How Frontier is positioned to endure the current market environment
The market environment of 2022 is presenting investors with a remarkably different situation than that of last year. While the tenets of inflation and a tightening Fed remain (as stated in the 4Q 2021 Download), we now find ourselves facing a severe situation with the war in the Ukraine.
I think it’s important to note, that investors in general are currently vulnerable to market volatility. Investors likely have more money than they have ever had given strong equity markets over the last 10 years, ownership of risk assets appears to be near an apex, and we have record levels of retirees. The changing dynamics of inflation, globalization, and the world order are not minor issues.
What got you here may not get you there going forward. It is highly likely that the investment themes that were successful in the recent past are not going to provide return leadership through these changes.
While the current bout of capital markets volatility is a natural consequence of the tectonic changes that are occurring, we should remember that through change comes opportunity. Wars, inflation, and Fed policy changes are not black swans. We have been here before. Albeit the war in Ukraine does appear to be more shocking than anything we have seen in decades. But, with volatility comes opportunity and active management can take advantage of change.
As always, at times of market stress such as now, please feel free to reach out to me if you would like to schedule a one-on-one update.
Frontier strategy positioning
The following are aspects of our strategy positioning that we believe will help investors capital through this unfolding conflict.
We are constructive on equities
Equities, and the right equities, historically have endured inflation and wars better than most other asset classes.
- The global economy and earnings remain strong for now, and central banks may be less likely to take extreme actions to fight inflation given the War in Ukraine.
- Frontier Core Strategies hold a lower effective exposure to European stocks than their custom benchmarks. Our analysis shows that we have 0% exposure to Russia in our Balanced Strategy, and less than 1% exposure in the Global Opportunities Strategy.
- Frontier Core Strategies hold positions in actively managed strategies that can adjust their holdings towards areas of opportunity.
Quality securities
Frontier strategies have a tilt towards managers that have historically held securities we believe are of a high-quality nature, and that have performed well during volatility.
Lower fixed income duration
Most Frontier Core Strategies have a lower effective duration than their custom target mixes. This positioning should help our fixed income holdings as interest rates have increased given inflation and the anticipated changes coming from the Fed.
Tax trading
While downward trending markets may be unpleasant, the Frontier Tax-Managed Strategies have been actively looking for tax loss swapping positions to create potential tax benefits for investors.
Inflation considerations
Inflation is currently rising due to the impact of removing Russia from the commodity supply chain. This could imply that inflation may remain higher for longer. The implication of this is:
- Commodity prices have historically been a volatile asset class that doesn’t lend itself to long-term holdings. Thus, timing of market cycles is paramount to investor’s success. Most commodity booms historically have been met with relatively severe losses on the other side.
- Higher for longer inflation can impair future returns of most fixed income investments, which makes becoming defensive difficult.
- Active stock managers can tilt their portfolios into higher commodity prices by investing in businesses that profit from commodity prices.
- Frontier Conservative and Balanced Strategies hold managed futures as a non-directional way to participate in commodities exposure.
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 s 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. Frontier may modify its process, opinions and assumptions at any time without notice as data is analyzed. Frontier does not provide tax advice.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. 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 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. Frontier does not directly use economic data as a part of its investment process.
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 strategies managed by Frontier.
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, throughout 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 relied upon in making investment decisions.
Frontier’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and are available on our website www. Frontierasset.com. They include important disclosures and should be ready carefully. Frontier Asset Management is a registered investment adviser with the U.S. Securities and Exchange Commission; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Additional information about Frontier and its investment adviser representatives is available on the SEC’s website at www.adviserinfo.sec.gov.
Benchmark Composition. The custom benchmarks for the Global Opportunities, Long-Term Growth, Moderate Growth, Balanced, Conservative Multi-Asset Income, Conservative, and Capital Preservation strategies are combinations of indices representing the asset class groups shown in the table below. The benchmark for the Focused Opportunities strategy is a US Large Cap asset class index. The benchmarks for the Absolute Return Plus and Absolute Return strategies are Absolute Return asset class indices. Underlying constituents are available upon request at no cost. In the case of indices that include foreign securities, index returns are still presented on a total return basis but will be net of foreign taxes on income generated by these securities.
In order to better represent the asset classes Frontier was investing in at the time, the blends from January 1999 – April 2004, vary from those for the time period May 2004 – current. The blends of the indices for these two time periods are:
| Capital Preservation Bench | Conservative Bench | ||||
| Inception – Mar 21 |
Apr 21 – Current |
Inception – Apr 04 |
May 04 – Mar 21 |
Apr 21 – Current |
|
| U.S. Equity | 10% | 10% | 30% | 15% | 24% |
| Int’l Equity | 0% | 0% | 10% | 5% | 4% |
| Real Assets | 15% | 7% | 0% | 15% | 4% |
| Alternatives | 25% | 23% | 0% | 25% | 16% |
| Fixed Income | 40% | 60% | 40% | 40% | 52% |
| Cash Equivalents | 10% | 0% | 20% | 0% | 0% |
| Balanced Bench | Moderate Growth | |||||
| Inception – Apr 04 |
May 04 – Mar 21 |
Apr 21- Current |
Inception – Apr 04 |
May 04 – Mar 21 |
Apr 21 – Current |
|
| U.S. Equity | 45% | 30% | 40% | 60% | 45% | 52% |
| Int’l Equity | 15% | 15% | 14% | 20% | 20% | 24% |
| Real Assets | 0% | 10% | 2% | 0% | 10% | 0% |
| Alternatives | 0% | 20% | 6% | 0% | 15% | 4% |
| Fixed Income | 40% | 25% | 38% | 20% | 10% | 20% |
| Long-Term Growth Bench | Global Opportunities Bench | ||||
| Inception – Apr 04 |
May 04 – Mar 21 |
Apr 21 – Current |
Inception – Mar 21 |
Apr 21 – Current |
|
| U.S. Equity | 70% | 50% | 58% | 0% | 60% |
| Int’l Equity | 30% | 30% | 32% | 0% | 40% |
| Global Developed | 0% | 0% | 0% | 100% | 0% |
| Real Assets | 0% | 10% | 0% | 0% | 0% |
| Alternatives | 0% | 10% | 0% | 0% | 0% |
| Fixed Income | 0% | 0% | 10% | 0% | 0% |
It is generally not possible to invest directly in an index and therefore they do not incur frictional costs. 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.