Down Market Strategies

bee

I've been contemplating down markets as we make new highs in some areas of the market.

I have been reviewing my portfolio for what has not participated to the recent upside and I trying to understand why. Like being picked last in kickball, some of my holdings have been left on the sidelines. I need to consider the value these laggard investments provide my portfolio. Most importantly, as an retired investor in the de-accumulating phase of life, I contemplate how best to manage my portfolio withdrawals as I dollar cost average out of positions in up and down markets.

Long term treasuries have historically appreciated during periods of equity down turns. This was not the case most recently as we witnessed both equities and bond move down in unison.

Have we returned to more normal times where bond (especially LT bonds) will balance out our portfolio performance by acting as the opposite weight (barbell) to our equities?

Time to review some of the all weather portfolio links I have bookmarked somewhere.

I'll start be re-posting @hanks June 2023 discussion submission:

debate-over-60-40-allocation-continues/p1

hank

”Have we returned to more normal times where bond (especially LT bonds) will balance out our portfolio performance by acting as the opposite weight (barbell) to our equities?”

@bee - Thanks for this great post. I agree recent relationships (assets / segments) haven’t made a lot of sense.

Err … I’d say “semi-normal times”. If equities tank, bonds don’t have to gain to prove their worth. If they just hold their own (and continue to produce income) it would be a net positive. Some might say than why not cash? Good question. But bonds can lock in some longer duration in case rates tumble. And a good bond fund manager can diversify into “corners” of the market (and play around there) that might be more rewarding. / d

Sorry - I don’t have any “down market strategies”. If I were worried I’d gradually raise my cash allocation, which sits at a nominal 10%. That number’s a bit deceiving because most of my other holdings (funds) also hold some cash / short term bonds. One thing I work hard on is diversification. I try to stay away from the Mag 7 and that kind of Crap stuff!

Edit - Just to note - I do like L/S funds at my age (78). Own 2 @10% each.

sma3

I think it depends on why the market crashes. 2022 crashed because of the rapid rise in interest rates, which killed normally safe bonds, in proportion to their duration.

With Interest rates higher, it is less likely that a sharp rise will occur, but not impossible if there is some geopolitical shock. Treasuries should do much better than corporates.

I compared the performance of a number of different ETFs that hedge in various ways during 2022 ( interest rate ppt) and 2020 ( economic catastrophe from Covid)

Many of the "hedged " ETFs ( JHAQX HEQT TAIL) lost money but not as much as the market in both situations. TAIL was up in 2020 but down in 2022 because it uses treasuries for collaterals. In 2020 Long term treasuries did well but got killed in 2022.

The only hedges to consistently increase in both situations were inverse equity ETFs and ETFs that go long on Volatility. Both classes of funds loose day in and day out during regular up markets or even side ways markets, so are a constant drag on performance.

HSGFX was positive in both situations, but I can never be sure I know what Hussman is going to do.

hank

Nice comprehensive post @sma3

Yes. Inverse funds, TAIL, HSGFX, others work in down markets. Knowing when to get-in and get-out is problematic. I’ve carried small positions in SPDN (inverse S&P) and DOG (inverse Dow) in the past as hedges while remaining overwhelmingly long. They did serve a purpose in mitigating down days. But in hindsight I’d rather let a L/S manager make the long-short decisions. I noticed once that Leuthhold’s Core ETF (LCR) maintains a very small position in SPDN - something north of 2% as I recall. Interesting, because the fund is essentially “long” equities.

Lots of ways to slice & dice!

JD_co

There's no shortage of conservative funds that claim they can smooth the ride. Choose your poison. Many of us like to play around for fun.

Here are some "diversifiers" from my watchlist, some of which I would buy, and some I would not.

-Balanced/Allocation Funds (VWINX, VWELX, PRCFX)
-Multi-Asset (MAFIX, REMIX, PRPFX, QDSNX)
-L/S and Market Neutral Funds (QLENX, VMNFX)
-Option strategies (JHQAX, HELO)
-Merger Arb (HMEZX, ARBFX)
-Funds that are willing to hold Cash (PVCMX, LCORX)
-Low volatility (MLVAX, SPLV)

Observant1

bee said:

I've been contemplating down markets as we make new highs in some areas of the market.
[snip]
Long term treasuries have historically appreciated during periods of equity down turns. This was not the case most recently as we witnessed both equities and bond move down in unison.

Have we returned to more normal times where bond (especially LT bonds) will balance out our portfolio performance by acting as the opposite weight (barbell) to our equities?
[snip]

Intermediate-Term Treasuries have historically provided ballast for stocks during downturns without the duration risk of Long-Term Treasuries. I don't believe 2022 bond market performance will be repeated anytime soon. Starting yields were very low and the Fed funds rate increased significantly thoroughout 2022.
We have returned to more normal times.
This doesn't preclude Treasuries or investment-grade bonds from experiencing potential losses in 2024.
However, I think high-quality bonds are much more attractive today compared to a few years ago.

Sven

Quite honestly I have not been successful with alternatives in the last few years. I move on to short bonds and T bills. Much less expensive to own.

sma3

I have found inverse funds helpful for taxable accounts when selling would trigger large gains, and to damp down volatility when things go really south. Of course when they go wat up ( 2008 and 2020), I can never sell them at the top so it usually is a round trip.

I am rereading Taleb's Black Swan and "Fooled by Randomness" both highly recommended. A recent book "Chaos Kings" details how Taleb and other guys make money during crashes, usually with deep out of the money puts, I guess. Some of the ideas mentioned in the book pay off huge profits if the drops are severe enough.

The author of Chaos Kings says "finally there is a similar product for retail investors " and says it is SPD an ETF from Simplicity designed to capture downside convexity.

When I checked, SPD lost 19% in 2022, presumably because of the decline in the treasury collaterals. They also have another hedged ETF CYA ( what a sense of humor!) that is hard to figure as it lost 50% in a three day period in October ( early in the week).

I was going to talk to them about this stuff when I get a minute. Simplicity is a pretty sharp group of option guys whose specialty is custom ETFs with complex strategies.

Another idea I haven't used but maybe someone else has are the new "buffered" ETFs.

Now interest rates are back up it is simpler and probably more profitable to use short term treasuries

FD1000

IMO, the only way to avoid a crash is to sell to MM and buy back after that. Yes, it is timing. Most can't do it so just own several funds up to 6-7, using indexes and good managed funds(PRWCX), according to your goals and risk, and hardly trade.

See (link).

hank

@sma3 - Thanks. Taleb sounds fascinating. Next on my audible listening list. Currently still listening to Howard Marks, who likes Taleb and quotes him in some of his chapters.

Marks tells a funny story about a (fictional) fund manager who, after a 10 year sizzling hot bull market in stocks, writes a letter of apology to his clients for having lagged the S&P over that time. He and his staff have been trying to “uncover” the reason for why some manager years ago decided the fund needed to own bonds. It’s a real mystery to the current staff. Apparently the decision was based on some unfounded “archaic tradition”. So, he’s been gradually selling off the bond holdings over recent years. Now, finally, his fund is rid of its bonds and 100% invested in equities. No more of this bond nonsense.

sma3

@hank

Eric Cinammond ( PVCMX) calls it "the art of looking stupid" . This is a good read.
( BTW PVCMX was ahead of SP500 last three years until October with lot smoother ride!

https://www.palmvalleycapital.com/post/the-art-of-looking-stupid

"In our opinion, current equity valuations do not justify aggressive positioning. However, as we witnessed in Q4 2023, valuations alone have not deterred investors from chasing asset prices higher during the current market cycle. With small caps soaring into the end of the year, we're sure our patient positioning didn’t look very bright. But this isn’t new for us. Patient positioning almost always looks unintelligent during periods of sharply rising asset prices. And while we can’t predict the future, we expect we’ll continue to experience periods of looking stupid, and maybe even smart, but rarely will our paths look the same."

I would think the worst thing to do is to be forced to go 109% in equities because your staff ( or investors) don't like bonds.

Individual investors do not suffer from GMO's career risk where they can be fired for underperformance, unless your partner pays much more attention to the bottom line than mine does.

We just have to answer to ourselves and be able to sleep at night

hank

+1

Marks is a big contrarian. The point of the story I recounted wasn’t necessarily that Marks is a big fan of bonds. His point is simply that herd-following (both for individuals and at institutions) is a huge factor affecting market valuations. He advocates making money by running against the herd and buying whatever isn’t popular. Could be bonds, could be unpopular stocks, unpopular styles, etc.

Baseball_Fan

I just hope cinammond doesn't turn into another hussy. Commentary is very astute and rational but does he make you monies and or lose you monies via opportunity costs?

I've reduced my holdings on pvcmx and put those monies in 6 months tbills

FD1000

I invested with Eric Cinammond (ICMAX) several months years ago around 2009-10 and sold when markets started to fly, his analysis looks great when markets crash but then he holds too much cash for too long and misses a lot of performance.
Deep VALUE investing usually = trouble LT, because markets are going up most times, based on momo, and can go up much longer than you think. The best I have seen in the last two decades is PRWCX managed by David R. Giroux. It has been a "perfect" fund for anyone who loves a great risk-adjusted performance fund.

sma3

Depends on how well you want to sleep and how much return you need. Cinammond has a much better defined investing approach than Hussey. I could never figure the latter out.

WABAC

hank said:

+1

Marks is a big contrarian. The point of the story I recounted wasn’t necessarily that Marks is a big fan of bonds. His point is simply that herd-following (both for individuals and at institutions) is a huge factor affecting market valuations. He advocates making money by running against the herd and buying whatever isn’t popular. Could be bonds, could be unpopular stocks, unpopular styles, etc.

As long as you have the nerve to sit it out, you'll already be there when the market turns in that direction. If whatever it is pays dividends, you have been buying cheap shares along the way.

BaluBalu

Is it reasonable to call PVCMX a tactical allocation fund, rather than an equity fund?

I have liked HFSAX in the tactical allocation category for a while. I spoke with the fund personnel a few years ago but never got around to pulling the trigger because I was not sure how long the manager will work in asset management (single manager fund). Does anyone here by any chance know? He does not need work. I am not sure anyone else can replicate his skill. I think 2022 and 2023 performance is an anomaly relative to the fund's long history.

davfor

bee said:

Most importantly, as an retired investor in the de-accumulating phase of life, I contemplate how best to manage my portfolio withdrawals as I dollar cost average out of positions in up and down markets.

Here are a couple of things I think about while considering this issue.

Is there a set % of the portfolio balance or a set $ amount to be withdrawn over a given time period or can market behavior impact withdrawal decisions?

Relatedly, what is the anticipated time period between withdrawals...a month, 3 months, 12 months, etc., or can that also vary depending on market behavior?

shipwreckedandalone

PVCMX is absolute return... in this case small cap value. Totally different investing conviction than benchmark investing. Important to know that going in. It serves a purpose for some investors.

hank

Certainly looks like Leuthold is preparing for a “down market”. Just looked this morning and LCORX is sitting at 13% equity exposure according to M*. That’s based on around 17% long and 4% short equity positioning. According to M* 74% of the fund’s portfolio is invested in ”fixed-income” with the remainder in cash. Its newer ETF sibling (LCR) is positioned somewhat more aggressively with 56% net long equity.

The firm has received a lot of attention in recent months, including some kind words from the Professor in last November’s Commentary. They’re apparently betting against what seems like an increasingly euphoric mainstream media and retail investment crowd.

Edit - The M* figures are not accurate. See comments from Mike & Catch below.

JD_co

MRFOX is getting noticed in another MFO thread. Fund Mgrs are willing to move to cash, and have shown good timing/judgement in the past. Limited brokerage availability.

MikeM

I don't think M* gave you the right information, @hank. When I look with Schwab, LCORX has net equities of 62% (76 long, 14 short), 17% bonds and 21% cash (as of 12/31/23). LCR has differed little in holdings than LCORX since LCR inception.

catch22

From the fund company page. LCORX Holdings dated: Jan. 1, 2024

https://funds.leutholdgroup.com/funds/48-leuthold-core-investment-fund

hank

Thanks fellas. I thought it looked suspect. Wonder why M* has it so far off? I’ve looked at M* in the past and it showed a much higher allocation to equities for LCORX so I incorrectly assumed a change had occurred. M* also downgraded LCORX from gold to silver at the end of December - FWIW. They cite high fees (despite a recent reduction) and a lot of turnover in the managerial ranks at the firm. I wouldn’t pay much heed. Just reporting ….

@Catch. That’s a great chart. And dated 1/1/24

zenbrew

@Hank
The discrepancy seen for LCORX on Morningstar is that they have 3 options under asset allocation on the portfolio page. The classic gives the typical allocation. The economic exposure supposedly reflects derivative effect. There's also a market value tab. Some mutual funds and ETFs don't have the economic exposure tab- ie LCR.
LCORX invests in individual stocks vs LCR which is a fund of funds to implement their (I imagine) similar strategies. I'm not sure which would be more advantageous.

hank

Thank you @zenbrew

Something I hadn’t realized before. You have it correct. Click on “classic view” header at the top and the numbers match those Catch pulled up from Leuthold’s site.

Hmm … Something to munch on (the discrepancies among the 3 different views).

sma3

another idea for down market strategies

Buffered ETFs like PJAN BURF or BALT There are over 100 of them in all flavors with limited downsides. down to a certain percentage. But upside is limited too