Why 50/30/20 Makes More Sense Than 60/40 For This Market Environment

Why 50/30/20 Makes More Sense Than 60/40 For This Market Environment
Investors Are Ditching 60/40 and Integrating Funds Like MBXIX That Thrived as Markets Tanked

By Michael Schoonover | July 2022

In an environment set up to be a lost decade for many traditional asset classes, a potentially compelling option is moving from a 60/40 to a 50/30/20 portfolio allocation model to integrate a fund like the Catalyst/Millburn Hedge Strategy Fund (MBXIX), which has generated positive returns in both bull and bear markets.

In fact, in an environment setting the stage for a lost decade–a decade where an asset class generates negative returns–for both stocks and bonds, the 50/30/20 portfolio allocation model (50% equities, 30% bonds, and 20% alternatives) is probably more important than ever to position investors for long-term success. Today we’ll provide an example of how investors can integrate a hybrid alternative product like the Catalyst/Millburn Hedge Strategy Fund (MBXIX) to position their portfolio for this new market environment and the decade ahead.

Can Investors Rely on the 60/40 Portfolio to Get Them Through the Next Decade?

Source: Catalyst Capital Advisors LLC and Bloomberg LP. Data as of 07/15/2022. 60/40 Portfolio represented by 60% allocation to the S&P 500 TR Index and 40% allocation to the Bloomberg Agg TR Index (rebalanced monthly).

There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

Near-zero yields that are bound to increase combined with stretched equity valuations and growing risks have had investors with heavy exposure to “traditional” portfolio models on alert for years. Despite the warning signs, many investors had a fear of missing out on market upside.

Trying to manage upside participation and downside market risk makes a fund like MBXIX a potentially compelling option for a portfolio. Whether looking to compliment traditional investments or replacing pure equity, MBXIX implements an approach that combines an allocation to long-only equity ETFs with a long/short futures portfolio that spans 125+ global markets. This strategy has the potential to provide positive returns in both bear and bull markets.

In an environment with limited options for positive returns, many investors have been looking to integrate strategies like MBXIX to implement a 50/30/20 portfolio model.

Download Fact Sheet

MBXIX delivered positive returns during every structural bear market since 1997…

Resulting in Long-Term Outperformance Versus the S&P 500 and a 60/40 Portfolio

There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

Why 50/30/20? Historical Outperformance and Favorable Positioning

MBXIX’s strategy combines two distinct components. During a structural bear market, which is what tends to occur during a Lost Decade, the Fund’s futures component has the potential to produce returns that more than offset any losses from the equity component. This was the case for the last two equity bear markets (2000-2002 and 2008) where MBXIX was positive during both periods.

How does MBXIX currently implement its strategy?

Passive Equity Portfolio
Approximately $0.50 of notional exposure for every $1.00 invested

Designed to provide beta exposure to equities for normal, upward trending markets
Domestic, developed, and emerging market exposure via ETFs
U.S. equity exposure diversified by market capitalization (small, mid, and large)

Futures Program
Approximately $0.70 of notional exposure for every $1.00 invested

Designed to leverage uncorrelated nature for both incremental returns and to offset equities during periods of long-term structural market change
Multiple model approach
Implements machine learning technology

Approach cannot be replicated through two different funds as $1.00 allocated separately to futures and equities will only give an investor $1.00 in exposure. More than 100% notional exposure is possible because collateral required for futures is less than the notional exposure provided (i.e., $.030 in collateral may be needed for %.50 in exposure).

A 50/30/20 Portfolio Has Historically Outperformed a 60/40 Portfolio Since 1980

Source: Catalyst Capital Advisors LLC, BarclayHedge, and Bloomberg LP. Data as of 06/30/2022. 60/40 Portfolio represented by 60% allocation to the S&P 500 TR Index and 40% allocation to the Bloomberg Agg TR Index (rebalanced monthly). 50/30/20 Portfolio represented by a 50% allocation to the S&P 500 TR Index, 30% allocation to the Bloomberg Agg TR Index, and 20% allocation to a 50/70 hybrid alternative strategy (rebalanced monthly). The 50/70 hybrid alternative strategy is represented by a 50% allocation to the S&P 500 TR Index and a 70% allocation to the Barclay CTA Index (rebalanced monthly).

There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

The Net Benefit of a 50/30/20 Portfolio Over Time is Significant, Especially Compared to the Initial $10,000 Investment Amount

Implementing a 50/30/20 Portfolio Model

As previously demonstrated, the 50/30/20 portfolio model is designed to perform well in both bull and bear markets, and therefore it’s not too late to begin implementing this in any portfolio. While the 50/30/20 model is the standard approach, investors have different options to integrate a 20% alternative allocation. Below are three different options, depending on market views and investment goals.

Positioning Your Portfolio for A Lost Decade in Stocks and Bonds.

Going forward, it’s difficult to predict where markets will end up in 2022. In managing money for clients, we understand the goal is to help investors meet their long-term financial objectives, and this implies not only trying to avoid outsized drawdowns, but also generating positive returns that can help an individual meet their financial objectives. It is for this reason we believe it is an ideal time to integrate a strategy like MBXIX, which maintains the upside equity exposure but also provides a diversified and non-correlated futures component that could lead to positive returns in various market environments, including the environment we are in for in 2022 and beyond. We recommend that investors consider the 50/30/20 portfolio model to integrate this strategy.

Investors have a few options for these types of strategies, but investors are choosing MBXIX because of its proven track record, distinct approach, and wide availability across financial firms.

Positioning Your Portfolio for A Lost Decade in Stocks and Bonds.

Adding a hybrid equity/futures strategy like MBXIX to a portfolio is a potentially attractive option for the current market environment as you can maintain equity exposure but also gain access to a long/short futures portfolio spanning 125+ global markets, providing the potential for positive overall returns during a structural bear market environment.

Investors have a few options for these types of strategies, but investors are choosing MBXIX because of its proven track record, distinct approach, and wide availability across financial firms.

Download MBXIX Brochure

About the Author

Michael Schoonover is Chief Operating Officer of Catalyst Capital Advisors LLC, Catalyst International Advisors LLC and Rational Advisors, Inc. He is an experienced financial professional having worked in various portfolio management, operations management, and trust officer roles. He serves in various executive roles for U.S. registered investment advisers and marketing and consulting companies in the investment management industry. He is President of Mutual Fund Series Trust, President of Mutual Fund & Variable Insurance Trust, and President of Strategy Shares. Mr. Schoonover has a Bachelor of Science degree in biochemistry from the University of Michigan and a Master of Business Administration degree with high distinction from the University of Michigan.

Performance (%): Ending June 30, 2022
Annualized if greater than a year

Share Class/Benchmark	1 Year	3 Years	5 Years	10 Years	Since Inception*
Class I	2.31	8.29	7.87	9.46	10.63
S&P 500 TR Index	-10.62	10.60	11.31	12.96	8.61
ML 3 Month T-Bill Index	0.17	0.63	1.11	0.64	2.02
Class A	2.04	8.02	7.61	n/a	9.00
Class C	1.29	7.22	6.80	n/a	8.18
S&P 500 TR Index	-10.62	10.60	11.31	n/a	11.91
ML 3 Month T-Bill Index	0.17	0.63	1.11	n/a	0.95
Class A w/Sales Charge	-3.82	5.90	6.34	n/a	8.01

The Fund’s maximum sales charge for Class “A” shares is 5.75%. Investments in mutual funds involve risks. Performance is historic and does not guarantee future results. Investment return and principal value will fluctuate with changing market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month end performance information, please call the fund, toll free at 1-866-447-4228.

There is no assurance that the Fund will achieve its investment objective. You cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. Performance shown before December 28, 2015 is for the Fund’s Predecessor Fund (Millburn Hedge Fund, L.P.). Gross expense ratios for share classes A, C, and I are 2.29%, 3.04%, and 2.04%, respectively.

*The price-earnings ratio is the ratio of a company’s share price to the company’s earnings per share and is used to determine the value of a company.

Glossary of TermsLost decade – a decade in which a traditional asset class (equities, bonds, commodities, etc.) generates negative returns.

Bull market – a market in which share prices are rising, encouraging buying.

Bear market – a market in which prices are falling, encouraging selling.

Beta – the measure of the volatility of a security or portfolio compared to the market as a whole.

Long/short futures – an investment strategy that takes long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline

Past performance is not a guarantee of future results.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Catalyst Funds. This and other important information about the Fund can be obtained by calling 866-447-4228. The Catalyst Funds are distributed by Northern Lights Distributors, LLC, member FINRA/SIPC. Catalyst Capital Advisors, LLC is not affiliated with Northern Lights Distributors, LLC.

Important Risk Considerations:

Investing in the Fund carries certain risks. The Fund will invest a percentage of its assets in derivatives, such as futures and options contracts. The use of such derivatives and the resulting high portfolio turn-over may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities and commodities underlying those derivatives. The Fund may experience losses that exceed those experienced by funds that do not use futures contracts, options and hedging strategies. Investing in commodities markets may subject the Fund to greater volatility than investments in traditional securities. Currency trading risks include market risk, credit risk and country risk. Foreign investing involves risks not typically associated with U.S. investments. Changes in interest rates and the liquidity of certain investments could affect the Fund’s overall performance. The Fund is non-diversified and as a result, changes in the value of a single security may have significant effect on the Fund’s value. Other risks include U.S. Government securities risks and investments in fixed income securities. Typically, a rise in interest rates causes a decline in the value of fixed income securities or derivatives owned by the Fund. Furthermore, the use of leveraging can magnify the potential for gain or loss and amplify the effects of market volatility on the Fund’s share price. The Fund is subject to regulatory change and tax risks; changes to current rules could increase costs associated with an investment in the Fund. These factors may affect the value of your investment.

Performance shown before December 28, 2015 is for the Fund’s Predecessor Fund (Millburn Hedge Fund, L.P.). The prior performance is net of management fees and other expenses including the effect of the performance fee. The Predecessor Fund had an investment objective and strategies that were, in all material respects, the same as those of the Fund, and was managed in a manner that, in all material respects, complied with the investment guidelines and restrictions of the Fund. From its inception through December 28, 2015, the Predecessor Fund was not subject to certain investment restrictions, diversification requirements and other restrictions of the 1940 Act or the Code, which if they had been applicable, might have adversely affected its performance. In addition, the Predecessor Fund was not subject to sales loads that would have adversely affected performance. Performance of the predecessor fund is not an indicator of future results.

Alternative investments may not be suitable for all investors and an investment in alternative funds is suitable only for investors who can bear the risks associated with the illiquidity of the fund’s shares and should be viewed as a long-term investment.

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