For the past few years, we have been living in strange economic times. Case in point: It’s widely held that stock prices and bond prices are not correlated, meaning bonds can serve as the cornerstone of a hedge when stock prices waver and drop.
In the past year, though, we have seen stock and bond prices move in a correlated manner. When both are rising, no one complains – but now that markets are seesawing, many investors are seeing, in alarm, that tandem rises are paired with tandem falls. If both asset classes move in the same direction, what kind of risk management can bonds offer?
Thinking Outside of the Style Box and Getting Granular
The stock-to-bond relationship became hard-wired in people’s brains because we’ve had decades in which they moved in opposite directions. But I propose this isn’t an ironclad rule. If you look back over 60 years, you will see that stocks and bonds have been correlated more often than not, and there is not yet any reason to believe they won’t remain so most of the time.
Yet, many asset managers still simply fill “style boxes” in a pre-set allocation with the right asset type, and voila – you have a Growth strategy, or a Conservative strategy.
Again, however, the data shows that some other force is at play. If you compare the return on the best and worst U.S. large-cap funds over the past 12 months as of June 30, 2022, the difference in the returns is in the neighborhood of 50%. These are in the same asset class, so what accounts for the difference? It’s the equities that are chosen.
Putting In the Work to Be Selective
I propose that there is a better way to manage risk and seek out the best possible returns. It hinges on – get this – finding the best security selectors in the business and understanding what is and is not correlated at a given time.
At my firm Frontier Asset Management, we have filtered the many thousands of available funds out there to some hundreds that we believe have brilliant managers. And we have a proprietary process to model different combinations of these select funds to create investment strategies that we believe will perform well compared to the market overall while providing a specific level of risk.
Offering Advisors and Investors an Independent Option
This approach takes hard work, close scrutiny, and is an ongoing process with frequent tweaks and adjustments to stay on track.
This may not be the right fit for everyone, but it’s worth thinking of it as another form of diversification: Working with a firm like Frontier offers the possibility of breaking away and forging a different path no matter what the market may bring next.
 Source: Frontier Asset Management. Stocks are represented by the Ibbotson® SBBI® US Large-Cap Stocks (Total Return) and Bonds are represented by Ibbotson® SBBI® US Long-term (20-Year) Government Bonds (Total Return).
 Source: Morningstar, Frontier Asset Management.
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