BUY & HOLD vs. TACTICAL STRATEGIES. David C. Wright, Managing Director Sierra Investment Management, Inc. and the Sierra Mutual Funds

Transcription

1 BUY & HOLD vs. TACTICAL STRATEGIES David C. Wright, Managing Director Sierra Investment Management, Inc. and the Sierra Mutual Funds National Advisors Trust Conference Las Vegas May 2013 NAT Vegas 0513

2 TOP EMERGING THEMES FOR 2013 The investment industry is increasingly focusing on Risk mitigation clients are tired of the rollercoaster and have lost faith in the old theories Alternative Investing especially Absolute Return for the same reasons 2

3 SECULAR BULLS & BEARS Latest 113 years Stocks can be productive for long periods and then NOT productive but always volatile (risky)

4 CYCLES RISK ON, THEN RISK OFF, THEN REPEAT

5 THE RISK ON/RISK OFF CYCLE Behavioral Finance now plays an important part in the emerging new investment theories 5

6 SECULAR BULLS & BEARS Latest 113 years Let s take a quick look at the cycles within the secular Bear Market

7 BIG RALLIES OCCUR EVEN DURING EXTENDED SECULAR BEAR MARKETS A Secular Bear Market: The Dow first touched 1000 in years later, the Dow was at

8 1/66-8/82: CYCLICAL RALLIES DURING EXTENDED ( SECULAR ) BEAR MARKETS Circles: a 32-month rally of 66.6%, , and a 22-month rally of 75%,

9 RECENT STOCK MARKET CYCLES Latest 16 years Now >+138%! Major cycles within the current secular Bear Market how will your clients react to another

10 PROJECTED ASSET CLASS RETURNS Next seven years, after 2.5% inflation GMO s LT outlook for the S&P is not attractive! Our own shorter-term outlook is: trouble ahead!

11 The Ongoing (R)evolution in Investment Theory David C. Wright, Managing Director Sierra Investment Management, Inc. and the Sierra Mutual Funds CFA Institute Chicago, Illinois May 2012 CFA Institute 0512

12 RE-THINKING ASSET ALLOCATION and BUY AND HOLD

13 BUY AND HOPE Can you name any Wall Street firm that has EVER used a buy-and-hold approach in its own multi-billion $ proprietary accounts? B&H has been a convenient, self-serving paradigm for brokers and the mutual fund industry and it has destroyed the retirement finances of tens of millions of Americans B&H ignores the impact of risk on real people

14 HOLDING PERIODS FOR STOCKS Latest 89 years Average was 6-8 years, 40 years ago Average is now less than 12 months How many institutions believe in Buy and Hold? Should you?

15 HOLDING PERIODS FOR STOCKS Latest 89 years Average was 6-8 years, 40 years ago The most recent average is TWO MONTHS! How many institutions honestly believe in Buy and Hold? Should you?

16 SOME ISSUES WITH BUY-AND- HOLD The downside can be substantial One can go a decade or more without any gain Too much focus on one Asset Class U.S. equities leads one to not pay attention to other profitable uptrends and new

17 TRAILING STOPS One example $ Sell Northeast Investors Trust (red) to 4/27/11 Moving Average (blue) Sierra uses trailing stops to limit the impact of a sustained decline in any holding

18 THE RISE OF ALTERNATIVE INVESTING Institutional investors (and others) became greedy for higher returns through 2000 Starting about 2001, institutional investors became dissatisfied with the results of traditional models The hedge fund industry, then the mutual fund industry responded, plus ETFs Many of the new products and strategies have names driven by marketing appeal

19 BASICS OF ALTERNATIVE INVESTING Allocate among more Asset Classes e.g., Permanent Portfolio Fund Tactical allocation and strategic allocation : Change the allocation according to some discipline A wide range of alternative strategies e.g., managed futures, long-short, market neutral, strategic income, Absolute Return are dominant themes today

20 BUY-AND-HOLD and STATIC ASSET ALLOCATION A static asset allocation (pie chart) is a version of Buy and Hold A static allocation to investment managers can result in the same Are there times in the market cycle to take on risk, and times to reduce risk?

21 A CLASSIC EXAMPLE OF SUCCESSFUL TACTICAL ALLOCATION

22 JUNK BONDS vs. TREASURIES Recent 10 years Fidelity Adv. High Income up 140%! PIMCo Long-Term U.S. Gov t up to 130% 9/9/ Same end result, but a far bumpier ride at least, for Buy and Hold investors

23 JUNK BONDS vs. TREASURIES Recent 10 years Fidelity Adv. High Income PIMCo Long-Term U.S. Gov t to /9/ Let s examine this phase of the risk taking/risk aversion cycle

24 A TIME FOR JUNK BONDS during the recovery phase, 9/02-6/ Fidelity Adv. High Income up 161%! PIMCo Long-Term U.S. Gov t up 14.2% % compounded in Treasuries vs. 22.7% in High

25 THE RISK CYCLE REVERSES High-grade outperforms high yield to 9/9/11 Fidelity Adv. High Income PIMCo Long-Term U.S. Gov t Now the opposite part of the cycle June 2007-February

26 RISK ASSETS PEAKED IN time to move to safer Asset Classes like /12/07 to 12/19/08 Fidelity Adv. High Inc now? PIMCo Long-Term U.S. Gov t High-yield bonds have more correlation to stocks than to Treasury bonds

27 WHEN THE CYCLE TURNED AGAIN after the March 2009 Global Fear Bottom /19/08 to 2/8/11 Fidelity Adv. High Inc. PIMCo Long-Term U.S. Gov t Score: Risk-taking %, safety +3.6%

28 THE RISK CYCLE TURNED AGAIN Seven great months to be in high-grade! to 10/4/11 PIMCo Long-Term U.S. Gov t (green) Fidelity Advisor High Income Adv. (red) During 2011, many non-u.s. market participants gradually lost appetite for risk

29 THE CURRENT RISK-ON CYCLE Mid-2011 to the present to 4/17/13 Fidelity Advisor High Income Adv. (red) PIMCo Long-Term U.S. Gov t (green) Although many global Risk-On asset classes peaked months ago (or more) HYCB not yet

30 THE BIRTH OF ABSOLUTE RETURN First goal to mitigate volatility and downside risk Second goal to achieve satisfying average returns Hmm sounds strangely like what conservative clients have been seeking for a long time?

31 Thanks!

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