February 2021: Rebalance Rationale

by | Feb 1, 2021 | Rebalance Rationales

Below is a brief rationale behind the rebalance directions given by our PM team. We will be working through these changes and anticipate being fully positioned in early February. You can expect to see the updated models from us in the coming days.

The highlights of this rebalance are below:

  • Increase Developed and Emerging Market Equities
  • Increased Smaller Cap exposure
  • Reduce Hedged Equities

To start, here is a blurb from our March 2020 model rebalance rationale:

“Future growth prospects on the other side of this worldwide slowdown should be attractive.”

Our last major rebalance in March 2020 was during a time when markets were in chaos. Volatility was spiking, equities were selling off and our economy was just beginning to shut down. We have seen an incredible recovery in markets, as evidenced in Figure 1 above showing performance since the last market peak on February 19th, 2020.

As it relates to this rebalance, we are looking to increase cyclicality in our portfolios by decreasing hedged equity and bond allocations. While we are still holding true to our Drawdown Patrol methodology, we are using improving economic conditions, accompanied by global growth, as a backdrop to seek higher upside capture in portfolios. To do this, we are adding to Developed and Emerging Markets and moving down the capitalization range in our domestic equities, all areas that have more cyclicality and have historically performed well when markets are coming out of recessions.

While we are focusing more on upside capture, we are not chasing performance or sacrificing all the strong downside protection we strive to have in our portfolios. Despite the recently strong performance in International, we think valuations remain attractive and the gap in longer-term performance remains wide. We see the increases in risk as small tweaks, more pronounced in our more aggressive portfolios. In the more conservative portfolios, we are shifting away from traditional bonds that we feel hold a great deal of risk in that interest rates are near all-time lows, prospective returns could be meager, and the benefits of strong returns in selloffs look to be muted.

 Moving forward:

As global economies recover after they were sent reeling from the pandemic, we feel we are in a good position to be able to increase exposures in riskier areas we believe will benefit.  We are seeing global macro analysts forecast increased growth, with optimism we will see reopening economies soon as the vaccine is distributed. With this rebalance, we feel the models are positioned to further benefit in multiple environments and we feel good about the participation levels in both up and down markets moving forward.

Plans for redeployment:

Where it applies in your portfolios, you will see an increase in International Equity (SPDW/SPEM), Smaller Capitalization exposures (OSCV/RSP), Aptus Defined Risk (DRSK), and non-traditional fixed income with Quadratic Interest Rate Volatility and Inflation Hedge (IVOL).  There will be decreases to Risk-Managed positions; Aptus Collared Income Opportunity (ACIO) and Aptus Drawdown Managed Equity (ADME) and traditional bond exposures (SPAB, ICSH)

Please reach out with any questions at all.  As always, thanks for your trust.


The Aptus Team





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