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Special Edition: Advisor Q+A: Market Commentary from Cabana’s CEO – April 20, 2020

4 years ago

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We’re mixing things up this week. The below commentary is a compilation of the questions and answers that came out of a monthly webinar our team hosted last week with professional advisors around the country. The advisors that participated are currently using our portfolios for their own clients, and in my opinion, had some very good and timely questions. I hope everyone enjoys and even learns a little from some of the thoughts and back and forth taking place among those of us that do this for a living. These advisors are on the front lines of taking care of their clients during really difficult times.

1. How do you believe the recent Fed activity impacts Cabana’s investment process and the relevancy of the different factors that we pay attention to and reallocate on, if at all?

Short term, restarting QE and dropping interest rates has an impact on asset pricing, whether it is stocks, bonds, real estate, commodities or the U.S. dollar. Each major asset class is judged by its relationship to a risk-free rate of return, which is being manipulated directly or indirectly by the Fed’s actions.

Long term, investing is always a zero-sum game and capital flows from one asset class to another in search of yield (or return) relative to perceived risk. This is what makes the outcome consistent from one cycle to the next. It’s all relative, and the most attractive asset at any given time wins. Our algorithm is monitoring interest rates across the yield curve, earnings, as well as the price of the broad U.S. market (using the S&P 500 as a proxy). We believe it is these basic data points that make up and reflect the cyclical economy, regardless of how or why they move. It is only necessary to know that they have moved and that they are inherently related.

2. I have a few potential new clients with a current advisor telling them to stay long. What would you tell them? Why invest in Cabana’s portfolios now at the detriment of locking in loss?

While it is ultimately up to the advisor to determine what is suitable for their client or prospect, to me, the most important elements of investing are first, having a process that can be systematically employed and secondly, avoiding large losses. These concepts flow from one another. If your “system” allows for large losses when things get tough, we believe it is unlikely that it will be followed and thus it is not a system at all. Conversely, if an individual’s portfolio avoids large losses during adverse market conditions, we believe the investor will have the confidence to stick to his or her process and in doing so will be more likely to adopt a system that can be successful over a reasonable investment horizon of three to five years.

3. Can you expand on how the portfolios will be free of capital gains taxes this year?

As you know, our portfolios are invested primarily in ETFs (exchange-traded funds). Recent proposed changes in regulation have amended rules relating to the redemption process of underlying shares of tactical ETFs. This change may result in tax neutral transactions, which occur inside the wrapper of the ETF. Our investment committee is working on various scenarios that would allow us to take advantage of this potential change, and will keep our clients and partners updated.

4. Why haven’t there been any equity buys since the market bottom?

Our portfolios currently have approximately a 20% equity position in a large cap/value dividend ETF. This is one of the reasons our portfolios are moving up on days when the equity market bounces.

We have a process of allocating our capital to the assets that our algorithm deems are relatively attractive at given a point in the repeating economic cycle. Our algorithm is focused on a combination of fundamental data, as well as technical data. With this information, we have a picture of what the risk/reward conditions are among stocks, bonds, real estate, commodities and the U.S. dollar. We purchase those assets that are deemed attractive, and then hedge with other assets that are inversely or non-correlated with our target assets. This is one of the methods our algorithm uses to manage risk when stocks sell off.

The other way is that we respond to the changes that our algorithm is seeing and reallocate out of stocks when they no longer appear attractive – based upon the data we are analyzing. Currently, we remain in what we call our Bearish “Scene” as defined by this same data. The current fundamental and technical facts suggest that it is prudent to remain hedged across all assets. Essentially, we are invested with the goal of avoiding large and sudden losses resulting from falling stocks, but also invested to allow for gain if stocks bounce and data improves. We are happy to collect some dividends and bond interest while we wait for a confirmed signal to reallocate and add equity exposure. While continuing improvement in equity prices is a part of that decision, it is not the only factor.

5. Do you fear missing out on a market recovery while waiting for the algorithm to signal a change?

No. We are investors and not traders. We are not interested in guessing, predicting or trying to catch tops and bottoms. We have a systematic approach that focuses on protection of capital first and profits second. We have produced several marketing pieces that exhibit our portfolios’ upside and downside capture versus the S&P 500 during both good and bad markets. These simple mathematical examples evidence the long-term (and short-term) value of minimizing losses, even if it means being a little late back to the party.

Interested in viewing these materials? Send a request to info@thecabanagroup.com

6. Is the algorithm predicting another selloff?

The algorithm currently shows that we remain in bear market conditions and that equities are not relatively attractive compared to other assets. Should the current environment persist, we would expect for stocks to continue to perform poorly in comparison to other assets like bonds, gold and the U.S. dollar.

7. I have a client in the Target Drawdown Income 5 who asked if he/she should move into the Target Drawdown 10, 13 or 16 to capture more of the rebound. What are your thoughts?

Again, determining the suitability of any portfolio falls on the responsibility of you as their advisor. With that in mind, all Target Drawdown Portfolios, including the Income 5, are currently invested in the exact same positions. Moreover, each portfolio will reallocate at the same time. The amount of risk added at the reallocation will be dependent upon the drawdown target of the respective portfolio. The Target Drawdown Income 5, 7 and 10 will add risk on more slowly than the 13 and 16. It is rarely a good idea to try and play catch up and chase returns. We believe that if we stick to our process and remain invested, we will make up ground. 

Download a PDF of this commentary at the following link:

Cabana-Weekly-Market-Commentary-April-20-2020Download

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

“CARA” is Cabana’s Cyclical Asset Reallocation Algorithm. Scenes assigned as per the judgment of The Cabana Group. Scene names and number of scenes have changed over time in an effort to obtain efficiencies and provide clarity of investment objective. 

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm 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 the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV Part 2A or Form CRS. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. 

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

All recommendations made in the prior 12 months are available upon request. Cabana’s allocation history is available here. For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/. 

Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq