FolioBeyond Fixed Income Commentary For December 2019 and Year End Recap
FolioBeyond’s algorithm underlying the S-Network FolioBeyond Optimized Fixed Income Index (SNFBFI) ended 2019 on a strong note, generating net returns of +1.36% in December and registering a full year return of +12.28% for 2019. It was the best year over the past 10 years of index history and was achieved with modest volatility of returns.
FolioBeyond’s strong performance was generated by its automated rebalancing process across 23 possible Fixed Income subsector ETFs. The results summarized below are favorable versus the benchmark and comparable fund strategies.
* SNFBFI’s returns are net of underlying ETF fees and 40 bp assumed management fee. Although 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.
** Composite figures are simple averages and include actively managed mutual funds from Morningstar Categories US Intermediate Core-Plus Bond, US Fund Multisector Bond and US Fund Nontraditional Bond.
SNFBFI outperformed AGG by 356 basis points in 2019 with a significantly lower standard deviation of returns. The major contributions of returns came from Agency Mortgage REIT, Municipal Credit, and Short Duration High Yield Corporate Credit, followed by Bank Loans and Long Duration Treasuries. SNFBFI also outperformed the average of Morningstar Fixed Income Category Composite by +369 basis points.
FolioBeyond’s performance can be better dissected by reviewing return attribution on a quarterly basis relative to AGG. The table below summarizes the major sources of quarterly returns.
The quarterly return summary shows the diversity of exposures that contributed to returns during different time periods over the course of the year. In Q1 and Q2, the major contributions came from credit exposures to bank loans, high yield municipals and short duration high yield corporate bonds. Q3’s returns, however, were derived more from Mortgage REIT and Long-term Treasuries. A noteworthy highlight is a significant outperformance in Q4 where Credit and Mortgage REIT exposures contributed to solid returns when AGG suffered from its pure rate duration exposure as interest rates rose modestly.
In summary, FolioBeyond’s dynamic and algorithmic process of optimizing Fixed Income sector allocations utilizing ETFs offers major benefits:
A consistent, systematic process producing optimal portfolio allocations subject to a pre-defined return volatility target.
Extensive coverage of a broad suite of Fixed Income sub-sectors that offer unique risk/return characteristics while subjecting the model to proper risk constraints.
Superior strategy vs the ad hoc process often followed by Unconstrained, Multisector, and Core Plus managers who often incorporate macro biases that lead to less consistent and unpredictable alpha.
Application of more objective, thorough and up-to-date analytics and market data rebalances the portfolio as needed versus subjective, portfolio manager-driven transactions using imperfect analytical backup.
Manage frequency of rebalancing against targeted risk constraints.
Efficient execution through liquid sector ETFs that would be infeasible with hundreds of individual security holdings.
Using sector rotation or asset allocation alpha implemented with the proper methodology, FolioBeyond offers compelling advantages over both purely passive and traditional active strategies, for both intermediate and long-term investment horizons. SNFBFI is structured to create an attractive, cost-effective solution with applications for both core Fixed Income portfolios or as a return enhancing strategy alongside a lower risk liquidity portfolio.
Please contact us to learn more about our algorithmic strategies and how they can be potentially customized to your investment goals.
James Viceconte
Chief Marketing Officer
FolioBeyond, LLC [foliobeyond.com]
1325 Avenue of the Americas, 23rd Floor
New York, NY 10019
(W) 212-299-5526
(C) 203-249-6661
jviceconte@foliobeyond.com
