March 2020: Rebalance Rationale

by | Mar 27, 2020 | Rebalance Rationales

We wanted to share brief rationale behind the rebalance directions given by our PM team. We’ll be working through these changes and anticipate being fully positioned by the end of March. You can expect to see the updated models from us in the coming days.

The highlights of this rebalance are below:

  • Increase Hedged Equity Exposure
  • Reduce exposure to Pure “Beta”
  • Reduce exposure to developed and emerging market equities

**Data from Bloomberg, 3.23.2020 (AGG, iShares Barclays Aggregate Bond Fund.  LQD, iShares IBoxx $ Invest Grade Corp Bd Fd. HYG, iShares iBoxx $ High Yid Corp Bond Fund. GOVT, iShares U.S. Treasury Bond ETF. EMB, iShares J.P. Morgan USD Emerging Markets Bond ETF.)

To start, here is a blurb from our January 2020 model rebalance rational:

“We believe potential risks remain elevated in bonds as interest rates have dropped to historical lows. On top of that, investors aren’t getting paid what we consider sufficiently for the credit and duration risk.”

As evidenced in the table above, we believe there has been a significant correction across most areas of the credit market.  Although we are uncertain of what the near term holds, we feel better about the risks in this space moving forward.

As it relates to this rebalance, the downside capture has been where we hoped it to be for most of our risk-managed positions.  The goal is to use active risk management to mitigate against further losses while keeping upside participation intact if rising prices are to come.  We’re attempting to use hedging to adjust potential returns higher.

While we are focusing more on upside capture, we are shifting away from excessive pure beta(market) exposure and paying special attention to Small Cap stocks.  They have been hurt recently and we will be adjusting exposures as necessary.  Uncertainty is still very high and we believe upside is most likely to be improved by being smart on the downside in this environment.  We think this market demands caution.

A word on the models:

The models have created separation.  We are not surprised at what has happened in the markets, especially as it relates to pure beta and credit, but hedges have helped offset some of that.  For taxable accounts, we believe this rebalance can be an opportunity to harvest losses while adding more hedged exposures.

Moving forward:

After a significant decline over the past month (roughly) we believe the Risk/Reward trade-off looks much different than it did a month ago.  Future growth prospects on the other side of this worldwide slowdown should be attractive.  With this rebalance, we feel the models are positioned further to benefit in multiple environments and we feel good about the participation levels in both up and down markets moving forward.

Plans for redeployment:

You will see a slight decrease in Ultra Short-Term bond (ICSH), Pure Beta (SPTM/ SPLG), and International Equity exposures (IEFA/IEMG).  There will be increases to Risk Managed positions; Aptus Defined Risk (DRSK), Aptus Collared Income Opportunity (ACIO) and Aptus Drawdown Managed Equity (ADME).

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

The Aptus Team

(251) 517-7198


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