Portfolio Manager Perspectives

Jeff Benjamin

These two alternatives funds come with beta blockers

New offerings from Stadion aim to generate equity-like returns with fixed-income-like volatility

Apr 2, 2012 @ 11:55 am

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Stadion Money Management is making a bigger play in the alternative-investment space with an intriguing new strategy that's designed to prosper in just about any market environment.

The Stadion Trilogy Fund Ticker:(STTGX) is one of two new mutual funds launched today by the $5.5 billion asset management firm. As the name suggests, the Trilogy fund is a three-part, blended portfolio designed to produce absolute returns annually —with an emphasis on keeping risk and volatility lower than the U.S. equity markets. The fund has a 40% allocation to stocks, 40% to fixed income, and 15% to 20% dedicated to a trend-following strategy using options and other financial instruments.

“We want two of three components working in any market environment,” said strategist David Purcell.

The equity portion is represented by about 40 blue-chip, dividend-paying stocks or exchange-traded funds. This part of the strategy applies an option collar that limits downside and caps upside. The equity exposure provides broad market performance with dividend income.

The fixed-income slice of the portfolio also uses options to generate additional income, while using the bonds as collateral to eliminate the need for margin loans. This option-income tranche is expected to perform best during calmer or flat markets, according to Mr. Purcell.

Finally, the trend component will attempt to profit from large price changes and trending equity markets.

The application of options and other financial instruments is designed to enhance upside and limit losses. The fund should perform best in longer-term up and down-trending markets.

“It's a very systematic strategy, because we realize it is difficult to predict the markets,” Mr. Purcell said. “We're trying to get equity-like returns with fixed-income-like volatility.”

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The company also launched the Stadion Olympus Fund Ticker:(STOAX), a tactical international fund that has the flexibility to maintain all-or-nothing equity exposure.

“We know that investors sometimes underinvest in international stocks because of the volatility,” said Brad Thompson, Stadion's chief investment officer.

“There is a very strict sell discipline behind this model,” he added.

The Olympus fund, which invests in ETFs, uses the same three-step selection process as Stadion's managed portfolio, which includes investing during favorable conditions, investing only in category leaders and managing exposure to reduce risk.

“We place sell criteria underneath each ETF in the fund,” Mr. Thompson said.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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