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Weekly Update 4-12-2020

Monthly Perspective | November 2020

19 November 2020

Geremy van Arkel, CFA® | Principal


Geremy van Arkel, CFA | Director of Strategies

Wow, are you watching this? As I write this, the Dow Jones Industrial Average is up over 1,000 points, and that’s today (November 13, 2020) alone. It just so happens that I had already finished writing a whole different article for October than the one you are reading here, but now what I had to say is old news. As we have witnessed all year, the volatility of asset prices and investor emotions whipsaws continuously, creating a new narrative for each month in 2020. So, I did what I’ve done numerous times in the last 11 months: I ripped the old article up and filed it in the round filing cabinet, then took out a pen and gathered my thoughts.

Despite an overall negative month for risk assets in October, in November, investors are again bullish. Really bullish, in fact! As we have stated all year long, we will take all the positive responses that we can get. Higher asset prices are the best possible result to follow the turmoil of this past year. Alternatively, if the stock prices were 30% lower, we would be in a “world of hurt,” as they say.

The “old news” of October saw returns of stocks globally come under pressure, likely due to election anxiety in the U.S., renewed COVID–19 lockdowns across Europe, and an agonizingly slow economy on the ground. Ironically – as with all bad news this year – this did imply that more stimulus would be likely. Then came November. Investors reacted extremely positively to the election and to what now appears to be a highly effective vaccine near–ready for distribution. As it stands today, U.S. stocks – as measured by the S&P 500® and the Russell 2000 indices – are at all-time highs. Investors apparently not only believe that the worst is behind us but that all our problems may be over: the year seems done, and investors appear to be blowing it out. We can sigh a collective breath of relief, for now. Right?

We, of course, understand investors’ bullish “feelings” about the market. Buy low, sell high. Never bet against the Fed. No reason for bear markets if stocks always recover. Interest rates are low, stock prices can be higher, and today’s stocks are amazing companies. That being said, though, rule number one of investing is that you don’t get to go back in time to achieve historic returns. We must all go forward. And when you talk to risk managers looking forward, they don’t always sound too positive.

Overall, this year’s volatility in capital markets prices and investor emotions have been a friend to Frontier investors, and I may just be getting used to all these random outcomes. Most Frontier strategies weathered this year’s steep decline, as well as the month–to–month market swings, with valor, and we are slowly chipping away at what may end up being another solid year for our investors.

Capital Markets Overview

Clifford Stanton, CFA® | Director of Investments


  • Rising COVID–19 cases and hospitalizations in the U.S. and Europe, coupled with the 32nd consecutive week in which initial jobless claims exceeded the prior all–time high, tempered enthusiasm for large cap developed market stocks. The S&P 500 fell approximately 2.7% for the month of October, and the MSCI EAFE Index declined by about 3.9%. But there were winners, as both the Russell 2000 and the MSCI Emerging Markets indices each advanced by nearly 2.1%.
  • And there was good news on the 3Q earnings front (with 83% of companies reporting):
  • 84% of S&P 500 companies beat expectations, and 76% beat on sales.
  • Operating margins for large cap stocks continued to improve, hitting 10.3% (est.), up from about 5.9% in the first quarter, but remain well below the nearly 12.1% level in 3Q18.
  • Operating earnings increased by 31% from the prior quarter and fell “only” 11.7% from the prior year (not long–ago expectations were for a 21% decline).
  • With the yield on the 10–year Treasury increasing by 11 basis points and the long end of the curve backing up, even more, bonds retreated, and the Barclays U.S. aggregate returned about –0.45%. Duration continued to be shunned, in part due to the anticipation of a large stimulus package should the Democrats end up controlling the Presidency and Congress; the Barclays U.S. Treasury Long Index fell by nearly 3.0%. Credit was fairly flat, as investment–grade credit fell modestly, while high yield bonds generated small gains, as option–adjusted spreads came in by 9 bps.
  • Commodities advanced on increasingly solid economic data, especially in manufacturing. The Bloomberg Commodities Index advanced by about 1.4%, helped by a 12% gain in natural gas.


Strategy Overview

  • As has been the case for most of the year, relative to their long–term strategic allocations, our strategies were underweight equities and high–quality bonds at the beginning of the month while being overweight long–term Treasuries, and in the more conservative strategies (i.e., Capital Preservation, Conservative and Multi-Asset Income), cash.
  • Our underweights to U.S. large caps, international stocks, and REITs, along with our overweight to emerging market stocks in our more aggressive strategies, were all beneficial. However, underweight positions in small cap stocks and overweight positions in long–term Treasuries offset much of the advantage of our other exposures.
  • During the month, model changes were minimal, with only our Conservative and Tax Aware Capital Preservation strategies shifting exposures. In the former, we shortened duration, while in the latter, we reduced credit risk.
  • Going into November, our long–term return expectations for most equity classes had increased slightly, except for emerging markets, which fell by 19 basis points. The outlooks for high quality bonds, long–term Treasuries, and TIPs were largely unchanged, remaining at deeply depressed levels, given the interest rate environment.


Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. All calculations of performance are by Frontier. In certain instances, the use of the term “portfolio” within refers to the underlying combination of funds in the strategy.
Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from the performance of strategies managed by Frontier.

Data sources for investment products and indices are Morningstar and Hedge Fund Research Institute. While we believe the information provided by external sources to be reliable, we do not warrant its accuracy or completeness. Nor should their use be construed as an endorsement. Diversification and asset allocation do not ensure a profit or protect against a loss. Performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Nothing presented herein is or is intended to constitute investment advice and no investment decision should be made based solely on information provided herein.

Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future or expected returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice.
Any forward–looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long–term future asset class returns. They are not intended as guarantees of future returns and should not be solely relied upon in making investment decisions.
Hypothetical expected returns have certain limitations, are shown for illustrative purposes only and it should not be assumed that actual results will match the hypothetical expected returns shown. Unlike actual performance, hypothetical expected returns do not represent actual trading and since trades have not been executed, the results shown may have under or over compensated for the impact, if any, of certain unforeseen market factors. Hypothetical expected returns, whether back–tested or forecasted, have many inherent limitations and no representation is being made that any account will or is likely to achieve the results shown. In fact, there are frequently material differences between hypothetical expected results and actual results achieved. One of the limitations of hypothetical expected results is that they do not take into account that material market factors may have impacted the adviser’s decision–making process if the firm were actually trading clients’ accounts. Also, when calculating the hypothetical expected returns, the adviser has the ability to change certain assumptions and criteria in order to reflect better returns. There are numerous other factors related to the markets in general or to the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of hypothetical expected results, all of which can adversely affect actual trading and performance. Importantly, it should not be assumed that investors who actually invest in this strategy will have positive returns or returns that equal either the hypothetical expected results reflected, or any corresponding benchmark presented. In addition, performance can, and does, vary between individuals.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance. The performance information presented here covers different time periods. We present performance information for short time periods because we understand that clients and potential Investors are interested in this information, however, we recommend against making any investment decisions based on short–term performance information. For any investment products mentioned herein, a complete description of their investment objectives, along with details of the risks and fees involved is contained in their respective prospectus and statement of additional information, which is available on their websites and should be read fully.
It is generally not possible to invest directly in an index*. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
S&P 500®
Represents .S.U.S. large company stocks. It is a market–value–weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
Measures international equity performance. It is comprised of the MSCI country indexes capturing large and mid–cap equities across developed markets in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets
Measures large and mid–cap equities across 23 Emerging Markets (EM) countries which include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
Russell 2000
Measures the performance of the small–cap segment of the U.S. equity universe
Barclays US Aggregate Bond
Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.
Barclays Capital Long U.S. Treasury
Includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value
Credit Suisse Frist Boston High Yield
Represents domestic non–investment grade corporate bonds. Floating–rate and convertible bonds and preferred stock are not included.
Bloomberg Commodity Index
This is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ–UBSCISM is composed of futures contracts on physical commodities.

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