Four Pillars to the Investment Process
IV. Momentum: The fourth pillar ties everything together through a series of momentum models that we use to determine the overall flow into and out of equities. Large trends in equities are driven by the large institutions reallocating their portfolios amongst the various asset classes. Invariably at market tops institutions are over allocated to equities and the mere normalization of that allocation creates a down trend, and vice versa at market bottoms they’re under allocated to equities and the mere normalization creates an uptrend. We use a volume-breadth based momentum model that is designed to identify institutional flows and then use that as a trigger mechanism to directionally position the portfolio in line with our assessment of valuation, monetary factors and sentiment.
As illustrated below, in the January 2009 our volume-breadth models indicated downward momentum, i.e., there was more selling than buying. In late March 2009, our models reversed showing upward momentum and therefore, we began increasing our equity exposure.
Source: Trade Station
Past performance is not indicative of future results.
Understanding that there is inherent risk in the equity markets, we reject traditional buy and hold investing. We feel strongly that macro and market risk should be addressed in investment portfolios. This tactical approach to investing is not new to us, our CIO and investment team have followed this disciplined process.
- Discretionary directional equity long/short as opposed to traditional hedged equity
- Aiming for positive, risk-adjusted returns in any market environment
- Ability and experience to be net short, potentially generating alpha in a bear market
- No restrictions to holding 100% cash when necessary process for many years. We are able to quickly reposition portfolios due to our choice to use very liquid instruments such as index-based futures and ETFs. Broadmark Asset Management LLC serves as the advisor for several investment vehicles that follow this tactical process.
- Maximum drawdown less than 10% over 18+ year life of core tactical strategy
- Extremely nimble due to the ability to reposition the portfolio on a real time basis through the use of liquid index-based futures and ETFs
- A tactical approach may help to address entry risk