FolioBeyond Fixed Income Commentary For April 2020
FolioBeyond’s algorithm underlying the S-Network FolioBeyond Optimized Fixed Income Index ("SNFBFI") returned +0.84% (net of 30bp fee assumption) in April versus +1.78% for the Bloomberg Barclays U.S. Aggregate Bond Index (“AGG”). Over longer time periods, SNFBFI continues to outperform both AGG and Morningstar’s US Fund Multisector Bond category as shown below for 5-year and 10-year holding periods. Although risk levels declined somewhat relative to extreme volatility levels of March, risk measures still remain elevated by historical standards. Consequently, the algorithm continued to maintain a conservative portfolio allocation.
The primary drivers of returns for our strategy in April were intermediate duration Agency Bonds, short-dated TIPs, and short duration High Yield Corporate Bonds. The Fed’s initial intervention in the markets focused on Agency Mortgage Backed Securities and Investment Grade Corporate Bonds which quickly drove yield spreads in those sectors to tighter, less attractive levels. This has created some compelling relative value opportunities in various sub-sectors of the market that will come into play for our algorithm as volatility levels subside. While implied volatility levels have come off their highs from March, we are still at two times historical levels, which makes it premature for our optimization model to include many riskier sub-sectors given the model's volatility constraint.
Source: Morningstar
*SNFBFI’s returns are net of underlying ETF fees and 30 bp assumed management fee. Although the information herein is believed to be reliable, FolioBeyond makes no representation or warranty as to its accuracy, and information and opinions reflected herein are subject to change at any time without notice. The past performance information presented herein is not a guarantee of future results.
** The Rank is calculated using the total return of the S-Network FolioBeyond Optimized Fixed Income Index ("SNFBFI"), ranked against the closing total returns of the open-end mutual funds in Morningstar's US Fund Multisector Bond Category. Percentile Rank is the total-return percentile rank of SBFBFI relative to all funds in the defined Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100.
From a correlation perspective, FolioBeyond’s strategy has historically exhibited low correlation to commonly followed market benchmarks. One of the primary reasons for this low correlation behavior is the dynamic, multi-factor, sector rebalancing approach that utilizes an advanced modeling framework. In contrast, market benchmarks are quite static with limited periodic changes to their index composition. This low correlation benefit can be taken advantage of in a portfolio context by complementing existing investor portfolios of core Fixed Income Bonds with our alpha generating, Multisector FolioBeyond strategy.
To demonstrate the effective usage of FolioBeyond’s strategy within broad Fixed Income portfolios, we simulated the risk/return profile of different portfolio combinations. Blend A combines a core AGG exposure with FolioBeyond while Blend B combines AGG with a High Yield Corporate Bond exposure as represented by HYG, one of the benchmark High Yield ETFs, both on a 50/50 basis. The addition of FolioBeyond to AGG improves the risk-return profile by boosting returns while reducing standard deviation and drawdown risk, thereby improving the Sharpe Ratio. Blend A also produces a superior profile than Blend B that combines AGG with HYG.
Source: Morningstar
SNFBFI’s returns are net of underlying ETF fees and 30 bp assumed management fee. Although the information herein is believed to be reliable, FolioBeyond makes no representation or warranty as to its accuracy, and information and opinions reflected herein are subject to change at any time without notice. The past performance information presented herein is not a guarantee of future results.
Looking forward, we anticipate that the model will take advantage of the richer opportunity set of expected returns created by the recent market volatility. Whether there is a U-shaped, V-shaped, or the recently adopted Nike swoosh recovery, the FolioBeyond model will continue to update the underlying analytical measures daily to capture the most relevant value and risk measures and optimize sector allocations appropriately. This dynamic, algorithmic approach is likely to extract significant sector rotation alpha over intermediate and long-term holding periods, similar to how the algorithm generated significantly higher excess returns for the years following the Global Financial Crisis of 2008.
