January 2022 – How About a Seat Belt?
For a historically informed investors this is the equivalent to driving 100mph, blindfolded, on an icy mountain trail
Slight declines greet investors in the opening month of 2022, and judging from stories in the press and responses on social media, a 3% decline in equities is more pain than most care to tolerate. Keep in mind, equities regularly correct 10% during any twelve-month period, and a long-term investor will see numerous 30% drawdowns. While volatility is a constant and can be ignored if the fundamentals are strong, what should investors do if volatility is accompanied by weak fundamentals, rising inflation, an increasingly hawkish Federal Reserve, and market structure built on house-of-cards index investing? Perhaps it’s time for a seat belt! To better assist clients with index strategies, we are proud to introduce the West Hills Core Fund.
West Hills Core Fund
The West Hills Core Fund maintains an investment in low-cost S&P 500 ETFs, but uses options to target a beta of 0.75 and reduce drawdowns relative to the index. Fund management accomplishes this through purchases of put options and sales of call options on the fund’s core position. The fund will benefit from the fire-hose of flows into the S&P 500: 401ks with target date funds, ETFs, mutual funds, and other passive investors all buying in recent years. However, should these investors weaken market structure, the options positions in the West Hills Core Fund are like seat belts in your car, protection for when things get dicey.
With the S&P 500 posting another double digit gain in 2021, the 10-year average annualized return was 16.55% as of December 31, 2021. This is one of the best ten year returns in the index’s history! This spectacular performance brings the total market cap of US stocks relative to US GDP over 2.1x or above the richest valuations ever. Previously, with valuations near these levels, stocks suffered higher than average volatility with lower than average returns over periods as long as a decade. Clearly, remaining exposed to US equities without put options could be disastrous. For a historically informed investors this is the equivalent to driving 100mph, blindfolded, on an icy mountain trail! Now seems like a great time to add some protection to your portfolio, and Frank Capital Partners LLC is aiding clients with the West Hills Core Fund. For more information see: www.westhillscorefund.com