Managers who planned to let their positions coast for the
rest of December were in for a rude awakening last week as the persistent
weakness plaguing high yield bonds for much of the year (and markedly since
October) spread to the equity markets where even large-cap equities managers
discovered that while a rising tide might lift all boats, none can stand up to a
perfect storm. Red dominated through the
markets on Friday with the only notable exceptions of green being in the REIT
sector which dominated Friday’s Quant Movers report showing only global REIT
funds finding favor while U.S. funds were discarded as investors priced in more
dollar weakness. Even more terrifying
for investment professionals is the thought of what happens when they head home
for the holidays to face their families still nervous about markets that haven’t
been this weak since 2011. So in this week’s Monday Morning Update we’re turning
to “alternative” fund categories looking not just for signs of holiday hope,
but smart options which hopefully will allow us to enjoy our eggnog in peace.
We start with smart beta and specifically low volatility
funds which never claimed to offer immunity from market corrections but good
luck telling that to investors who in the last three months have poured
hundreds of millions into the two largest funds, the iShares MSCI USA Minimum
Volatility ETF (USMV) and the PowerShares S&P 500 Low Volatility Portfolio
(SPLV), that lost 2.46% and 2.93% respectively last week compared to the
S&P 500’s 3.8% rout. To understand
what low volatility strategies can and can’t do for you, make a quick trip to
the iShares and Invesco websites where you’d start to wonder if maybe they
hired the smart marketing people as USMV and SPLV have a specific message. Low Vol strategies focus on delivering a
positive ratio of the market’s upside for the amount of downside potential you
would be taking on and that’s not the only similarity between the two funds. Turning to upside/downside capture ratio,
both funds have managed to capture around 83% of the markets upside over the
last three years compared to 68%-72% of the downside despite having very
different strategies although there is a certain amount of sector overlap. Both funds have healthy allocations to REIT’s
like Public Storage and Avalon Bay which helped them outperform the S&P so
far in 2015, but potential investors should remember they’re passively managed
strategies that may not react as quickly to market developments as your angry
Aunt Ida will.
What about those advisors whose clients have been sitting
on cash, have itchy trigger fingers or just want something more than another
bond fund? If you REALLY can’t wait for
a better buying opportunity then use the ETFG scanner to search for
“Alpha-Seeking” funds where there are a number of actively managed strategies with
a broad mandate typically built around the concept of “capital preservation” or
participating in the market’s upside while limiting the downside exposure. That may sound similar to low volatility’s
pitch, but instead of focusing on managing the equity-to-bond ratio, many
“alpha-seeking funds” plan to deliver positive alpha by using different asset
classes and rotation strategies to offer low correlations to the broader
market, which during the go-go years of 2012 and 2013 when the S&P 500
marched upwards in a straight lines makes for low returns and challenging
comparisons. One relatively new fund
that’s been successful in gathering assets is the WBI Tactical Income Shares
ETF (WBII), which has handily outperformed Morningstar’s Conservative Allocation
Category in 2015 (down .58% compared to the category’s 3.7% loss) while only
slight trailing the S&P 500. Unlike
some funds which rotate between different asset classes, WBI’s team actively
manages the duration and make-up of their core bond portfolio while using a
quantitative system to add equity exposure when appropriate, currently less
than 15% of the portfolio. This make-up
is why it’s labeled as a conservative allocation fund and helped it keep last
week’s loss to just .22%.
By now you’ve noticed how tactfully we’ve danced around
the subject of bond funds and while some of that reluctance to tackle the fixed
income arena comes from a desire to explore alternative strategies, it’s also
partly due to the limited number of “active” ETF strategies for clients to
consider. Mutual fund investors have a
wide variety of options under the category of “strategic income” which
typically consists of strategies that are not easily benchmark defined due to
high turnover and often low to negative duration. Using the ETFG Scanner to search for actively
managed “broad debt” funds, brings up 15 options that when organized by
trailing one month performance are almost bookended by two industry titans and
rivals, the PIMCO Total Return ETF (BOND) and the newer SPDR DoubleLine Total
Return Tactical ETF (TOTL) which since its introduction last February has
quickly risen to be almost half the size of BOND. While most investors might consider the two
to be interchangeable or prefer TOTL for its lower modified duration, careful
investors should take note of from where there duration is coming. Both avoided high yield but TOTL, like
Doubline’s Total Return mutual fund, has a strong focus on mortgage backed
securities while the most recent commentary from BOND’s managers point to U.S.
Treasuries as the primary duration contributor.
No matter what their defensive inclinations, investors
certainly won’t lack for options if they get cornered by Cousin Eddie when he
comes looking for free investment advice.
Thank you for reading ETF Global Perspectives!
_______________________________________________________________
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