Why You Should Consider Replacing Your 60/40 Portfolio with a 50/30/20 Portfolio to Better Position for a Recession

Many Investors Are Ditching 60/40 and Integrating a Fund Like MBXIX Which Has a 25+ Year Track and Has Thrived in Various Economic and Market Environments

By Michael Schoonover | November 22, 2022

Stocks, bonds, and the “traditional” 60/40 stock/bond portfolio are all having a horrendous year. Experts predict more inflation, higher interest rates, and eventually a recession in 2023-2024, implying more pain ahead and possibly for several years. It is becoming increasingly evident that the 60/40 portfolio that carried investors for decades is probably not well positioned for what lies ahead.

The 50/30/20 portfolio allocation model (50% equities, 30% bonds, and 20% alternatives) can be a compelling option to position investors for long-term success, particularly in the face of a recession and more market turmoil. Today we’ll provide an example of how investors can integrate a proven hybrid alternative product like the Catalyst/Millburn Hedge Strategy Fund (MBXIX) as the 20% alternatives allocation in this 50/30/20 model. Hybrid strategies like MBXIX can play both offense and defense, thus providing the potential to generate positive returns in various economic and market environments.

ALLOCATING 20% TO A STRATEGY LIKE MBXIX COULD BETTER POSITION A PORTFOLIO FOR VARIOUS ECONOMIC AND MARKET ENVIRONMENTS

Source: Catalyst Capital Advisors LLC 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).

Past performance is not indicative of future results.

Trying to manage upside participation and downside market risk makes a fund like the Catalyst/Millburn Hedge Strategy Fund (MBXIX) a potentially compelling option for a portfolio. MBXIX 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 and has done so in its 25+ year history.

In the face of a recession and more market turmoil, many investors have been looking to strategies like MBXIX, which have the ability to play offense and defense.

Here is a three-step process that investors can use to implement a 50/30/20 portfolio.

1.

IDENTIFY A PROVEN STRATEGY THAT CAN PLAY DEFENSE.

Any alternative strategy integrated into a 50/30/20 model should be designed with the potential to produce positive returns during adverse market environments. Historically, many investors relied on bonds to play this role because, in the past decades, bonds delivered as equities declined. Rising interest rates revealed the flaw in the design of this approach, which is why many investors were poorly positioned for 2022. Rather, investors should seek out strategies that are designed to play defense and have exhibited a history of positive returns during adverse market environments.

MBXIX’s strategy combines two distinct components. During a structural bear market, the Fund’s futures component has the potential to play defense and produce returns that may 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.

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

This 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., $0.30 in collateral may be needed for $0.70 in exposure).

MBXIX DELIVERED POSITIVE RETURNS DURING EVERY STRUCTURAL BEAR MARKET SINCE 1997…

Past performance is not indicative of future results.

… AND HAS PERFORMED WELL IN 2022 AS MANY TRADITIONAL ASSET CLASSES ARE IN NEGATIVE TERRITORY, INCLUDING BONDS.

Past performance is not indicative of future results.

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

2.

ENSURE THAT THE STRATEGY CAN ALSO PLAY OFFENSE.

Generating strong returns in a bear market is often only useful if the strategy can also perform during more favorable market environments. 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.

MBXIX’S ABILITY TO PLAY OFFENSE AND DEFENSE HAS RESULTED IN A 25+ YEAR TRACK RECORD OF OUTPERFORMANCE…

Past performance is not indicative of future results.

… AND NO NEGATIVE 5-YEAR ROLLING PERIODS COMPARED TO 20% NEGATIVE 5-YEAR ROLLING PERIODS FOR THE S&P 500.

Rolling 5 Year Returns	MBXIX	S&P 500 TR Index
Number of 5-Year Periods	250	250
Average 5-Year Annualized Return	9.83%	7.48%
Best 5-Year Annualized Return	18.02%	23.00%
Worst 5-Year Annualized Return	1.66%	-6.63%
Standard Deviation of 5-Year Periods	2.99%	7.05%
Profitable Periods (%)	100%	80%
Average Profitable Period Return*	9.83%	9.74%
Unprofitable Periods (%)	0%	20%
Average Unprofitable Period Return*	N/A	-1.81%

Source: Catalyst Capital Advisors LLC and Bloomberg LP.

Past performance is not indicative of future results.

3.

DETERMINE THE RIGHT ALLOCATION MODEL FOR YOUR NEEDS.

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 approximately 20% allocation 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.

THE NET BENEFIT OF A 50/30/20 PORTFOLIO OVER TIME IS SIGNIFICANT, ESPECIALLY COMPARED TO THE INITIAL $10,000 INVESTMENT AMOUNT.

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).

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.

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.

Consider Replacing Your 60/40 Portfolio with a 50/30/20 Portfolio to Better Position for a Recession

While the 50/30/20 model is the standard approach, investors have different options to integrate a 20% alternative allocation.

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 and Rational Advisors, Inc. and Portfolio Manager of a share buyback strategy fund at Catalyst Funds. He began his association with Catalyst in 2011 as a research consultant supporting the implementation and back testing of quantitative strategies. In March 2013, he became a senior analyst at Catalyst to provide investment research for several mutual funds. From 2005-2011, he served in various technical and scientific management roles with the Perrigo Company. Mr. Schoonover has an MBA with high distinction from the University of Michigan Ross School of Business and a BS from the University of Michigan.

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

Share Class/Benchmark	1 Year	3 Years	5 Years	10 Years	Since Inception*
Class I	12.69	9.55	7.48	9.38	10.66
S&P 500 TR Index	-15.47	8.16	9.24	11.70	8.31
ML 3 Month T-Bill Index	0.62	0.60	1.15	0.68	2.02
Class A	12.43	9.28	7.22	n/a	9.16
Class C	11.55	8.45	6.41	n/a	8.33
S&P 500 TR Index	-15.47	8.16	9.24	n/a	10.62
ML 3 Month T-Bill Index	0.62	0.60	1.15	n/a	0.99
Class A w/Sales Charge	5.97	7.14	5.96	n/a	8.20

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 Terms

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

Notional Value – Notional value is the total value of a position in a financial security.

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.

8228-NLD-11292022