As the firm celebrates its 25th year in business, I wanted to talk about the new set of investment strategies that we launched in the fourth quarter of 2018.
When coming up with new strategies we wanted to add complementary approaches to our arsenal, while sticking to our philosophy—Create Wealth. Defend It. The missive this week is a re-print of the announcement for our new Tailwind Equity strategy (see below), which has been running for a little over a year with our own corporate money. At the end of last year, several clients took advantage of investing in the strategy as well. The next window for client investment will be June 2020.
We are encouraged by the early results and believe it could be a valuable addition to your asset allocation. While past performance is no guarantee of future results, Tailwind Equity has held up extremely well amidst the volatility last month.
If you have an interest in Tailwind Equity or would like us to determine whether you might be a candidate, please reach out to us via email or phone. Some of you have already expressed interest. We will be reaching out to you over the next several months for the June 2020 investment period.
As always, thank you for putting your trust in us!
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** Reprint of our Tailwind Equity announcement from September 2019.
Introduction
Over the last several months, and at our last Solution Series, we introduced a new set of strategies that are designed to go after the higher returns of equities without as much risk. Dubbed, Tailwind Strategies, there are two approaches– one is Tailwind Equity; the other is Tailwind Blended Asset.
I’m going to touch on Tailwind Equity in this letter.
Why the name Tailwind Equity? This strategy is so named because the tailwind of not having to climb back from large draw-downs and managing investments more tax efficiently results in much higher wealth accumulation over time. Keeping taxes in check (long term vs. short term) is a critical component to compounding your money.
Tailwind Equity is only for taxable money and for households with over $1mm to invest. These approaches should only represent one part of your portfolio. They aren’t designed to be your only exposure to the stock market. Just part of a diversified mix of strategies. The strategy will be run at a new custodian for us, Interactive Brokers, in a margin account (since there is leverage through the use of options).
As always, we are looking to use our expertise—in this case, our vast experience in the options markets—to roll out new investment solutions that you can’t find elsewhere, or you can’t re-create on your own.
Same Philosophy, Slightly Different Approach
All Season Financial Advisors has always tried to deliver as close to market returns as possible with a smoother ride. Our Tailwind Equity strategy is another method of trying to earn stock market returns with lower volatility and smaller drawdowns. Over time—and especially over long stretches—equities have delivered higher returns than the bond market and cash. A long-term chart shows a gently sloped line traveling from left to right up the page. It all appears so easy.
But real life doesn’t happen on a chart. Long time frames mask the volatility of achieving those passive returns. The angst that comes along with it is also absent from the page.
We want to earn you higher returns, BUT we also want to take away some of your anxiety.
So, we have structured Tailwind Equity to do just that.
Let’s fill in some of the details.
Here is what you would own in the Tailwind Equity strategy:
1. A slate of stock ETFs with a focus on generating both dividends and growth. The core strategy holds 3-7 ETF’s for some diversification and yield.
2. An options collar against those holdings. What is a collar? It is a set of options positions that take out the large losses (and large gains) that come from the equity market. We are aiming to capture the middle. Our goal is to earn as close to a market return as possible with drawdowns inside 10% in any given year. We want to capture a larger share of the gains compared to the losses we would take in a down year.
That’s it. Other than resetting the options and re-balancing the ETF’s (usually) once a year, we don’t really trade this model very much.
This strategy is striving for tax efficiency. Because the risk management of the portfolio is happening through the option positions, we can hang on to the core holdings through all kinds of markets. In other words, there shouldn’t be any short-term gains on the dividend ETFs held in your portfolio. Plus, we set the options out a year, so any gains there would be long term in nature as well.
We have put our money where our mouth is. We have been running the strategy in our corporate accounts since December 2018 and feel confident it could be a valuable addition to your portfolio mix.
