Stableford Capital Insights

Look to SMAs for a Clear-Eyed Perspective on Managing Risk

Humans like to think they can control the future by looking at the past … and avoiding ALL the mistakes that we have made in the past.But looking back to figure out the future is a sure path for pandemonium. And for so-called low-risk funds, the practice of looking back was a disaster in 2020. Like Lot’s wife, it’s not a good idea to look back as you flee a city in flames.

Low-Risk Funds

Low-risk funds aim to balance out a portfolio dominated by high-risk equities that we assume will provide higher returns. Yes, low-risk funds are boring but we rely on the hope that when times get rough, they will protect your fortune from going up in smoke. By following a strategy to avoid wild market fluctuations, the assumption is that your investments are buffered.

SMAs Stableford Blog Black Swan Theory definition-web

Alas, the market’s collapse in the spring was a lesson in Black Swan theory for some large low-risk funds. The Black Swan theory (coined by scholar and former options trader Nassim Nicholas Taleb) is a major event that comes as a surprise to our society; but in hindsight, we find false rationalizations and excuses to explain the event.Some of these Titanic-like funds did, indeed, meet their iceberg, in the March market collapse amid the COVID-19 pandemic (see Justin Thomas’ March Market commentary, Euphoria and Panic for Stableford’s analysis).It turns out that assumptions for minimizing risk can be false - or misleading. Some major low-risk funds fell more sharply than other investment vehicles - and were slower to recover throughout April and May.The pandemic revealed the weaknesses in hulls of these massive low-fisk funds, and provoked the question: do your portfolio’s investment strategies share the same weaknesses?The funds below usually had the same issues.

Investment Strategies Based on Storms of the Past

The COVID-19 pandemic is a unique storm -- just like the 2009 recession brought on by mortgage debt and a collapsing housing market. Or the pop of the Internet bubble in 2001. Every crisis requires a unique response to reduce losses and keep portfolios stable amid chaos.Mega funds rely on complex algorithms, which were created by quants who looked at what transpired during past market sell-offs. The funds use elaborate fail-safe mechanisms and triggers that sell - or purchase - a mix of ETFs, bonds, and stocks in sectors that are considered “safe”.

Not a Safe Harbor After All

That mix of stocks and bonds ended up dragging down these funds, instead of providing buoyancy in the choppy waters of March.

Low Risk for Stableford Capital SMAs blog tile blocks spell risk with man holding red arrow pointing down-web

Low-risk funds tend to be lighter in the tech sector - which was one of the sectors leading the bounceback in April and May. So-called safe sectors like finance, real estate, and utilities turned sour when it became clear that a lot of out-of-work households will not be paying rent and mortgages any time soon.Fixed-income securities usually are the go-to solution for buffering investors from painful losses in the stock market. But yields are so low now; and who knows how long this trend will last? The government has plowed more than $5 trillion of monetary and fiscal stimulus into the system this year - which means low yields for panicked investors.

It’s Hard to Steer the Titanic

Large, unwieldy funds were inflexible because they were set to run in an orderly, automated fashion. Often, fund managers could only make big shifts on a quarterly basis. That turned out to be a fatal flaw in the spring when the market finally realized how the pandemic would drag down the world’s economies.

Humans at the Wheel: SMAs

In contrast, Separately Managed Funds (SMAs) bring a nimble approach - combined with a human touch - during uncertain times. Many major investment firms offer SMAs to bring a customized view to each client.

Reviewing Client Strategy for Stableford fiduciary blog

In a similar fashion to SMAs, Stableford Capital creates customized portfolios that meet clients’ unique needs and goals. We have a team of experts who tailor each portfolio, instead of a preset formula that applies to all clients.We know that the world will always encounter Black Swan events that will roil the markets. Our team is dedicated to steering through these tumultuous times with clear eyes, thoughtfulness, and insight.Like SMAs, our customized portfolios include these Stableford Capital funds that aim to keep risk low when the overall market is under pressure. Talk to us about the best options for your circumstances, timeline, and needs for these funds, which all seek to keep risk levels below the overall market.Stableford ETF Conservative: Preserve Capital with Income and Growth Potential

Goal: focus on investing in high-quality securities, primarily ETFs, with opportunities for appreciation, balanced with capital preservation.

ETF Balanced Growth: Mostly Fixed Income with Equity Exposure for Growth

Goal: Income – Preservation of Capital with a Growth Component

Stableford ETF Plus: Active - Plus Model with a Passive Equal Sector Weight Component of Sector ETFs

Goal: Dynamic model with Maintaining a diversified portfolio of high-quality securities, in sectors with the largest opportunity for appreciation.

Stableford 50 Plus: Active - Plus with a Passive Equal Sector Weigh component of Top Large-Cap Stocks

Goal: Dynamic model focused on growth that keeps a diversified portfolio of high-quality securities in sectors with the largest opportunity for appreciation.

To learn more about balancing your investment portfolio with low-risk funds, contact Stableford, or call 480.493.2300.

Justin Thomas
Justin C. Thomas has worked for over 15 years as a portfolio manager and analyst managing institutional assets for hedge funds and large financial institutions. Career highlights include 8 years as an equity analyst and portfolio manager at PartnerRe Asset Management, a global reinsurance company with $17 billion in assets under management, and prior to that managing a long-short equity portfolio for Citigroup’s proprietary account. Justin has also worked as an analyst at long-short hedge funds and in research for Montgomery Securities (Bank of America Securities). In addition, Justin Thomas gained operational experience while working in finance and operations at E-Stamp, a start-up in Silicon Valley. He began his career working as a CPA at KPMG. Justin has an MBA and Masters in Accounting from Northeastern University and an undergraduate degree in Economics from Tufts University.