Alpha Power Investing Newsletter

December 3, 2018

Consistency is King

Consistency of returns may be the most important key to long-term success for investors. Every investor hopes to maximize returns. However, the truth is that if an individual investor takes on more risk than he or she is comfortable with they can eventually run into trouble as they come to realize that they cannot handle the requisite volatility. Hence the value of consistency - which enables an investor to stick to his or her plan, to accumulate long-term wealth, and to sleep at night along the way.

Alpha's strategies are designed to generate wealth over the long-term by focusing on a handful of the most persistent seasonal trends that play out over time in the financial markets. The Alpha Mid-Cap Power Index Managed Account is a strategy that focuses on three distinct seasonal trends, which we refer to as the "Power Zone", the "Dead Zone" and "Power Periods".

The managed account has underperformed the S&P 500 Index in recent years. This underperformance, however, is more a product of an abnormally long and persistent bull market than a function of the strategy "not working". In fact, the long-term consistency of the underlying trends that the strategy exploits remains nothing short of remarkable. This month we will shine a bright light on these underlying seasonal trends using the relevant stock or bond index in order to highlight just how remarkably consistent these trends have been. The tests below involve using index data in order to highlight the consistency of the underlying trends. As such, the results presented do not reflect actual trading and is not representative of the returns of the strategy and does not include fees, trading or fund expenses.

Trend #1 - The Annual "Power Zone": extends from November 1st through May 31st. During this time the strategy holds an index fund that tracks the S&P MidCap 400 Index. Figure 1 displays important information regarding the performance of this index ONLY during the "Power Zone".

Trend #2 - The Annual "Dead Zone": extends from June 1st through October 31st. During this time the strategy holds an index fund that tracks intermediate-term treasury bonds. Figure 2 displays important information regarding the performance of the Bloomberg Barclays Intermediate Treasury Index ONLY during the "Dead Zone".

Trend #3 - Fourth Quarter "Power Periods": includes three different multiple day periods during the fourth quarter of each year - comprised of 20 specific trading days. During these three periods the strategy holds an index fund that tracks the S&P MidCap 400 Index using leverage of 1.5 to 1. Figure 3 displays important information regarding the performance of this index (using leverage) ONLY during the "Power Periods".

Here are the most important things to note:

  • If we look at the 5-year and 10-year cumulative rolling rates of return using index data, all three "trends" have showed a gain 100% of the time starting with the end of the first 5-year period. It's hard to be any more consistent than that.
  • During the "Power Zone" the S&P MidCap 400 Index has outperformed the S&P 500 Index during 85% of all 5-year rolling periods and during 96% of all 10-year rolling periods.
  • During "Power Periods" the S&P MidCap 400 Index (using leverage of 1.5-to-1) has outperformed the S&P 500 Index during 100% of all 5-year and 10-year rolling periods.
  • During the "Dead Zone" intermediate-term treasuries outperformed the S&P 500 Index during 61% of all 5-year rolling periods and 93% of all 10-year rolling periods.

However, on a year-by-year basis, intermediate treasuries outperformed only 43% of the time. This tells us that there are times (i.e., during extended bull markets such as we have seen in recent years) that the stock market can significantly outperform treasuries during the "Dead Zone" - which results in temporary underperformance for the strategy itself - as it holds low-volatility treasuries while the major stock indexes advance. Historically, this trend has reversed in a big way during bear markets, during which time the S&P 500 Index has registered "Dead Zone" declines of -15% to -45% while treasuries hold steady or register a gain.

Summary
There are no "perfect" strategies. Likewise, there are no strategies that always "beat the market". Given this inherent limitation, one of the most critical things for any investment strategy to exhibit is "consistency" - both in terms of performance and regarding its underlying foundation. The consistency of the underlying seasonal trends displayed in Figures 1 through 3 suggest that the Alpha Mid-Cap Power Index Managed Account strategy will continue to deliver consistent gains in the years ahead and that the recent underperformance of the strategy will ultimately "revert to the mean".

Jay Kaeppel
Vice President and Director of Research
Alpha Investment Management, Inc.
877-229-9400
www.alphaim.net
info@alphaim.net

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The returns illustrated in Figure 1, 2 and Figure 3 do not represent actual trading and is not representative of any Alpha Investment Management strategy. The data does not include management fees or the cost of funds, trading, or other expenses. The illustrations are designed to quantify the effect of certain time periods (as specified) on the S&P MidCap 400 Index, the Bloomberg Barclays Intermediate Treasury Index and the S&P 500 Index. Indexes are not investment vehicles and persons cannot invest directly in an index. The S&P MidCap 400 Index is a market-weighted index of 400 mid-sized companies with total market capitalizations from roughly $750 million to $3 billion dollars. Stocks in this index represent companies from industries including information technology, energy, health care, financial, manufacturing, etc. The Bloomberg Barclays Intermediate Treasury Index measures the performance of intermediate U.S. Treasury securities with remaining maturities of between three and five years. The S&P 500 Index is a market-cap weighted index and is widely regarded as the best single gauge of large-cap U.S. equities. The index includes the common stock of 500 leading U.S. companies and captures approximately 80% coverage of available market capitalization. The data used to construct the illustrations was obtained from third-party sources. While Alpha believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  

Alpha Investment Management, Inc. is a SEC registered investment advisor. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

© 2018 Alpha Investment Management, Inc.

Alpha Power Investing Newsletter Archives