There are seven portfolios within Cabana’s Target Drawdown Series. The lineup includes multiple target drawdown variations designed to meet the needs of investors across the risk spectrum. Target drawdown ranges from 5% to 20% and includes an income and a tax-efficient solution.
We define target drawdown as the maximum loss, or amount a portfolio’s value can be expected to fall, from peak to trough during adverse market conditions.
We use monthly returns to calculate each portfolio’s drawdown percentage. A new “high-water mark” is created each time the portfolio’s value increases, which means drawdown is determined from the portfolio’s highest value, not from the investor’s starting balance.
All seven Target Drawdown Portfolios rely on the same proprietary algorithm to construct the portfolio — we call it the Cyclical Asset Reallocation Algorithm, or “CARA.” The algorithm runs on a continuous basis to identify changes within the economic cycle and signal reallocation to those assets that are deemed relatively attractive at that time in the cycle.
Risk is determined and adjusted dependent upon the identified target drawdown percentage of each portfolio. The portfolios with smaller drawdown targets generally have less risk at any given time than portfolios with higher targets. Additionally, these portfolios are designed to reduce risk more quickly than those with higher drawdown targets.
We adjust risk through the use of non-correlated and inversely correlated assets. The speed at which risk is removed (and reapplied) is dependent upon the target drawdown of that portfolio. The higher target drawdown portfolios simply remove risk more slowly.
Our asset allocation decisions are based on the relative attractiveness of the various asset classes we follow. We reallocate when our Cyclical Asset Reallocation Algorithm (CARA) signals a change in the economic cycle.
Absolutely not. CARA is not intended to outsmart or time the market or the economic cycle. What it is intended to do is identify the timing of economic change and remove risk from the portfolio on that basis. The key to the system is recognizing that there are certain periods within the repeating economic cycle when all major asset classes become relatively risky.
Cabana claims compliance with the Global Investment Performance Standards (GIPS®) and has been independently GIPS verified on a firm-wide basis for the period January 1, 2012 to December 31, 2018. All seven of Cabana’s Portfolios have been independently examined from Portfolio inception to December 31, 2018. Hypothetical back-tested data on the Model Portfolio from January 1, 2001 to December 31. 2012 has been independently examined by a third-party.
Because we’ve provided a way for advisors to determine a client’s tolerance for risk and match that client to the corresponding Target Drawdown Portfolio, we believe there’s a portfolio or combination of portfolios appropriate for most investors. By truly setting expectations around risk, the Target Drawdown Portfolios have the potential to change the conversation that advisors are having with their clients. With that, all Target Drawdown Portfolios are designed for investing success over the long term.
It varies by portfolio – anywhere from 3-7 years. All portfolios in the Target Drawdown Series are derived from Cabana’s 2001-2011 Model Portfolio hypothetical backtest. The Model Portfolio tested the combination of the Nobel Prize winning concept of Modern Portfolio Theory and Cabana’s Cyclical Asset Reallocation Algorithm (“CARA”). The Model was formally implemented as the Target Drawdown 10 on January 1, 2012. Cabana has been actively managing client portfolios since 2007.
View portfolio fact sheets and the Model Portfolio backtest
The Target Drawdown 10 is rated four stars overall by Morningstar, Inc. The remaining Target Drawdown Portfolios will be eligible for rating in November 2019.