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  • Jonathan Poyer

No Stocks No Bonds No Blend...So... What?

Performance has been hard to come by for investors thus far into 2022. What has been especially difficult has been the performance of the S&P 500 and the general fixed income environment as measured by the Bloomberg Barclays US Aggregate (AGG) index. It has often been assumed that bonds are uncorrelated to equities and thus provide a nice "hedge" in the case one of the two majors have a tough go. Not this year:

Perhaps because of the performance challenges, investors have been moving money around accordingly; trading away from bonds and equities.

According to the ICI, estimated mutual fund outflows for the week ended June 22nd were $31.3B while estimates for ETFs were $6.38B This includes $-12.3B out of equity funds and -$22B in bond funds:

According to Morningstar's monthly fund flows report (HERE), liquid alternative funds have seen $21B of net inflows through May. The category is on track to top 2021s record inflows of $38.3B.

One manager that the Wall Street Journal highlighted in a recent article is the familiar Mt. Lucas team and their KFA Mount Lucas Index Strategy ETF, which is basically the trend component of their enterprise. Mt. Lucas information can be found here:

How do they think about macro-economic challenges we are seeing in terms of how to adapt?

  • Inflation: get some commodity exposure

  • Crisis & War: something other than stocks

  • 60/40 Troubles: value in short bonds

The gist of trend following is that it attempts to adapt to the areas that are hurting stocks during times of market crisis. Some of the "Turtle Traders" of managed futures lore talk about this as "crisis alpha"; although the term is not originated to them. Typically, these managers are looking at commodities, currencies, and fixed income futures.

Be careful chasing performance, but perhaps blending another way of thinking with stocks and bonds can be helpful when it seems like everything is going to pot.

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