Why You Keep Underperforming the Market, and How to Beat it with this Nobel Prize Winning Formula to Build Generational Wealth
- Every day, countless investors embark on their financial journeys with dreams of wealth and success. Yet, the brutal truth is that most of them will stumble and fall short of their goals. Why? Because they lack a precise, proven strategy to navigate the ever-evolving markets.
- In the world of finance, there are a few individuals who stand head and shoulders above the rest, pioneers who crack the code to outperforming the stock market. One such luminary was Dr. Harry Markowitz, a brilliant professor at UCSD, who recently passed away, leaving behind a legacy that every investor should take heed of.
- Dr. Markowitz’s groundbreaking work, known as Modern Portfolio Theory (MPT), unveiled the secret to beating the stock market through bull and bear market cycles. He showed the world how any investor, regardless of their background or expertise, could apply his formula to generate more consistent returns from the ever-fluctuating markets. It was this profound discovery that earned him the Nobel Prize in Economics, a testament to the immense value of his contribution.
- After Dr Markowitz published his MPT formula so many professional investors utilized it to earn Billions that he became a legend.
But here’s where the story takes an exciting turn. One mutual fund, Catalyst Systematic Alpha Fund (Symbol: ATRFX), decided to deploy Dr. Markowitz’s MPT formula to conquer the market. The results? Absolutely staggering. Over the past five years, ATRFX not only crushed the market but also earned the prestigious Lipper Award for the best absolute return fund.
In the first half of 2023 alone, ATRFX provided its investors with an incredible total return of +25.13%, leaving the S&P 500 in the dust with its +16.89%. But you might be wondering, can this fund withstand the test of bear markets? The answer is a resounding yes. Even during the bear market of 2022, ATRFX outperformed the S&P 500 by a remarkable 13.79%.
This isn’t your run-of-the-mill mutual fund that thrives only when the market is soaring and crumbles when things take a downturn. ATRFX is something entirely different, an actively managed fund that offers astute investors an alternative to the mediocre performance of index funds.
Thesis
As I journeyed from the bustling streets of London to the ancient wonders of Cairo earlier this year, my flight encountered an unexpected turbulence. For a seasoned traveler like myself, anxiety was a fleeting thought, yet it triggered a profound reflection on the turbulent waters of the market and the art of investment.
In these recent years, the relentless rise of the bull market has bestowed an aura of genius upon many investors. Yet, we’ve seen time and again that most investment strategies crumble in the face of market volatility, leaving investors squandering precious opportunities to nurture their long-term wealth. So, why not embrace the turbulence and harness the prevailing headwinds with strategies designed to thrive even in the darkest of bearish times?
Now, I’m not suggesting you attempt the perilous task of timing the market or scouring the endless labyrinth of internet newsfeeds in search of elusive undervalued stocks. No, what I propose is a strategy that transcends the seasons, one that flourishes when skies are clear and perseveres when storms rage.
You might be tempted to dismiss this as too good to be true, but consider this: While the S&P 500 relinquished 2.65% of its value from September to December 2022, the Catalyst Systematic Alpha Fund not only weathered the tempest but delivered a generous 6.19% total return to its astute investors over that same tumultuous period.
Data By YCharts
ATRFX isn’t just a mutual fund that does well during market pullbacks.
It still managed to outperform the market when market conditions were brighter.
Data By YCharts
ATRFX Won The Lipper Award Earlier This Year
The award was given for delivering the best absolute return performance for its class category over the past three and five years. According to Morningstar, ATRFX has consistently outperformed 99% of competing multi-strategy funds, placing it firmly in the top 1% of multi strategy mutual funds.
Multi strategy funds are mutual funds that invest in multiple asset classes rather than just stocks or bonds. This is important for all investors as modern portfolio theory shows that diversification enhanced returns while reducing risk. Generally speaking, these funds aim to produce positive returns that don’t correlate to traditional investments or benchmarks, giving astute investors exposure to assets and investment strategies that would otherwise be inaccessible to them. ATRFX’s investment objective is to provide its investors with long-term capital appreciation.
Investment Strategy
Since partnering with BNP Paribas, France’s largest bank, in 2018 to create the BNP Paribas Catalyst Systematic Alpha Index (the BNP CASA Index II), ATRFX has aimed to beat its benchmark index by making use of the index’s investment strategies in addition to maintaining a fixed-income portfolio.
The BNPP CASA Index II aims to profit from market volatility, momentum, and carry by dynamically allocating funds into six BNP Paribas Index Components, which are exposed to fixed-income securities, equities, currencies, and commodities in ten different regions or countries. By investing in a range of asset classes, investors benefit from diversification due to the low correlation that these asset classes have to one another and broader markets.
BNP Paribas
This strategy is essentially an embodiment of the Markowitz Portfolio Theory, established by 1990 Nobel Prize in Economics recipient Harry Markowitz.
The Markowitz Model aims to optimize an investment portfolio by maximizing returns, while also adjusting risks through diversification and, therefore, creating an efficient portfolio. ATRFX achieves this efficiency using the six BNP Paribas Index Components and employing daily rebalancing strategies — an approach that allows the fund to quickly adjust risks and returns to quickly respond to and profit from market conditions.
Scaling the BNPP CASA Index II back shows just how well and consistently the index has performed against the S&P 500 during market stress events, like the 2008 Great Financial Crisis, the 2010–11 Sovereign Debt Crisis, and the Q1 2020 Global Coronavirus Crisis. The thesis is that lower negative returns during market downturns, paired with higher returns when the market is up, can allow investors to truly maximize returns over time.
BNP Paribas
David Miller, ATRFX’s Portfolio Manager, calls this an “offense-defense” strategy that generates returns from the positive and negative momentum of stocks, bonds, currency, and commodities through the use of future contracts.
For example, the fund’s fact sheet suggests that during rising growth, ATRFX may take a long “offensive” strategy on US, European, and Japanese equities. These positions are then paired with “defensive” short or long positions that are informed by the volatility, momentum, and carry of various asset classes.
Catalyst Funds
Limiting Losses, While Cutting On Costs
Miller says that this strategy is superior to buying puts or selling calls, as options trading costs money and reduces overall total returns. Instead, ATRFX opts for defensive strategies that appreciate when the underlying assets they’re meant to hedge decline in value. This may allow ATRFX to be up more when the market’s up and helps limit investor losses when the market’s down.
It also explains how ATRFX managed to limit its losses in the last four months of 2022. To beat its benchmark, the BNPP CASA Index II, ATRFX also makes use of an actively managed fixed-income portfolio that primarily consists of short-term US corporate bonds.
Over the last year, ATRFX has beaten its peers by a massive margin. Over the last twelve months, Symmetry Panoramic Alternatives Fund Class I (MUTF:SPATX), Tactical Growth Allocation Fund Class I (MUTF:TFAFX), and AlphaCentric Symmetry Strategy Fund Class I (MUTF:SYMIX) managed total returns of +7.45%, +4.50%, and +1.81%, respectively. ATRFX, on the other hand, managed +25.67%.
Morningstar
This Strategy Comes At A Cost
Mutual fund investors will already know that mutual funds tend to carry a significantly higher expense ratio than regular ETFs. This is particularly true for ATRFX, which is very actively managed through daily rebalancing. The 1.93% expense ratio is on the high end and somewhat explains the high turnover ratio of 1,335% as of August 30th, 2023. This turnover ratio isn’t exactly surprising, however, considering just how actively managed the fund is.
In my opinion, however, ATRFX’s remarkable performance more than makes up for its price tag. Retail investors are unlikely to be able to replicate ATRFX’s performance, largely due to a lack of access to the BNP CASA II’s underlying indices, the daily rebalancing needed, and the tax implications involved.
Investors should note that, similar to other mutual funds, ATRFX has a minimum investment amount, which currently stands at $2,500.
The fund has a 4.75% TTM yield as of August 30th, 2023.
Risks
ATRFX is admittedly a smaller fund, with around $165M in assets under management (AUM). A lower-than-average AUM can often be an issue, as lower AUMs typically indicate inferior investment inflow, quality, and management experience. However, I don’t believe that to be a necessarily bad thing in the case of ATRFX. A year ago, ATRFX’s AUM stood at just over $5M.
This reflects a 2,400% increase in the fund’s assets in the span of a year.
Personally, ATRFX feels like a fund that has consistently outperformed its peers but has been flying under the radar — until now. Investors are (rightly) starting to take note of ATRFX’s winning strategy.
Data By YCharts
Interestingly, Morningstar rates ATRFX as a “risky” investment compared to the MSCI ACWI index. The data appears to disagree, however.
Morningstar
ATRFX’s beta score, which reflects an investment’s volatility against the market, is lower than that of the MSCI ACWI index (0.55 vs. 0.79 — as of July 31st, 2023). This means that, despite ATRFX’s remarkable performance, its volatility remains acceptable. This all translates to a “good” Sharpe ratio of 1.21, rendering ATRFX’s reward profile “acceptable to good” per unit risk. This healthy risk profile is further reinforced by the fund’s maximum drawdown of -14.20%, which is, in fact, lower than the MSCI ACWI index’s -18.54%.
Morningstar
Investors should remember that ATRFX will be exposed to a wider set of risks than a typical ETF or mutual fund. This is a fund that aims to capture the volatility, momentum, and carry in equity, fixed-income, commodity, and currency markets. As such, this leaves ATRFX exposed to more numerous market risks, especially if the models that were used to create the BNP Paribas CASA Index II prove their limitations sometime in the future.
After all, past performance is never an indicator of future results.
We all know that, don’t we?
Conclusion
Given the fund’s performance, all-season investment strategy, risk profile, and objective to produce positive returns that don’t correlate with traditional investments, I am making a tactical allocation in my portfolio with a strong buy.
I believe long-term prudent investors stand to benefit from some exposure to diversified investments, and a well-managed fund, like ATRFX, may be a solid choice for most.
The content of this is not investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not take into account your individual needs, investment objectives and specific financial circumstances.
