A strategy to profit in bull markets and protect in bear markets

September 28, 2018 Marija Majdoub

 

Fund Spotlight: MDPIM Global Tactical Opportunities Pool

Thinking about “what ifs?” can keep some investors up at night: stock market shocks, economic turns, political shifts and trade wars—and that’s just from today’s headlines.

But reading signals behind global events and having a deep understanding of the global macroeconomic landscape is exactly what brings MD’s internal portfolio management team into work each day.  

Using proprietary research and advanced data analytics, they look for investment opportunities by increasing allocation in their portfolios to assets they think will outperform in the current business cycle.

Their job includes managing the MDPIM Global Tactical Opportunities Pool (MDPIM GTO Pool) for MD Private Investment Council (MDPIC) clients, a specialized investment pool used to make portfolio adjustments that are more short-term in nature.

“We believe that a top-down, global, macro approach can add value and complement traditional, bottom-up portfolios with an uncorrelated source of investment returns,” says Marija Majdoub, Senior Portfolio Manager and Vice President of MD’s Investment Management and Strategy team.

Tilting portfolios to offset risks, seek returns

MDPIM GTO Pool was developed exclusively for MDPIC clients as a way to personalize portfolios, lower investment costs and complement performance of core holdings.

Most importantly, it provides an active portfolio management strategy known as tactical asset allocation to adjust investment exposures to world markets and asset categories. MDPIM GTO Pool Portfolio Managers take an advanced approach, similar to that of many pension funds, to execute their strategy using alternative investments known as derivatives.

The tactical MDPIM GTO Pool may now represent 4% to 8% of a MDPIC client’s overall portfolio, depending on that individual’s investor profile.

Launched on April 28, 2017, the MDPIM GTO Pool was quickly adopted in 95% of MDPIC discretionary portfolios, with $1.5 billion of assets under management.

Short term, but not short sighted, investments

The aim of the MDPIM GTO Pool is to anticipate global economic and financial market trends within a 12-month horizon to enhance returns and smooth out investment performance of core portfolios.

“We look to capitalize on our short-term outlook for stocks, bonds and currencies as well as our regional views, but we are not day traders: we are not short-term traders,” says Majdoub, who leads MD’s nine-person internal investment team of portfolio managers, analysts, and trading and operations specialists.

MD looks for structural trends among countries and asset classes, attempting to:

  • Understand what drives asset class performance and risk over time
  • Identify the best asset classes depending on the market cycle and regime
  • Analyze the past to make unbiased decisions about what might happen next

“We look at history, we look at economic data and fundamental data, we look at forward earnings expectations from a top-down level to see what they are calling for in different markets. We also have proprietary models and chart books we’ve developed on G10 and emerging market countries, asset classes and relevant economic and financial data through time,” says Majdoub.

For instance, looking at the current uncertainties around NAFTA and global trade, MD models are currently tracking four most likely scenarios, from best case to worst case, and how markets may react.

Broader horizons include alternative investments

MD’s management team adjusts portfolio asset allocation with the MDPIM GTO Pool through derivative investments, without trading the underlying assets directly — essential to the way their tactical asset allocation strategy is executed.

These can include exchange-traded options, futures contracts and currency forwards — financial agreements to buy or sell a certain asset at a specified date.

Rather than directly buy stocks, bonds or currencies, these derivatives allow the Pool to take “long” or “short” positions in asset classes already held in a portfolio. This anticipates that an asset’s value may, respectively, rise or fall.

This can be used to hedge against (reduce) perceived risk. It can also add exposure to markets that may be underpriced—positioning to profit.

Derivatives lower trading costs, increase tax efficiency

“We’re not taking more risk in terms of allocations from what we used to when we bought and sold individual pools,” says Majdoub. “However, now, any performance attributed to tactical asset allocation is isolated. Any gains or losses are confined to this one pool without creating taxable events by selling other pools.”

Trading in derivative investments also lowers transactions costs, relative to investing directly in the underlying assets.

Derivatives can be readily bought and sold, and are highly liquid in the case of futures and options allowing for effective, timely portfolio adjustments.

And lastly, crucial for investors, reporting is standardized, transparent and clear, similar to stock trades. 

Making sense of markets for MD investors

MD’s internal portfolio management team is at the forefront of advanced analysis on pricing, economics and the behavior of financial markets to decipher “what ifs.”

“We continue to expand our research, look for new ways to capitalize on our research ideas and develop highly customized investment solutions to benefit our clients,” says Majdoub.

While MD’s core portfolios are designed to perform through the entire market cycle with a long-term, buy-and-hold philosophy, strategies like tactical asset allocation aim to complement this as a source of additional, uncorrelated returns. For the one-year period ended August 31, 2018, the MDPIM GTO Pool reported a return of 15.13%, compared to 8.88% for its benchmark.

Depending on your investment objectives, MDPIM GTO Pool or one of our leading-edge alternative investment strategies may be suitable for your portfolio. For more information about MDPIM GTO Pool, tactical asset allocation or MD Private Investment Counsel, please contact your MD Advisor.

 

Standard performance data assume reinvestment of distributions only and do not take into account sales, redemption, distribution or optional charges payable by any security holder that may reduce returns.

About the Author

Marija Majdoub

Marija Majdoub, CMA, CFA, is Vice President with the Investment Strategy team at MD Financial Management. She leads the team of portfolio managers and investment professionals responsible for managing the firm’s mutual funds and investment pools, and developing MD’s investment views.

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