Investing in hedged equity strategies is a bit like running with the bulls: investors love the adrenaline rush of the Read More
President & CEO Dan Kraninger reflects on the 1st quarter and provides insight moving forward.
As we enter the second quarter with 40% in cash in our U.S. tactical strategies, I thought some background would be helpful. On the following page we have plenty of information as to why we are carrying that hedge, but below I want to try and make it more personal for you.
Imagine you are taking a family road trip – driving from point A to point B. After checking Google maps, the suggested directions should take 3 hours driving at an average speed of 55 MPH. Upon arrival, your brother greets you at the door and smiles as he says it only took him 2 ¼ hours to make the same trip whereas your trip took 2 ¾ hours. So which is better? You both arrived, which is one measure of success, but what other variables matter?
Most would ask questions such as did you have to stop for gas? Stop to eat? Take the same route? Few people really ask the most important question – what risks did you take? Did your brother increase his probability of an accident? Because the distance traveled is 165 miles, we know you averaged 60 MPH and your brother averaged 73 MPH. Overall, he drove 21% faster than you. Now let’s say that his incremental speed raised his probability of an accident from 0.1% to 0.2%. One can see how the question now gets framed . . . is the 30 minutes of saved time worth doubling the risk?
Many of our tactical strategies look at the market through that same lens. What risk did you take to produce that return? $100,000 invested in our CAN SLIM® strategy when it launched almost 10 years ago is now worth over $165,000 (after fees and expenses). This is roughly the same amount as if the $100,000 was invested in the S&P 500 over the same time period. However, is a portfolio decline of over 50% between 2008-2009 in the S&P 500 worth it? How valuable is the peace of mind knowing there is a strategy designed to mitigate that kind of risk?
The Sharpe ratio is one key risk metric to help investors compare investment strategies. It takes the return from a time period and divides it by the volatility of the strategy over the same time period. Answering the question, how much did you make for taking on that increment of risk? It is a very helpful measure and one that investors should consider before any investment. Our long-term Sharpe ratio for CAN SLIM® is 0.40* (compared to a 0.29* of the S&P 500 Index) which makes us proud. Next time you look at an investment return or a drive home for Thanksgiving, remember performance is not independent of risk and risk is the variable that many good strategies address.
*1/1/2007 – 3/31/2016.
Past Performance is not indicative of future results. All investments involve risk, including loss of principal. One cannot directly invest in an index.