Thoughts
We are pleased to announce the launch of the LHA Market State® Alpha Seeker ETF (MSVX). Below are links to the Press Release and the ETF’s Prospectus. Please visit www.lhafunds.com or contact Little Harbor Advisors, LLC at (781) 639-3000 (ext. 147) with questions, comments or requests for more information.
Investing involves risk. Principal loss is possible.
The LHA Market State Alpha Seeker ETF is distributed by Quasar Distributors, LLC.
After $6 trillion of monetary and fiscal stimulus succeeded in pulling markets back from all-out panic in April, markets find themselves caught in the middle of an epic gladiator match between liquidity and solvency, now down just -1% since March despite the sharpest economic contraction since the Great Depression.
Heeding the distress signals that continued to emanate from the VIX complex, TCM strategies remained defensively positioned in April, holding long volatility exposures which continue to carry quite well despite a falling VIX index. (Under crisis conditions, VIX futures and long VIX ETPs tend to be less reactive to the direction of the VIX index. As an illustration, with the VIX Index -15% since March 1st, the iPath VIX Short Term Futures ETN (VXX) has returned +66%. See chart below.)
Cumulative return comparison, Mar 1- Apr 30, 2020
Benefiting from the bounce in equities, Smart Index (+9.0%) and Legacy Navigator (+6.5%) posted solid numbers in April while Alpha Seeker’s (-3.1%) long volatility positions slipped along with the receding panic. Solidly positive on the year as markets continue to sag, all three strategies continue to be in a good position to watch the gladiator match from a safe distance until markets eventually declare a winner.
After an outstanding first quarter, we’re pleased to announce that as of 4/22, TCM strategies now occupy the top spots on Morningstar’s ETF Managed Portfolios database with Smart Index leading the pack on both 1 and 3-year returns while Alpha Seeker holds the top spot for the 5-year number.
With both the lowest and highest VIX readings in history, the last 5 years have certainly been a thorough test and we are pleased to have met the challenge. Thank you to all those who have supported us along the way, we look forward to growing with you!
Smart Index #1 one-year and three-year return as of 4/22/20
Alpha Seeker #1 five-year return as of 4/22/20
VIX Index, 1990-2020
Coronavirus panic brought stunning volatility to markets in March, with the largest-ever average daily move of any month in S&P 500 history pushing the VIX index to its highest close ever, eclipsing even the worst of the 2008 Financial Crisis. The volatility was not all on the downside either: after suffering its worst 20-day return in history into the low on March 23, the S&P 500 recorded its best 3-day return ever toward the end of the month. When it was all said and done, stocks had skidded to their worst first quarter in history.
True to their “risk-responsive” nature, TCM strategies all recorded very strong results after profiting during the market’s dramatic decline and subsequent bounce. Profitable on nearly 80% of days in March, Alpha Seeker (+11.2%) recorded its best overall month in six years and its best month relative to the S&P 500 since 2012, while the massive outperformance of VIX products relative to the decline in equities boosted Smart Index (+19.5%) and Legacy Navigator (+8.2%) to their best months since inception.
As of March 2020, TCM strategies are not only standouts in a brutal year, but are each ahead of their respective benchmarks with lower volatility over every annual time frame since inception (1-year, 2-year, 3-year, etc). This is no small accomplishment, and a testament to the power of risk control.
Rolling returns as of March 2020. 2- and 3-year returns are annualized. Alpha Seeker and Smart Index net of 1% management fee.
We make no attempt to predict the future- we let the VIX do the predicting and then follow along. Right now, its message is clear: the virus shock is massive, and markets will need time to stabilize. With VIX contracts still holding at crisis levels even several months in the future, it appears that those conditioned to expect a “V” bounce for equities could be in for months of frustration.
We recently made an update to the allocation of our Legacy Navigator portfolio, swapping its 10% allocation to 7-10 Year US Treasuries (IEF) for Investment Grade Corporate Bonds (LQD). With US interest rates approaching zero and the Fed explicitly supporting the investment grade corporate bond market as a result of the coronavirus shock, we feel the risk/reward trade off of fixed income has tilted decisively in favor or exposures like LQD.
As always, we will continue to monitor market developments and use signals from the VIX marketplace to guide our portfolio exposures. Please contact us with any questions.
Legacy Navigator allocation pre- and post-3/24/20 update. Subject to change without notice.
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