twittergoogle_pluslinkedinmailtwittergoogle_pluslinkedinmail

20/20 Vision

Down­load in PDF

 

Quick — where were you 20 years ago?

Allow me to provide some con­text.

In the spring, “Wannabe” by The Spice Girls was the #1 song in Amer­i­ca, lat­er fol­lowed by “MMM­Bop” by Han­son. “Men in Black” would dom­i­nate the sum­mer box office, but MiB would be dwarfed by “Titan­ic” lat­er on in the year. Tim Dun­can had just been draft­ed by the San Anto­nio Spurs and the Hous­ton Oil­ers depart­ed to Ten­nessee. Peo­ple were start­ing to wor­ry about the dread­ed “Y2K” bug.

While many use cul­tur­al mile­stones like music, movies, or sports to mark a time and a place, let’s look at where the cap­i­tal mar­kets were.

In July 1997 the Dow Jones Indus­tri­al Aver­age crossed 8,000 and the S&P 500 cracked 900[1], both firsts. Apple Com­put­ers was a joke, Amazon.com was an on-line book­store, and Google, Face­book, and YouTube did not yet exist. Alan Greenspan had warned about “irra­tional exu­ber­ance” creep­ing into the mar­ket in Decem­ber 1996, but the Dot-com Bub­ble was still a year or two in the future. On July 1st, 1997 3-mon­th yields were 5.31% and 30-year Trea­sury bonds yield­ed 6.74%[2].

July 1997 was also when Randy Swan launched the Defined Risk Strat­e­gy (DRS). Randy’s vision was, and remains, to offer investors a unique approach to invest­ing and an alter­na­tive to the tra­di­tion­al 60/40 port­fo­lio. With the love and sup­port of his wife Lau­ra, Randy moved to Duran­go, Col­orado to estab­lish what was then called Swan Con­sult­ing. The goal was to “build a bet­ter mouse­trap” — to design an invest­ment strat­e­gy that addressed the short­com­ings of tra­di­tion­al asset allo­ca­tion. Tra­di­tion­al asset allo­ca­tion seeks to mit­i­gate risk through diver­si­fi­ca­tion, but one of the main caveats of asset allo­ca­tion is that mar­ket risk can­not be diver­si­fied away. To Swan, leav­ing the biggest source of risk unad­dressed was unac­cept­able. There­fore, if mar­ket risk can­not be diver­si­fied away, the DRS sought to hedge it away.

 

20-Year Market Recap of Crises, Challenges, and Calamities

While the pre­vi­ous­ly men­tioned Y2K bug turned out to be a non-issue, the last twen­ty years have seen a mul­ti­tude of cri­sis, chal­lenges, and calami­ties:

  • 1998 — Rus­sian default/LTCM cri­sis
  • 1999 – Dot Com mania and day-trad­ing lead to fren­zied val­u­a­tions
  • 2000 – Dot Com bub­ble bursts
  • 2001 – Sep­tem­ber 11th attacks, inva­sion of Afghanistan
  • 2002 – Sar­banes-Oxley Act passed in the wake of account­ing scan­dals at Enron, Tyco, MCI World­comm, etc
  • 2003 – The Iraq War ini­ti­at­ed
  • Mid-2000’s – Hous­ing bub­ble inflates
  • 2007-09 – Hous­ing bub­ble bursts; biggest finan­cial cri­sis since Great Depres­sion
  • 2008 – oil hits $147/barrel
  • 2009–2012 – Euro cri­sis, focused on Greece but also dri­ven by Por­tu­gal, Ire­land, Spain and Cyprus. Peri­od of ultra-loose mon­e­tary pol­i­cy of low rates and quan­ti­ta­tive eas­ing
  • 2010 – “Flash Crash” in May; intra-day loss­es on the DJIA are almost 1,000 points
  • 2011 – Down­grade of U.S. Trea­sury debt from AAA to AA
  • 2015–2016 – Fears of a “hard land­ing” in Chi­na cause steep sell-offs in August 2015 and ear­ly 2016
  • 2016 – Oil falls to below $30 per bar­rel as shale-based frack­ing rev­o­lu­tion­izes ener­gy mar­kets. Brex­it, elec­tion of Don­ald Trump and oth­er pop­ulist-fueled polit­i­cal devel­op­ments
  • 2017 – U.S. equi­ty mar­kets con­tin­ue to set all-time highs

Just about every mar­ket envi­ron­ment imag­in­able has hap­pened over the last 20 years. The two largest bear mar­kets since World War II as well as the sec­ond-longest bull mar­ket is U.S. his­to­ry. Loss­es of 50% as well as gains of 300%. Short-term shocks and cor­rec­tions. Two wars and an attack on Amer­i­can soil. A rever­sal in the mul­ti­lat­er­al, col­lab­o­ra­tive, post-World War II order. Tech­no­log­i­cal inno­va­tions unimag­in­able in 1997. Com­modi­ties at his­toric highs as well as lows.

 

How Did the Defined Risk Strategy Weather?

While the mar­kets have under­gone sig­nif­i­cant changes, the Defined Risk Strat­e­gy has not. The over­all goal remains the same — max­i­mize the return-risk trade-off by min­i­miz­ing the impact of down mar­kets. We remain “always invest­ed, always hedged” by active­ly hedg­ing our hold­ings in the mar­ket. How has Swan deliv­ered on this goal?

Swan Defined Risk Strat­e­gy Select Net-of-Fees

Growth of $100,000 — July 1, 1997 to June 30, 2017

20-Year Performance Comparison - Swan DRS vs S&P 500 vs 60-40 | Swan Blog

Source: Zephyr StyleADVISOR Zephyr StyleADVISOR, Swan Global Investments, and Morningstar. The Barclays U.S. Aggregate Bond Index and the S&P 500 Index are unmanaged indices, and cannot be invested into directly. Past performance is no guarantee of future results. DRS results are from the DRS Select Composite, net of fees, as of 6/30/2017. Structures mentioned may not be available within your Broker/Dealer.

The Swan Defined Risk Select Com­pos­ite has out­per­formed both the S&P 500 and a blend­ed 60/40 stock/bond mix, on both an absolute and risk-adjust­ed basis. It’s impor­tant to keep in mind what that blue line incor­po­rates. It’s not just 20 years….it’s all those crises list­ed above. The DRS has been bat­tle-test­ed through all of the afore­men­tioned events.

Of course, some­one might legit­i­mate­ly claim that very few peo­ple would have been invest­ed in the DRS for that full 20-year peri­od. The pre­vi­ous graph rep­re­sents the entire his­to­ry of the DRS.

What if some­one had only been invest­ed for a sub-period…say, for exam­ple, a peri­od of 10 years rather than 20?

10-yr Rolling Period Returns Comparison - SP 500 vs Swan DRS | Swan Blog

Source: Zephyr StyleADVISOR, Swan Global Investments. All data based on historical performance of the S&P Total Return Index and the Swan DRS Select Composite. Prior performance is not a guarantee of future results.

The above com­par­ison is one of Swan’s most pop­u­lar graphs show­ing ten, 10-year invest­ment peri­ods. The first peri­od is 1/1998 to 12/2007; the last peri­od is 1/2007 to 12/2016. Each line rep­re­sents a ten-year invest­ment peri­od with a dif­fer­ent incep­tion date (when the ini­tial invest­ment was made).

In oth­er words, the lines chart the “ride” investors expe­ri­enced over 10 years in the S&P 500 (left) or the DRS (right), if they were to sim­ply change the date of their ini­tial invest­ment.

The con­trast in out­comes is stark. While the unhedged S&P 500 has had out­comes all across the board, the DRS has been able to main­tain a much tighter range of out­comes by mit­i­gat­ing the impact of those two big bear mar­kets.

We have run sim­i­lar analy­sis over 3, 5, and 15 year rolling peri­ods, which are avail­able to invest­ment pro­fes­sion­als and advi­sors upon request. Investors should con­tact their finan­cial advi­sor to learn about the sig­nif­i­cance of rolling peri­od returns.

 

Consistency as the Key to the 20-Year Track Record

Through­out the last twen­ty years the DRS has remained very con­sis­tent, both in terms of invest­ment results as well as the under­ly­ing invest­ment process. What has changed is Swan Glob­al Invest­ments as an orga­ni­za­tion. What start­ed as a one-per­son shop with a few mil­lion under man­age­ment has grown to over forty team mem­bers and $4.5bn AUM.

The DRS is avail­able as a sep­a­rate­ly man­aged account, mutu­al funds, CITs or cus­tomized solu­tions and across mul­ti­ple asset class­es. Swan is rec­og­nized as a lead­er in options and hedged equi­ty.

Fur­ther­more, Swan is con­sis­tent­ly pub­lish­ing research and is rec­og­nized as a lead­er in options and hedged equi­ty.

 

Looking Forward

What might the future bring? On July 1st, 2037, what events will have occurred in the mar­ket? What inno­va­tions will be com­mon­place? What will the world look like?

No one knows. If the last twen­ty years are any guide for the next twen­ty, it is rea­son­able to expect bull mar­kets and bear mar­kets, unfore­seen events, and a lot of volatil­i­ty along the way.

What­ev­er the future brings, the DRS was designed as a full mar­ket cycle solu­tion with mean­ing­ful upmar­ket par­tic­i­pa­tion and sig­nif­i­cant down-mar­ket pro­tec­tion.

We look for­ward to the chal­lenge.

 

David Lovell - Director of Marketing - Swan Global InvestmentsAbout the Author: David Lovell, Direc­tor of Mar­ket­ing, is respon­si­ble for Swan’s mar­ket­ing and engage­ment ini­tia­tives. This includes devel­op­ment and exe­cu­tion of mar­ket­ing pro­grams for Swan’s web­sites, con­tent, com­mu­ni­ca­tions, events, and media. David began his career in the finan­cial indus­try at Mass Mutu­al. David cur­rent­ly holds a Series 65 license.

 

Impor­tant Notes and Dis­clo­sures:

[1] Source: finance.yahoo.com

[2] Source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

Swan Glob­al Invest­ments, LLC is a SEC reg­is­tered Invest­ment Advi­sor that spe­cial­izes in man­ag­ing mon­ey using the pro­pri­etary Defined Risk Strat­e­gy (“DRS”). SEC reg­is­tra­tion does not denote any spe­cial train­ing or qual­i­fi­ca­tion con­ferred by the SEC. Swan offers and man­ages the DRS for investors includ­ing indi­vid­u­als, insti­tu­tions and oth­er invest­ment advi­sor firms. All Swan prod­ucts uti­lize the Swan DRS but may vary by asset class, reg­u­la­to­ry offer­ing type, etc.  Accord­ing­ly, all Swan DRS pro­duct offer­ings will have dif­fer­ent per­for­mance results, and com­par­ing results among Swan prod­ucts and com­pos­ites may be of lim­it­ed use. Any his­tor­i­cal num­bers, awards and recog­ni­tions pre­sent­ed are based on the per­for­mance of a (GIPS®) com­pos­ite, Swan’s DRS Select Com­pos­ite, which includes non-qual­i­fied dis­cre­tionary accounts invest­ed in since incep­tion, July 1997, and are net of fees and expens­es. Swan claims com­pli­ance with the Glob­al Invest­ment Per­for­mance Stan­dards (GIPS®). All data used here­in; includ­ing the sta­tis­ti­cal infor­ma­tion, ver­i­fi­ca­tion and per­for­mance reports are avail­able upon request. The S&P 500 Index is a mar­ket cap-weight­ed index of 500 wide­ly held stocks often used as a proxy for the over­all U.S. equi­ty mar­ket. Index­es are unman­aged and have no fees or expens­es. An invest­ment can­not be made direct­ly in an index. Swan’s invest­ments may con­sist of secu­ri­ties which vary sig­nif­i­cant­ly from those in the bench­mark index­es list­ed above and per­for­mance cal­cu­la­tion meth­ods may not be entire­ly com­pa­ra­ble. Accord­ing­ly, com­par­ing results shown to those of such index­es may be of lim­it­ed use. The adviser’s depen­dence on its DRS process and judg­ments about the attrac­tive­ness, val­ue and poten­tial appre­ci­a­tion of par­tic­u­lar ETFs and options in which the advis­er invests or writes may prove to be incor­rect and may not pro­duce the desired results. There is no guar­an­tee any invest­ment or the DRS will meet its objec­tives. All invest­ments involve the risk of poten­tial invest­ment loss­es as well as the poten­tial for invest­ment gains. Pri­or per­for­mance is not a guar­an­tee of future results and there can be no assur­ance, and investors should not assume, that future per­for­mance will be com­pa­ra­ble to past per­for­mance. All invest­ment strate­gies have the poten­tial for prof­it or loss. Fur­ther infor­ma­tion is avail­able upon request by con­tact­ing the com­pa­ny direct­ly at 970–382-8901 or www.swanglobalinvestments.com. 174-SGI-071117