In our June 16th poll we asked our LinkedIn followers to tell us their go-to strategy for managing downside risk in the current market environment. 76% of the 83 responses said to stay the course. We agree. This is one strategy to use during any bear market. However, there is a particular investment strategy that we believe advisors and investors should consider when the going gets tough, and that is managed futures.
What are managed futures?
Yung-Shin Kung, our guest on a recent “Managed Futures” episode of our Deconstructing Alpha podcast explains it the best by stating “we’re focusing on capturing price trends, up or down, across major asset classes through the deeply liquid futures market.” The trends that are captured are across all asset classes, stocks, bonds, currencies, and commodities. Generally, all major regions are included in the strategy, making managed futures diversified in both portfolios and in the market.
Why choose this route?
Simply put, managed futures can provide the opportunity for steady growth in any kind of market environment. However, during times of heightened market volatility and material changes to the Fed Funds rate, managed futures have delivered attractive returns. In the chart below, note how managed futures performed in a prior period when inflation and rates were under pressure.
The diversification benefit of managed futures can help to reduce overall risk in a portfolio. And that’s exactly what we seek to do. At Frontier Asset Management, our open architecture approach allows us add or remove managed future funds based on our forward looking asset allocation process. In a year when most major asset classes have delivered negative returns, the diversification benefit has been a welcome offset for diversified portfolios.
The views expressed represent the opinion of Frontier Asset Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Frontier Asset Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. The use of such sources does not constitute an endorsement. Frontier does not have an affiliation with any author, company or security noted within. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the Frontier Asset Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. Past performance is not indicative of future results.
Strategy Management Process. Each Frontier strategy consists of carefully selected mutual funds that are combined in an effort to achieve the Performance Objectives of the strategy. Strategies are managed using a four-step process. First, we establish a long-term asset allocation mix that we call the “Target Long-Term Allocation”. Periodically we adjust the Target Long-Term Allocation based on our changing expectations about the future risk and return characteristics of various asset classes to create the “Target Current Allocation”. Next, we develop an “approved list” of mutual funds that we believe can add value over time. Finally, we test thousands of combinations of mutual funds from our approved list to find the combination that we believe is most likely to perform better than the Target Current Allocation. Over time the mutual funds in the strategy may change. Frontier may modify its process at any time without notice if it is deemed to be in the best interest of our clients.
Not all asset classes are utilized in the construction of all strategies. Asset classes may be added to or removed from the above list at any time. The Target Current Allocation for a strategy may include asset classes that are not included in the Target Long-Term Allocation for that strategy. When determining the asset allocation for a strategy, each mutual fund is assigned to a single asset class. Funds assigned to an asset class group may have exposure to other asset classes. For the Mutual Funds 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.
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