The Most Important Characteristic of Loss Avoidance Strategies – Up-Capture

The Most Important Characteristic of Loss Avoidance Strategies – Up-Capture
December 31, 2013 phillip_toews_1p9l0e9h

Updated from October 30th, 2013

It’s not a small matter. Strong return years make outsized contributions to the overall above-inflation returns realized by equities. It is also hugely important behaviorally for investors. Studies show that missing out on gains creates even more investor unrest than experiencing losses, and high return years add an exclamation point.

In our initial study on loss avoidance strategies in 1989, we looked at many possibilities for reducing portfolio risk. Most strategies shared a common problem: Poor or unreliable Up-Capture. Options strategies (and now VIX strategies) were so erosive to portfolio returns that they largely vaporized the inflation-beating properties of equities. Systems that attempted to “predict” market direction, which include those that rely on underlying technicals, subjectivity, or market fundamentals, were unreliable at both up-capture and loss avoidance. The conclusion: implement a strategy based on asset price movements alone, and ignore the periphery.

Few other asset managers in the risk management/tactical space reached that conclusion. Results across the tactical management industry have made advisors reluctant to place loss avoidance strategies as core holdings in portfolios. We understand their trepidations. A sampling of loss avoidance categories reveals poor returns in both of the last two high return years:

Toews Delivers Strong Up-Capture, Again.

In 2013 our system delivered strong up-capture. Representative of our domestic equities performance, our US Aggressive Growth Strategy increased 30% for the year, compared to 32.4% for the S&P 500*. This is not the first time that Toews Corp. has delivered during market surges. During calendar years when the S&P has eclipsed 20%, our all-equity Aggressive Growth strategy has averaged 90% of the S&P 500 returns since we began managing portfolios in 1996 (net of fees).

We view the price reactivity of our models, and the reliability it brings, as a core competitive advantage. In order to meaningfully dial down portfolio risk, advisors need to make sizable allocations to loss avoidance strategies. In order to make those allocations, they need a high level of confidence that strategies will deliver equity levels of returns during bull market cycles. We hope our consistent performance around market moves allows advisors the ability to reduce portfolio risk and improve investor outcomes.

Toews’ Tax Advantaged Instruments Improve Investors’ After-Tax Returns – A Big Deal in High Return Years.

Advisors may assume that the short-term trading associated with many unconstrained models produces only short-term gains. In most cases, it does. At Toews, we take stock exposure almost exclusively through index futures contracts. Unlike stocks or ETF’s, futures pay out gains as 60% long term and 40% short term. In years when the market returns 30%, that’s a big deal for taxable investors.

In addition to their preferred tax treatment, futures precisely track market indices, and are the most highly traded instruments available. That means that our trades are executed with extremely low cost and minimal market impact, both a plus for investors.


Prior performance is no guarantee of future results. There is the potential for loss, including the loss of principal with this and any investment. There can be no assurance, and individuals should not assume, that future performance of any of the portfolios referenced will be comparable to past performance. There can be no assurance that Toews will achieve its performance objectives.

This commentary may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

This commentary is intended to provide general information only and should not be construed as an offer of specifically-tailored individualized advice. Please contact your investment adviser, accountant, and/or attorney for advice appropriate to your specific situation.

This document refers to the performance of one Toews portfolio to illustrate the effect of Toews management on US and intl. stocks and high yield bonds. Performance of individual accounts varied based on the client’s investment risk profile and their specific investment funds. For your individual account performance, please refer to the enclosed quarterly statement or the quarterly statement recently sent to you. In addition, not all model portfolios were referenced in this letter. It is not, nor is it intended to be, a comprehensive accounting of Toews asset management. There are other portfolios that Toews manages that performed differently than what is referenced in this letter. For a complete list of GIPS firm composites, their performance results and their descriptions, as well as additional information regarding policies for calculating and reporting returns, please go to

Toews Corporation acts as the investment advisor that implements the asset allocation and models for each of the portfolios. Investors cannot invest directly in an index. Performance included reinvestment of dividends and other earnings. The performance of the model shown should be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the performance information. Inclusion of benchmark or index information is not intended to suggest that its performance is equivalent or similar to that of historical investments whose returns are presented or that investment with or firm is an absolute alternative to investments in the benchmark or index (if such investments were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Toews portfolios are actively traded and thus are not tax-efficient. Investors may incur additional tax liabilities as a result of investing in Toews portfolios.

Toews’ US Aggressive Growth strategy is comprised of 25% Small Cap Growth Funds, 25% Mid Cap Growth Funds, 25% Large Cap Growth Funds, 12.5% Large Cap Value Funds, 6.25% Mid Cap Value Funds, and 6.25% Small Cap Growth Funds. The S&P 500 is based on the market capitalizations of 500 large companies listed on the NYSE or NASDAQ. The Long/Short, Multi-Alternative and Market Neutral Portfolios are equity portfolios that use various strategies to attempt achieve a desired performance level. They hold but perhaps not all of the following: small, mid, and/or large-cap equities, may go short against these or may include other holdings in order to balance the equity performance. Toews fees are disclosed in our Form ADV, Part 2A, which will be provided upon request.

*Source: Morningstar