how do you attempt to manage the future(s)? · 2016-08-22 · particularly during periods of market...

APRIL 2016FREEDOM FOCUS E C O N O M I C AN D M AR K E T P E R S P E C T I V E F O R F R E E D O M P O R T F O L I O P O S I T I O N I N G

Diversification does not ensure a profit or protect against a loss. All investments are subject to risk. There is no assurance that any investment strategy will be successful.

Managed futures, an alternative investment strategy to

traditional asset classes, is receiving copious attention

from investors seeking return potential beyond what equity

and fixed income have been offering. Even with the recent

interest, the strategy is probably the most misunderstood

of all alternative approaches. In fact, the strategy’s name

provides no indication or clarity of its intentions.

So what are managed futures? Simply put, they are any

investment vehicle that attempts to create a rate of return

by buying or selling futures contracts. These contracts are

an agreement to take or make delivery of a specific asset

on a date in the future at a set price. Futures contracts

are traded to buy or sell assets, such as commodities,

currencies, shares of equity or interest rates. The term

“managed futures” is actually describing an investment

vehicle – futures contracts – rather than an investment

strategy or source of return.

FINDING THE RIGHT STRATEGY

Investors tend to refer to managed futures with an attitude of

love or hate, collectively putting the whole strategy into one

bucket as if all forms of the strategy follow the same objective.

The diversity of the managed futures universe is nearly

infinite, and most managers execute their own proprietary

strategy. Broadly speaking, most of these strategies fall into

a few distinct categories, including efforts to capture trends,

attempts to exploit relative value, employ discretionary

oversight, utilize short-term trading techniques, or some

Asset Management Services Research explains potential risk mitigation effects of managed futures, an often misunderstood alternative investment strategy.

combination. Due to the size and diversity of this investment

universe, strategy selection is critical within this space. A

long-term, trend-following strategy will have a distinctly

different return stream from a short-term trend follower,

much less a counter-trend or value strategy.

FOLLOWING THE TREND

Within the Freedom portfolios, trend-following managed

futures strategies that diversify between intermediate- and

long-term horizons are primarily used. Why? These strategies

have historically displayed attractive diversification benefits,

particularly during periods of market stress.

This example of negative equity correlation during periods

of market stress is precisely why trend-following managed

futures strategies have the potential to be beneficial during

portfolio construction. Of note, most counter-trend strategies

and value-oriented strategies performed poorly over this

same time period.

LOOKING OUT FOR RISKS

What is the downside? If the markets that a product is

exposed to reverse direction repeatedly, performance can

suffer. When this happens, the investment can rarely break

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Economic and market perspective for Freedom portfolio positioning

Freedom Focus


Diversification does not ensure a profit or protect against a loss. All investments are subject to risk. There is no assurance that any investment strategy will be successful.

even to overcome expense ratios. In 2011, this risk became

a reality when a strong start to the year for equities

reversed course over the summer amid escalating

instability in the eurozone before bouncing back in the fourth

quarter. This market environment led to a mid-single-digit

loss in many trend-following managed futures products.

However, it’s prudent to remember what you are really seeking

protection from as an investor. While negative market events

momentarily shake spirits and portfolios’ bottom lines,

it’s the worst-case scenario of a rare free-falling equity

market collapse that can permanently impair investors in

retirement or those unable to stay the course during times

of significant asset depreciation. This is precisely why the

Asset Management Services Investment Committee (AMS

IC) positions trend-following managed futures in most of the

equity-centric Freedom models.

SEEING THE BIG PICTURE

The descriptor “managed futures” is hazy, at best, when

attempting to understand its investing intentions. Several of

the varying factors to assess before assigning a high level

of conviction to a specific fund include a myriad of factors.

Since nuances within managed futures portfolio categories

are extremely important and nearly unending, the AMS IC

works to uncover and diligently review all angles of these

investments before considering them for inclusion in the

Freedom portfolios.

At a minimum, you should have a clear understanding of which

category the particular managed future strategy falls within

(trend-following, value, etc.) before considering including it

as part of your financial plan. Having a clear understanding of

how a product is “managing its futures,” will help you see how

many of these strategies have the potential to offer healthy

risk-adjusted returns and strong diversification benefits –

often when they are needed most. Your financial advisor can

help you determine if managed futures are an appropriate fit

for your investment portfolio.

Talk to your financial advisor to determine if, and how, managed futures are an appropriate fit for your investment portfolio.

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Mutual funds are sold by prospectus only. Investors should consider the investment objectives, risks, charges and expenses of an investment company carefully before investing. The prospectus contains this and other information about an investment company and is available from your financial advisor. The prospectus should be read carefully before investing.

The foregoing content reflects the opinion of Raymond James Asset Management Services and is subject to change at any time without notice. The aforementioned material is for information purposes only and should not be used or construed as a recommendation regarding any security outside of a managed account.

Past performance is not a guarantee of future results. Indexes are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Asset allocation and diversification do not ensure a profit or protect against a loss.

There is no assurance that any investment strategy will be successful or that any securities transaction, holdings, sectors or allocations discussed will be profitable. It should not be assumed that any investment recommendation or decisions made in the future will be profitable or will equal any investment performance discussed herein. Strategies discussed are subject to change at any time by Asset Management Services due to market conditions or opportunities.

Please note that all indices are unmanaged and investors cannot invest directly in an index. An investor who purchases an investment product which attempts to mimic the performance of an index will incur expenses that would reduce returns.

It is important to review the investment objectives, risk tolerance, tax objectives and liquidity needs before choosing an investment style or manager. All investments carry a certain degree of risk and no one particular investment style or manager is suitable for all types of investors.

• High-yield (below investment grade) bonds are not suitable for all investors.

• There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise.

• International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility.

• Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal.

• Investing in small-cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor.

• Commodities trading is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Among the factors that could affect the value of the fund’s investments in commodities are cyclical economic conditions, sudden political events, and adverse international monetary policies.

• These portfolios may be subject to international, small-cap and sector-focus exposures as well.

• Markets for precious metals and other commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

• Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

• Accounts may have over weighted sector and issuer positions, and may result in greater volatility and risk.

• Diversification does not ensure a profit or protect against a loss.

• Some accounts may invest in Master Limited Partnership (“MLP”) units, which may result in unique tax treatment. MLPs may not be appropriate for ERISA or IRA accounts, and cause K-1 tax treatment. Please consult your tax adviser for additional information regarding the tax implications associated with MLP investments.

• Alternative investments are generally considered speculative in nature and may involve a high degree of risk, particularly if concentrating investments in one or few alternative investments. These risks are potentially greater and substantially different than those associated with traditional equity or fixed income investments. The investment strategies used by certain Funds require a substantial use of leverage. The investment strategies employed and associated risks are more fully disclosed in each Fund’s prospectus, which is available from your financial advisor.

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©2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. ©2016 Raymond James Financial Services, Inc., member FINRA/SIPC. AMS16-0478 expires 10/31/16

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how do you attempt to manage the future(s)? · 2016-08-22 · particularly during periods of market...

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