By Shawn Gibson on Oct 19, 2022
The 3rd Quarter once again had few, if any, bright spots as virtually all risk assets continued to sell off. The S&P 500 Index was down 4.88% for the quarter bringing it to -23.87% for 2022. The Bloomberg Barclays US Aggregate Bond Index was nearly as bad as equities with a -4.75% for the quarter, bringing the YTD losses to -14.61%. Not having bonds as a portfolio ballast has caused negative investor sentiment and is leading to investors’ imaginations running wild with how bad things can get. Against this extremely tough backdrop, the gross Overlay strategy return was -2% for the quarter and is down 4.6% YTD. This negative contribution has resulted in YTD underperformance in the separate account strategies and the funds.
While markets like this are very trying and are difficult for the Overlay strategy, we are confident in a couple of things: 1) the market will eventually stabilize and recover (the timing of this is impossible to predict); and 2) the opportunity for the strategy once the market stabilizes should be very attractive for an extended period of time. We have developed a separate paper that goes into the historical behavior of strategies similar to the Overlay when the market has recovered from previous high volatility regimes.
As for the remainder of this year, the markets should continue to be extremely data sensitive and reactive to every word from the FOMC. Early October can often come with more volatility, but seasonality tends to be supportive in the 4th quarter. Given the extreme level of fear and pessimism from market participants, it would not take much positive news to spark a significant recovery rally. In order to have a sustained recovery, the range of expectations for future inflation and economic growth will need to contract. As most of you know, whether a true recovery has started will not become obvious until months or perhaps quarters after it begins, during which time risk assets could produce significant gains. As such, we would encourage investors to focus on finding investments that they are confident can produce attractive returns over the coming years rather than months.
ANNUALIZED SEPARATE ACCOUNT ILLUSTRATIVE RETURNS (Net1)
11/01/2013 - 09/30/2022
| Q3 | 1 YEARS | 3 YEARS | 5 YEARS | Inception to Date | |
| Large Cap Equity Strategy | -7.30% | -19.54% | 7.68% | 8..08% | 11.67% |
| S&P 500 Index | -4.89% | -15.50% | 8.14% | 9.22% | 10.43% |
| Small Cap Equity Strategy | -7.52% | -22.72% | 5.04% | 3.70% | 8.77% |
| S&P 600 Index | -5.20% | -18.83% | 5.48% | 4.84% | 7.58% |
| Foreign Equity Strategy | -11.85% | -25.03% | -4.97% | -2.19% | 3.12% |
| MSCI ACWI ex US MinVol | -9.91% | -25.17% | -1.52% | 0.81% | 1.21% |
| Core Bond Strategy | -6.91% | -18.23% | -3.33% | -0.93% | 2.56% |
| Bbg Barc US Aggregate Index | -4.75% | -14.60% | -3.26% | -0.27% | 1.10% |
| Short Term Bond Strategy | -4.32% | -12.10% | -0.87% | 0.17% | 2.87% |
| Bbg Barc US Corp 1-5 Yr TR | -1.94% | -8.06% | -0.66% | 0.94% | 1.52% |
| Municipal Bond Strategy | -5.25% | -13.96% | -1.59% | 0.02% | 3.54% |
| Bbg Barc Muni Bond Index | -3.46% | -11.50% | -1.85% | 0.59% | 2.18% |
1Net of fees assumes a 0.75% management fee applied monthly. The three, five and ITD are shown annualized. These returns are illustrative, hypothetical numbers representative of two actual return streams (Liquid Strategies Overlay and the underlying index ETF). The numbers illustrate what would have happened had we taken the underlying index ETF returns and added Liquid Strategy Overlay returns to them. Source: Morningstar, Liquid Strategies.
HEDGED LARGE CAP EQUITY SINCE INCEPTION RETURNS (Net1)
06/30/2019 - 09/30/2022
| Inception to Date | |
| Annualized Return (Net) | 7.07% |
| Annualized Volatility | 11.89% |
| Sharpe Ratio | 0.57 |
| Max Drawdown | -19.25% |
| Beta vs S&P 500 | 0.57 |
| Up Capture | 65.51% |
| Down Capture | 59.31% |
OVERLAY STRATEGY ANNUALIZED PERFORMANCE
11/01/2013 - 09/30/2022
| Q3 | 1 YEARS | 3 YEARS | 5 YEARS | Inception to Date | |
| Overlay Strategy (Gross) | -2.01% | -3.84% | 0.76% | 0.14% | 2.26% |
| Overlay Strategy (Net) | -2.20% | -4.20% | 0.00% | -0.61% | 1.50% |
Net of fees assumes a 0.75% management fee applied monthly.
*Hypothetical/Illustrative performance is not an indicator of future actual results. The results reflect performance of a strategy not offered to investors during the time indicated in the analysis and do not represent returns that any investor actually attained. Hypothetical/Illustrative results are calculated by the retroactive application of the Overlay strategy constructed on the basis of historical data combined with other existing independently-managed ETFs and based on assumptions integral to this presentation which may or may not be testable and are subject to losses. General assumptions include: The manager would have been able to purchase securities in a single portfolio with similar characteristics to the Overlay Strategy and the Index ETFs recommended by the illustration, and the markets were sufficiently liquid to permit all trading. Indexes used for comparative purposes cannot be traded, however there are securities, funds, and similar investments that can be purchased to obtain similar results and include no fees. Changes in these assumptions may have a material impact on the hypothetical returns presented. No representations and warranties are made as to the reasonableness of the assumptions. This information is provided for illustrative purposes only. Actual performance may differ significantly from hypothetical/illustrative performance. Source: Morningstar, Bloomberg, L.P., Liquid Strategies.
As always, we are happy to not only do calls and meetings to discuss the performance and outlook for the Overlay, but we are also happy to serve as a resource for general questions on market volatility.
We appreciate your continued support and interest.
Shawn Gibson, Founding Member
Adam Stewart, CFA, Portfolio Manager
Justin Boller, CFA, Portfolio Manager
The assertions and statements in this blog post are based on the opinions of the author and Liquid Strategies. The examples cited in this paper are based on hypothetical situations and should only be considered as examples of potential trading strategies. They do not take into consideration the impact that certain economic or market factors have on the decision making process. Past performance is no indication of future results. Inherent in any investment is the potential for loss.
Manager Commentary: Q1 2023
Manager Commentary: Q1 2022