Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser. Cabana only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of Cabana by securities regulators and does not imply a level of skill, training or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2 and its Form CRS, copies of which are available upon request, and online at www.adviserinfo.sec.gov.
The material presented on the Cabana Advisor Tool (the “Tool”) is proprietary, and is not to be copied, reproduced, altered, deconstructed, or distributed without Cabana’s express written consent.
The Tool is intended for informational purposes only and is not investment advice or a recommendation to buy or sell any securities.
The Tool is intended for use by investment advisors to generate an investment portfolio composed of certain of Cabana’s Portfolios, and does not reflect an actual portfolio. The Tool is highly reliant on the gathering and analyzing of large amounts of data and it is not possible or practicable, however, to factor all relevant, available data into Cabana’s proprietary algorithm (as adjusted for the Tool, the “Tool Algorithm”). The Tool is by its nature a simplification of reality, and real-world events can prove those simplifications inappropriate. The returns presented are a depiction or illustration of the Tool’s application of its algorithm to historical data (i.e., hypothetical) and are not intended to indicate how the actual Cabana proprietary algorithm will be applied in the future in actual circumstances.
The Tool is not promissory or predictive, and actual results could be substantially lower than shown. There is no guarantee that any results will align with those shown in the Tool. The results shown represent retroactive results generated by applying the Tool’s current algorithm, with the benefit of hindsight, to historical market data. Like all investment advisers, Cabana has an incentive to present results that reflect positively on its investment strategies. While Cabana seeks to apply its algorithm objectively and consistently, Cabana might not be successful in removing all instances and forms of bias from the model construction and implementation processes and this presentation of the Tool.
Hypothetical returns involve significant elements of subjective judgment and analysis, and the assumptions on which they are based may prove to be invalid or may change without notice. Variations in any of these factors could cause actual returns to differ substantially from those returns displayed by the Tool. Other foreseeable and unforeseeable events, which were not taken into account, might occur. Hypothetical returns provide insight into the level of risk that Cabana is likely to seek with respect to its investments. As such, the hypothetical returns should be viewed as a measure of the relative risk of such investments, with higher hypothetical returns generally reflecting greater risk (e.g., greater drawdowns, volatility, and risk of loss). The recipient is urged to use extreme caution when considering hypothetical Outputs (as defined below under “Hypothetical Returns”), and not rely on such Outputs in making an investment decision.
The results shown in the Tool are subject to the limitations of the Tool and the specific calculation methodology applied as well as the investment universe and data sources then available. All performance results and risk targets contained in the Tool are subject to revision by Cabana and are provided solely as a guide to current expectations. The returns presented are not the actual returns of any portfolio invested in the strategy and are not intended to reflect the returns of the strategy in the future. There can be no assurance that a strategy will achieve any performance result or that there will be any return on capital. The returns do not reflect the deduction of trading costs but do reflect the deduction of Cabana’s advisory fees for the Cabana investment portfolios (each a “Cabana Portfolio”). The advisor and their client should carefully review all Cabana disclosures provided by Cabana prior to making any recommendations and investing, as applicable.
The Cabana Strategies as used in the Tool
Cabana Portfolios invest in ETFs selected by Cabana (the “Underlying ETFs”).
Based on the inputs and risk tolerance chosen by the investment adviser, the Tool:
(1) selects up to three Cabana Portfolios from a group of six Cabana Portfolios (the six Cabana Portfolio strategies that the Tool draws from are: The Target Drawdown Professional Series 5, 7, 10, 13 and 16; and the Cabana Income strategy);
(2) allocates a portion of the investment account to each Cabana Portfolio based upon the user’s input; and
(3) provides output resulting from the combination of the selected Cabana Portfolios.
While the Cabana Portfolios were not in existence for the entirety of the time-period that the Tool can display, the performance results and metrics are based on the actual results of the Cabana Portfolio’s Underlying ETFs, which have been in existence since at least January 1, 2007, except as we note below.
Data is populated in the Tool daily, and Cabana revisits and adjusts the Tool Algorithm as it believes is necessary, typically several times each year, although this schedule varies.
Hypothetical Returns
The outputs presented by the Tool, including Compounded Annual Return, Compounded Account Value, Tax Amount, Maximum Drawdown, Tax Efficiency, Tax Savings and Dividend Yield (each an “Output” and collectively, “Outputs”) are purely hypothetical and are intended for illustrative purposes only and should not be construed or relied upon as actual performance. The Outputs are not based upon the actual investment of client funds and were never actually achieved. Instead, they are based on historical market data showing what the performance of a portfolio may have been if the adviser had managed the portfolio using a specific investment strategy over a certain time-period that has already occurred. (Such performance results can also be referred to as being “back-tested”). The Outputs are net of Cabana’s advisory fee, but do not include all fees incurred by such clients, unless the financial advisor adjusts the Advisor Fee input, and even then, not all fees a client may incur will be accounted for in the Outputs.
Hypothetical performance results have many inherent limitations, some of which are described in this document. Cabana makes no representation that any account will or is likely to achieve profits or losses similar to those shown in the Tool. In fact, there are frequently differences between hypothetical performance results and the actual results subsequently achieved by any particular strategy. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. For these reasons and others, hypothetical returns tend to be higher than those that can be achieved through actual trading.
Specific limitations and differences between the Outputs and Cabana’s Portfolios include but are not limited to, the following:
- The Tool Algorithm is not implemented in real life. The Tool Algorithm is only a representation of the algorithm used in the Cabana’s Portfolios and is not actually used in real life. The Tool Algorithm differs from the algorithm Cabana actually implements in its portfolios in that the Tool Algorithm assumes that all trading achieves end-of-day pricing for the Underlying ETFs, without regard to when the Underlying ETFs are actually traded and the price achieved. In real life, the Cabana algorithm is implemented throughout a trading day and trades are executed at intra-day market prices rather than at market close. Accordingly, the Outputs displayed in the Tool are based on an assumption that does not occur in real life. In addition, the Cabana Portfolios incur expenses that are not accounted for in the Tool Algorithm such as trading expenses. For Cabana strategies that allocate to the Cabana ETFs, the Tool Algorithm differs from such strategies because the Tool Algorithm does not use the Cabana ETFs and thus does not account for the total expense ratios of the Cabana ETFs, which would have an adverse effect on certain Outputs.
- Variance in the timing of trades. The Outputs reflect automatic end–of–day trading upon receipt of a hypothetical rebalance signal from the Tool Algorithm. However, Cabana’s Portfolios are generally subject to a 3- to 5-day delay from the time a rebalance is signaled to the time the rebalancing is completed. This delay accounts for Cabana’s blackout procedures, trading preparation, and execution via third–party trading systems. As a result, the Outputs can more quickly and efficiently reflect the rebalancing signals from Cabana’s proprietary algorithm and this will cause the performance results of the Outputs to differ from the actual performance achieved (or that would have been achieved) by the Cabana’s Portfolios. Similarly, hypothetical trading does not involve financial risk, nor is it subject to numerous other factors that relate to the performance of markets generally, any of which could adversely affect Cabana’s (or a financial advisor’s) actual trading. The resulting variance in trading execution can and will have a material impact on performance between the Outputs and Cabana’s Portfolios. In addition, Cabana’s actual trading will be subject to trade errors from time to time which could cause additional delays and changes in variances in performance. For these reasons and others, hypothetical performance almost invariably shows better results than would be achieved through actual trading.
- Variance in cash allocation. Cabana’s Portfolios allocate 2% to cash to account for liquidity needs (i.e. fees) whereas the Tool Algorithm reflects a 0% cash allocation for modeling purposes. As a result, each Output will show better performance over time because it is gross of these fees when compared to Cabana’s Portfolios. The difference in allocation results in a variance in performance between each Output and Cabana’s Portfolio’s which will be material when applied over an extended time period.
- The Tool Algorithm benefits from modifications to Cabana’s proprietary algorithm. Cabana’s proprietary algorithm has been incrementally modified over time to optimize and automate its methodology. Likewise, because the Tool Algorithm is a representation of the Cabana proprietary algorithm, it will implement and benefit from such modifications. However, hypothetical performance information assumes the consistent and unchanged application of the latest version of the model during all periods presented. Accordingly, the Outputs reflect modifications to the Cabana proprietary algorithm (as implemented by the Tool Algorithm) that were not in use by any of Cabana’s Portfolios during the same time periods and therefore there will be material variances in performance as a result of such modifications. This means the Tool Algorithm benefits from these incremental modifications and applies them across the selected time period and such modifications could improve the hypothetical performance results, and do not reflect the Cabana proprietary algorithm’s capabilities at all time periods or results that could have been achieved at those time periods; over time, it is possible that even incremental modifications could cause the performance results to differ as between the Tool and the Cabana Portfolios, and such difference could be material.
- The Tool Algorithm benefits from changes to the Underlying ETFs. Cabana’s investment committee evaluates Underlying ETFs and changes the pool of Underlying ETFs when deemed appropriate. The Tool Algorithm benefits from these changes as more products become available in the market, which will likely materially impact performance. This means that the Outputs benefit from and select products that were not available at the time the Cabana’s Portfolios were selecting products, which cause the Tool Algorithm’s hypothetical allocation to Underlying ETFs to differ from the Cabana’s Portfolios actual holdings during a certain time period, and any difference does result in a difference between the Outputs and Cabana’s Portfolios performance, and lead to materially different performance results over time.
- Tax Savings from ETF Investments and Limitations in Output. The “Tax Savings” field shows the amount of taxes the hypothetical account avoided due to the benefit of investing within an ETF structure; an account invested without the ETF structure would have paid this amount in taxes. In order to calculate the Tax Savings, the Tool applies the following formula: taxSavings = gain * taxRate / 100 – tax. “Gain” means the account value at the end of the interval minus the account value at the beginning of interval. “Tax” means the amount of taxes the account would owe based upon the application of the top marginal tax rate selected by the adviser, and with that rate applied to all gains. In some circumstances, accounts will have an unrealized loss, even though an individual portfolio holding may itself have a realized gain. In those cases, the Tax Savings is a negative number due to the realized gain. If the Tax Savings is negative, then The Tool shows the Tax Savings as being 0, and also shows the tax efficiency as 0%. Note that Cabana does not provide tax advice and we encourage you to discuss this with your own tax advisor.
- Dividend accounting for cash dividend payments. The Tool automatically reinvests cash dividends on the ex-dividend date, which may cause the performance Outputs shown in the Tool to be higher than that of an actual Cabana account. Actual Cabana client account performance will be lower than the Tool Outputs when a Cabana client account is held at a broker or custodian that uses the cash accounting methodology instead of the accrual accounting methodology. Such broker and custodian reporting systems that do not accrue dividend payments on the ex-dividend date will show a reduction in account value until the cash proceeds are actually in the account. This means that if the ex-dividend date is in one accounting period and the dividend payment date is in the next accounting period (month, quarter, year), the account valuation for the customer whose account is held at a broker or custodian using the cash accounting methodology will be lower at the end of first accounting period. This will result in a reduction in any gains or addition to any losses during the first accounting period. Because the Tool automatically reinvests dividends on the ex-dividend date, performance Outputs will be unaffected by this issue and will be higher than if the Tool used the cash accounting methodology.
- Use of Underlying ETFs. Not every Underlying ETF has a history back to January 1, 2007, which is the earliest date the Tool permits a user to select. For Underlying ETFs that did not exist that far back in time, the Tool makes assumptions and substitutions that will result in material performance differences between the Outputs and Cabana’s Portfolios performance. These material differences arise for several reasons, including:
- the Tool will incorporate data from one of two sources for each day the U.S. markets were open during the period that the Underlying ETF was not in existence. These data sources are either: (1) cash (US dollars), equivalent to the percentage that the Tool Algorithm allocates to that asset class; or (2) an ETF that was in existence during the missing performance period for the Underlying ETF (“Substituted ETF”) and that is in the same asset-class as the Underlying ETF (based upon asset-classes as defined by Morningstar). The behavior of cash and of a Substituted ETF varies from that of the Underlying ETF.
- The Tool Algorithm makes the assumption that the use of cash or a Substituted ETF is an appropriate substitute for the missing Underlying ETF, but it is impossible to be sure that such substituted cash or Substituted ETF is in fact an appropriate substitute because (i) there is no performance history of the Underlying ETF during the missing performance periods to support the reasonableness of the assumption, and (ii) cash does not generally behave like an ETF.
- The percentage of Substituted ETFs and cash in any given portfolio changes over time, depending upon the time frame and scene selected by the user as Inputs. The time periods for the use of cash generally date from January 1, 2007 through August 25, 2015. However, cash was more likely to be used as a substitute for the period from January 1, 2007, through December 27, 2007. Although cash may be used as a substitute for certain Substitute ETFs, it is less likely that cash will be used for a material percentage of an allocation after 2007. Note that market conditions during from 2007 through 2009 were generally not favorable to investors, as a result, the use of cash as a substitute during that timeframe would cause certain performance Outputs to be more favorable than if an ETF was invested in the market during that time (as explained below).
- When the Tool uses cash as a substitute for an Underlying ETF, material differences in performance may occur depending on the market during the selected period. For example, if cash was used as a substitute during a down market, the performance decrease (or drawdown) may be less drastic because a larger portion of the hypothetical strategy would be in uninvested cash that would not experience the same loss in value as invested assets.
- the Tool will incorporate data from one of two sources for each day the U.S. markets were open during the period that the Underlying ETF was not in existence. These data sources are either: (1) cash (US dollars), equivalent to the percentage that the Tool Algorithm allocates to that asset class; or (2) an ETF that was in existence during the missing performance period for the Underlying ETF (“Substituted ETF”) and that is in the same asset-class as the Underlying ETF (based upon asset-classes as defined by Morningstar). The behavior of cash and of a Substituted ETF varies from that of the Underlying ETF.
Hypothetical performance is based on a variety of factors and assumptions including that investments with similar characteristics will continue to be available and perform similarly. Unless otherwise indicated, performance data is expressed in U.S. dollar currency and includes the reinvestment of dividends and capital gains. Target Drawdown is identified on a gross of advisory fees but net of trading costs basis. Any fees will reduce actual returns.
Past performance is no guarantee of future results. No client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance. All investment strategies have different degrees of risk and the potential for profit or loss. There is no guarantee that any specific investment or strategy will be suitable or profitable for any investor. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. While loss tolerance and targeted “drawdown” are identified for each Cabana’s Portfolio, the Tool Algorithm does not take any one client’s situation into account, such as an account’s investment objectives, financial situation, or the particular needs of any individual investor. It is the responsibility of the advisor to determine what is suitable for the client. An advisor should not simply rely on the name of any portfolio to determine what is suitable. All references to Cabana’s proprietary algorithm and the Tool Algorithm herein refer to the most current version of the algorithm as of the date of use of the Tool.
