By: Brenden Gebben, MBA, CIMA®, Managing Director & Thomas Kapfer, MPA, Associate
We all see the market news making headlines. When will the Fed finally raise interest rates? The Greek crisis is behind us (for the moment). The Chinese market has recently cratered. Fifteen major markets are all below their 200 days moving average. A “Death Cross” (where the 50 day moving average falls below the 200 day moving average) has recently occurred in the S&P 500. The presidential election is forthcoming.
What do all of these types of events have in common? We believe they are all ingredients contributing to an unsettled market characterized by increased volatility, as evidenced by a recent 10% market correction.
Absolute Capital Management has been deploying active management strategies for client accounts since 2002. We believe in the importance of tactically managing a portfolio in response to the dynamic nature of the markets. Particularly in light of the unsettled nature of today’s market, our responsive strategies are in contrast to a “buy and hold (hope)” or “set it and forget it” strategy. Our programs are designed to actively navigate market conditions according to our analysis.
So what are we looking at today? Clearly, we are watchful for signs to indicate whether the recent bull run is over or merely taking a breather. It is commonly thought that a correction is when an index such as the S&P 500 falls 10% from its recent high. This has recently occurred. Furthermore, a bear market is defined as a 20% drop from the recent high. This has not yet occurred.
In our opinion, market risks have been rising. Our current thinking is that increased volatility will occur through at least the end of the year. In response to these market conditions, Absolute Capital Management has been deploying tactical allocation shifts within client portfolios. The purpose of these moves is to attempt to lower volatility and to help protect against the downside.
Let’s now take a closer look at how we implement these shifts within the various strategies.
The Asset Allocator*
On July 28, the Asset Allocator program implemented a defensive portfolio shift, which involved trimming existing equity and bond positions, as well as fully exiting a small emerging markets bond position. The slightly more defensive outlook is highlighted by an overweight cash holding, as well as the programs’ continued preference for large cap stocks, which generally have lower beta figures than the small cap stock positions that the program exited earlier in the year.
The rotation from small to large cap investments has recently been supported by a variety of trend, seasonality, and secular trend factors. Other equity allocations within the programs include investments to outperforming sectors that also have the possibility to be more defensive – financials, health care, technology, and consumer cyclicals – as well as a dollarhedged international position. The program’s fixed income allocations continue to favor high yield bonds – in light of the likely impending increases to the Fed funds rate – along with small multi-sector bond and energy master limited partnership (MLP) investments.
The Portfolio Protector*
In a series of trades occurring between June 24 – August 5, the Portfolio Protector program has adopted a more defensive positioning, gradually shedding market exposure in favor of an overweight cash holding, as invested positions dropped below moving average trendlines. The equity model within the strategy is currently in a 61% defensive position, with the invested position favoring large cap, high quality growth stocks. The fixed income model is in a 75% defensive position, with the invested position favoring high yield bonds. Accordingly, the blended model (shown below) is currently in a 66% defensive position.
The Sector Selector*
On September 11, the Sector Selector adopted a more defensive position by trimming existing allocations in Energy, Health Care, Construction and Aerospace & Defense. Overall, the portfolio continues to favor Consumer Cyclicals, Health Care and Industrials. The reduced allocation to Energy has helped minimize exposure to the recent downward trend in energy markets. Contact Absolute Capital or your financial professional if you would like to learn more about deploying our active risk management strategies on other accounts that you may have.