We’re in a period of high inflation, with a war disrupting energy markets and the Federal Reserve raising interest rates.
The murky outlook calls for a multiyear cycle of central-bank policy moves that will be unfriendly to the stock and bond markets.
An investment approach that can take advantage of price movements across all assets — not only stocks and bonds — might serve you well, especially if volatility keeps you up at night, temps you to sell into a declining market or causes you to chase performance.
One such an example is the Standpoint Multi-Asset Fund
which has about half of its assets invested broadly in stocks and bonds (mostly stocks) across developed markets through low-cost exchange traded funds. The rest of the money is used in futures markets that encompass currencies, energy commodities, gold and silver, industrial metals, such as aluminum, copper, zinc and nickel, grains and soft commodities such as sugar and coffee.
During an interview, Eric Crittenden, who co-manages the fund, explained its strategy and described how it places long and short trades in non-equity assets to give investors “a smoother ride” over the long term.
There are dozens of mutual funds that use futures-trading strategies. Most are designed to mitigate risk in down markets by taking advantage of price movements, up or down, across various asset classes. They can be used by investors to hedge against downturns in the stock market or bond market, as a complement to a portfolio of stocks or bonds, or funds that hold stocks or bonds.
The objective of the Standpoint Multi-Asset Fund is to perform both functions within the same portfolio, using a systematic approach to futures trading to limit risk while still pursuing long-term growth. That way an investor won’t have to make their own risk-management allocation decision among funds, and hopefully will be able to limit their own emotional reactions to market turmoil.
“ There is always a bull market somewhere, in some asset class or some region of the globe.”
— Eric Crittenden, co-manager of the Standpoint Multi Asset Fund.
The Standpoint Multi-Asset Fund was established at the end of 2019 and now has about $250 million in assets under management. The fund is too new to have a Morningstar rating. However, it has high performance rankings within Morningstar’s Macro Trading fund category.
Here’s a look at the performance of its institutional shares from inception through March 21, 2022, compared to the performance of the SPDR S&P 500 ETF Trust
which tracks the U.S. benchmark, and two funds that mainly use futures-trading strategies, without the large-equity component maintained in the Standpoint portfolio:
There’s a lot going on in this chart, which shows total returns with dividends reinvested.
The Standpoint Multi-Asset Fund has been the best performer for the entire period from the end of 2019 through Mach 21, 2022, as the S&P 500, represented here by SPY, has pulled back from its high in early January.
The two purer-play funds on the chart making use of futures-trading strategies are the American Beacon Hill AHL Managed Futures Strategy Fund
and the Pimco Trends Managed Futures Strategy Fund
Looking to the left of the chart, from an early-year closing high on Feb. 19, 2020, SPY fell 34% through its coronavirus pandemic low on March 23, 2020. During that period, the Standpoint fund fell only 8%, despite being about half invested in stocks. Crittenden attributed this outperformance to short positions in the energy futures market. Meanwhile, the two purer-play funds performed very well during that short equity crash, with AHLIX returning 6% and PQTAX 12%.
All four funds did their job from the early-pandemic equity crash through the bull market that followed. The Standpoint fund has been the best performer since the end of 2019. Even though it trailed the S&P 500 during the bull run through January 4, 2022, it has outperformed during the stock-market downturn since then. The two purer-play futures-trading funds have performed best during this year’s stock-market decline, as should be expected, but once again, the Standpoint fund has held its own:
Going back to the first chart, the blue line showing the Standpoint fund’s performance illustrate the smoothing-out of long-term returns Crittenden and his co-manager Shawn Serikov are aiming for.
Futures trades for a smoother ride
Crittenden, who previously managed a hedge fund and was formerly chief investment officer for Longboard Asset management, which he co-founded, stressed that rather than relying on the fund managers’ intuition, he and Serikov use a disciplined, systematic process to take advantage of price movements, up or down, across all developed markets. For the fund’s long stock positions, only ETFs listed in the U.S. are used. They are listed below.
For futures trading, “we only trade exchange-traded plain-vanilla liquid futures contracts on regulated futures exchanges,” Crittenden said.
When discussing the systematic futures-trading approach, he said that “three variables matter to us and explain more than 90% of any asset manager’s success:
The investment return of the market — with no crystal ball, decisions are based on recent price movements.
The term structure of the market — this encompasses the timing of stock and bond dividends. For example, all things being equal, if a company pays a dividend of a dollar a share on a given day, the share price declines by a dollar that day. Structural considerations also encompass the timing of bond interest payments, call dates and maturity dates, and for commodities, the structures of futures contracts.
The liquidity of the market — supply-and-demand imbalances lead to opportunities to trade as prices move up or down.
With no crystal ball, Crittenden acknowledged that futures trades, such as the short positions in energy commodities the fund employed during the early stage of the pandemic, won’t capture the best prices up or down. But the fund’s approach is to place them early enough during large price swings to mitigate the risk of the equity portion of the portfolio.
“There is always a bull market somewhere, in some asset class or some region of the globe,” Crittenden said.
When describing the fund’s broad approach, he said: “What we give up is all the excitement,” as the highest highs and the lowest lows are avoided.
Warning signs — stagflation
This decline in the stock market so far this year seems mild, given decades-high inflation, tightening monetary policy and war breaking out in Europe. With so many moving pieces, investors may be in for plenty of volatility.
Crittenden sees stagflation as a possibility over the coming years. Stagflation is a combination of high inflation and slowing or negative economic growth. It can have a devastating effect on corporate earnings, as companies are less able to pass rising costs on to their customers.
The unprecedented economic stimulus from the Federal Reserve, through very low interest rates and bond purchases that vastly increased the U.S. money supply, combined with the federal government’s direct payments of stimulus cash to families, helped the economy recovery quickly from the pandemic, but has now led to high inflation.
“The bill is coming due. The question is who is going to pay it? I think it will be stagflation,” Crittenden said, emphasizing that as a portfolio manager, he is prepared for it.
ETFs held by the fund
Crittenden said the Standpoint Multi-Asset Fund holds the same group of eight ETFs and that it will occasionally make changes to keep positions from getting too large or small. He doesn’t favor regular rebalancing.
“I have found people rebalance too much and too quickly,” he said. “They generate transaction fees and tax implications that reduce returns.”
The fund, which is available through major distribution platforms, including Charles Schwab and Fidelity, steers clear of emerging markets, which make up only about 8% of the total international stock market in dollars, according to Crittenden’s estimate.
Here are the eight equity ETFs held by the Standpoint Multi-Asset Fund, according to the most recent information available from FactSet:
% of portfolio
SPDR Portfolio S&P 1500 Composite Stock Market ETF
Vanguard Total Stock Market ETF
iShares Core S&P Total U.S. Stock Market ETF
Schwab U.S. Broad Market ETF
Vanguard FTSE Developed Markets ETF
SPDR Portfolio Developed World ex-US ETF
Schwab International Equity ETF
iShares Core MSCI EAFE ETF
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