Risk-Off Is Acting Right Again
The Case For The ATAC Rotation Fund (ATACX/ATCIX)
Risk rotation strategies tend to be at their most effective when a variety of market sectors and asset classes are participating. That has not been the case for most of the past two years.
In 2022, the S&P 500 and the Nasdaq 100 fell as much as 24% and 34%, respectively, in the process of posting their worst calendar year performances since 2009. That should have been the ideal time for Treasuries to step in to act as the counter-risk asset and reduce portfolio volatility. Instead, long-term Treasuries lost 30% themselves. How can risk rotation strategies work if the expression of risk-off doesn’t at all behave like a risk-off asset?
But conditions have changed in the 2nd half of this year. That’s when tech took a back seat and allowed small-caps & value stocks the opportunity to lead. Cyclicals and defensive stocks started to perform well. More importantly, Treasuries became a traditional risk-off asset class again. The reverse yen carry trade caused an historic spike in volatility, but the ATAC Rotation Fund (ATACX) was ready for it. The fund followed intermarket signals to position itself defensively ahead of this event. The result was reduced risk exposure for shareholders and positive performance in a very challenging market environment.
From July through the end of August, the S&P 500 was up a little over 3%, while long-term Treasuries gained just short of 6%. ATACX, on the other hand, returned nearly 13% on the back of getting the signals correct and the risk-on/risk-off assets behaving as would traditionally be expected in a higher volatility market. When mega-caps are the only game in town, it’s tougher for risk rotation strategies to be effective. When we see more long-established intermarket relationships playing out, they can really deliver for investors.
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. For standardized fund performance https://www.atacfunds.com/atacx/.
The market cycle may have changed this summer. Lower inflation, steady growth and easing monetary conditions could produce an environment that’s more conducive to previous laggards, especially small-caps and emerging markets. As the global economy eventually slows and the labor market starts to weaken, investors often shift from more expensive, growth-oriented stocks back into value. Conditions are healthy enough that investors may not want to abandon equities altogether, but they may want to shift in a more defensive direction. Value usually provides that. And what two areas of the stock market have as much of a value tilt as any right now? Small-caps and emerging markets.
One of the biggest risks facing the credit markets today are abnormally low spreads. Corporate credit, especially junk bonds, are being priced as if there’s very little risk. That makes the risk/reward tradeoff on this group quite poor. If credit spreads begin to widen as the economy cools, there’s a good chance that Treasuries, again, return as a risk-off play and the flight to safety trade makes a comeback.
The overarching theme is that the conditions that often improve the success rate of risk rotation strategies may have finally returned. We’re seeing equities outside of just a handful of mega-caps outperforming again. We’re seeing Treasuries acting as a risk-off asset in times of volatility again. We’ve seen in just two short months time how a strategy, such as the one used by ATACX, can be a big winner for investors. And we may just be getting started.
If you’d like to learn more, I’m happy to discuss how the strategy works over a one-on-one call. Simply use my Calendly link to book a meeting by clicking HERE.
With Warm Regards,
Michael A. Gayed, CFA
Portfolio Manager of the ATAC Rotation Funds
Why The ATAC Rotation Funds?
Highly active strategies designed to help investors mitigate investment volatility.
Seeks to provide a differentiated return stream relative to passive strategies.
Rotates tactically offensively and defensively using historically proven leading indicators.
The Russell 2000 Index is a stock market index that tracks the performance of 2,000 small-cap US companies, serving as a key benchmark for small-cap stocks and a barometer for the US economy
The Nasdaq 100 is a stock market index comprising the 100 largest non-financial companies listed on the Nasdaq stock exchange, weighted by modified market capitalization
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
Past performance is no guarantee of future results.
The Fund’s investment objectives, risks, charges, expenses and other information are described in the statutory or summary prospectus, which must be read and considered carefully before investing. You may download the statutory or summary prospectus or obtain a hard copy by calling 855-ATACFUND or visiting www.atacfunds.com. Please read the Prospectuses carefully before you invest.
Mutual fund investing involves risk. Principal loss is possible. Because the Fund invests primarily in ETFs, it may invest a greater percentage of its assets in the securities of a single issuer and therefore is considered non-diversified. If a Fund invests a greater percentage of its assets in the securities of a single issuer, its value may decline to a greater degree than if the fund held were a more diversified mutual fund. The fund is expected to have a high portfolio turnover ratio which has the potential to result in the realization by the Fund and distribution to shareholders of a greater amount of capital gains. This means that investors will be likely to have a higher tax liability. Because the Fund invests in Underlying ETFs an investor will indirectly bear the principal risks of the Underlying ETFs, including but not limited to, risks associated with investments in ETFs, large and smaller companies, real estate investment trusts, foreign securities, non-diversification, high yield bonds, fixed income investments, derivatives, leverage,short sales and commodities. The Fund will bear its share of the fees and expenses of the underlying funds. Shareholders will pay higher expenses than would be the case if making direct investments in the underlying funds.
The Fund’s investments will be concentrated in an industry or group of industries to the extent the portfolio manager deems it appropriate to be so concentrated. In such event, the value of Shares may rise and fall more than the value of shares that invest in securities of companies in a broader range of industries.
Investing involves risk including the possible loss of principal.
RORO and JOJO Are distributed by Foreside Fund Services, LLC.
ATACX is distributed by Quasar Distributors, LLC.