Atlas Capital Advisors

Atlas Global Downside Protected (GDP)

Global Equity Strategy

July 2016 Update

Performance

The global capitalization weighted equity index (FTSE World net of tax) was down 0.62% in June 2016. GDP strategy performance net of fees in June was up 0.53%, 1.15% ahead of the index. From strategy inception on July 9, 2015 through the end of June 2016, the GDP strategy has a loss of 9.18%, net of fees. That is 4.88% below the loss of 4.30% for the global equity index over the same period. The underperformance since inception is primarily the result of the low weight in equities after the January downturn, which limited participation in the sharp rebound of the global equities market which ran from mid-February to April.

The GDP strategy went into June with 74% of the portfolio in the stock market. The choice by voters in the United Kingdom to exit the European Union (“Brexit”) roiled markets toward the end of the month. By June 27, the Monday after the vote, global stocks were off 5.5% for the month, with GDP off half as much at 2.7%. Global stocks then recovered almost all of that loss by June 30.

Most of the GDP positioning choices were beneficial in June. In particular, the strategy was helped by its underweight in Europe – just an 8.5% weight vs a benchmark weight of 20.7%. The other major benefits to performance were from:

1. –The overweight to Brazil. Brazil has a multitude of problems, just ahead of hosting the summer Olympic games, but nonetheless Brazilian stocks rocketed up 19.5% in June. Most of the gain was from a 12.4% rise in the Brazilian currency, which rallied on improved current account balances.
2. –The overweight to the US Telecom and Utilities sectors, each of which gained over 7% in June as investors sought “safe haven” assets.

Asset allocation is the most important decision one can make as an investor. Each quarter, Atlas Capital Advisors updates estimates of the expected returns of each asset class, and adjusts allocations accordingly. We make these decisions in a systematic repeatable way using approaches grounded in academic evidence.

Foundations of Atlas Risk Asset Allocation

We are fundamental investors. We seek to increase weights in asset classes that are attractively priced, and reduce weights in those that are not. Attractively priced asset categories, with higher expected returns, have “good value” in our terminology.

The evidence for making investment decisions in alignment with value is robust. On average, based on data since 1980, the annual return of single country stock markets with the top third most attractive valuations outperform the bottom third by 5% per year.

We also use price trends as a catalyst for determining when to enter positions. Through long experience in the markets, we have repeatedly seen asset classes that appear to have strong value characteristics continue to get cheaper. Many of the emerging equity markets have had this characteristic in the last five years. We have learned that it is better in the long run to wait for cheap asset classes to start rising in price before committing to an overweight. Similarly, it’s better to wait for expensive asset classes to start falling in price before moving to an underweight.

The evidence to consider trend is also strong. For instance, in stock market history, the future return tends to be better if the past return is positive than if it is negative. On average, if the past 6 – 12 month stock market return is positive, the next quarter return is 1.5% to 2.0% higher than if the prior 6 – 12 month return is negative.

2020Q1 update

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Below are some additional slides that we found in a recent Fidelity Investments slide deck. The information correlates perfectly with the our investment thinking.

Overweight Energy, Info Tech and Financials

Overweight Asia, EM and Canada

Underweight Consumer Staples, Utilities, Real Estate

Underweight US and Europe

Q2 Review: The Atlas asset allocation strategy performance slightly trailed the MSCI World benchmark for Q2. The primary drivers for this underperformance are due to:

• Overweight International (-3.6%), Underweight US (+3.8%)
• Overweight Emerging Markets (-10.1%) within International
• Overweight Value, Underweight Growth.

Most global benchmark indices are flat or down for the year with the tech heavy NASDAQ Composite markedly in positive territory. Relative valuations still favor increased international exposures at the expense US equities. In fact, a close analysis of S&P 500 performance shows the benchmark’s YTD positive showing has been driven by just 10 stocks (See graphic below). As always, we emphasize diversification to mitigate risks in these uncertain times.

Absent these 10 stocks (image below), the S&P500 is down on the year.

Through the 1st half of 2018, S&P500 performance has been entirely driven by only 2% of the index’s stocks. Five of the top 6 stocks comprise the darling FAANG index. As expected, these stocks exhibit fair to good Momentum scores. However, all except AAPL and NVDA, score poorly for Value metrics like Price/Book, Price/Earnings and Price/FreeCashFlow.

Value v. Growth Review

Considering recent outperformance of ‘growth’ investment style, we thought it topical to review the merits of a value investment style over the long term. Both empirically and intuitively, value should outperform growth over long period of time but as you can see from the link to a Fidelity article on this subject, the most recent 5 year period has grown outperforming value by more than 2.0% per year. This has been a drag on Atlas relative performance over this period.

Q3 Outlook

Below is our current analysis of market opportunities and how we are positioning portfolios. We would be glad to discuss or answer any questions.

US Sector Return Estimates

The chart below shows our current evaluation of the sector choices available to US equity investors. This evaluation drives our allocation decisions. Markets which appear most attractive for investment are in the upper right. Those sectors that have both good value and positive momentum. Future real returns based on historical value norms are unappealing.

US Sector Positioning

Consumer Staples, Utilities, and Real Estate underweight based on valuation. Overweight Financials and because of reasonable value. Info Tech and Consumer Discretionary overweight based on Momentum. Neutral-weight Small Cap, Underweight Mid Cap.

Regional Positioning Chart

Atlas portfolios in relation to the weights of the benchmark global equity index are depicted below. The weighting preferences continued the trend we’ve implement most of the 30 months; reduced US exposure and increasing International weightings. We’re underweight US equities versus both benchmark and International equities. Within International, we are overweight Asia, Canada and Emerging Markets while underweight Europe and Small Cap.

Disclosures