Multi-Asset Income. Newfound Case ID: December 2015

Transcription

1 Multi-Asset Income Newfound Case ID: December 2015

2 The Newfound Mission Defensive Simple Consistent Thoughtful In August 2008, Newfound Research was founded based on a simple, but powerful, premise: investors care deeply about capital preservation. Newfound Research offers a full suite of tactically risk-managed ETF portfolios that seek to participate in market growth and avoid significant market declines. We believe in portfolio processes that are simple, consistent, and thoughtfully designed. Most of all, we believe that managing risk is paramount to achieving superior risk-adjusted returns. Volatility happens. Have a plan with Newfound Research. Defensive Simple Consistent Thoughtful Views risk management from the investor s point of view, seeking to participate in bull markets and avoid large losses during bear markets. Volatility will happen. It is the price of admission to the financial markets. Investors need a thoughtful plan to deal with this volatility before it happens. We believe that each strategy should seek to adhere to a simple investment objective, providing transparency both in expected outcome and process. Our research shows that simple processes are more robust to uncertainty than complicated processes an important factor in delivering consistent and repeatable results. To meet a simple objective, a strategy must be governed by a guiding policy. At Newfound, we believe that the best way to ensure consistency in our process is through a quantitatively-enabled, rulebased approach, which can help mitigate the behavioral biases that often compound into investment errors. At Newfound, we recognize the clear distinction between the algorithms that generate our investment signals and the rules we use to translate those signals into portfolios. We believe that it is with these rules the design of the portfolio that we seek to achieve our objective and manage model risk. 2

3 About Newfound Defensive Simple Consistent Thoughtful Founded to license output from our core momentum models Began to actively develop and manage customized tactical overlays and portfolios for institutions, asset managers, and large RIAs Made strategies directly available to advisors under the Newfound brand for the first time Full Suite of Tactically Risk-Managed ETF Portfolios Equity Risk Managed Global Sectors Risk Managed U.S. Sectors Risk Managed Small-Cap Sectors U.S. Factor Defensive Equity Alternative Income Multi-Asset Income Bond Alternative Total Return Newfound Strategy Suite Fixed Income 1% Target Excess Yield 2% Target Excess Yield 3% Target Excess Yield 4% Target Excess Yield Liquid Alternatives Dynamic Alternatives 3 Total Portfolio Tailwinds Conservative Tailwinds Moderate Tailwinds Growth Simple Objective Consistent Process Thoughtful Design

4 Multi-Asset Income A Simple Objective A Consistent Process A Thoughtful Design A simple objective The strategy seeks to generate an attractive risk-adjusted income profile within a disciplined risk management framework utilizing alternative income generating asset classes. A consistent process Applies a disciplined, rule-based process to evaluate each asset independently utilizing Newfound s proprietary momentum models. Assets identified as exhibiting negative momentum are removed from the portfolio. A thoughtful design After screening out asset classes exhibiting negative momentum, the remaining ETFs receive an allocation in proportion to their riskadjusted income with single positions capped at 25%. There is no assurance that the strategy will achieve its investment objective. Newfound reserves the right to substitute the ETFs used in the investment universe. 4

5 Multi-Asset Income An Unconstrained Investment Universe What are MLPs? Master Limited Partnerships are publicly traded partnerships that combine the taxbenefits of limited partnerships with the liquidity of traded securities. MLPs generally derive income from the extraction and transportation of natural resources. What are REITs? Real estate investment trusts are companies that invest in real estate through properties and mortgages but trade like a stock. REITs receive special tax considerations and are a highly liquid way of investing in real estate. What are Preferreds? Preferred equities are a class of equities that has a higher claim on assets and earnings than common stock. They generally have a dividend that must be paid prior to the payment of any dividends on common stock. What are Bank Loans? Bank loans are typically senior - must be paid back before other debt - and secured - backed by collateral, similar to a mortgage - loans issued by a company. The income of this debt typically floats, meaning that it resets to reflect changes in prevailing interest rates. When interest rates rise, income also rises. What are Convertibles? A convertible bond is a bond that may be converted into shares of the issuing company s equity or cash of an equivalent value. Convertible bonds typically pay lower coupons than traditional bonds issued by the same company due to the value of being able to convert to equity ownership. Traditional Equity Income Exposures U.S. Dividend Stocks Intl. Dividend Stocks Traditional Fixed Income Exposures International Treasuries High Yield Corporates 20+ Year U.S. Treasuries IG Corporates Non-Traditional Income Generators MLPs Convertibles Mortgage REITs Bank Loans USD EM Bonds U.S. REITs U.S. Covered Call Local Currency EM Bonds Preferred Stocks International REITs 5

6 Multi-Asset Income Attractive Income Producers and Effective Diversifiers High income exposures can both improve portfolio yield and help to diversify core stock and bond positions. Our investment universe has an average yield of 5.1% with an average correlation of 0.60 to the S&P 500. Asset Class Asset Class Yield Correlation to S&P 500 U.S. Dividend Stocks (VYM) 3.16% 0.96 Intl. Dividend Stocks (IDV) 4.99% 0.88 International Treasuries (BWX) 0.19% 0.43 High Yield Corporates (HYG) 5.88% 0.73 IG Corporates (LQD) 3.48% Year U.S. Treasuries (TLT) 2.62% MLPs (AMJ) 7.95% 0.61 Bank Loans (BKLN) 4.11% 0.70 Convertibles (CWB) 5.07% 0.90 Local Currency EM Bonds (EMLC) 6.33% 0.64 USD EM Bonds (PCY) 5.44% 0.44 Preferred Stocks (PFF) 5.87% 0.57 Mortgage REITs (REM) 14.12% 0.58 U.S. REITs (VNQ) 3.85% 0.74 International REITs (VNQI) 3.49% 0.69 U.S. Covered Call (PBP) 4.66% 0.88 Source: Yahoo! Finance. Analysis provided by Newfound Research. Yield on a given day is calculated using smoothed 12-month trailing dividends. Yield presented in the table is computed as of 12/31/2015. Correlation is calculated as Pearson correlation of monthly returns between the asset class ETF and the S&P 500 ETF SPY from ETF inception to 12/31/2015. The Pearson s correlation coefficient between two variables is defined as the covariance of the two variables divided by the product of their standard deviations. A positive Pearson s correlation implies that when one of the variables is above its mean, the other variable also tends to be above its mean and vice versa. 6

7 Multi-Asset Income The Weekly Portfolio Process* Newfound s models generate a buy or sell signal on each of the sixteen exposures each week. Exposures with sell signals are excluded from the portfolio. The process of de-risking the portfolio Short-term U.S. Treasuries 16 ON 7 ON 2 ON 0 ON The process of re-risking the portfolio 0 ON 2 ON 7 ON 16 ON * For demonstration purposes only of how the over-arching portfolio process works. Exact allocations may not exactly reflect these portfolios. An on signal refers to an asset class exhibiting positive momentum as measured by Newfound s proprietary model. 16 On means that as measured by Newfound s model, all sixteen asset classes in the universe are exhibiting positive momentum. 2 On means that as measured by Newfound s model, two of the sixteen asset classes in the universe are exhibiting positive momentum. 7

8 Multi-Asset Income The Weekly Portfolio Process* Allocations are adjusted by the yieldto-risk ratio of each ETF. By using yield-to-risk, we reinforce our focus on generating riskadjusted income while also biasing towards undervalued asset classes a nice complement to our momentum models. 7 ON Newfound s proprietary models used to exclude exposures deemed to be at an increased risk of loss. Measure yield-to-risk ratio of all exposures included in the portfolio. Over-weight exposures with higher yield-to-risk and under-weight exposures with lower yield-to-risk. * For demonstration purposes only of how the over-arching portfolio process works. Exact allocations may not exactly reflect these portfolios. There is no guarantee that the strategy will achieve its objectives. There are no guarantees that the strategy will be positioned correctly for any given market environment. The strategy utilizes various rebalance techniques designed to reducing transaction costs and turnover, which may result in the strategy s actual allocation straying from its target allocation. 8

9 Using Multi-Asset Income Harnessing the Power of Tactically Risk-Managed Strategies Use MAI Example Allocations 1 to diversify total return sources in a low growth environment where income may be a key component. In a diversified portfolio, divide the return generators between price return (equity) and income return. Fixed Income Risk Mitigators Equity MAI Return Generators 2 as a sleeve in a comprehensive retirement distribution strategy. A retiree wants to focus on stability and growth with the ability to cover discretionary expenses in a low yield environment. Equity Stable Returns Fixed Income MAI Long-Term Short-term Intermediate-term 3 in a core/satellite approach to complement a strategic asset allocation. An client wants exposure to alternative assets such as MLPs, REITs, bank loans, convertibles, and preferreds but is concerned about riskmanagement. 9 Equity Strategic 60/40 Fixed Income Other Alts. MAI The ideas presented on this slide should not be considered investment advice.

10 IMPORTANT DISCLOSURES Newfound began to actively calculate the performance of the Newfound Multi-Asset Income index (formerly known as the Newfound Risk Managed Income index) on September 14, Performance results prior to September 14, 2013 are all backtested and hypothetical. Newfound began to manage and trade a brokerage account on November 27, 2013, which sole purpose was to track the performance of the index. Before you invest in the Newfound Multi-Asset Income strategy, you are strongly encouraged to consult with your financial advisor. Newfound shall have the right at any time, in its sole discretion, to substitute any or all of the ETFs or other securities utilized within the investment strategy. This presentation (including the hypothetical/backtested performance results) is provided for informational purposes only and is subject to revision. This presentation relates to a rule-based index and related investment strategy which are managed by Newfound. This presentation is not an offer to sell or a solicitation of an offer to purchase an interest or shares ( Interests ) in any pooled vehicle. Newfound does not assume any obligation or duty to update or otherwise revise information set forth herein. This document is not to be reproduced or transmitted, in whole or in part, to other third parties, without the prior consent of Newfound. Certain information contained in this presentation constitutes forward-looking statements, which can be identified by the use of forward-looking terminology such as may, will, should, expect, anticipate, project, estimate, intend, continue, or believe, or the negatives thereof or other variations or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of an investment managed using the Newfound index or investment strategy may differ materially from those reflected in such forward-looking statements or in the hypothetical backtested composite results or the index s model performance results included in this presentation. The information in this presentation is made available on an as is, without representation or warranty basis. There can be no assurance that the Newfound index or related investment strategy will achieve any level of performance, and investment results may vary substantially from year to year or even from month to month. An investor could lose all or substantially all of his or her investment. Both the use of a single adviser and the focus on a single investment strategy could result in the lack of diversification and consequently, higher risk. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. You should consult your investment adviser, tax, legal, accounting or other advisors about the matters discussed herein. These materials represent an assessment of the market environment at specific points in time and are intended neither to be a guarantee of future events nor as a primary basis for investment decisions. The hypothetical/backtested performance results and model performance results should not be construed as advice meeting the particular needs of any investor. Past performance (whether actual, hypothetical/backtested or model performance) is not indicative of future performance and investments in equity securities do present risk of loss. The ability to replicate the hypothetical or model performance results in actual trading could be affected by market or economic conditions, among other things. 10

11 IMPORTANT DISCLOSURES Investors should understand that while the performance results may show a general rising trend at times, there is no assurance that any such trends will continue. If such trends are broken, then investors may experience real losses. None of Newfound nor any other person managed any product or account seeking to track the performance of the index prior to November 27, No representation is being made that any account will achieve performance results similar to those shown in this presentation. In fact, there may be substantial differences between backtested performance results and the actual results subsequently achieved by any particular investment program. As a result, the index theoretically may be changed from time to time to obtain more favorable performance results. There are other factors related to the markets in general or to the implementation of any specific investment program which have not been fully accounted for in the preparation of the hypothetical/backtested performance results, all of which may adversely affect actual portfolio management results. The information included in this presentation reflects the different assumptions, views and analytical methods of Newfound as of the date of this presentation. The index s performance during the Backtested Period is not based on live results produced by an investor s actual investing and trading, but was achieved by the retroactive application of a model designed with the benefit of hindsight, and, other than the composite results, the index model performance subsequent to September 14, 2013 is not based on live results produced by an investor s investment and trading, and fees, expenses, transaction costs, commissions, penalties or taxes have not been netted from the gross performance results except as is otherwise described in this presentation. The performance results include reinvestment of dividends, capital gains and other earnings. As the Hypothetical Information was backtested, it does not reflect contemporaneous advice or record keeping by an investment adviser. Actual, live client results may have materially differed from the presented performance results. All information presented after the index inception date (September 14, 2013) is the index s model performance, which means it was calculated by Newfound in real-time (not on a backtested basis), but does not reflect the payment of any fees, commissions or expenses (except as otherwise described in this presentation). Accounts and funds managed by an adviser using the Newfound model portfolios are subject to additions and redemptions of assets under management, which may positively or negatively affect performance depending generally upon the timing of such events in relation to the market s direction. The Hypothetical Information and model performance assume full investment, whereas actual accounts and funds managed by an adviser would most likely have a positive cash position. Had the Hypothetical Information or model performance included the cash position, the information would have been different and generally may have been lower. While there have been periodic updates and improvements to the Newfound model, there have not been any material changes in the objectives or strategies of the model that have occurred that may affect results. While Newfound believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information. 11