Download Stocks-Bonds - Model Capital Management LLC

Tactical–Stocks-Bonds
STRATEGY PROFILE | May 31, 2017
60 State Street, Suite 700 • Boston, Massachusetts 02109 • [email protected] • 617-854-7417 • http://modelcapital.com/
Foradvisoruseonly.Notforpublicdistribution.
FIRM’SINVESTMENTPHILOSOPHY
Model Capital Management LLC (MCM, we) is an investment manager that focuses on asset allocation. Tactical
managementisastrategythatinvestsinassetclasseswiththebestreturn-riskoutlook.Asopposedtobuy-and-hold,this
strategy alters portfolio allocations based on expected returns and risks – attempting to avoid significant market
downturns, but to participate in the upside. However, it is as challenging as all of active management, and simplistic
methodscanhardlywork.Wethinkthattacticalmanagementcanbesuccessfulifweincorporatefundamentalfactors
thatdrivemarketsaspartofaforward-looking(forecasting)approach.
To decide whether to allocate to risky assets,
we utilize our statistical model (the PAR
20%
Model™), developed since 2003, to forecast 6monthequityindexreturns.Themodelutilizes
0%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
over 20 fundamental factors such as valuation
-20%
BacktestedReal-Time
and economic variables. It dynamically adjusts
-40%
to the market environment by detecting the
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
100%
factorsthattendto“work”atanypointintime.
S&P 500
Model's Buy Signal
Model's Sell Signal
Given the forecast, we then invest the
50%
strategies either in risky assets, or in fixed
0%
income/cash markets. We offer U.S. tactical
-50%
strategies ranging in risk profiles from Income,
“Model Return Forecast” for 6-month S&P 500 return is MCM’s measure of
attractiveness of the market, but is not promissory, and does not constitute an to Stocks-Bonds (average balanced), to
investment recommendation. The forecast shown may not be up to date, and may 2xStocks-Bonds(growth,upto2xleverage).
40%
S&P5006mReturns
Model'sS&P500ReturnForecasts
Mar31, 2017:1.7%
changeatanytime.SourcefortheS&P500actualreturns:S&PDowJones.
Allourstrategyportfoliosarelong-only.Forecaststypicallygenerate2-5re-allocationtradesperyear,andthestrategies
havelowtradingvolume.Weuseonlybroad-indexETFsasanefficientwaytoimplementtheportfolios,whicharewell
diversifiedacrosssecuritiesandsectors,arehighlyliquidandhavelowexpenses.Eachstrategyintendstodeliveradded
returnvs.itsrespectivebenchmark,withcomparablevolatility,andwithlowermaximumdrawdownthanbenchmark.
STRATEGYPROFILE:STOCKS-BONDS
When equity return
forecastis…
Forecast<0%
Forecast0%-2%
Forecast>2%
Benchmark:Morningstar®TacticalAllocation
The objective of the Stocks-Bonds strategy is to provide US
marketexposureandparticipationinrisingmarketswhileheavily
emphasizing risk in down markets through the combination of
multiple asset classes including equity, fixed income, and cash
equivalents. The strategy allocates up to 100% of assets to
equities(risk-onallocation)ortofixed-incomeorcashequivalents
(risk-off), primarily based on the PAR Model’s™ 6-month return
forecast for equities, also taking into account risk and other
fundamentals. This top-level allocation to major asset classes is
theprimarysourceofperformanceforthisstrategyrelativetoits
benchmark.
Wetypicallyallocateto:
100%fixedincome
60%equities,40%F.I.
100%equities
Profile
Style
Risk*Profile
Equity*%*Min/Max/Avg
Strategy*Inception*Date
BackHtesting*Start*Date
Stocks-Bonds
Tactical*Asset*Allocation
Balanced
0%/*100%/*59%
3/1/2013
12/31/2001
When in risk-on mode (in equities), the manager allocates to broad large-cap equity ETFs or style ETFs (Value and/or
Growth)thatareexpectedtooutperforminagivenenvironment.Inaddition,wemanageshort-termequityvolatilityrisk
byutilizingourshort-termriskmodel–equityallocationmaybereducediftheriskmodelindicatescaution.Wheninriskoff mode (in fixed income) we allocate to short-term bonds, Treasuries, and/or investment-grade corporate bonds,
depending on their term-risk and credit-risk premium. Interest-rate and credit risks are actively managed when the
portfolioisallocationtofixedincome.
©2017ModelCapitalManagementLLC.Allrightsreserved.
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REAL-TIMEMODELPERFORMANCE(Mar1,2013–May31,2017)
REAL-TIMEMODELPERFORMANCE(Mar1,2013-May31,2017)
Performance
YTD2017
2016
2015
2014
Mar-Dec2013
SinceInception,ann.
8.6%
Morningstar®
Tactical
Allocation
5.2%
5.3%
-8.5%
9.5%
21.8%
8.2%
6.2%
-6.0%
2.7%
5.9%
3.2%
StocksBonds
StandardDeviation
6.3%
Morningstar®
Tactical
Allocation
5.9%
3.4%
-0.9%
-2.5%
6.8%
15.9%
5.0%
Betavs.S&P500
0.60
0.60
0.00
SharpeRatio
SortinoRatio
InformationRatio
1.10
2.04
1.48
0.49
0.73
0.60
1.31
1.48
StocksBonds
Risk(3y)
Relative
Relative
0.5%
InvestmentObjective: TheobjectiveoftheStocks-BondsstrategyistoprovideUSmarketexposureandparticipation
in rising markets while heavily emphasizing risk in down markets through the combination of multiple asset classes
including equity, fixed income, and cash equivalents. MCM commenced offering the strategy on Mar 1, 2013 by
providingrecommendationstootheradvisors.MCMstartedmanagingclientaccountstothestrategyonJan1,2014.
FiguresforperiodbetweenMar1,2013andJan1,2014reflecttheperformanceoftheStocks-Bondsmodelportfolio
asitwasrecommendedtoadvisors,netofaverage trading costs and MCM’sinvestment management fee of 0.90%,
rd
andwasverifiedbyanindependent3 party.However,MCMdidnotdirectlymanageindividualclientportfoliostothe
strategyduringthisperiod.Actualaccountperformancemayvaryduetotimingoftrades,securitypricing,andtrading
expensesbyeachparticularadvisor.
Composite returns reflect the performance of all fee-paying accounts managed to the Stocks-Bonds strategy since
inception of the composite on Jan 1, 2014. All performance figures presented are net of trading costs and MCM’s
investment management fee of 0.50%. All realized and unrealized gains and losses, dividends and interest from
investments, and cash balances are included in return calculation. Past performance is not a guarantee of future
returns.
Benchmark: The benchmark for the Stocks-Bonds strategy is the average net total return of all funds included in
Morningstar® Tactical Allocation category, updated monthly. This benchmark is relevant due to similarity of its
managementstyle,anditsriskprofiletothoseofthestrategy.
Onthisbasis,thestrategyoutperformedthebenchmarkby5.0%annuallysincethestrategyinceptiononMar1,2013.
MODELCUMULATIVERETURNS(Mar12013–May312017)
50%
Stocks-Bonds39.6%
Morningstar®TacticalAllocation14.2%
S&P500RiskControl10%45.0%
30%
REPRESENTATIVEETFsCONSIDEREDFORTHESTRATEGY
Stocks-Bonds
Ticker
IVV
QQQ
VTV
VUG
LQD
IEF
VCSH
FLOT
TIP
SecurityName
iSharesCoreS&P500
PowerSharesQQQETF
VanguardValueETF
VanguardGrowthETF
iSharesiBoxx$InvestmentGradeCorp.Bnd
iShares7-10YearTreasuryBondETF
VanguardShort-TermCorporateBond
iSharesFloatingRateBondETF
iSharesTIPSBondETF
SourceforAUMandexpenses:Morningstar
©2017ModelCapitalManagementLLC.Allrightsreserved.
Feb-17
Type
Equity
Equity
Equity
Equity
FixedIncome
FixedIncome
FixedIncome
FixedIncome
FixedIncome
Aug-16
Feb-16
Aug-15
Feb-15
Aug-14
Feb-14
Aug-13
-10%
Feb-13
10%
AUM,$mil ExpenseRatio
$119,860
0.04%
$50,670
0.20%
$32,060
0.06%
$23,310
0.08%
$36,070
0.15%
$7,560
0.15%
$19,190
0.07%
$5,770
0.20%
$23,190
0.20%
Fund Expenses: MCM implements the
desired portfolio exposures primarily
withlow-costindexETFs.WeselectETFs
thatmeetourcriteriaoflargeAUMsize,
high liquidity, and low fees. We are not
limited to any particular ETF sponsor.
Most ETFs currently approved have
expenseratiosbelow0.2%.Ourchoiceof
ETFsmaychangeinfrequently.
2
AdditionalDisclosures
DEFINITIONS
RelativeReturn:Theportfolio’sreturn
relative to its benchmark. It is
calculated as the difference between
the portfolio’s annualized return and
its benchmark annualized return for
thesameperiod.Activereturncanbe
used to measure the value added or
subtractedbyafundmanagerrelative
topassiveindexbenchmark.
Standard Deviation: measures the
volatility,orthedegreeofvariationof
returns around the average return.
Thehigherthevolatilityofinvestment
returns, the higher the standard
deviation will be. For this reason,
standard deviation is often used as a
measure of investment risk. A more
volatile stock or investment would
haveahigherstandarddeviation.
Maximum Drawdown: A measure of
risk that captures the largest
percentage drop of an investment
from any peak to trough, in a given
historical period. It is generally
calculated using month-end data. It
showsinpercentagetermsthelargest
loss during that particular historical
period.Forexample,ifyoubeganwith
a $100,000 investment and your
maximum drawdown was 30%, your
maximum loss from peak to trough
during that period would have been
$30,000.
Sharpe Ratio: A return-to-risk ratio
developed by William Sharpe that
measures the return generated per
unit of risk. The return (numerator) is
defined as the incremental average
return over the risk-free rate (such as
3-month Libor). Risk (denominator) is
defined as the standard deviation of
theseincremental
returns over the risk-free rate. A
higherSharpeRatiowouldindicatean
investment manager, method, or
strategy achieving higher returns
(relative to risk-free rate) per unit of
risk.
Information Ratio: An active returnto-risk ratio that measures the active
return (over benchmark) generated
per unit of active risk. The active
return (numerator) is defined as
difference between the portfolio’s
annualized return and its benchmark
annualizedreturnforthesameperiod.
The active risk (denominator) is
defined as the standard deviation of
these active returns over the
benchmark. A higher Information
Ratio would indicate an investment
manager, method, or strategy
achieving higher active returns per
unitofactiverisk.Inactiveinvestment
management analysis, Information
Ratio is often considered to be a
measure of skill of a manager or
method.
PERFORMANCECALCULATION
MCM commenced offering the
strategy on Mar 1, 2013 by providing
recommendations to other advisors.
MCM started managing client
accounts to the strategy on Feb 1,
2014.FiguresforperiodbetweenMar
1, 2013 and Feb 1, 2014 reflect the
performance of the Stocks-Bonds
model portfolio as it was
recommended to advisors. Model
performance for this period was
calculated by MCM, and was verified
rd
byanindependent3 party.However,
MCM did not directly manage
individual client portfolios to the
strategy during this period. Actual
accountperformancemayvarydueto
timing of trades, security pricing, and
trading expenses, among other
factors.
The Stocks-Bonds composite was
created on February 1, 2014.
Composite returns reflect the
performance of all fee-paying
accounts managed to the StocksBonds strategy since inception of the
compositeonFeb1,2014.
Unless
noted
otherwise,
all
performancefigurespresentedarenet
of trading costs and of MCM’s
investmentmanagementfeeof0.90%.
Past performance is not a guarantee
offuturereturns.
MCM claims compliance with the
Global Investment Performance
Standards (GIPS®) and has prepared
this report in compliance with GIPS®
standards. MCM’s performance has
been independently verified for
compliance with GIPS® standards for
the periods Jan 1, 2014 through June
30, 2014. The verification reports are
availableuponrequest.
Investment results are time-weighted
performancecalculationsrepresenting
total return. Monthly geometric
linking of performance results is used
tocalculateannualreturns.Allrealized
©2017ModelCapitalManagementLLC.Allrightsreserved.
andunrealizedcapitalgainsandlosses
as well as all dividends and interest
from investments and cash balances
areincludedinreturncalculation.
The investment results shown are not
representative of an individually
managedaccount’srateofreturn,and
differences can occur due to factors
such as timing of initial investment,
client restrictions, cash movement,
etc. securities used to implement the
strategiescandifferbasedonaccount
size,custodian,andclientguidelines.
RISKS
The value of investments and the
income derived from them can go
downaswellasup.Futurereturnsare
notguaranteedandalossofprincipal
mayoccur.
The investment strategy described
herein does not ensure a profit and
does not protect against losses in
declining markets. Model Capital
Management’s
risk-management
process includes an effort to monitor
and manage risk, but should not be
confused with (and does not imply)
lowrisk.
The 10-year time period shown in
Risk/ReturnMetricsisshort,anddoes
not include all potential market
scenarios that can occur, and their
impact on the portfolio. Maximum
drawdown is calculated as the worst
cumulative peak-to-trough decline
fromanymonth-enddatapointtoany
other month-end data point. The
potential drawdowns of the StocksBonds investment strategy could
exceed that shown in Risk/Return
Metrics. Maximum drawdown for the
benchmark was incurred from Nov 1,
2007throughFeb28,2009.
There are risks associated with any
investmentapproach.Investorsshould
carefully consider risks before
Investinginthisstrategy.Onlysomeof
therisksaredescribedasfollows:
1. Equities: Our tactical strategies
may,fromtimetotime,allocate100%
of client portfolios to a broad equity
market index or a combination of
equity market indices. Investing in
equity markets involves significant
risks: (a) Common stock holders of a
company may lose 100% of their
investment in case of bankruptcy of
thecompany.(b)Broadequitymarket
indices (such as the S&P 500) are
volatile – the index level, or price,
3
fluctuates significantly over time.
Investors may incur a loss if the time
of redemption of their investment
coincides with a downturn in general
equitymarket.
2. Exchange-Traded Funds (“ETFs”):
ETFs are securities the price of which
isbasedontheunderlyingportfolioor
index. ETF’s total assets (size),
liquidity,
expenses,
and
premium/discount to their net asset
value(NAV)aresubjecttochangedue
to the ETF sponsor or manager
actions, market conditions, or other
reasons beyond our control. One or
moreofthefollowingrisksmaycause
anETFinvestmenttodeviatefromthe
underlying index and to erode the
value of a portfolio investment: high
expenses,lowliquidity,thepricebeing
materiallydifferentfromNAV.
BENCHMARKS
The peer benchmark for the StocksBonds
strategy’s
real-time
performance is the average total
return of all funds included in
Morningstar® Tactical Allocation
category, updated monthly by
Morningstar®. This benchmark is
relevant due to similarity of its
management
style,
average
equity/bond allocation, and risk
profiletothoseofthestrategy.
The market-based benchmark for
hypotheticalback-testedresultsofthe
Stocks-Bonds strategy is the mix of
60% equities and 40% bonds,
rebalanced monthly. The benchmark
for the equity portion is the total
return of SPDR® S&P 500 ETF (SPY),
managed by State Street Global
Advisors.Thebenchmarkforthebond
portion is the total return of iShares
Core U.S. Aggregate Bond ETF (AGG),
managedbyBlackrock.
These benchmarks are chosen based
on similar management style and/or
risk profile between the benchmark
and the portfolio’s strategy. The
benchmarkshavenotbeenselectedto
represent
that
an
investor’s
performance would follow it closely,
but rather is disclosed to allow for
comparison of the investor’s
performance to that of a similar
managementstyle,andofwell-known
andwidelyrecognizedindex.
Reference to a benchmark does not
imply that the Stocks-Bonds strategy
will achieve returns, experience
volatility, or have other results similar
to the index. The composition of a
benchmark does not reflect the
manner in which the Stocks-Bonds
investment portfolio is constructed in
relation to expected or achieved
returns, investment holdings, asset
allocation guidelines, restrictions,
sectors, correlations, concentrations,
volatility, or tracking error targets, all
of which are subject to change over
time.
ABOUTTHEMANAGER
Model Capital Management LLC
(“MCM”, “Model Capital”, “we”) is an
investment advisor registered in the
Commonwealth of MA. Model Capital
focuses on tactical management. We
believe that tactical management of
broad index exposures has significant
potential for achieving excess return
relative to a buy-and-hold portfolio.
We utilize our forecasting models to
determine near-term risk-return
opportunities in broad asset classes,
such as U.S. stocks and bonds. We
then tactically rebalance portfolios to
take advantage of these risk-return
opportunities. Model Capital offers a
choice of several tactical portfolio
strategies to its clients to invest in,
including U.S. Stock-Bonds, U.S.
Complete Market, and 2xStocksBonds. We implement the portfolios
using primarily ETFs or other broadbasedindexfinancialinstruments.
ABOUTTHEINVESTMENT
Tactical – Stocks-Bonds strategy may
beofferedtoinvestorsasaseparatelymanaged account (SMA) or as an
investment portfolio on a custodian
platform. It is typically managed by
the applicable Investment Advisor or
FinancialAdvisorwhoholdscustodyof
client assets, and sub-advised by
Model Capital Management LLC.
Termsandrestrictionsmayapply,such
asaminimuminvestmentamount.
©2017ModelCapitalManagementLLC.Allrightsreserved.
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