RISING RATES, FALLING STOCKS: Presenting The Case For Enhanced Diversification In A Changing Macro-Economic Environment

Traditional approaches to diversification are not guaranteed to work in the future.

We are entering a unique time in history: A multi-year bull market in stocks has run out of steam, with large losses in Q4 2018 as referenced below, at the same time that a multi-decade bull market in bonds has also shown signs of turning as interest rates have begun rising from all-time lows.

This presents a fundamentally different macroeconomic environment than the past 30 years. In this new environment, traditional stock and bond mixtures may not behave the same as they did previously, and it is possible that investors need to adapt to this changing landscape with a change in their approach to diversification.

Fiduciaries likely need to think carefully about new ways to position portfolio allocations in the best interests of their clients against the backdrop of persistently rising interest rates and slower growth – or possibly an outright bear market – in stocks.

Following are real-life scenarios comparing the historical performance of stocks and bonds in relation to the Issachar Fund during various periods of financial market stress. These scenarios display the hedging potential that the Issachar Fund provided to investors in various market conditions.

Past performance is not a guarantee of future results, and individual results may vary, but such analysis can give investors insight into the historical behavior of a particular investment during certain market events.

INTEREST RATE HIKE

During the five months between July 8th, 2016 to December 15th, 2016, interest rates on the 10-year US Treasury spiked from 1.37% to 2.60%, a 90% increase in yields. This sharp move higher in interest rates had an adverse effect on the bond market.  Figure 1 displays the resulting effects that this rapid increase in bond yields had on the bond market, as measured by the Barclays US Aggregate Bond Index, as well as the performance of the Issachar Fund during that timeframe. While the so-called “safe” bond market chalked up a loss of -5.03%, the Issachar Fund remained slightly positive with a 0.26% gain, providing an effective hedge against interest rate risk. When interest rates spiked higher, it would be normal and expected that the bond market would experience losses. However, the non-interest rate sensitive nature of the Issachar Fund has helped investors offset losses in the bond market in the past, providing a more stable portfolio value.
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bear market

From October 3rd, 2018 to December 24th, 2018, the stock market suffered a precipitous loss of value. U.S. stocks, as measured by the S&P 500 Index, lost -19.25% in less than three months. After several years of strong bull market advances, this drop marked the biggest slide in stock prices investors had seen in years, reminding many investors of the potential for life-altering losses when investing in the stock market.


Figure 2 illustrates the level of risk management that the Issachar Fund was able to provide investors during that decline. While the S&P 500 lost -19.25%, the Issachar Fund was down just -0.97%.

While there are no perfect solutions and all investing involves risk of loss, this scenario highlights how the Issachar Fund provided an effective hedge against a declining stock market during a very turbulent period of financial stress.

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ENHANCED DIVERSIFICATION

Surely investors, and the fiduciary advisors who serve them, have an interest in avoiding market losses when possible. If interest rates begin to rise persistently as many economists and the US Federal Reserve Bank indicate, the traditional approach of diversifying a portfolio using only a blend of stocks and bonds may not provide the same level of volatility reduction as in the past.

Traditionally, it is assumed that when stocks go down, bonds go up and vice-versa. This negative correlation counterbalance helped to dampen volatility in a portfolio.

But what if stocks go down and bonds go down at the same time?

In an environment of a long-term trend of rising interest rates, it is possible that this scenario could present itself on a cyclical, periodic basis. In such case, investors may need to explore broadening their diversification to include active risk management vehicles, such as the Issachar Fund.

As illustrated in the charts previously, the Issachar Fund has historically demonstrated it’s potential to reduce portfolio volatility during periods of stock and bond market stress. Investors and fiduciary advisors should consider how adding the Issachar Fund could compliment current portfolio allocations, and potentially improve risk-adjusted returns in a changing macro-economic landscape.

(Performance
as of 3/31/19)
1 Year 3 Years
Cumulative
3 Years
Annualized
5 Years
Cumulative
5 Years
Annualized
Since 2/28/14
Cumulative
Since 2/28/14
Annualized

Issachar Fund (LIONX)

-3.66%
6.58%
2.15%
8.53%
1.65%
8.20%
1.56%

S&P 500 Index is an unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large- cap stocks.

Barclays U.S. Aggregate Bond Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS sectors.  Fix income securities are subject to risks including inflationary and interest rate changes, among others.