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Should You Abandon the Market? |
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FORECASTS & TRENDS E-LETTER IN THIS ISSUE: 1. Investors Saying “Get Me Out!” 2. A Tactical Money Management Approach 3. Metropolitan’s Methodology 4. MCS Performance Many Investors Just Want Out I recently read one of the most disturbing headlines I have seen in quite a while. No, it wasn’t about an impending recession or a European debt default, though those would fit the description. The headline that caught my eye said, Tired of Ups and Downs, Investors Say, ‘Let Me Out!’ The article appeared in the Wall Street Journal last Wednesday and described a growing trend among investors who are pulling all of their money out of the stock market. Why is this news so disturbing? Because many Baby Boomers haven’t saved enough for retirement so they still need an exposure to equities to help meet their retirement goals. The problem is that the market has gone nowhere for over a decade, something the buy-and-hold gurus said was not supposed to happen. Last Thursday, the S&P 500 Index closed at 1,164.97, near where it was back in November of 1998. Add to that the recent up and down stock market swings of more than 1% (there have been 29 of them since the beginning of August) and you get uncertainty on a scale rarely seen, and we haven’t even started to talk about global concerns. What investors need is a strategy that seeks to be in the market when chances are good for a gain and out of the market during periods of uncertainty. Fortunately, my clients have access to just such a strategy provided by Metropolitan Capital Strategies. This ETF-based managed account program stays in the safety of a money market fund until its proprietary model indicates a 90% or better chance of a significant gain. Sound like just what the doctor ordered? I think so. Plus, it doesn’t hurt that since 2005 Metropolitan has generated six buy signals, all of which have resulted in gains. Of course, past performance doesn’t necessarily predict future results, but I think MCS’s strategy is likely to be a lot better than what investors would do if they tried to move in and out of the market on their own. A Tactical Approach to Managing Money Metropolitan Capital Strategies (MCS) of Manassas, Virginia is owned by Sharon Snow and David Schombert. They have developed an exchange-traded fund (ETF) trading system that not only determines the best time to be in the markets, but also selects the asset class with the highest probability for gain. Metropolitan’s primary approach to managing money is based on two key concepts. First is the knowledge that market performance is seldom in a straight line. In any uptrend or downtrend, there are opportunities for outsized gains along the way. Of course, these opportunities don’t always materialize for domestic stocks, so MCS has expanded its horizons to include virtually any market or asset class covered by an acceptable ETF, including foreign and domestic stocks and bonds, commodities, currencies, real estate and so on. They can cover virtually all the bases. The second key concept is risk management with the goal of preserving capital. One way MCS seeks to manage risks is requiring their proprietary model to reach a 90% confidence level that a trade will be successful before entering the market. While the goal is to identify market trends that last anywhere from seven weeks to four months, MCS will exit the market anytime its confidence level goes below 90%, such as they did in late April of this year. At those times, MCS remains on the sidelines in the lowest-risk asset class, usually a money market fund. Metropolitan’s Methodology The MCS strategy is a balance of discretionary insight from fundamental analysis coupled with the mechanical discipline of technical analysis. As the primary portfolio manager, David Schombert has developed a proprietary process called Flexible Asset Class Trading, or FACT for short. FACT incorporates six technical, 26 fundamental and 25 economic factors into a trading model that helps David determine the market’s direction and which asset classes have the greatest potential for gain. One of the most important facets of Metropolitan’s strategy, however, is the fact that there is a measure of manager discretion involved in investment decisions. I believe that a properly diversified portfolio should have both mechanical and discretionary strategies. That’s because 100% mechanical trading models have the advantage of not having to deal with investor emotions, but they also can’t read the newspaper to anticipate what we have now come to know as “black swan” events. MCS incorporates both technical and discretionary analysis to provide a check on emotional trading. This discretion allows MCS to identify periods of time when global events may be moving the markets more than fundamental factors. A very good example of manager discretion was evident earlier this year when MCS reached a 90% confidence level but the issue of the Japanese nuclear power plant meltdown was still up in the air. David delayed entering the market until mid-March due to the possible market ramifications of a nuclear meltdown in Japan, where a mechanical system might have gone full steam ahead. Because of the nature of the MCS strategy, typical historical gains have been in steps, reflecting an outsized gain followed by a period of time in cash. The performance graphs shown later on are indicative of a tactical asset management style that moves in and out of the market based on perceived opportunities. Since MCS tends to trade infrequently, accounts spend an average of 50% of the time in cash at Fidelity. For taxable (non-IRA) investors, MCS offers an options overlay in their Tactical Growth Strategy that will actively trade put and call options within tightly controlled risk parameters. Accordingly, the minimum investment for the Tactical Growth Strategy is $250,000. Since options trading is not available to IRA and other qualified accounts, MCS also offers a Tactical Moderate Strategy which is managed exactly like Tactical Growth, except no options are traded. Tactical Moderate is available to both taxable and tax-qualified accounts at a minimum investment of $100,000.
MCS Performance Whether you are in the bull market camp or running with the bears, the MCS Tactical programs should be attractive to you. That’s because MCS is firmly committed to the goal of preserving capital, but they also seek double-digit returns when market conditions are right. While past performance can’t guarantee future results, I think it’s very impressive that the six times MCS has entered the market since the inception of these programs in 2005, all have produced gains. Below, I have highlighted the performance of the MCS Tactical Growth Strategy through the end of September. Detailed performance information for the Tactical Moderate Strategy may be found at the following website link: Tactical Moderate Strategy Advisor Profile As you review the performance information below, you will note that MCS did not participate in the market rally that followed the March 2009 low in the stock market. David explains that the FACT system never reached a 90% confidence level even though the market was screaming higher. Looking back, however, this was a reasonable stance. I’m sure you will recall that as the market rallied in 2009, there was still a great deal of uncertainty in the market caused by massive government intervention in the financial markets. Plus, many analysts were calling for a correction, though it never materialized. Note that all charts below reflect actual performance, net of fees and expenses, from the inception of the Metropolitan Tactical Growth Strategy in October of 2005 through September of 2011.
One of the most important performance statistics in the above presentation relates to the worst losing streak, or drawdown, of the Tactical Growth Strategy. While posting an annualized gain in the 9% range since its inception, the worst drawdown has been -10.63%. The worst-ever drawdown for the Tactical Moderate Strategy is even lower, at -5.57%. This is an impressive statistic, especially for those who want an exposure to ETFs but are also concerned about capital preservation. The Tactical Growth and Tactical Moderate Strategies are offered on the Fidelity Institutional platform where MCS has access to hundreds of ETFs. Each investor opens a brokerage account at Fidelity and grants MCS the authority to trade the account. Note that MCS cannot withdraw assets from the account except for periodic management fees. Conclusions For our clients, the MCS investment strategies offer two big advantages. First, they take over the decision process of when to be in or out of the market and replace it with a time-tested tactical model that seeks out only the best times to be in the market. This allows investors near retirement the potential to share in market gains while minimizing risks during down markets. A second benefit of the MCS strategies is that they use ETFs exclusively. Many investors are seeking ways to take advantage of the flexibility offered by ETFs, but are unsure as to which funds to purchase. MCS handles all that by not only deciding when it’s best to be in the market, but also determining which markets or asset classes provide the best potential for gain. Whether your outlook for the future is bullish or bearish, Metropolitan deserves your consideration. If you would like to learn more about the Metropolitan Tactical Growth and Tactical Moderate Strategies or any of our other risk-managed AdvisorLink® investment programs, please feel free to contact us in one of the following ways:
While the brief discussion in this E-Letter offers a good thumbnail sketch of Metropolitan’s approach to managing money, you can gain a better appreciation of their strategy by hearing David and Sharon themselves explain their methodology. Click on the link below to listen to a recorded webinar that we did with Metropolitan earlier this year: Metropolitan Capital Strategies Webinar As always, past performance is not necessarily indicative of future results. Be sure to read all offering materials and Important Notes below before making a decision to invest. Wishing you profits,
Gary D. Halbert IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM) and Metropolitan Capital Strategies, LLC. (MCS) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. HWM receives compensation from MCS in exchange for introducing client accounts. For more information on HWM or MCS, please consult the respective Form ADV Part II, available at no charge upon request. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others. From May 1, 2007 to present, the performance data represents composites that include MCS discretionary accounts consistent with each investment strategy. MCS claims compliance with Global Investment Performance Standards (GIPS). Compliance with GIPS has been verified by Cohen Fund Audit Services for the period from May 1, 2007 through May 31, 2008, and by Ashland Partners & Co., LLP from the period June 1, 2008 through December 31, 2010. To receive a complete list and description of MCS investment composites and/or presentation that adheres to GIPS standards, contact Cheryl Parish at 571-379-8586 or email info@mcsmgr.com. Prior to May 2007, the composites consisted of one account in each program that is related to one of the firm’s principals whose investment objectives and philosophy were similar. These performance numbers have not been verified by HWM, and therefore HWM is not responsible for their accuracy. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Metropolitan Tactical Growth and Moderate Strategies. The signals are generated by the use of proprietary models developed by Metropolitan Capital with the objective of participating in markets gains while keeping the level of risk moderate to aggressive. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. ETFs carry their own expenses which are outlined in the ETFs’ prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency. When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategies, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Metropolitan Tactical Moderate and Growth Strategies. In addition, you should be aware that (i) in these programs, your principal is not guaranteed and there are risks involved; (ii) the performance of these programs may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in these programs; (iv) Metropolitan Capital will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) these programs fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses. As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), and the MSCI World (Gross) Index (“MSCI World”) represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these benchmarks may differ materially (more or less) from that of the Metropolitan strategies since they are unmanaged Indexes which cannot be invested in directly. The performance of the S & P 500 Stock Index and the MSCI World Index is not meant to imply that investors should consider an investment in the Metropolitan strategies, which are actively managed, as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the MSCI World Index, which is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed markets. All accounts in the composites are charged the rate of fees corresponding to the assets placed under management with MCS. Bundled, tiered fee accounts make up 100% of the composites for all periods beginning May 1, 2007. Wrap fee schedules are provided by independent wrap sponsors and are available upon request from the respective wrap sponsor. The bundled fees include custody, trading expenses, and other expenses associated with the management of the account. Prior to May 1, 2007, the composites consisted of single non-wrap fee portfolios and these returns have been reduced by transaction costs and HWM also reduced them by the maximum current fee of 2.2%. Therefore, the performance numbers shown by HWM prior to May 1, 2007 are different (lower) than the numbers shown by MCS. The Tactical Growth program writes covered and uncovered put and call options, coupled with risk management techniques. There are special risks associated with uncovered option writing which may expose an investor to a potentially significant loss, and the strategy may not be suitable for all customers. The potential loss in uncovered call writing is unlimited, and the risks of writing uncovered put options can be substantial. Investors should understand the risks and have sufficient liquid assets to meet margin calls. (Note: The Tactical Moderate Strategy does not use options.) Returns illustrated are net of the maximum Advisor management fees, custodial fees, underlying ETF or ETN fees, and other expenses. Management fees are deducted quarterly, and are not accrued on a month-by-month basis. Returns do not include the effect of annual IRA fees, if applicable. No adjustment has been made for income tax liability. Consult your tax advisor. “Annualized” returns take into account compounding of earnings over the course of an investment’s actual track record. Dividends and capital gains have been reinvested. Money market funds and other low risk asset classes are not bank accounts, do not carry deposit insurance, and do involve risk of loss. These programs buy and sell on a short-term basis and clients are expected to incur short-term capital gains and losses. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments. |
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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent. |
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