Dear Spartan Client,
Below are the main asset classes utilized in Spartan portfolios and their model-driven exposure heading into October.
At a Glance: Allocation Adjustments heading into October, 2020
U.S. Equities: No change from last month. Allocations remain overweight, as there are uptrends across the intermediate and long term.
International Equities: No change to exposure. Baseline allocation remains with continued uptrends across all timeframes.
Real Estate: No change. We are at the minimum allocation due to continued downtrends in all timeframes.
Intermediate-Term Fixed Income: No change from last month. Remains in uptrends across all timeframes for U.S. and international bonds.
TIPS: No change to exposure, which is at its baseline allocation, with uptrends remaining across all timeframes.
Short-Term Notes and Cash Equivalents: No change to exposure, with uptrends across all timeframes.
Hedge Strategies: No change from baseline exposure, with uptrends across all timeframes.
Asset Level Overview
Equities and Real Estate
September brought a temporary slowdown to climbing global equities, with the S&P 500 Index down almost 6% at the time of this note. International equities and REITS fared similarly along with other inflationary assets, such as gold. Despite this pullback, both domestic and international equities remain in intermediate and long-term uptrends and will remain in their target positions heading into October. Real estate continues weak performance, unable to regain uptrends from the decline in this year’s first quarter and will remain in its minimum position in all Spartan portfolios.
While still near highs, bonds produced mixed results in September. Longer duration U.S. instruments had strong results, inflation-indexed notes declined along with international bonds, and short duration U.S. notes were also slightly negative. As with equities, all trends remain intact as we enter October keeping allocations at the same level.
Three potential macro catalysts for the recent trend changes:
Additional U.S. Fiscal Stimulus Bill Delayed: Prospects for bipartisan agreement on an additional round of stimulus seemed to diminish following the passing of Supreme Court Justice Ruth Bader Ginsburg and President Donald Trump’s vow to have a replacement confirmed before the election. However, the House did pass a continuing resolution to replace federal funding set to expire later this week, avoiding a potential government shutdown.
Mixed U.S. Economic Data: September U.S. economic data generally indicated a continued, but slowing, recovery. In the latest release, initial jobless claims rose slightly, to 870,000 and continuing claims declined less than expected, from 12.7 million to 12.6 million. Housing continues to be a bright spot, with new home sales in August reaching their best level since September 2006.
Renewed Coronavirus Fears in Europe: Stella Kyriakides, the European Commissioner for Health and Food Safety, warned the continent may be facing its “last chance” to avoid a repeat of the widespread coronavirus outbreak. She urged all EU member states to be ready to implement containment measures. In the UK, tighter social restrictions were put in place with increased fines for noncompliance. France, Spain, and Germany all followed suit in hopes of avoiding a second wave of the virus.
Risk Management Versus the World
“How many people in the United States own a house without insurance on the house? The way they [critics of hedging] look at it, you won’t buy a house if the insurance is expensive. No, you would buy a smaller house. Insurance is not an option.”
– Nassim Taleb, Author, The Black Swan
Institutional Investor, a financial publication, released a fascinating article in late September that illustrates a problem investors and advisors face daily. The problem relates to the tradeoff between traditional diversification and downside protection, referred to in the article as tail risk hedging.
The article used a real-time example from Nassim Taleb and his experience as Scientific Advisor to Universa Investments. The other player in the article is the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the United States. CalPERS raised eyebrows earlier this year when it was revealed it had unwound a position that was primarily managed by Universa. The position was designed to protect the portfolio in the case of an equity market decline…the unwinding happened just before the coronacrash in this year’s first quarter.
The article pitted CalPERS lead investment decision maker at the time, Ben Meng, against Nassim. Meng explained that the position was unwound due to its high cost and CalPERS’ reliance on traditional diversification to hedge against downside risks. Nassim countered with a series of arguments that run near and dear to our hearts at Spartan.
Spartan, unlike CalPERS and Universa, seeks to blend downside protection processes within an otherwise diversified portfolio — in other words, our process is integrated rather than piecemeal. Yet, we sometimes hear some of the same doubts that ultimately led to Universa’s position being unwound by CalPERS. The catalyst for those doubts is our willingness to occasionally deviate from benchmarks over the short term, with the goal of outperforming in the long term. For other metrics, such as risk and risk-adjusted return, our goal is to outperform more consistently. We believe these are more important, and more easily controllable because they increase the probability that you will stay on the best path to reach your present and future goals. . After unwinding its position with Universa, CalPERS experienced a severe decline in the first quarter leaving it further below its optimal funding point. We have often noted that portfolios with a distributive element have a harder time recovering from large losses, even when followed by historically fast recoveries. As is typically the case, the cost of poor risk management is much higher than the discomfort created by short-term relative performance.
At Spartan, we attempt to strike a balance between having a rigorous plan to insulate from catastrophic loss without sacrificing too much participation in equity bull markets. We realize that in order to be different from the benchmarks on a risk-adjusted basis and in terms of overall long-term performance, it requires us to be willing to be different in the short term as well. With your future in our sight, we always keep the long game at the forefront. What is said about championship golf tournaments – you can’t win the tournament in the first round, but you can sure lose it - is the way we treat risk management for your goals. We manage risk like your lifestyle depends on it and will always seek the best path to the future you have or are working to create.
Please feel free to call or email us for additional details. We would be happy to discuss our take on the current environment with you in greater detail.
David Childs, Ira Ross, Blaise Stevens, and Eric Warren
Disclaimer: this note is for general update purposes related to the strategy and approach of Spartan Planning portfolios. Every client's situation including Risk Profile, Time Horizon, Contributions, and Distributions is different from other clients. Your particular exposure to any given asset class will depend on your goals, risk profile, and how tactical or passive your risk profile calls for. If there have been changes to your risk profile and/or goals or if you wish to discuss them in more depth please contact your advisor. This email and the data herein is not a solicitation to invest in any investment product nor is it intended to provide investment advice. It is intended for information purposes only and should be used by investment professionals and investors who are knowledgeable of the risks involved. No representation is made that any investment will or is likely to achieve results comparable to those shown or will make any profit at all or will be able to avoid incurring substantial losses. While every effort has been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Historical data are presented for informational purposes only. Investment programs described herein contain significant risks. A secondary market may not exist or develop for some investments portrayed. Past performance is not indicative of future performance. Investment decisions should be made based on the investor's specific financial needs and objectives, goals, time horizon, tax liability, risk tolerance, and other relevant factors. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Investors should consider the underlying funds’ investment objectives, risks, charges, and expenses carefully before investing. The Advisor’s ADV, which contains this and other important information, should be read carefully before investing. ETFs trade like stocks and may trade for less than their net asset value. Spartan Planning Group, LLC (“Spartan” or the “Advisor”) is registered as an investment adviser with the United States Securities and Exchange Commission (SEC). Registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the Adviser has attained a particular level of skill or ability. Indexes are unmanaged and do not incur management fees, costs, and expenses. Spartan’s risk-management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk or the ability to control risk. There are risks associated with any investment approach, and Spartan strategies have their own set of risks to be aware of. First, there are the risks associated with the long-term static holdings for each of the strategies. The more aggressive the Spartan strategy selected, the more likely the strategy will contain larger weights in riskier asset classes, such as equities. Second, there are distinct risks associated with Spartan Strategies’ shorter-term tactical allocations, which can result in more concentration towards a certain asset class or classes. This introduces the risk that Spartan could be on the wrong side of a tactical overweight, thus resulting in a drag on overall performance or loss of principal. International investments may involve additional risks, which could include differences in financial accounting standards, currency fluctuations, political instability, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. Diversification strategies do not ensure a profit and do not protect against losses in declining markets