AZA Capital Management / DRIV Core Update

Last week we made another allocation shift to further reduce our equity exposure from 50% to 20%, putting the strategy in its most defensive posture.  Cash and bonds (currently a short-duration U.S. Treasury ETF) now constitute 80% of the portfolio.  Previously, we reduced equity from 65% to 50% in October.

Our objective is not to forecast the short-term moves of the stock market, which we feel is a fool’s errand.  Rather, we aim to identify whether broad financial conditions are supportive of stock investing and adjust portfolio exposures accordingly to help navigate long market cycles.  To that end, we monitor a broad range of data that in combination have historically proven to be reliable indicators.

Our allocation shift in October was primarily driven by worsening changes in credit markets.  A simple interpretation is that market price changes reflected a reduction in liquidity and participants’ willingness to bear risk.  Our recent shift was informed by worsening trends across equity, credit and other macro data.

Driven by a small group of technology stocks, the market has delivered above average performance for quite some time. A pullback should not come as a big surprise.  However, markets tend to work in cycles and have a history of reverting to averages.  For many investors, it’s easy to let emotions influence decisions in ways that can be counterproductive.   With this in mind, DRIV Core is designed to offer a data-focused foundation to navigate times like these.

We will continue to monitor key data.  When market and financial conditions improve, we will look to increase our exposure to stocks and take advantage of future opportunities.

DRIV Core may be a fit for several different client situations.  Specific client details should be discussed.

1. Timid investors – Not sure when to get in or out of the market?  Tired of making ill-timed decisions?  Don’t let emotions rule the day.   DRIV Core can offer data-driven allocation guidance over the course of long-term market cycles.

1. Stock investors who have downside sensitivities – Need stock market returns to help grow your portfolio but can’t handle the downside?  DRIV Core seeks to participate in the stock market during bull markets and limit exposure during bear markets.

1. Balanced investors who want a managed allocation – Do you think your 60/40 portfolio should hold the same percentage of stocks at all times?  Age and risk tolerance are important, but so are market conditions.  DRIV Core can be used to improve upon static allocations.

1. Tactical piece of a larger pie – Do you have a large portfolio of stocks and bonds.  Consider adding a tactical allocation sleeve in the “middle” of the portfolio to help make your portfolio more adaptable to market cycles.  Example: 40% stocks, 20% DRIV Core, 40% bonds.

Additional Notes:

·         Our DRIV Core strategy returned approximately -4.70% for 2018, exceeding our Morningstar Tactical Category peer group which lost -7.88%.

·         In January 2018 we held an allocation of 65% equity and 35% bonds.  At that time, 20% of the equity was invested in developed international stocks, a top performer in 2017.  We reduced international in July.

·         In October 2018 we shifted stocks down from 65% to 50% and further reduced international exposure.

·         As of January 2, 2019 we hold 20% equity and 80% bonds.  Among stocks, we favor large caps with a slight tilt toward value.  In the bond portion of the portfolio, we currently favor short-duration Treasuries.