LEXINGTON, MA--(Marketwired - June 20, 2013) - The classic asset allocation model, "60-40" (60% invested in stocks and 40% invested in bonds), that generations of investors and advisors have relied on, may not prove to be the best model portfolio over the next decade based on a recent study by Research Affiliates that predicts a return of just 4.4% for this type of portfolio. To adapt, some advisors are adding alternatives or tactical investments in order to seek higher yields and returns that can beat traditional investments. These funds seek to allocate assets to the best performing asset classes based on quantitative models.
The tactical approach to investing is nothing new for BTS Asset Management; they have been tactical investment practitioners for over 30 years, refining and honing their methodology and models. "Every day we look for the bond asset class that represents what we believe to be the best option," said Isaac Braley, President. "Our methodology looks to identify the best opportunities using our quantitative models. We take a total return approach to bond investments."
While the BTS Bond Asset Allocation Fund (BTSAX) is just over three years old, the models and methodology have been employed by BTS Asset Management for over 3 decades. The following Q&A with BTS President and Investment Committee member Isaac Braley explores the BTS approach to bond investing.
Q. Is yield important to you when selecting investments for the fund?
Yield is only important if it is adding to the total return of the investment. Our approach is to focus on the total return of our portfolio and seek preservation of capital. For example, because we hold some credit default exposure in the portfolio, it can lower our overall yield, but still allows us to participate in the potential upside of the bonds.
Q. In a recent
Wall Street Journal
article, bond funds that own stocks have surged to their highest stock allocation in 18 years. Are investors taking on bigger risks to boost returns? Has the BTS Bond Asset Allocation Fund been part of this trend?
We do not have exposure to stock at this time as our model does not identify equities as having the greatest potential. Our largest holding is currently in High Yield bonds. We have not resorted to increasing exposure to dividend paying stocks to pick up additional yield. While high quality corporate debt and U.S. Treasuries have very low yields, purchasing stocks adds incremental risk for modestly higher returns. A representative ETF that invests in dividend yielding equity securities is currently paying 3.4% vs. the 10 year U.S. Treasury bond at 1.77%. Given the disparity in yield, you can see why some managers may be willing to take the increased risk of moving into stocks. However, High Yield is still yielding in the 5-7% range. While High Yield spreads have narrowed, we think the relative value is in High Yield in the short term and view them as a tactical alternative that may produce equity-like returns.
Q. With rates at historic lows and the Fed committed to maintaining low interest rates into 2014, how has your approach to bond investing changed? Are you relying more on high yield or other spread sectors?
Our main bond strategy focuses on High Yield bonds, U.S. Treasuries or cash. We believe that the current market completely favors the High Yield market. This does not mean that the market can't change in a week, but our long position in High Yields has us 100% invested in that asset class.
Q. What is your view on Treasuries?
The U.S. Treasury markets could stall or fall for many reasons. At that point we would be buyers of U.S. Treasuries, even with their incredibly low yields. It would not take much yield movement to get a big price change.
Q. Are you expecting rates to rise? If so, how have you positioned the fund in an attempt to avoid principal loss?
We do expect rates to rise, but of course we do not know when. We use technical models that allow us to quickly react to markets. We don't look for long-term allocations for defensive posturing. We prefer to be agile and adjust as the markets change.
About BTS Asset Management
Founded in 1979, BTS Asset Management provides quantitative risk management and portfolio solutions for individuals, advisors, and mutual fund/variable annuity clients. BTS manages approximately $1.9 billion in individual, corporate, and pension accounts, and works with over 3,000 advisors and registered representatives. BTS has multi-year track records in tactical fixed income and equity management dating back more than 30 years.
There is no assurance that the Fund will achieve its investment objective.
Mutual Funds involve risk, including possible loss of principal.
The Fund may invest in derivatives. Even a small investment in options may give rise to leverage risk, and can have a significant impact on the Fund's performance. Derivatives are subject to credit risk and liquidity risk. The Fund invests in fixed income securities, derivatives on fixed income securities or Underlying Funds that invest in fixed income securities. The value of the Fund will fluctuate with changes in interest rates. Defaults by fixed income issuers in which the Fund invests could also harm performance. Lower-quality bonds known as "high yield" or "junk" bonds, present greater risk than bonds of higher quality, including an increased risk of default. An economic downturn or period of rising interest rates could adversely affect the market for these bonds and reduce the Fund's ability to sell its bonds. The lack of a liquid market for these bonds could decrease the Fund's share price.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the BTS Bond Asset Allocation Fund. This and other information about the Fund is contained in the prospectus and should be read carefully before investing. The prospectus can be obtained on our web site, www.btsfunds.com, by calling toll free 1-877-287-9820 (1-877-BTS-9820), or by calling your financial representative. The BTS Bond Asset Allocation Fund is distributed by Northern Lights Distributors, LLC, Member FINRA. BTS Asset Management, Inc. is not affiliated with Northern Lights Distributors, LLC.
2012 Chris Brightman, Research Affiliates as reported by Charles, Passy, Wall Street Journal, April 25, 2013.
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