typical vix in an atypical year
From a VIX perspective, the election surprised by not being very surprising. Following the typical pattern around a known deadline, hedges which had propped up the VIX ahead of the election were abandoned with the passing of the “known unknowns” of the event itself, causing a quick repricing lower in the VIX and higher in stocks immediately following the election.
In response to this message from the VIX, TCM strategies moved from defense to offense during the first week of November, with Alpha Seeker in place to profit from the slow decompression in volatility in the balance of the month while Smart Index strategies benefitted from their strategic index exposure during a strong month for equities. When it was all said and done, the S&P 500 and Nasdaq finished nearly 11% higher with the VIX receding from near-panic levels at the start of the month, though still stubbornly above normal (see chart below).
VIX futures curves, 2020 vs 2016. Source: vixcentral.com
process over opinion
When it comes to investing through extreme uncertainty, the election is another example of the value of process over opinion. Our process is simple: when crisis conditions are present, defend against crisis-sized losses. Not just a psychological benefit, avoiding major losses is more beneficial to portfolios than maximizing gains. This is clearly demonstrated by the substantial outperformance of Smart Index vs the S&P 500 in 2020 despite trailing the index in each up month this year- the same profile it has produced for our clients over the past four years. Even with its outstanding March return set to 0%, Smart Index would be nearly double the S&P 500 on the year through November! (see chart below).
YTD 2020 return comparison. Smart Index net of 1% fee. Orange line = hypothetical results setting Smart Index March 2020 return to 0% and using actual returns otherwise.
This is the power of compounding- a concept that humans don’t easily internalize. Since investment returns compound on each other, the path of returns is as important to a portfolio’s end result as the magnitude of any one period. A risk-managed approach may not fully participate in relief rallies like we saw in November, but as this year’s results have shown, smart risk control can make all the difference for portfolios over time.