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AlphaPeak Market Commentary

Market Update

In the last several months, the US has seen a myriad of positive catalysts that have supported the market. The closure of the 2020 election cycle effectively neutralized political risks. The announcement of the vaccine and successful rollout provides hope that life may return to normal later in the year. After spiking to 14.8% in April 2020, the US unemployment rate has steadily dropped down to 6.0%. There is also continued stimulus support from both monetary and fiscal sources. All these variables ultimately support the case for strong economic growth over the next year.

Since entering 2021, the story has become more focused on the bond market, Fed policy, and the implications that higher interest rates may have on other asset classes. The yield on 10-year treasuries has moved up 229% between July 31st, 2020 and March 31st, 2021 (from 0.53% to 1.74%). The yield curve steepened substantially over that same timeframe.

The trend in higher rates has benefitted value stocks while hurting growth stocks. Coming out the pandemic we are seeing investor preference moving towards an allocation of greater market exposures in 2021 as part of a macroeconomic ‘re-opening’ trade. This cyclical rotation back to value and small cap stocks implies greater structural upside for the Russell 2000 relative to the best performing large cap tech stocks of 2020.

We saw very strong performance from our MLP, Real Estate, and Small Cap exposures over the last six months. We have seen a strong rebound in global growth but believe the rebound to be “bumpy” in 2021.  As such we remain underweight in higher beta portfolio positions in favor of low beta strategies.

Portfolio Update

Overall, the portfolios have continued their strong performance. With the benefit of high diversification level and application of alternatives, the risk managed portfolios positioned well for rising interest rate environment.

Since inception, we have experienced two periods in a rising interest rate environment:

In both cases, the conservative Risk Managed models consistently and significantly outperformed its traditional benchmarks. These portfolios are designed for rising rates and positioned well going forward.

Attribution

The Risk Managed models performed well against their respective benchmarks in the 1st quarter, with the more conservative portfolios showing stronger outperformance. Since the interest rates bottomed last year, the conservative portfolios consistently and significantly outperformed the corresponding traditional benchmarks. The conservative portfolios were able to outperform their benchmarks for the quarter by both underweighting U.S. Fixed Income and having superior manager selection within the asset class. Allocation towards alternatives also contributed to excess returns. The main detractor was manager selection in U.S. Equity. In the aggressive portfolios, the primary drivers of underperformance were being overweight EM Bonds and underweight U.S. Small Cap. However, this was largely offset by U.S. Fixed Income (where we allocated less to the category and had superior manager selection).

In the Risk Managed Income portfolio solutions, the models outperformed their respective yielding and non-yielding benchmarks across the spectrum. In the conservative portfolios, the top performance by total attribution was significantly explained by U.S. Fixed Income (both selection and underweight allocation).  The main detractor was underweighting U.S. Equity. Across the growth portfolios, the primary detractor was an overweight allocation towards EM Bonds. However, portfolios still outperformed due to superior manager selection for U.S. Fixed Income and Real Estate, as well as overweighting MLPs.

The Strategic Core portfolio solutions mostly outperformed their respective benchmarks in the 1st quarter, with the more conservative portfolios showing stronger outperformance. Within the conservative portfolios, the primary drivers of outperformance were an overweight towards U.S. Equity and superior manager selection within U.S. Fixed Income. The main detractors were being underweight Intl Equity and U.S. Small Cap. For the more aggressive portfolios, the underperformance was largely attributable to being underweight U.S. Small Cap and the overweighting and poor manager selection within EM Bonds. Having no exposure to U.S. Fixed Income added value to the portfolio over the quarter compared with the benchmarks.

Broad Market Index Performance:

Asset Class Index March YTD
US Large Cap Equity Russell 1000 Index 3.8% 5.9%
US Small Cap Equity Russell 2000 Index 1.0% 12.7%
Intl Equity MSCI EAFE Index 2.3% 3.5%
EM Equity MSCI Emerging Index (1.5%) 2.3%
US Bond Bloomberg Barclays US Aggregate Index (1.2%) (3.4%)
US High Yield Bloomberg Barclays US Corporate High Yield Index 0.1% 0.8%
Intl Bond Bloomberg Barclays Global Aggregate Ex US Index 0.1% (2.0%)
EM Bond J.P. Morgan EMBI Global Core Index (1.1%) (5.3%)
Equity Hedge HFRI Equity Hedge Total Index 1.1% 7.4%
Event Driven HFRI Event-Driven Total Index 1.9% 8.2%
Macro HFRI Macro Total Index 0.7% 3.8%
Relative Value HFRI Relative Value Total Index 0.7% 3.9%
MLP Alerian MLP Total Return Index 6.9% 22.0%
Real Estate FTSE EPRA/NAREIT Global Index 2.8% 6.0%
Private Equity Thomson Reuters Private Equity Buyout Index 3.2% 4.7%

As of March 31, 2021

Source: Bloomberg

Rising Interest Rates and the Role of Alternatives

60/40

What we have been warning investors about for a while seems to be the consensus view: the 60/40 model’s expected performance for the next 3 to 5 years could be mediocre compared what we have experienced in the past decades. That is accompanied with low-income generation by quality bonds. Both pillars (Equity and Bond) are under pressure:

Pillar 1 (Fixed Income): Interest rates bottomed out in the summer of 2020 and have since made some impressive gains. We believe these gains are here to stay, with the most likely outcome being that rates continue trending upwards. That will put pressure on traditional conservative portfolios with duration.

Pillar 2 (Equity): Valuations are high and market leadership has cyclically changed in the past. The US Large Cap Equity dominated the equity market in the last 10 years. It is prudent to diversify into other asset classes, such as Small Cap or Emerging Market to position better, in case the US Large Cap Equity dominance weakens in the coming years.

Usually, the advice is to lower expectation and increase diversification, but without clear execution path. The Risk Managed portfolios are highly diversified solutions that have worked in the past and are expected to work in the future.

Alternatives during rising interest rates

We have compared how alternatives (represented by the HFRI Fund Weighted Composite Index) performed in rising interest rate environment against a similar volatility traditional portfolio (represented by 40% IWB and 60% AGG).  In the last 10 years, during rising rate environment(*), alternatives did better than a similar risk 40/60 traditional portfolio:

Source: Bloomberg, JAA

(*) Investigated rising interest rate time periods (6): Sep’10 – Mar’11, Aug’12 – Dec’13, Feb’15 – Jun’15, Jun’16 – Mar’17, Sep’17 – Apr’18, Aug’20 – Feb’21

 

Important Risk Information

The Risk Managed portfolios are well positioned to outperform during low and/or in a rising rate environment and take advantage of the recovery phase of the current cycle.

This information should not be relied upon as investment advice, research, or a recommendation by James Alpha or Alpha Peak regarding (i) the Funds, (ii) the use or suitability of the model portfolios or (iii) any security in particular. Only an investor and their financial advisor know enough about their circumstances to make an investment decision.

Carefully consider the James Alpha Funds within the model portfolios’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting  https://www.jamesalphaadvisors.com/prospectuses. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal. Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns.

The Alpha Peak Model Portfolios are provided for illustrative and educational purposes only, do not constitute research, investment advice or a fiduciary investment recommendation from James Alpha to any client of a third party financial advisor (each, a “Financial Advisor”), and are intended for use only by such Financial Advisor as a resource to help build a portfolio or as an input in the development of investment advice from such Financial Advisor to its own clients and shall not be the sole or primary basis for such Financial Advisor’s recommendation and/or decision. The Alpha Peak Model Portfolios themselves are not funds.

There is no guarantee that this investment strategy will achieve its objectives, goals, generate positive returns, or avoid losses. Liquidity and/or diversification does not ensure profit or protect against loss.

Incorporating alternative investments into a portfolio presents the opportunity for significant losses including in some cases, losses which exceed the principal amount invested. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors. Asset allocation and diversification strategies do not ensure profit or protect against loss in declining markets.

The views and opinions expressed herein are those of James Alpha senior management and may change at any time with prior notification. This commentary contains information from sources we believe are a reliable source. However, we are not responsible for the for the accuracy of such information. The information contained on this commentary is not an offer or a solicitation of an offer to purchase or sell any securities mentioned herein.

Definitions

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The Russell 1000 Index® measures the performance of the 1,000 largest companies in the Russell 3000.

The Russell 2000 Index® measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

The Bloomberg Barclays US High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.

The J.P. Morgan Emerging Market Bond Global Index (EMBI) includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi sovereign entities.

The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships (MLPs) that provides investors with an unbiased, comprehensive benchmark for the asset class.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS and CMBS (agency and nonagency). Provided the necessary inclusion rules are met, US Aggregate-eligible securities also contribute to the multicurrency Global Aggregate Index and the US Universal Index, which includes high yield and emerging markets debt.

The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. There are four regional aggregate benchmarks that largely comprise the Global Aggregate Index: the US Aggregate (USD300mn), the Pan-European Aggregate, the Asian-Pacific Aggregate, and the Canadian Aggregate Indices. The Global Aggregate Index also includes Eurodollar, Euro-Yen, and 144A Index-eligible securities, and debt from five local currency markets not tracked by the regional aggregate benchmarks (CLP, MXN, ZAR, ILS and TRY). A component of the Multiverse Index, the Global Aggregate Index was created in 2000, with index history backfilled to January 1, 1990.

The Thomson Reuters Private Equity Buyout Index (“Thomson Reuters PE Buyout Index”) replicates the performance of the Thomson Reuters Private Equity Buyout Research Index (“Thomson Reuters PE Buyout Research Index”) through a combination of liquid, publicly listed assets. The Index is calculated from the performance of seven private equity sector portfolios. The Thomson Reuters PE Buyout Index is the first index to allow liquid access to the gross performance of the private equity industry through index-linked investment products. The Thomson Reuters PE Buyout Index is published daily.

The FTSE EPRA/Nareit Global Real Estate Index is a free-float adjusted, market capitalization-weighted index designed to track the performance of listed real estate companies in both developed and emerging countries worldwide. Constituents of the Index are screened on liquidity, size and revenue.

HFRI Event-Driven (Total) Index – Event-Driven: Investment Managers who maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Security types can range from most senior in the capital structure to most junior or subordinated, and frequently involve additional derivative securities. Event Driven exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company specific developments. Investment theses are typically predicated on fundamental characteristics (as opposed to quantitative), with the realization of the thesis predicated on a specific development exogenous to the existing capital structure.

HFRI Macro (Total) Index – Macro: Investment Managers which trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top down and bottom-up theses, quantitative and fundamental approaches and long and short-term holding periods. Although some strategies employ RV techniques, Macro strategies are distinct from RV strategies in that the primary investment thesis is predicated on predicted or future movements in the underlying instruments, rather than realization of a valuation discrepancy between securities. In a similar way, while both Macro and equity hedge managers may hold equity securities, the overriding investment thesis is predicated on the impact movements in underlying macroeconomic variables may have on security prices, as opposes to EH, in which the fundamental characteristics on the company are the most significant are integral to investment thesis.

HFRI Relative Value (Total) Index – Relative Value: Investment Managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative or other security types. Fixed income strategies are typically quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment manager. RV position may be involved in corporate transactions also, but as opposed to ED exposures, the investment thesis is predicated on realization of a pricing discrepancy between related securities, as opposed to the outcome of the corporate transaction.

HFRI Equity Hedge (Total) Index – Equity Hedge: Investment Managers who maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. EH managers would typically maintain at least 50% exposure to, and may in some cases be entirely invested in, equities, both long and short.

 

Not FDIC Insured • May Lose Value • Not Bank Guaranteed