Reducing Volatility in Portfolios with Managed Futures

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1 Reducing Volatility in Portfolios with Managed Futures A Registered Investment Advisor 600 Village Trace, Building 23 Marietta, GA Big enough to deliver, small enough to care

2 by Chris Briggs, CFP and Leo Rose, AIF PPC Call to action: Consider alternatives in your client s portfolio. The Dog Days of summer have come to a close and so have the days of low volatility. In late July and August the S&P 500 went through one of the longest stretches on record where its daily moves were less than 1%, the CBOE Volatility index hit 52 week lows, and stocks were quietly grinding higher. Then, just as we were all returning from vacation, some Fed officials talked of raising interest rates and the market swooned. Using Managed Futures can stabilize a portfolio s return as inevitable market volatility returns, regardless of the reason. Managed futures is an alternative asset class which seeks to generate returns using futures contracts on financial instruments such as currencies, treasury bonds, equity indices, and physical commodities like corn, oil, gold, and sugar. Each has different drivers of return and seek to profit from both bullish and bearish trends in their respective markets, which causes managed futures to have a low or negative correlation with stocks and bonds. Thus, managed futures can reduce the volatility of returns when combined with a portfolio of stocks and bonds. LCA s Strategic Alternative Portfolio is specifically designed with managed futures to accomplish this goal. A little background: In 1983, Professor John V. Lintner of Harvard University presented his seminal research paper, The Potential Role of Managed Commodity-Financial Futures Accounts (and/or funds) in Portfolios of Stocks and Bonds. The findings of his works simply stated that portfolios of equities and fixed income exhibit substantially less variance, at every possible level of expected return, when combined with managed futures. Lintner recommended a 40% allocation of managed futures to a diversified portfolio of stocks and bonds. He hypothesized this allocation would achieve the lowest volatility in a portfolio. Recognizing that most investors are unwilling to commit such a significant allocation, our analysis demonstrates that at least a 25% allocation is necessary to effectively achieve a satisfactory level of risk reduction. 1 One of the main reasons managed futures are found to be an attractive asset class is their performance during large equity drawdowns. Though they can make money in any type of market, they can thrive during times of high volatility and large losses. 1 Robert J. Lindner, Stabilizing Portfolio with Managed Futures, 2011

3 Source: Equinox Fund Management, Why Managed Futures, July Looking back at how managed futures performed during more recent downturns, consider the time periods of August 1 st through August 31 st of 2015 and January 1 st through February 29 th of Investment Aug-15 Jan-Feb 2016 S&P 500 TR -6.03% -5.09% MSCI ACWI ex USA NR -7.64% -7.87% Russell 2000 TR -6.28% -8.80% Credit Suisse Managed Futures -2.76% 7.38% Source: Morningstar Direct Both of these time periods saw large drawdowns across domestic large caps, domestic small caps, and international equities. Though negative in August 2015, managed futures lost less than half of what the comparative indexes lost. The first two months of 2016 showed how powerful managed futures can be as a diversifier. Given the recent gains (and volatility) in stock and bond markets, your clients might be reluctant to invest more money or may be nervous about their current portfolio allocations. The talking heads on TV make it worse with their positive and negative predictions often in the same breath.

4 Having managed futures within well-balanced portfolios offers your clients several benefits: 1) the potential to lower overall portfolio risk (standard deviation) 2) the opportunity to enhance overall portfolio returns 3) the opportunity to broadly diversify investments 4) the opportunity to profit in a variety of market conditions 5) the potential to reduce losses through a combination of flexibility and discipline For your clients that may be feeling uncomfortable or who may even want to stay on the sidelines altogether, having an allocation to managed futures may be a good solution to keep them invested in the market. LCA s Strategic Alternative Portfolio (SAP), comprised of 53% equities, 18% fixed income, 25% managed futures and 4% cash equivalents, is a simple solution for you and your clients who want a portfolio that seeks to lower volatility to enhance returns over time.

5 About LCA Lindner Capital Advisor, Inc. is a federally Registered Investment Advisor based in suburban Atlanta, Georgia, with representation throughout the United States. Our investment platform provides access to institutional fund strategies and exclusive money managers that are not readily available to the retail market. Our portfolios are designed to be consistent with a client s unique investment objectives, individual time horizon, and tolerance for risk. LCA has been CEFEX certified since 2006 and is committed to our fiduciary responsibility. Ask your Relationship Manager for a copy of The Educated Investor written by Robert Lindner. For more information, call (770) or portfolios@lindnercapital.com. Visit LCA s website at Lindner Capital Advisors, Inc. (LCA) is an SEC registered investment advisor. The information contained in this document is informational and for educational purposes only. It is intended for the use of the person to whom it is given and is not to be reproduced or redistributed without LCA s consent. It is not a solicitation to invest in any specific investment product, nor is it intended to provide individualized investment advice. This presentation does not constitute an offer to sell or the solicitation of an offer to buy any securities, nor will any sale of a security occur in any jurisdiction where such an offer, solicitation or sale would be unlawful. Past performance is no guarantee of future performance, and LCA s strategies, like most investment strategies, involve the risk of loss. Since no one manager is suitable for all types of investors, it is important to review investment objectives, risk tolerance, liquidity needs, tax consequences and any other considerations with a financial professional before choosing an investment style or manager. Cover Photo Credit: freerangestock.com StuartMiles 2016 Lindner Capital Advisors, Inc. All rights reserved. LI_TRI1_ (08/16) A Registered Investment Advisor 600 Village Trace, Building 23 Marietta, GA Big enough to deliver, small enough to care