Investment Committee Perspectives

PMC Tactical ETF Core Rotation Portfolios: Keeping portfolios ready and healthy for the long-term

2013 may have been the year for U.S. equities, though both political and economic uncertainty will linger in the markets into 2014 and beyond. Will the monetary liquidity train come to a halt? Will the US economy dip? Does another government shutdown lie ahead? Which industries stand to lose or benefit?

Staying in the PMC Tactical ETF Core Rotation Portfolios can provide the risk management clients need for the long term. Since they were launched on the Envestnet platform more than five years ago, these portfolios have been positioned defensively relative to the benchmarks, and opportunistically when sectors and markets present more attractive fundamentals, as called for by Innealta’s tactical model. The Core Rotation Portfolios’ defensive aspect has of course constrained absolute performance this past year as equity markets posted strong gains. However, the PMC Investment Committee remains confident in Innealta’s quantitative strategy and ability to tactically manage these portfolios to continue to do what they were designed to do: provide favorable risk-adjusted returns over time while preserving capital and complementing (as opposed to correlating or moving with) other asset classes to round out a fully diversified portfolio.

Compared to their equity, fixed income and blended benchmarks, the Core Rotation Portfolios have performed considerably well. More importantly, the portfolios have maintained much lower volatility over the long term compared to their benchmarks, as demonstrated by standard deviation (Figure 1). Investors may need to be reminded of their longer-term investment objectives and risk tolerance—just how conservative are they without those recent gains in the equity markets? Not only do the Core Rotation Portfolios have the potential to generate returns comparable to their benchmarks over the long-term, they do so while minimizing investor risk exposure.

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The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this brochure is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment vehicle. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Past performance is not indicative of future results.

Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) funds are subject to interest rate risk which is the risk that debt securities in a fund’s portfolio will decline in value because of increases in market interest rates.

Exchange-Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Income (bond) ETFs are subject to interest rate risk which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates.

The PMC Tactical Portfolio may utilize inverse and leveraged ETFs. Leveraged ETFs are ETFs that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse ETFs utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. Inverse and leveraged ETFs are generally most suitable for sophisticated investors who understand leverage and are willing to assume the risk of magnified potential losses. Given the risk/ return trade-offs, these types of ETFs may not be appropriate for long-term investors who typically subscribe to “buy and hold” investment strategies.

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