If you were to sail across the ocean, would you set the sails only at the beginning of the trip and then ignore upcoming storms? No. Auour does not believe that holding investments through all market environments is the correct way to invest. If the probability of market downturns increases, you should be proactive, or you risk making bad decisions at the worst time. Auour’s investment process seeks to exploit the irrational emotions of fear and greed that can take hold within the global markets.
Client Example 1
Client is 10 years away from retirement and is sitting in a static allocation of mutual funds and other securities. A 2008-type recession hits the market and client’s funds experience a 30% drop in value. Now, time to retirement and spending assumptions need to change. Auour offers the ability to move to cash when certain warning flags are raised, looking to reduce the volatility and loss experienced so that the client does not need to change their lifestyle.
Client Example 2
Client experiences a market correction and moved their funds to cash, worried about further losses. Now, they sit in a position of having to think about when and how to get back in. The market experiences an increase but headlines still are negative, leaving them to continue to sit on the sidelines and miss the recovery. Auour looks at nine super factors to determine when to get back in, allowing for a well thought out method of moving back in and with the flexibility to move fast or slow, depending on the market outlook.
Not necessarily. Auour believes that a disciplined approach to tactical investing is critical. At the core of the process is a belief that the strategies’ aggressiveness needs to match the market’s willingness to compensate for taking risk. Auour aims for modest position tilts in most market environments to match normal risk environments. The strategies can move to cash in times when taking risk is not productive. Auour’s largest difference from the market will be when the strategies move to 100% cash in times of predicted distress. It is the aim of the Auour strategies to mitigate large losses so clients do not lose faith in the long-term benefits of investing and advisers do not risk client defections due to down markets.
First developed for the largest pension funds, Regime Based Investing is the idea that the market goes through different phases in the typical economic cycle. Regime Based Investing looks to adapt to those phases (regimes) to produce better investment returns.
History shows that the one asset that can protect capital in times of duress is cash. Auour can move 100% of each strategy into cash when it predicts a material and enduring downturn. In times were Auour believes markets are favorable, they will tilt the strategies to areas that have traditionally shown better returns: small caps, international, and emerging markets.
Bonds have experienced times of great outperformance when equity markets are weak but those have been during a bond bull market. With rates low, it is not clear that long-term bonds will be a safe haven the next time.
The largest determinants to fixed income performance is credit quality and duration. When Auour predicts favorable markets, the portfolio will tilt to higher yielding and longer duration instruments. In times of expected market duress, the portfolio will move to short duration government and high-quality corporates.
No. The fixed income strategy is meant to be a core portfolio offering, focusing on capital preservation first. The aggressiveness of the strategy is determined by the duration and credit exposure of the ETFs used.
Auour structured their strategies to be stable throughout the business cycle so that discretion would not be necessary. However, Auour does actively monitor the process and will take some minor discretion in the execution of regime changes.
Through extensive backtesting of the strategies, we expect to be in a fully invested stance about 75% of the time. We expect to be in 100% cash only 5% of the time and holding a portion of cash (to minimize volatility) approximately 20% of the time.
Market dynamics will dictate the number of regime changes in a year. Experience and backtests suggests 2-3 regime shifts in a year. That will typically result in turnover averaging 30-60% per year over a complete business cycle.
It is expected that very sharp V-shaped corrections are unlikely to be caught given the stability and balance built into the Auour Regime Model. Brexit, as an example, caused a very quick correction that did not display risk factors suggesting it would be a correction of significant duration.