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Kristal Insights6 Mins Read

How Our Balanced Portfolio Returned 24% Profits – Katalyst Kristal

catalyst

/ˈkat(ə)lɪst/

noun: catalyst; plural noun: catalysts

a substance that increases the rate of a chemical reaction without itself undergoing any permanent chemical change.


Katalyst is one of our long-standing flagship Kristals, created with the specific intent to take tactical positions at a more targeted level than traditional style-based investing. It enables investors to acquire a low-cost exposure to popular, growing sectors like technology, healthcare, industrials, consumer discretionary that have been characterized by solid risk-adjusted returns.

To reap the benefit of diversification, Katalyst also takes some exposure in emerging markets, while any remaining cash is invested in short-term U.S. treasuries. The Katalyst Kristal is created using our own proprietary genetic algorithm, and overseen by our Investment Committee.

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Isn’t tactical the same as market timing?

We get asked this all the time.

We are all familiar with the act of rebalancing one’s portfolio annually. Since Katalyst is an actively-managed strategy, these rebalances happen every month; sometimes even on a more frequent schedule.

Katalyst is a balanced portfolio and has exposure to multiple asset classes. Now, instead of holding assets in the traditional portfolio split 60/40 between stocks and bonds and hoping all the pieces will fall buttered side up, a tactical rebalancing changes portfolio exposure within the asset classes to take advantage of market movements.

So, within the equity portion of the Katalyst portfolio, a rebalance might favor emerging markets over U.S. or small-caps over large-caps, or increase individual asset allocations if needed.

Tactical investing does carry a hint of market timing to it, but it is not an all-or-nothing approach which many stock pickers take. The decisions taken during rebalances are driven by our algorithm after careful consideration of market patterns and historical simulations. Each rebalance is vetted by the expert committee.

Katalyst’s tactile nature becomes even easier to understand when we look at the rebalances made in 2019 to offset geopolitical headwinds.

The Russia Connection: The trade war last year kept Russian oil machines working despite issues like contamination. In August 2019, the iShares MSCI Russia Capped ETF (ERUS) which has a huge focus on the energy sector saw an 8% jump. As the month erupted in a blaze of threats and tariffs, Russia automatically became a good hedge against the U.S. due to the significantly lower economic correlation.

Our algorithm and the advisory committee saw it fit to include Russia in the Katalyst portfolio. The move would pay off later when we sold our Russia stocks for an 8% profit.

Russia Katalyzed? Hell, yes!

Beating the Yield-Curve: As the trade war progressed, we shifted our position on U.S. bonds; selling long-tenor corporate bonds to short-term treasury bonds.

The reason was simple enough. The markets were in panic mode and the flight to safety meant that long-tenor bonds (10 years) became cheaper in a classic yield-curve inversion.

As a result, we rebalanced Katalyst to move away from corporate bonds and invest in 0-1 year and 1-3 year treasury bonds.

By the end of September though, the yield curve had started to steepen again. The USTR announced tariff exclusions for 400 Chinese products. A deal was being talked about in hopeful tones, and a shift to medium-duration treasury bonds was the result.

By the end of November, as ceasefire talks had progressed further and market outlook looked bullish on China, we sold our medium-term bonds to buy 20-year long-duration treasury bonds.

balanced portfolio katalyst kristal.ai-yield curve inversion

The Small-Caps Have It: In the midst of all the yield-curve drama, our advisors noticed another anomaly in the markets. Generally, the large-cap and small-cap equities chart a similar path; going up and down in different magnitudes, but together. Over the last year, small-caps have declined and large-caps have advanced. Historically speaking that is a rare occurrence in the investment world! Over the past 20 years, we’ve seen this happen only about 7% of the time with a trailing 12-month period of return divergence.

When this happens, the market reaction is that small-caps will in the future rise up and outperform the large-caps. Hence, a rebalance to include U.S. small-cap equity ETFs in the Katalyst portfolio to stay ahead of this curve.

small-cap-growth-kristal.ai

And Then There Was Gold: A very recent rebalance we did, paid off handsomely amidst the ongoing U.S. – Iran crisis. Gold prices have risen by over 4.2% in the last two months. We capitalized on the trend by selling our gold holdings at a high on 3rd January.

With increased tension in the Middle East, we are also taking profit on our WisdomTree Middle East ETF position, which was initiated based on algorithmic recommendations on 5th November 2019, to return around 3.3%.

Apart from this, the Katalyst portfolio now also includes new sectors like ‘Health Care Equipment’ (with a 12% allocation), and increased allocation to the technology sector – both of which are expected to do well in the coming days.

But, why use genetics in your algorithm?

Going back to high-school chemistry, a catalyst is a substance that accelerates any reaction. In an ideal investing world, a fiscal reaction would look something like this:

Money + Time ——-> Expected Returns

But we all know this doesn’t happen. Markets go up and down, interest rates change, countries and economies fall into trouble. An actively-balanced strategy needs to handle all these cause-and-effect market scenarios on an on-going basis, and a rigid set of investment rules alone isn’t up to the task.

A genetic algorithm, on the other hand, borrows from Darwin’s theory of evolution in which only the fittest set of genetic traits survive the asteroids (bye dinosaurs!). Evolution is a dynamic act; it takes into account several factors – environmental, behavioral, and physical – in an ever-changing coda.

“It is not the strongest of the species that survives, nor the most intelligent, but the one who is most adaptable to change.” — Darwin

By using a natural selection-inspired genetic algorithm in our recommendation framework, we ensure that the tactical changes made to the Katalyst portfolio are in line with market changes, and optimized for volatility.

Our IC looks at all these recommendations before actually implementing them, so that we do not curve fit the portfolio and rebalance using only the best values.

So, why Katalyst?

Here are three things which do not lead to better financial growth:

  • Dreaming about diving into a pool of gold coins like Uncle Scrooge.
  • Limiting your portfolio only to specific asset classes and geographies.
  • Market timing.

Here are three things which, and this has been proven by results, do in fact help you grow your wealth in a stable manner over a long-term horizon:

  • Diving into an actual pool for an hour or so. Swimming is the best cardio there is, and it helps you make better decisions.
  • Diversifying your portfolio for wider exposure to non-U.S. markets and upcoming sectors.
  • Using a tactical approach to take advantage of market differentials. Not market timing; just better judgment.

The Katalyst portfolio returned 24% in 2019’s ultra-volatile market (Jan 2019-Dec 2019), and 26% by January 2020 (at the time of writing) due to pertinent decisions and rebalances which capitalized on market movements. For a balanced portfolio offering global exposure, these are really good numbers. Annualized lifetime returns stand at 9.26%.

balanced-portfolios-katalyst-kristal-performance

In 2019, Katalyst generated a positive alpha which was 0.5% greater than the ACWI+LQD (50/50) benchmark. The MSCI ACWI refers to the market capitalization-weighted index which is used as a broad measure of global equity-market performance. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is a tracker of an index composed of USD-denominated, investment-grade bonds across the maturity spectrum.

A 50-50 mix of ACWI+LQD can be used as a benchmark for tracking the performance of a balanced portfolio like Katalyst. A positive alpha means Katalyst outperformed the benchmark.

So, if you’re looking for a strategy designed with the core and satellite approach in mind; perfect for medium-risk investors looking for capital appreciation, actively rebalanced with both algorithmic recommendations and advisory oversight, why look further?

Katalyze your investments now. Your swimming sessions will be more enjoyable, we promise!

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Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.

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