Toews Delivers Up Capture as Tactical Suffers

Toews Delivers Up Capture as Tactical Suffers
January 22, 2014 phillip_toews_1p9l0e9h

Investors remained anxious entering 2013, and there was no shortage of stress-evoking events. Despite that, the S&P 500 realized the best gain since 1997, rising 32.4%. Toews investors spent the majority of the year fully invested in stocks across their allocations. In fact, with the exception of 6 market days when we were 2/3 invested, our US stock algorithm remained fully invested in index replication instruments all year. As a result, we are pleased with our ability to capture returns this year.

Other risk amelioration strategies, however, generally failed to provide strong up capture. Morningstar’s tactical allocation strategy returned only 8.62% during 2013. Long/short, multi-alternative, and market neutral strategies all produced anemic returns.

Toews’ propensity to realize strong up-capture during high return years is due to two unique characteristics. First, our model is purely price reactive. When markets turn higher, Toews’ single-factor algorithms fully commit to stocks. This is uncommon in the unconstrained tactical space, where most systems are driven by multi-factor, black box models. The stock market may turn higher, but these systems have other reasons for not acknowledging the change in trend. Interest rates may be moving unfavorably, earnings may be declining, or any number of more nuanced technical indicators may suggest that, although the market has begun to advance, it won’t continue. Will they be right? Perhaps. Managers relying on predictive models are betting that their system is producing intelligence that the market as a whole doesn’t know or understand. We wish them well. However, it’s intuitively easy to see that such systems over the long run will make incorrect calls and potentially fail to capture strong market advances.

A second factor behind Toews’ up-capture success is our index replication mandate. When markets turn higher, we commit to market indices. This reduces the possibility that we’ll allocate the wrong countries or sectors, and improves the chance that we’ll track broad market advances.

Together, we believe that these two factors make Toews appropriate for core, long-term allocations across investors’ portfolios.

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.

What Lies Ahead

One might expect that after the market soars, it swoons. Nope. Since 1915, the year following an S&P 500 gain of 20% or more it realized an average return of 11%, very close to its long term average. When markets did turn lower after a big year, they lost 10% on average.

However, there are historically unique and significant challenges for the economy and the markets. The most important among these is the Federal Reserve and its need/desire to lessen unprecedented levels of monetary stimulus. Scaling back bond purchases and increasing interest rates threaten growth, and investors with a sensitive sell trigger could amplify market losses.

Toews Set to Exit at the Signs of a Downturn

Our models remain poised to exit stocks and bonds if markets turn lower. Should that happen, we hope to avoid the bulk of a subsequent market decline. If this is achieved successfully, it creates an opportunity to buy near market lows and participate in rebounds. As a result, it may be possible to produce positive returns even when the market is losing money or moving sideways.
The path to navigate these markets and address possible significant declines is straightforward but requires constant vigilance: 1) stay committed to equity markets, historically the best performing asset class to help protect against inflation; and 2) hedge your equity portfolios against losses. Both are pillars on which the Toews system is built.


Prior performance is no guarantee of future results. 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. There is the potential for loss as well as profit when investing in this, or any, investment strategy. No part of this document should be considered unless accompanied by these disclosures.

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 the majority of Toews portfolios 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 and is an SEC registered investment advisory firm incorporated in 1994.