Q1 2022 “was what it was” war, inflation, rate hikes…Yikes! A repricing across markets and asset classes is understandably taking place. Pockets of the equity market have held in reasonably well, all things considered. Bonds, on the other hand, have experienced drawdowns and volatility which have been extreme by historical measures. The poor year to date performance in core bond portfolios is particularly painful for investors depending on those allocations for portfolio ballast. However, when index drawdowns challenge all-time historical records and generations-long trend lines are broken, we must wonder if this is over-done? For long-term income investors, opportunities for solid risk adjusted yield are presenting themselves.
I’d be remiss not to mention the 10year- 2year treasuries yield curve briefly inverted on April Fool’s Day (and the following trading day) before that spread quickly moved back into positive territory. Will there be a recession? Yes, there will be a recession someday. However, the shorter end of the yield curve remains in a steepening trend with the 10year – 3month spread above 2% to finish the trading week ending April 14. Is it cliché to say, “cautiously optimistic over the intermediate term”? As such, we prefer the Equally Weighted S&P 500 vs Cap Weight for our large cap equity beta with that allocation currently sitting at 70% of its max position. Equally weighted vs cap weighted roughly cuts Tech and Communications Services exposures by half, and doubles relative representations by Industrials, Staples, Real Estate, Utilities, Materials.
QUANTITATIVE EQUITY
Interesting moves were made in the Alpha Vee Risk Managed Top 5 Sector Indexes as the quarterly rebalance includes a more aggressive equity to treasuries allocation of 90% – 10%, after a moderate 60% equities to 40% treasuries position for Q1. Additions of Healthcare and Communications Services replace Financials and Consumer Goods. The disciplined process scores equities based on a proprietary quality & value model which is applied to 1000+ individual stocks. This scoring drives the quarterly index rebalance & reconstitution, including overall risk posture of equities / treasuries allocations.
STRATEGIC INCOME
Wild bond markets have thrown asset allocators a series of curveballs in the relatively short year-to-date period. On the bright side this is now presenting patient income seekers with opportunities to find solid risk adjusted yield assuming you do not believe that inflation will run at its current levels for years to come. The Rareview Capital Dynamic Fixed Income CEF Strategy has significantly reallocated its portfolio out of High Yield and into Investment Grade Corporates. Recent bond market volatility coupled with high discounts-to-NAV being offered in the Closed End Fund market allowed the strategy to significantly increase its portfolio credit quality while sacrificing very little yield. The Dynamic strategy offers a high level of current income, with the Municipal Bond CEF Strategy seeking high tax-equivalent income and may offer compelling opportunities for tax sensitive investors with longer time horizons. As an interest rate sensitive sector of the market, Municipal bonds have been battered through Q1, making their taxequivalent yields look attractive again.
LIQUID ALTERNATIVES
Commodities have had a great run over the past 12 months as many individual components of the GSCI commodity index remain solidly above their 50 & 200 day moving averages with fundamental narratives to support the elevated prices. Liquid alternative strategies with meaningful exposure to physical commodity markets have shined, helping to buoy portfolios taking shots from both equity and fixed income allocations in Q1. With healthy premiums being seen for carry, volatility, and liquidity I expect alternatives to continue to offer relatively attractive risk-adjusted-returns in addition to diversification benefits as stocks and bonds work to f ind their footing. In instances when Slingshot looks to derivatives markets to harvest alternative risk premia, we prefer trading strategies by specialized active managers. For long, broad commodities exposure we prefer ETFs with trading discretion for more efficient contract rolling to potentially decrease slippage.
Slingshot’s top 3 considerations for building & enhancing alternative portfolio sleeves in Q2:
- Can the strategy dynamically alter overall asset allocation of my portfolio, and by how much?
- What are the specific sources of returns and risk for the asset or strategy, and can I quantify?
- Do I already have exposure to the alternative risk premia through my traditional sleeves?
IMPORTANT DISCLOSURES:
Slingshot Financial LLC (“Company”) is an investment advisor registered in Colorado. Company and its advisors are in compliance with current filing requirements by those states in which Company maintains clients. Company may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.
Slingshot Financial serves as an unaffiliated, fee-based institutional representative for other investment advisors, which may be but not limited to, those mentioned in this communication. Slingshot Financial does not guarantee the accuracy or timeliness of information provided herein. Due to various factors, including changing market conditions or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this communication serves as the receipt of, or as a substitute for, personalized investment advice. Investing in commodities and derivative instruments carry extra risks and should be carefully considered within the complete context of investor objectives and constraints. Indexes are unmanaged and it is not possible to invest directly in an index. Exposure to an asset class or trading strategy represented by an index is only available through investable instruments (if any) based on that index.
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