Many Investors Are Ditching 60/40 and Integrating Funds Like MBXIX That Are Designed to Thrive in Both Bear and Bull Markets

By Michael Schoonover | September 30, 2022

If your investment portfolio feels derailed this year, you are not alone. Few investments are holding up well. For 2022 year-to-date, stocks are in bear market territory and bonds are close. Even the historically safer 60/40 stock/bond portfolio is close to bear market territory.

Unfortunately, the outlook remains bleak with rising rates, inflation, and geopolitical risks abound. In fact, even many typically optimistic market strategists predict that the worst may not arrive until late 2023 or 2024. Combine this with the fact that both equity valuations and bond yields are still far from historical averages, and it looks like 2022 has set the stage for a lost decade–a decade where an asset class generates negative returns–for both stocks and bonds.

A lost decade can derail an investor’s long-term financial goals. But today we’ll explain why not all hope should be lost on investors. By allocating at least 20% to a strategy that is designed to thrive in  bear and bull markets by playing both offense and defense in the same portfolio, like the Catalyst/Millburn Hedge Strategy Fund (MBXIX), investors are positioned to thrive in almost all market environments, including a lost decade.

Some investment products are designed to only play defense and do well when market conditions deteriorate but then fail to deliver–or even deliver negative returns–during good market environments. These “bear market” products are unfortunately difficult to implement as part of a long-term portfolio strategy because the absence of offense means that they tend to lose too much value over good market environments and/or end up out of the portfolio right when an investor needs the product most.

In contrast, MBXIX is designed with the potential to produce positive returns during both bull and bear markets because it plays both offense and defense in the same portfolio. The equity component is always playing offense and, depending on market dynamics, various aspects of the futures program may be dynamically playing offense and/or defense relative to the returns of traditional asset classes. As a result, MBXIX has never generated a negative 5-year rolling return (based on month-end data) since 1997 (as of Q3 2022), compared to the S&P 500, which has negative 5-year returns 20% of the time.

Past performance is not indicative of future results.

Despite the drawdown in equities that has already occurred, the S&P 500 TR cyclically adjusted price-to-earnings ratio* is still well above long-term averages (around 18x to 20x), suggesting that equities have a long way to decline before bottoming out. At the end of 2021, the historical probability of a positive 10-year forward return for the S&P 500 Index was only 4%, and today it’s around 50%. Likewise, bond yields remain well below historical averages despite the significant increases this year.

Source: Robert Shiller and Catalyst Capital Advisors LLC based on data from 1900 to July 2022.

Going forward, it’s difficult to predict where markets will end up. 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 replace a meaningful portion of any equity allocation you may have with 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.

Adding a strategy that can play offense and defense 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 and for future bull market environments.

The question for investors then comes down to how to allocate to a strategy like MBXIX. We have published various research on the topic over time, but our findings generally indicate that an allocation of at least 20% to alternatives has historically benefited investors. A common method is 50/30/20, 50% to equities, 30% to bonds, and 20% to alternatives.

The MBXIX strategy is known as a 50/70 hybrid strategy, referring to the 50% notional exposure to equities and 70% notional exposure to a futures program. Historically, an investor that used a 50/30/20 portfolio approach where the 20% allocation was to a 50/70 hybrid alternative strategy would have significantly outperformed a 60/40 portfolio model and would have been better positioned for various market environments.

Source: Catalyst Capital Advisors LLC, BarclayHedge, and Bloomberg LP. Data as of 09/30/2022. 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). RoR Estimated of 9/30/22 for 10/4/22 (source: barclayhedge.com).

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.

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 September 30, 2022
Annualized if greater than a year

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. 

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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