Tactical Adaptive Strategies Update
Performance
All three strategies finished 2020 with a flourish.
Adaptive Global finished with a gain of 5.16% for December and 14.95% for 2020. Gains were led by overweight positions in Asia Pacific equities and commodities.
Adaptive Income finished with a gain of 1.70% for December and 9.78% for 2020. Adaptive Income was invested entirely in municipal high yield bonds.
Adaptive Innovation finished with a gain of 5.99% for December and 34.38% for 2020. Investments were split between the ARK Innovation funds and Treasuries used to manage volatility.
Perspective
Month after month I’ve been writing that “All 3 Tactical Adaptive strategies continue to outperform the S&P 500 on a risk adjusted basis”. While this statement can be readily verified by viewing the 20+ year performance tables I update each month, I thought it would be informative to compare all three Tactical Adaptive strategies to the S&P 500 for this past year which uniquely included both a furious bear market and a (seemingly) invincible bull market:
Tactical Adaptive Global
- CAGR @ 14.9%
- Max Monthly Drawdown: 4.2%
- Ulcer Index: 1.9%
- Standard Deviation: 12.7%
- Upside/Downside: 308.9%
Annual return 19% below S&P 500, drawdown 78% below S&P 500, much higher return per dollar risked at $3.09, Ulcer Index and Standard Deviation less than half of S&P 500
Tactical Adaptive Income
- CAGR @ 9.8%
- Max Monthly Drawdown: 0.5%
- Ulcer Index: 0.2%
- Standard Deviation: 3.3%
- Upside/Downside 1040.4%
Annual return 47% below S&P 500, drawdown 99% below S&P 500, much higher return per dollar risked at $10.40, Ulcer Index and Standard Deviation at small fractions of S&P 500
Tactical Adaptive Innovation
- CAGR @ 34.4%
- Max Monthly Drawdown: 4.9%
- Ulcer Index: 2.7%
- Standard Deviation: 21.2%
- Upside/Downside 421.3%
Annual return 87% above S&P 500, drawdown 75% below S&P 500, much higher return per dollar risked at $4.21, lower Ulcer Index and Standard Deviation
S&P 500 ETF (SPY)
- CAGR @ 18.4%
- Max Monthly Drawdown: 19.4%
- Ulcer Index: 6.9%
- Standard Deviation: 24.6%
- Upside/Downside 170.2%
Lowest return per dollar risked at $1.70, highest drawdowns, highest Ulcer Index and Standard Deviation
While 2020 has been favorable for our tactical strategies, not every year will demonstrate such clear-cut advantages. It is critical to keep in mind that our tactical strategies are designed to deliver higher returns with lower risk across full market cycles, not just a single year. See the tables at the end of this post for 21 years of detail.
Subscribers are provided with the opportunity to combine these strategies in a manner which best suits their individual comfort zone of risk/reward.
Revisiting Tactical Adaptive Innovation
Last month’s letter made the case for increased exposure to Tactical Adaptive Innovation. I ran across a graph this month which makes a strong case for some caution.
When I began developing Innovation in 2019, the five ARK Innovation Funds had roughly $2 billion in Assets Under Management. During the past year, AUM have grown 10-fold from a little over $3 billion to $33 billion.
Late in the year, inflows were reaching a billion dollars a day. As ETFs, the ARK Funds can not be closed to new investment. As inflows rise, the ARK Funds are forced to buy more of the same/similar stocks and create more ETF shares. While this has reinforced the rise in ARK fund shares along with the prices of the shares in which they invest; this mania can not end well for ARK or the companies into which they are pouring money.
We will not be increasing our investment to the Innovation strategy until a meaningful correction takes place in the ARK Funds.
Market
From the January 1st Market Monitor
"The big caps had a good week with the S&P 500 up 1.8%; however mid and small caps fell slightly. Both the Broker Dealer and Banking indexes have been improving while the Housing index continues to weaken. The only sector which continues to show strength is materials.
Cumulative Advancing Declining Volume spent most of the week in distribution although it improved on 2 and 10 week comparisons. Improvement aside, CADV continues to show a significant divergence from price across the big and mid cap indexes. Only the small cap CADV continues to confirm the rally in small caps.
The Credit Markets Index improved a bit this week on a resumption in decline of several high yield spreads. While spreads over Treasuries are clearly compressed to excess, there is no sign that spreads are rising which would signal increased risk aversion by investors.
The 10 Year Treasury Yield has stabilized above 0.9% and appears to be showing a propensity to move toward 1.5%.
Gold appears to be on the cusp of a move higher after closing above the downtrend line from the early August high
While both the equity and credit markets remain in decent shape, the extreme valuations scream high risk and are at levels which are supportive of fast and furious declines. Declines in price momentum coupled with deterioration in CADV suggests this is an excellent time to shift attention toward managing downside risks."
