Have you been living in a one-dimensional world?

Monday, May 23rd, 2016
Written by the Charles McNally, Chief Portfolio Strategist, RiskX Investments

The Dollar is dominant in 2016. Or maybe it’s crude oil.

Investors are in disagreement on what’s driving markets this year, but they can agree on one thing — a commonality to the day-to-day returns in disparate markets. For a U.S. Dollar-based investor, knowing the direction for any of the S&P 500, Crude Oil, or the Dollar’s value in foreign exchange trading has been sufficient to hazard a good guess on the direction of the others.

Recently, even high-yield bonds have exhibited similar daily behavior to the other “risk assets” — equities, commodities and currencies. Collectively, these factors add up to a one-dimensional opportunity set for U.S. Dollar-based investors.

One-Dimensional-Chart

Source: Bloomberg Finance L.P.

Fortunately, there have been exceptions to this year’s unidimensionality. At home, the investment-grade fixed-income markets — Treasury securities in particular — have followed a different course from “risk” asset returns. This means balanced portfolios that hold investment-grade bonds have enjoyed relatively better stability.

Certain foreign equity markets have displayed a significant degree of independence as well: the United Kingdom and Australia, for example. In addition, the Canadian equity market, which has been a standout performer in 2016 for a U.S. investor willing to take the currency risk.

The challenge for many investors is how to incorporate positions such as these, which may not be present in “structural” balanced portfolios. One possible solution is to include tactical strategies as an active “sleeve” in the portfolio.

Tactical strategies can operate in a multi-dimensional space, with many seeking to capture opportunities in global markets and / or stability in fixed income markets. Even with the increased interconnection among factors driving daily markets, tactical strategies provide flexibility in managing risk.

A tactical approach can be added individually, or strategies can be combined to provide additional defense against downside commonality. The question is not whether Dollar or crude oil are dominant — but do your portfolios occupy a multi-dimensional space? If not, maybe it’s time to consider adding a tactical strategy to your clients’ portfolios.

The views and opinions expressed in this article are for informational purposes only, not for the purpose of providing investment advice, are those as of the date of the article and are subject to change over time or at any time. The investment strategies discussed are not appropriate for every investor and investors should review with their advisors the appropriateness of any investment strategy. RiskX Investments, LLC makes no guarantees on the completeness or accuracy of information provided herein.

The asset allocation, diversification and other strategies discussed in this article do not ensure a profit and cannot protect against losses in a declining market.

Investing involves risk. Investments in fixed income securities are subject to the risks associated with debt securities including credit, price, and interest rate risk. In certain interest rate environments, such as when real interest rates are rising faster than nominal interest rates, inflation-protected securities with similar durations may experience greater losses than other fixed income securities. Interest payments on inflation-protected debt securities will fluctuate as the principal and/or interest is adjusted for inflation and can be unpredictable. Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses.

For more complete information on the AI Funds and Rx Funds, you can obtain a prospectus containing complete information for the Funds by calling 866.410.2006 or by visiting www.riskxfunds.com. You should consider the Fund’s investment objectives, risks, charges, and expenses, carefully before you invest or send money. Information about these and other important subjects is in the Fund’s prospectus. The prospectus and, if available, the summary prospectus should be read carefully before investing.

Shares of the Rx Funds and AI Funds are distributed by Matrix Capital Group, Inc., which is not affiliated with RiskX Investments, LLC.

No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of RiskX Investments, LLC.

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