Did you predict U.S. stocks would perform so strongly right after the 2016 presidential election?
Did you predict that U.S. stocks would sell off in December 2018, and then recover in January 2019?
The Huygens active equity portfolios
So many investors react to volatile markets by moving their money to the sidelines, then waiting “until things settle down” to get back in.
The hardest thing about a market selloff isn’t knowing when to get out - it’s knowing when to get back in. Most often, that right time happens well before the typical investor’s emotions are comfortable again with taking risk.
That’s why we developed our active equity portfolios. They’re designed to:
Capture some of U.S. stocks’ growth during low volatility periods, while cushioning against minor volatility
Reduce risk in periods of higher volatility by switching to a bear market positioning designed to protect assets against losses
Switch back to the bull market positioning quickly as the volatility abates
In bull markets, the portfolio favors stocks with strong price momentum and low price volatility, with some government bonds in the portfolio to cushion unforeseen volatility. The bullish portfolio consists of:
In bear markets, the portfolio replaces the momentum stocks, which can be more volatile, with 10-year treasuries to protect against steep losses. The rest of the portfolio remains unchanged. The bearish portfolio consists of:
The above portfolio weights are for our customers that have selected capital preservation as their investment objective. The precise weighting of these ETFs in your portfolio will depend on which objective you’ve selected: capital preservation, moderate growth, or aggressive growth.
Past 3 years performance - Huygens Active Equity Portfolio (Capital Preservation objective)*
January 2016 through December 2018
Bear market performance snapshot - October 2018 through January 2019
Huygens Active Equity Portfolio* (Capital Preservation objective)
The above charts show how our active equity portfolios are designed to switch to a bear market positioning in times of market stress, and then back to a bull market positioning as soon as the stress begins to abate.
In October 2016, the bearish sentiment prevailing before the presidential election caused our portfolios to switch to the bear market positioning right before election day.
Then just one day after the election, our portfolios switched back to bull market positioning, and didn’t budge through the rest of 2016 and all of 2017. U.S. stocks embarked on a strong bullish run with little volatility, despite persistent headlines regarding U.S. politics and foreign relations.
In the fourth quarter of 2018, bearish U.S. stock market sentiment was back and stocks were selling off precipitously. Multiple times during that period, our active portfolios switched to bear market positioning, cushioning them against volatility. Had it not switched, the Huygens portfolio shown above would have fallen 3% more than it did in October and again in December.
By year end 2018, the U.S. stock market began recovering. Soon after, on January 9th 2019, our active portfolios switched back to bull market positioning, and maintained it through the first half of 2019.
Huygens Active Equity Portfolios - Monthly Performance Since Inception
July 2014 - August 2019
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Actual performance shown for these portfolios reflects client account and proprietary account performance, both of which reflect the pro-forma impact of 1.25% management fee
The Huygens Active Equity Portfolio’s bull market positioning composition was changed as of April 1st, 2019.
Before this date, the bull market portfolio consisted of IWM (the Russell 2000 small cap index ETF), UWM (the 2x Russell 2000 ETF), SPLV (the low volatility U.S. stock ETF), and IEF (the 10-year U.S. treasury ETF), in proportions that varied based on the investor’s objective (capital preservation, moderate growth, aggressive growth).
After this date, MTUM - the MSCI US Momentum stock index ETF - replaces the portion of the portfolios previously occupied by IWM and UWM.
The MSCI US Momentum stock index is a Smart Beta index (read more about that here) that re-selects and weights its constituents every 6 months, starting from a population of all US large and mid-size publicly traded companies
Our rationale for making this change is described in our Aug 3rd 2019 blog post
Therefore, the equity index return shown for comparison is a composite of the Russell 2000 small-cap index (for the period July 2014 through March 2019) and the Russell 1000 large-cap and mid-cap stock index (for all periods after March 2019).