Laif Meidell,president of American Wealth Management and a FINRA registered representative with Foothill Securities, a hybrid Reno, Nev.-based RIA firm, recently shared his thoughts with Paula Vasan regarding market volatility and his response by adopting a more defensive portfolio position with his AdvisorShares Meidell Tactical Advantage ETF (aka MATH).
Recent sentiment shows investors are increasingly fearful of volatility. During the past several weeks you have become more defensive, with 50% in cash and little equity exposure. How does this compare with your previous allocation model, and why are you so defensive now?
We think the best solution is to have a process that lets the portfolio adapt to the prevailing market trends by selecting those areas that are in uptrends and then allocating to those areas that have the greatest probability to outperform. We were 100% invested in stocks from the start of the year through May, but our models began reducing our equity exposure in mid to late June.
Our shift from stocks to bonds and cash was in part a function of stocks underperforming shorter-term bonds. Additionally, high volatility is inherently bearish for the stock market, so when we see high volatility we use an additional non-linear trending model to tell us what if any positions should be sold to reduce the portfolio's volatility.
How have investors been responding to the defensiveness of your fund?
Quite favorably I think. We have seen a pickup in inflows into the fund the past couple of months as we have worked to lower the portfolio's volatility. I think advisors are watching our moves and appreciate our efforts to protect their clients' assets during these turbulent times. However, we also participated in the market rally earlier in the year while some of our competitors didn't.
What is the fund's performance since inception? And whats the current asset allocation of the fund?
MATH has returned 12.49% since inception. We're 20% foreign stock, 5% U.S stock, 5% commodities, 19% short-term bonds and 51% cash.
What motivated the launch of your fund?
We have been successfully running the strategy for clients since 2008, well before the launch on June 23, 2011. We saw that there was an opportunity to provide our style of investing to the market by partnering with AdvisorShares, and given the fund choices consumers had available at the time we felt we could provide additional value that investors weren't getting.
What makes your AdvisorShares Meidell Tactical Advantage ETF unique?
The fund is designed to capture gains during bull markets and protect assets during bear markets. The fund's ability to shift from 100% cash and bonds to 100% stocks creates a mechanism designed to limit the fund's drawdowns during bear markets. To do this we look at an investment pool of roughly 55 ETFs and use a quantitative, non-emotional approach to selecting where in the market to be invested at any given time. The fund's investment process allows it to be adaptive to the markets and align the portfolio to the prevailing market trends.
Who is this ETF best suited for?
I think this fits in the portfolio of the person who wants a mechanism to dial down the portfolio's volatility during market corrections as well as having a strategy for getting back into the market once trends reverse up. Those that are more risk averse might see MATH as a core holding where as those with a larger appetite for risk may use the fund as a satellite position.
You are a principal of your own independent RIA firm. How do your clients react to volatility in general? How does your position at an RIA influence this ETF?
I feel I have a greater appreciation of what the average advisor goes through and what investors want from them, versus someone who is more removed from the investment experience. We want the advisor to look good in front of his or her clients and want MATH to help them do that.
Where do you see the most opportunity in region/asset class?
After having underperformed U.S. equities for most of the year we are seeing some foreign equities moving back into the portfolio, so if the stock market can rally higher I think foreign stocks could start to outperform.
What are your favorite ETFs now? Why?
We have owned the iShare Europe ETF (IEV) for several weeks now and when we were buying it Europe was still a dirty word, but the price was moving up. I like the fact that we can see trends emerging early enough to identify and participate in them. We also own the Powershares DB Commodity index (DBC), which again has underperformed most of the year but is holding up quite well now given the geopolitical backdrop we are looking at today.
Critics say the fund-of-fund model is dead due to higher fees, lack of transparency, etc. How do you respond to them?
First, with ETFs there is complete transparency on a daily basis as to the holding in the portfolio. I have the same issues with the lack of transparency in mutual funds, but that doesn't exist with ETFs and certainly not with MATH. So, the transparency argument is actually a strength for ETFs. Regarding higher fees, the fact that we own primarily index ETFs inside the fund makes us more competitive on a fee basis and we are very competitive if not significantly when it comes to comparing us to actively managed mutual funds and those funds are managing tens of billions of dollars. If people vote with their wallet, there is a lot of money in those funds that says it's not dead.
Have managers of purely institutional assets and/or public funds (state pensions, treasuries, endowments and foundations, i.e. not asset managers who deal with private funds) utilized actively managed ETFs to a large degree yet?
Most institutions won't consider a fund like MATH until it has a three-year track record, so we still have that hurdle but we are less than a year away.
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