Post on 04-Feb-2018
David C. Wright, Managing Director
Sierra Investment Management, Inc.
and the Sierra Mutual Funds
National Advisors Trust Conference
Las Vegas May 2013
BUY & HOLD vs.
TACTICAL STRATEGIES
NAT Vegas 0513
2
TOP EMERGING THEMES FOR 2013
The investment industry is increasingly focusing on
Risk mitigation – clients are tired of the rollercoaster and have lost faith in the old theories
“Alternative Investing” – especially “Absolute Return” – for the same reasons
“SECULAR” BULLS & BEARS Latest 113 years
Stocks can be productive for long periods – and then NOT productive – but always volatile (risky)
CYCLES – RISK ON,
THEN RISK OFF,
THEN REPEAT
5
“Behavioral Finance” now plays an important part in the emerging new investment theories
THE “RISK ON/RISK OFF” CYCLE
“SECULAR” BULLS & BEARS Latest 113 years
Let’s take a quick look at the cycles within the 1965-1982 secular Bear Market
BIG RALLIES OCCUR EVEN DURING EXTENDED SECULAR
BEAR MARKETS
A “Secular” Bear Market: The Dow first touched
1000 in 1965 – 17 years later, the Dow was at
764!
1/66-8/82: CYCLICAL RALLIES DURING
EXTENDED (“SECULAR”) BEAR MARKETS
Circles: a 32-month rally of 66.6%, 1970-73,
and a 22-month rally of 75%, 1974-76
Major cycles within the current secular Bear Market – how will your clients react to another
down cycle?
RECENT STOCK MARKET CYCLES
Latest 16 years Now
>+138%!
PROJECTED ASSET CLASS RETURNS
Next seven years, after 2.5% inflation
GMO’s LT outlook for the S&P is not attractive! Our own shorter-term outlook is: “trouble ahead”!
David C. Wright, Managing Director
Sierra Investment Management, Inc.
and the Sierra Mutual Funds
CFA Institute
Chicago, Illinois May 2012
The Ongoing (R)evolution
in Investment Theory
CFA Institute 0512
RE-THINKING ASSET ALLOCATION – and “BUY AND HOLD”
“BUY AND HOPE”
Can you name any Wall Street firm that has EVER used a buy-and-hold approach in its own multi-billion $ “proprietary” accounts?
B&H has been a convenient, self-serving paradigm for brokers and the mutual fund industry – and it has destroyed the retirement finances of tens of millions of Americans
B&H ignores the impact of risk on real people
HOLDING PERIODS FOR STOCKS
Latest 89 years
How many institutions believe in
“Buy and Hold”? Should you?
Average is now less than 12
months
Average was 6-8
years, 40 years ago
HOLDING PERIODS FOR STOCKS
Latest 89 years
How many institutions honestly believe in
“Buy and Hold”? Should you?
The most recent average is TWO
MONTHS!
Average was 6-8
years, 40 years ago
SOME ISSUES WITH BUY-AND-HOLD
The downside can be substantial
One can go a decade or more
without any gain
Too much focus on one Asset
Class – U.S. equities – leads
one to not pay attention to other
profitable uptrends and new
opportunities
$6.50-
6.00-
5.50-
5.00-
4.50-
4.00-
3.50-
3.00-
-6.50
-6.00
-5.50
-5.00
-4.50
-4.00
-3.50
-3.00
2007 2008 2009 2010 2011
“TRAILING STOPS” One example
Sierra uses trailing stops to limit the impact of a sustained decline in any holding
Moving Average
(blue)
Northeast Investors Trust (red)
to 4/27/11
Sell
THE RISE OF “ALTERNATIVE INVESTING”
Institutional investors (and others)
became greedy for higher returns –
through 2000
Starting about 2001, institutional
investors became dissatisfied with the
results of traditional models
The hedge fund industry, then the mutual
fund industry responded, plus ETFs
Many of the new products and strategies
have names driven by marketing appeal
BASICS OF “ALTERNATIVE INVESTING”
Allocate among more Asset Classes – e.g., Permanent Portfolio Fund
“Tactical allocation” and “strategic allocation”: Change the allocation according to some discipline
A wide range of “alternative strategies” – e.g., managed futures, long-short, market neutral, “strategic income”, “Absolute Return” – are dominant themes today
BUY-AND-HOLD and STATIC ASSET ALLOCATION
A static asset allocation (pie chart) is
a version of Buy and Hold
A static allocation to investment
managers can result in the same
Are there times in the market cycle
to take on risk, and times to reduce
risk?
A CLASSIC EXAMPLE OF SUCCESSFUL
“TACTICAL ALLOCATION”
260- 240- 220- 200- 180- 160- 140- 120- 100- 80-
-260 -240 -220 -200 -180 -160 -140 -120 -100 - 80
Same end result, but a far bumpier ride – at least, for Buy and Hold investors
“JUNK BONDS” vs. TREASURIES Recent 10 years
2001 2003 2005 2007 2009 2011
to 9/9/11
PIMCo Long-Term U.S. Gov’t – up
130%
Fidelity Adv. High Income –up
140%!
260- 240- 220- 200- 180- 160- 140- 120- 100- 80-
-260 -240 -220 -200 -180 -160 -140 -120 -100 - 80
Let’s examine this phase of the “risk taking/risk aversion” cycle
“JUNK BONDS” vs. TREASURIES Recent 10 years
2001 2003 2005 2007 2009 2011
PIMCo Long-Term U.S. Gov’t
Fidelity Adv. High Income
to 9/9/11
250-
225-
200-
175-
150-
125-
100-
-250
-225
-200
-175
-150
-125
-100
2003 2005 2007
3.2% compounded in Treasuries vs. 22.7% in High
Yield Corporate Bonds, with a skillful manager
A “TIME” FOR JUNK BONDS during the recovery phase, 9/02-6/07
PIMCo Long-Term U.S. Gov’t – up 14.2%
Fidelity Adv. High Income – up 161%!
260- 240- 220- 200- 180- 160- 140- 120- 100- 80-
-260 -240 -220 -200 -180 -160 -140 -120 -100 - 80
to 9/9/11
2001 2003 2005 2007 2009 2011
Now the opposite part of the cycle – June 2007-February 2009
THE “RISK” CYCLE REVERSES High-grade outperforms high yield
Fidelity Adv. High Income
PIMCo Long-Term U.S. Gov’t
130-
120-
110-
100-
90-
80-
70-
60-
50-
-130
-120
-110
-100
- 90
- 80
- 70
- 60
- 50 2007 2008
High-yield bonds have more correlation
to stocks than to Treasury bonds
Fidelity Adv. High Inc.
“RISK ASSETS” PEAKED IN 2007 -- time to move to safer Asset Classes – like
now?
PIMCo Long-Term U.S. Gov’t
6/12/07 to 12/19/08
225-
200-
175-
150-
125-
100-
75-
-225
-200
-175
-150
-125
-100
- 75 2009 2010 2011
Score: Risk-taking +126.6%, “safety” +3.6%
Fidelity Adv. High Inc.
WHEN THE CYCLE TURNED AGAIN
after the March 2009 “Global Fear Bottom” 12/19/08 to 2/8/11
PIMCo Long-Term U.S. Gov’t
130-
120-
110-
100-
90-
-130
-120
-110
-100
- 90
PIMCo Long-Term U.S. Gov’t
(green)
During 2011, many non-U.S. market participants gradually lost appetite for risk
THE “RISK” CYCLE TURNED AGAIN
Seven great months to be in high-grade!
to 10/4/11
2011
Fidelity Advisor High Income Adv. (red)
130-
-
120-
-
110-
-
100-
-
90-
-130
-
-120
-
-110
-
-100
-
- 90
PIMCo Long-Term U.S. Gov’t
(green)
Although many global Risk-On asset classes peaked months ago (or more) – HYCB not yet
THE CURRENT “RISK-ON” CYCLE
Mid-2011 to the present
to 4/17/13
2011 2012 2013
Fidelity Advisor High Income Adv. (red)
THE BIRTH OF “ABSOLUTE RETURN”
First goal – to mitigate volatility
and downside risk
Second goal – to achieve
satisfying average returns
Hmm – sounds strangely like
what conservative clients have
been seeking for a long time?
Thanks!
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