across all included scenarios. The one-year expected return is then compounded to obtain a 5 year return estimate. Historically, major downside events occur roughly twice a decade, making 5 years an appropriate timeframe for comparison of long term returns and downside scenario risk. Volatility - HiddenLevers measures volatility as the annualized standard deviation of an investment or portfolio, expressed in percentage terms. The standard deviation is calculated using weekly data points, and is then annualized by multiplying by the square-root of 52 (number of periods in one year). Method: This report describes one or more potential scenarios, and shows the HiddenLevers-model based performance for the portfolio in each scenario. The steps below are performed to generate the projections: Scenario -> Levers -> Assets (Stocks etc) -> Portfolio Return A scenario pushes levers up or down, which in turn push assets up or down, which in turn impact a portfolio's modeled return in the scenario. As defined above, a scenario is modeled as a set of movements in the levers. Regression analysis is used to determine the historical (prior 10 year) relationship between each lever and each asset in the portfolio. The model is then run 2500 times for each scenario/portfolio combination. In each iteration, the model projects the returns for each asset using the historical regression coefficients for each lever, and using the scenario assumptions on how each lever will change. The model varies the regression coefficients for each iteration using a normal distribution around their mean (similar to a Monte Carlo model's varying of expected returns across iterations), and aggregates the results of the 2500 iterations to find a mean portfolio return with a 95% confidence interval. The confidence interval is displayed on the report as "margin of error" for each scenario. Limitations and Assumptions: This report describes one or more potential scenarios that may or may not occur. Each scenario discussed in this report is defined by the economic assumptions listed in the Macro Impact section of each scenario page. HiddenLevers does not guarantee that any particular scenario will occur as modeled in this report. HiddenLevers uses historical analysis in the creation of this report, and past performance is not a guarantee of future results. The information contained in this report is not to be construed as advice and should not be confused as any sort of advice. Investors should consider this report as only a single factor in making their investment decision. Gxworks LLC, maker of software used to create this report, makes the following disclosures: Gxworks LLC's mission is to educate and provide useful macro risk analytical tools to help provide data to assist with the investment decision process. We rely on financial data, including stock prices, provided by third parties. The data is believed to be accurate, but HiddenLevers does not guarantee or warranty this data. This report is intended only as an informational tool for you and your investment advisor, and should not in any way be construed as investment advice by HiddenLevers. If you make investment decisions based on information you receive in connection with this report, you do so at your own risk and neither HiddenLevers nor its employees will be liable for any losses that you may incur. GxWorks LLC (dba HiddenLevers), its employees, officers or affiliates, in some instances, may have long or short positions or holdings in the securities or other related investments of companies mentioned herein. Users of this should conduct their own independent research and due diligence and consult with their investment advisor before making any investment decisions or recommendations.  Hidden Levers does not endorse Alternative Capitalis, LLC. Past Crashes: Financial Crisis 9/1/08 - 3/9/09 This scenario covers the timeframe from September 1, 2008 through March 9th, 2009, and measures the historical change of each lever over those dates. This scenario outcome reflects the economic movements between Sept. 1, 2008 and March 9th, 2009. For monthly and other less granular levers, the nearest time period is used. Timeframe: 6 Months. Please visit https://www.hiddenlevers.com/ for more information.