Stocks have continued to advance through the first few months of 2021. Market valuation rose to an extreme, in line with 2000 and among the highest ever. This could portend a sharp sell-off with any negative catalyst going forward.
In the upcoming webcast, Beware the Bubble: Investing in an Overvalued Market, Frank Donovan, Vice President, Business Development, Model Capital Management; and Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, will illustrate how using fundamentals-based models for asset allocation could reduce the risk of wealth-destroying downturns.
Model Capital Management focuses on asset allocation. Research has shown that close to 90% of return and risk for a diversified balanced (stock-and-bond) portfolio comes from asset allocation. Focusing on the 90% has high potential of achieving good above-index performance.
“Asset allocation process should allocate to asset classes with the best expected risk-return combination. Obtaining mid-term expected returns (for strategic) and short-term return forecasts (for tactical asset allocation) is the hard part. Once we have the return forecasts, we allocate to asset class(es) that are expected to perform the best, with the least risk,” according to Model Capital Management.
For example, Model Capital Management offers a range of Tactical Investment Strategies. Its Tactical Growth Limit-Loss strategy can provide U.S. market exposure and participation in rising markets while heavily emphasizing risk management in down markets. The portfolio can include ETF or index fund investments in one or multiple asset classes including U.S. large cap equity, fixed income, and/or cash equivalents. The strategy allocates up to 100% of assets to equities (risk-on allocation) or to fixed-income or cash equivalents (risk-off), primarily based on the manager’s proprietary model’s 6-month return forecast for the S&P 500 index, also taking into account short-term risk and other fundamentals.
The Tactical 2xGrowth Limit-Loss strategy can provide U.S. market exposure and participation in rising markets, while heavily emphasizing risk management in down markets. The portfolio can include ETF or index fund investments in one or multiple asset classes including U.S. large cap equity, fixed income, commodities (up to 40%), and/or cash equivalents. The strategy allocates to equities (risk-on allocation) or to fixed income or cash equivalents (risk-off), primarily based on the manager’s proprietary model’s 6-month return forecast for the S&P 500 index, also taking into account short-term risk and other fundamentals. The strategy may, at times, utilize up to 2x leverage (200% allocation) to equities, when the forecast for the S&P 500 is especially strong.
Lastly, the Tactical Income strategy generates income from exposure to U.S. fixed income markets, and total return from participation in various fixed income markets while heavily emphasizing managing downside risk. The portfolio can include ETF or index fund investments in Treasuries, corporate bonds, cash equivalents, and high-yield bonds and loans. A set of proprietary models is utilized by the manager to evaluate attractiveness of risk-return for each asset class. Each model uses several indicators that historically proved to identify or lead changes in asset class risk-return trends.
Financial advisors who are interested in learning more about investing in the current market environment can register for the Wednesday, Jun 16 webcast here.