2011 - The Market's Volatile Pause

The title is, to say the least, an appropriate description of what took place in 2011.  While 2011 marked the end of a 30 month cyclical bull market (created on the heels of the 2008 market collapse), equity indices are still below where they were at the last market peak of late 2007.

In terms of absolute gain or loss in the index value of the S&P 500, NOTHING happened in 2011.

In terms of an additional year of geo-political and financial events creating a flurry of second guessing resulting in whipsaw volatility the likes of which has not been seen in market history, EVERYTHING happened in 2011.

The chart below, titled "2011 S&P 500 Index / 13 Countertrend Moves of Approximately 7% or Greater" is an excerpt from a market summary letter from Hanlon Investment Management (click on the title to review the entire article).

We encourage you to review the article in it's entirety, as it puts a professional money manager's views clearly on the table as to what took place in 2011.  The article closes with the following commentary, which underscores our approach to structuring client's investment portfolios:

 What are investors and their advisors to do? Continue to seek investment solutions that are noncorrelated to the volatility displayed in the above chart and table. This means true diversification in portfolios, not just diversification achieved by having “many” investments in a portfolio. Advisors and their clients must ask, “Am I truly diversified?”

True Asset Class Diversification

Market volatility during 2011 underscores for us the importance of "True Asset Class" Diversification in a client's portfolio.  More detail on this can be obtained by viewing the following presentation "The March of a Different Drumbeat":

Active Management Summary - 12-31-2011

Here is a summary of the annual average returns (net of all fees) of the two primary active management platforms in use for our clients.  Additional detail and disclosures, including year by year performance figures, are provided via the linked titles below:

* You cannot invest directly in an index. Even though the index value for 2011 was unchanged, the returns reflected in each year are inclusive of dividends.

Where Do They Fit?

ITS Asset Management has four managed portfolios.  The "Premier Asset Analyzer" is our substitute for traditional equities allocations in a client's portfolio.  In our view, performance should be viewed in light of what happens over time, as well as how a particular manager performed during times of market stress.  Thus, we do not consider 2011 to be a "stress" year, but it was a difficult year for most active managers, including ITS.  2008 was the last "stress" year in equity markets, with the S&P posting a loss of 37%, while ITS was down 8.6% and Hanlon was down less than 1 percent (.95%). The 2011 decline in the ITS portfolio indicated above is largely due to losses realized in precious metals and emerging markets.

Hanlon Investment Management also has four managed portfolios.  Our use of the "Managed Income Portfolio" (MIP) is a strategic substitute for what would normally be comprised of bonds or bond funds in a client's portfolio.  While we are extremely pleased with Hanlon's MIP performance in 2011, the annual average returns over time, while not realized by our clients, say a lot about this portfolio being a cornerstone of "Capital Preservation" in a client's holdings.  Our objective for Hanlon is net average returns of 5% to 7%.  We must adjust our expectations here, relative to the returns above, due to the exceptional performance of this portfolio in 2003 (   %) and 2009 (  %), on the heels of the market declines which preceded these years.

As a reminder, Hanlon Investment Management became available to our clients at the end of 2010, concurrent with our transition to VFG Securities.  Many clients have since re-allocated between ITS and Hanlon with existing and additional funds.  Actual returns or losses during 2011 are dependent on the timing of when funds were invested in either portfolio.

ADV Disclosure forms for ITS, Hanlon and VFG Securities may be reviewed in the ADV Disclosure Page.