Market Update and Model Portfolio Reviews 8/31/2017
In summary, the three of the eight asset allocation models outperformed net of fees year to date as of 8/31/2017 when compared to their benchmarks. For the month of August, domestic large cap equities were relatively flat whereas domestic investment grade bonds had a very strong month returning approximately 1% over the month. The model allocations have been positioned defensively year to date and we believe will remain defensively positioned for the foreseeable future. The risk off strategies are intended to outperform in modestly positive, flat and negative market environments.
Month over month all the model portfolios yielded positive results, yet lagged their benchmarks except for the Ultra Aggressive Risk Off Model. The name seems rather counterintuitive, right? Our net underperformance was primarily driven by our focus on maintaining lower duration (interest rate sensitivity) by holding a basket of more traditional banking stocks that tend to track changes in interest rates due to net interest margins (by example: bank profitability = lend in the longer end of the curve ‘mortgages, auto loans, etc.’ - borrow in the short end of the curve ‘use deposits and repo’s). When longer term rates are falling market sentiment tends to correlate bad profitability for traditional banks. The opposite also tends to be true creating an alternative hedge to rising rates. See our commentary on “Back to School: Students worry about wardrobes, we worry about interest rates.”
For the month of August, our long duration allocation returned 4.89% and gold assets returned 4.2%. Our currency hedged and unhedged currency sovereign debt allocations outperformed the equity and bond benchmarks. The last day of August was an interesting day with the long Yen to Dollar, Gold, Broad US Investment Grade Bonds and Broad US Equities all finishing positive. Generally, those assets do not tend to move together like that, but it’s one day.
Year to date, broad based domestic small cap stocks continue to struggle while broad based domestic mid cap stocks trail large caps.
See “Model Disclosure” page for important disclosures and information – Period Measured 12/30/2016 – 8/31/2017. Model Performance presented net of highest advisory fee and trading costs.
See “Model Disclosure” page for important disclosures and information – Period Measured 12/30/2016 – 8/31/2017. Model Performance presented net of highest advisory fee and trading costs.
Back to School: Students worry about wardrobes, we worry about interest rates.
Treasury bonds are safe, right? Negative -30.7% return in the U.S. Treasury Bond Current 30-Year Index between December 18, 2008 through June 10, 2009. The same bond index returned a positive total return of 61.66% from August 9, 2007 to December 18, 2008. Since the past market peak of October 10, 2007 through August 31, 2017 the total return for US Large Cap equities is 96.04% while the above bond index returned 103.24%..... Let’s be clear, you cannot directly invest in these indexes but there are other securities and strategies that may yield similar results. How is it possible Treasuries were the best game in town? The longer the maturity on these treasuries and the lower the coupon (interest), the more sensitive the price is to changes in rates. Since September of 1981, long dated Treasuries have been on a bull market trend (yields trending lower). Since the financial crisis, the federal reserve’s quantitative easing and intent to drive down interest rates have created a massive balance sheet of $4.45 trillion. On September 20, we will likely hear more on the federal reserve’s position of unwinding the bloated balance sheet as well as a decision whether to raise interest rates for the third time this year. It has been communicated the likely scenario is to stop reinvesting maturing debt they have previously purchased rather than aggressively sell these assets back into the market…That would be a horrible experience for most asset classes as interest rates would likely surge given the markets inability to absorb that amount of assets. (Click links for sources. If in print sources available upon request).
Another Government Shutdown?
September 29 is the estimated date that the Government will run out of funding according to Treasury Secretary Mnuchin. If the treasury cannot issue new debt after this date the government may miss payments. There will be plenty to read in the headlines so we’ll leave politics aside. The last government shutdown took place from October 1-16, 2013. The Return over the government shut down period was positive 1.66% for large cap U.S. equities with a drawdown of -2.28%.
Hurricane Harvey: Pain at the Pump
The Texas Gulf Coast is home to 4.944 million b/d (barrels per day) of refining capacity, while the Louisiana Gulf Coast is home to 3.696 million b/d of capacity, according to the US Energy Information Administration. Total US capacity is 18.557 million b/d. Roughly 2.9 million b/d of Texas refinery capacity remained down Friday, or 16% of total US capacity. Assuming that the plants in partial shutdown or returning are at 50% of capacity, that would put the figure at roughly 3.9 million b/d, or 21% of US capacity. US Energy Secretary Rick Perry has authorized loans of as much as 4.5 million barrels of crude oil out of two Strategic Petroleum Reserve storage sites in Louisiana. (Click for Source)
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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 and 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. Benchmarks: The Growth & Income 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 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 sixty (60%) percent to SPY and forty (40%) to AGG. Unless otherwise indicated, the benchmarks are not rebalanced to maintain their original weighting. Instead, they are comprised of the starting allocation and will shift given the prevailing market environment over the period measured. Return Comparison: Explanation of why benchmark was chosen. 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.
The results do not represent actual trading and actual results may significantly differ from the theoretical results presented.