Market Update and Model Portfolio Reviews 3/31/2018
For the month of March, investment grade domestic bonds* were up 0.64% and down -1.46% on the year. Month over month, large cap domestic equities** finished down -2.54% and down on the year by -0.76%. It seemed as if the news flow was endless this month: (1) trade war concerns heated up over tit-for-tat tariffs; (2) Facebook experienced a data sharing dilemma (and its massive market cap weighed on stocks); (3) Amazon was scrutinized about the amount of domestic taxes they pay; (4) the White House replaced two major posts, with Gary Cohn and Rex Tillerson removed; (5) Jerome Powell presided over the first rate hike of the year as new Fed Chair; (6) the government passed a 2,232 page spending bill to sustain the government through September and avoid a shut down (prevailing concern was the lack of time Congress had to review the bill: less than 24 hours); (7) the Senate passed a bill to lighten regulations on banks that were largely imposed by the Dodd-Frank Act (still needs to pass the House); (8) Noteworthy steps from Kim Jong-un & North Korea; (9) and the EU added to the already battered tech sector for the month of March, proposing new tax rules for companies like Google (Alphabet), Apple, Amazon and eBay (technically these are not all GICS tech companies, but for sake of illustration).
Month over month, all of the strategies outperformed their benchmarks. With the exception of the Ultra Aggressive strategy, all model portfolios yielded positive results while all the benchmarks were in the red. Year to date, the portfolios have outperformed their benchmarks with the exception of the Ultra Aggressive strategy. Our allocation to equity large cap low volatility strategy was off by -0.26% vs. the S&P 500 TR Index, which was off by -2.54%. Our best performing allocation was one of our closed end fund allocations, which turned back positive on the year up 4.86% over the month. The primary risk in this closed end fund allocation, specifically, is the relative premium in market price relative to its net asset value. The market has consistently paid a very high premium over the years, but we do trim in actual investor accounts if the premium gets excessively wide compared to its historical average. Our gold allocation has fared well and continues to trend in a positive direction when measuring from the end of 2015. The primary reason for the underperformance within the Ultra Aggressive strategy relative to the other seven strategies is the heavier weighting to the technology sector over the period measured. Financials were also a detractor in performance across all portfolios, although the drag from financials’ underperformance was not enough to hold down the stronger performance in our more interest rate sensitive positions across the models. As we will show later, long floating rate bond securities (both Investment and Non Investment Grade) that typically range in the “less than five years to maturity” window have produced favorable results, while our long duration securities have had a bumpy ride over the quarter, they ended out the month favorably. The long end of the yield curve continues to trade in a band that is in line with our expectations of late cycle market behavior. Even with the record amount of Treasury issuances set to take place this year, next year and in 2020, the focus remains on bringing supply to the shorter end of the curve and rates rising with continued supply in the front end of the curve. On March 29, 2018 the yield spreads on the 2-year and 10-year Treasury hit their lowest level since October 15, 2007, at approximately 47 basis points. Historically, we have normally had a negative yield spread before a new previous market high and recession to follow. Fiscal and monetary policy have also normally been aligned during these periods, while this cycle has a divergence between stimulative fiscal policy and tightening monetary policy. This policy divergences may be a driver behind why the relationship on the S&P 500 Price Return Index and the 2 year – 10 year Treasury spreads breakdown. See the chart below or on the next page for further analysis of this breakdown.
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 – 3/31/2018. Model Performance presented net of highest advisory fee.
False Signals Due to Fiscal & Monetary Policy Divergence?
Period measured over 12/31/1989 to 3/29/2018 for the S&P 500 Price Return Index, the Daily Treasury Yield Curve Rates & the FOMC Target Rate. DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice.
Cash is Almost a Respectable Asset Class Again
Cash is almost not trash anymore with the relative rise in short-term rates. The primary risk in Treasuries is interest rate risk. In the shorter maturity market you are almost earning a positive carry when adjusting for inflation.
Flattening Curve: As mentioned in our brief performance attribution above, rising short term interest rates have benefited our long floating rate investment and non-investment grade bond allocations, while our long duration has traded in a range that has been beneficial and providing support in most of the recent risk-off market environments.
The Treasury Yield Curve chart shows three end of day closing rates of US Treasury Securities across a constant maturity series. The one month Treasury bill was as at 0% on 10/15/2015 and has continued to trend upward to its most recent high of 1.76% on 3/20/2018. This is the highest level since 8/14/2008.
8/1/2011 was the last time the 30 year Treasury series was above 4% and reached the lowest level in over 30 years on 7/8/2016 at 2.11%. Duration risk (interest rate risk) was at its highest level as well at the point on 7/8/2016 for the 30 year Treasury.
Period measured over 12/30/2016 to 3/29/2018 for the Daily Treasury Yield Curve Rates. DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice.
Disclosure WARRANTIES & DISCLAIMERS There are no warranties implied. Alternative Capitalis, LLC (“RIA Firm”) is a registered investment adviser located in Chelsea, 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%, the highest fee charged by Alternative Capitalis, LLC. 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, 1.00% annually. This will reduce the total return of the investable benchmark by the annualized rate of 1.00%. 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.”
The results do not represent actual trading and actual results may significantly differ from the theoretical results presented.