If further evidence is needed that the lines continue to blur between alternative and traditional asset classes, at least one advisory firm is blending traditional assets to create an alternative to alternative investments. And it appears to be working.
The strategy, which Ventura Wealth Management has been employing for nearly three years, analyzes 40 different asset classes as part of an ongoing asset-rotation technique designed to emphasize the potential of the top five asset classes.
Ventura, which works primarily with wealthy individual clients and has $200 million under management, uses the dynamic asset-rotation timing system in
separately managed accounts as a proxy for an alternative investment allocation.
Tom Cahill, the Ventura portfolio strategist who adapted the algorithmic formulas to create the strategy, said on a back-tested basis, the strategy would have been down just 24 basis points in 2008, a year when the S&P 500 fell by more than 38%.
The strategy's actual performance since it went live in December 2010 is equally impressive.
So far this year, the DART System is up 23.2%, which compares with a 14.7% gain by a model portfolio of 60% stocks and 40% bonds. The
hedge fund benchmark, the HFRI fund weighted index, is up 8.7% year to date.
Annualized since its inception, the DART return is 6.6% versus 10.3% for the 60/40 model and 2.7% for the
hedge fund index.
Mr. Cahill remains relatively tight-lipped about specifics of how the model is able to identify trending asset classes, but suffice it to say it is largely based on spotting relative-strength momentum and then being willing to adjust, even if that sometimes means going against popular thinking.
The current allocation, for example, is leaning heavily on micro-, small- and midcap equities, but also includes allocations to the technology and transportation sectors.
All asset class exposure is gained through the use of exchange-traded funds.
“We're letting what is actually happening in the market drive the asset allocation decisions, because it's not about what we think the market should be doing,” said Nicholas Ventura, president and chief executive.
The model not only helps identity asset class momentum, but also asset classes and categories that are poised for declines, Mr. Cahill said.
“From a technical standpoint, all the things that drove gold higher are still in place, but it has been a terrible year for gold,” he said. “We exited gold some time ago.”
The strategy is designed for monthly re-balancing, but that often involves slight adjustments to current allocations and few sweeping moves in or out of all five asset classes.
“We developed this in the midst of the financial crisis when the smartest guys on Wall Street were getting it wrong,” Mr. Cahill said. “The asset classes that tend to work tend to work for a full cycle.”
Another example of how the model can identify counterintuitive trends involves the broader real estate market.
“When the housing market was giving us horrible numbers in 2009 through 2011, REITs were doing really well,” Mr. Cahill said, referring to real estate investment trusts. “REITs started to rally in late '09 and stayed there until 2012.”
