Why You Also Need to Integrate the "Defense Wins Championships" Philosophy for Long-Term Investment Success

Why You Also Need to Integrate the “Defense Wins Championships” Philosophy for Long-Term Investment Success

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 | February 3, 2023

Many football fans have probably heard some iteration of the quote, “Offense wins games. Defense wins championships.” As a Detroit Lions fan, this saying hits home as the team ended the regular season ranked as the 5th best offensive team but the 5th worst defensively, causing them to miss the playoffs. In fact, in looking at the top performing teams for the NFL regular season, having a strong offense and defense was necessary.

Team	Wins-Losses	Offense (PPG)	Offense Rank	Defense (PPG)	Defense Rank
Kansas City Chiefs	14-3	29.2	1	21.7	16
Philadelphia Eagles	14-3	28.1	3	20.2	8
Buffalo Bills	13-3	28.4	2	17.9	2
San Francisco 49ers	13-4	26.5	6	16.3	1
Minnesota Vikings	13-4	24.9	8	25.1	30*
Cincinnati Bengals	12-4	26.1	7	20.1	6

* Minnesota Vikings were eliminated in the wildcard playoff game by the New York Giants.
Source: ESPN. PPG = Points per game.

We believe the formula for success in football also applies to investing – while oftentimes the focus is on the offense, investors should also make sure their portfolio has a sound defensive strategy. An offense-only strategy may have a great long-term chart but not perform well for investors who need to sell at adverse times. Similarly, a defense-only strategy would likely leave many investors far behind their long-term financial objectives over full market cycles. In short, positioning for long-term investment success requires both offense and defense. To illustrate this concept, consider the performance of the S&P 500 TR Index (offense only) versus the Catalyst/Millburn Hedge Strategy Fund (MBXIX) (offense and defense in one portfolio) since 1997 when MBXIX launched.

Offense and Defense (MBXIX) versus offense only (S&P 500 TR Index).

Source: Bloomberg LP and Catalyst Capital Advisors LLC. Monthly return data from 01/01/1997 to 12/31/2022. Graph presented in logarithmic scale. Past performance does not guarantee future results and there is no assurance that the Fund will achieve its investment objective.

Past performance is not indicative of future results.

The return chart for MBXIX appears much smoother than that of the offense-only S&P 500 TR Index strategy, still delivering positive returns when stocks went out of favor. This resulted in significant outperformance. Trying to manage upside participation and downside market risk makes a fund like MBXIX a potentially compelling option for a portfolio. Now that we explained what has happened with MBXIX outperforming, we will now break down how it happened and why this is a potentially better option than the traditional 60/40 approach.

In an environment with limited options for positive returns,
many investors have been looking to strategies like MBXIX.

Download Fact Sheet

Here are four reasons why investors have been reallocating from their traditional asset class exposure to MBXIX.

1.

MBXIX IS DESIGNED TO PLAY BOTH OFFENSE AND DEFENSE.

MBXIX’s strategy combines two distinct components: an allocation to long-only equity ETFs (offense only) with a long/short futures portfolio that spans 125+ global markets (offense and defense). It is important to note that the defensive component derives from an uncorrelated futures strategy, which is different than bear market strategies that typically only do well when market conditions deteriorate but fail to deliver–or even deliver negative returns–during good market environments. The futures component can deliver positive returns during both good and bad market environments.

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).

There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses. Managed futures often engage in leveraging and other speculative investment practices that may increase the risk of investment loss.

MBXIX can provide a better option than the traditional 60/40 portfolio approach as bonds are not necessarily designed to deliver positive returns during adverse equity markets, as was the case in 2022.

Source: Bloomberg LP and Catalyst Capital Advisors LLC. Data as of 12/31/2022. 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). Past performance does not guarantee future results and there is no assurance that the Fund will achieve its investment objective.

Past performance is not indicative of future results.

2.

MBXIX DELIVERED POSITIVE RETURNS DURING EVERY BEAR MARKET YEAR SINCE INCEPTION IN 1997.

During a structural bear market, the Fund’s futures component has the potential to play defense and produce returns that more than offset any losses from the offensive equity component. This has been the case for all structural bear markets since 1997 where MBXIX produced positive returns.

MBXIX Delivered Positive Returns During Every Structural Bear Market Since 1997…

Past performance is not indicative of future results.

… Resulting in long-term outperformance versus the S&P 500 and a 60/40 Portfolio

Source: Bloomberg LP and Catalyst Capital Advisors LLC. Monthly return data from 01/01/1997 to 12/31/2022. Graph presented in logarithmic scale. 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). Past performance does not guarantee future results and there is no assurance that the Fund will achieve its investment objective.

Past performance is not indicative of future results.

3.

MBXIX MORE THAN DOUBLED DURING THE LAST LOST DECADE FOR STOCKS AND IS OFF TO A STRONG START FOR THE NEW LOST DECADE.

When you combine the ongoing risk factors facing the market with the fact that both equity valuations and bond yields are still far from historical averages, it looks like 2022 may have set the stage for a lost decade–a 10-year period where an asset class generates negative returns–for both stocks and bonds.

The last lost decade for stocks occurred from 2000 to 2009. During this period, the S&P 500 TR Index lost more than 9% of its value. On the other hand, MBXIX more than doubled by the end of 2009. If 2022 turns out to be the start of the new lost decade, MBXIX seems to be off to a similarly strong trajectory.

MBXIX generated a +164% return during the last lost decade for the S&P 500 Index and so far is on a similar trajectory for the potentially new lost decade.

Source: Bloomberg LP and Catalyst Capital Advisors LLC. Data as of 12/31/2022. Past performance does not guarantee future results and there is no assurance that the Fund will achieve its investment objective.

Past performance is not indicative of future results.

CONCLUSION

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 potential adverse environment we face in 2023 and beyond.

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 December 31, 2022
Annualized if greater than a year

Share Class/Benchmark	1 Year	3 Years	5 Years	10 Years	Since Inception*
Class I	7.72	7.81	6.89	9.05	10.61
S&P 500 TR Index	-18.11	7.66	9.42	12.56	8.53
ML 3 Month T-Bill Index	1.47	0.73	1.27	0.77	2.04
Class A	7.46	7.54	6.63	n/a	9.02
Class C	6.67	6.74	5.83	n/a	8.20
S&P 500 TR Index	-18.11	7.66	9.42	n/a	11.37
ML 3 Month T-Bill Index	1.47	0.73	1.27	n/a	1.07
Class A w/Sales Charge	1.27	5.44	5.38	n/a	8.10

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 2.27%, 3.02%, and 2.02%, respectively.

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.

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.

Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.

Index definitions:

The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

The S&P 500 TR Index is an index consisting of 500 U.S. equities and is a broad-based benchmark used as a measurement of US stock market performance.

The ML 3-Month T-Bill Index is an unmanaged index that measures returns of three-month U.S. Treasury Bills.

5192-NLD-02062023

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.

7067-NLD-10062022