Welcome to our active management update on the market
When discussing our rules-based investment strategies, we often say, “All strategies work until they don’t.” I think it is important to explain what we mean by that. It’s not that all rules-based strategies are destined to fail; it’s that they are designed for specific market environments. This means that they may not deliver positive returns in every market environment.
Every strategy has a season
Rules-based strategies are designed to take advantage of specific observable and measurable opportunities—and/or avoid specific observable and measurable risks—in the market. When the market enters an environment where those target opportunities and risks are present, the strategy is designed to perform as its profile suggests it will.
However, the market does change—as do the specific opportunities and risks within it.
Because of this, we build portfolios composed of multiple strategies—each one designed to take advantage of different market opportunities and avoid different market risks. This gives the overall portfolio the tools it needs to navigate the market as it changes over time.
The lesson? Just because a strategy is not performing well in one market environment does not necessarily mean you should abandon it. You may need it when the market season changes.