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
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
SECULAR BULLS & BEARS Latest 113 years Stocks can be productive for long periods and then NOT productive but always volatile (risky)
CYCLES RISK ON, THEN RISK OFF, THEN REPEAT
THE RISK ON/RISK OFF CYCLE Behavioral Finance now plays an important part in the emerging new investment theories 5
SECULAR BULLS & BEARS Latest 113 years Let s take a quick look at the cycles within the 1965-1982 secular Bear Market
BIG RALLIES OCCUR EVEN DURING EXTENDED SECULAR BEAR MARKETS A Secular Bear Market: The Dow first touched 1000 in 1965 17 years later, the Dow was at
1/66-8/82: CYCLICAL RALLIES DURING EXTENDED ( SECULAR ) BEAR MARKETS Circles: a 32-month rally of 66.6%, 1970-73, and a 22-month rally of 75%, 1974-76
RECENT STOCK MARKET CYCLES Latest 16 years Now >+138%! Major cycles within the current secular Bear Market how will your clients react to another
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!
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
RE-THINKING ASSET ALLOCATION and BUY AND HOLD
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
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?
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?
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
TRAILING STOPS One example $6.50-6.00-5.50- Sell Northeast Investors Trust (red) -6.50-6.00-5.50 5.00- -5.00 4.50- -4.50 4.00-3.50-3.00- to 4/27/11 Moving Average (blue) -4.00-3.50-3.00 2007 2008 2009 2010 2011 Sierra uses trailing stops to limit the impact of a sustained decline in any holding
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
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
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?
A CLASSIC EXAMPLE OF SUCCESSFUL TACTICAL ALLOCATION
JUNK BONDS vs. TREASURIES Recent 10 years 260-240- 220-200- 180-160- 140-120- 100-80- Fidelity Adv. High Income up 140%! PIMCo Long-Term U.S. Gov t up to 130% 9/9/11 2001 2003 2005 2007 2009 2011-260 -240-220 -200-180 -160-140 -120-100 - 80 Same end result, but a far bumpier ride at least, for Buy and Hold investors
JUNK BONDS vs. TREASURIES Recent 10 years 260-240- 220-200- 180-160- 140-120- 100-80- Fidelity Adv. High Income PIMCo Long-Term U.S. Gov t to 2001 2003 2005 2007 9/9/11 2009 2011 Let s examine this phase of the risk taking/risk aversion cycle -260-240 -220-200 -180-160 -140-120 -100-80
A TIME FOR JUNK BONDS during the recovery phase, 9/02-6/07 250-225- 200-175- 150-125- 100- Fidelity Adv. High Income up 161%! PIMCo Long-Term U.S. Gov t up 14.2% -250-225 -200-175 -150-125 -100 2003 2005 2007 3.2% compounded in Treasuries vs. 22.7% in High
THE RISK CYCLE REVERSES High-grade outperforms high yield 260-240- 220-200- 180-160- 140-120- 100-80- to 9/9/11 Fidelity Adv. High Income PIMCo Long-Term U.S. Gov t 2001 2003 2005 2007 2009 2011 Now the opposite part of the cycle June 2007-February 2009-260 -240-220 -200-180 -160-140 -120-100 - 80
RISK ASSETS PEAKED IN 2007 -- time to move to safer Asset Classes like 130-120- 110-100- 90-80- 70-60- 50-6/12/07 to 12/19/08 Fidelity Adv. High Inc. 2007 2008 now? PIMCo Long-Term U.S. Gov t -130-120 -110-100 - 90-80 - 70-60 - 50 High-yield bonds have more correlation to stocks than to Treasury bonds
WHEN THE CYCLE TURNED AGAIN after the March 2009 Global Fear Bottom 225-200- 175-150- 125-12/19/08 to 2/8/11 Fidelity Adv. High Inc. PIMCo Long-Term U.S. Gov t -225-200 -175-150 -125 100-75- -100-75 2009 2010 2011 Score: Risk-taking +126.6%, safety +3.6%
THE RISK CYCLE TURNED AGAIN Seven great months to be in high-grade! 130-120- 110- to 10/4/11 PIMCo Long-Term U.S. Gov t (green) -130-120 -110 100-90- Fidelity Advisor High Income Adv. (red) 2011-100 - 90 During 2011, many non-u.s. market participants gradually lost appetite for risk
THE CURRENT RISK-ON CYCLE Mid-2011 to the present 130- - 120- - 110- - 100- - 90- to 4/17/13 Fidelity Advisor High Income Adv. (red) PIMCo Long-Term U.S. Gov t (green) 2011 2012 2013-130 - -120 - -110 - -100 - - 90 Although many global Risk-On asset classes peaked months ago (or more) HYCB not yet
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?
Thanks!
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