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Flexible Plan Investments


 

What is your investment style? I’m old enough to remember a time when an investment manager’s response to this question was quite different than what is typical today. Perhaps you are too.

There was a time when such a query would invoke responses like deep value, aggressive growth, earnings momentum, dividend growth, growth at a reasonable price, or other descriptive term. Additionally, various styles and investment approaches might include focusing on highly leveraged companies, turnaround plays, takeover targets, spin-offs, or other special situations.

You might be thinking these investment styles never went away and are still with us today. You would be correct. However, whereas these might have been among the most likely descriptions twenty-five years ago, something happened in the interim to lower the probability of receiving such a response.

A little bit of history

The arrival of the Morningstar Style Box was the “thing” that happened. Although it may seem like it has been around forever, the Morningstar Style Box wasn’t introduced until 1992. The nine-square matrix was, and still is, an excellent visual tool. It divides the domestic equity universe into three capitalization stratifications (large, medium, and small), which form the horizontal rows of the matrix. Next, Morningstar separates the stocks within each capitalization segment into three groups based on various growth and value characteristics. Stocks with a predominance of value characteristics are placed on the left, growth stocks on the right, and those with a blend of value and growth characteristics occupy the middle.

The simplest solution is often the best, and the Morningstar Style Box is genius in that respect. It is both easy to understand and visual. The upper left hand box of the three-by-three matrix represents Large-Cap Value stocks, the lower right hand corner is for Small-Cap Growth, and the rest is intuitive. With this new classification methodology, the stock holdings of mutual funds and investment portfolios are systematically measured, aggregated, and then placed inside one of the nine boxes.

The tool became so popular that it quickly developed into the primary method of determining and classifying investment styles. Managers formerly known as deep value investors landed on the left side of the matrix as you would expect. However, they were further split into large, medium, or small categories based on the average market capitalization of their holdings. This may seem quite logical at first glance, but consider a manager whose methodology typically selects small company stocks, yet a couple of Large Cap stocks suddenly meet his selection criteria. Since the market capitalization of these big stocks is dramatically larger than the Small Cap holdings, a classification methodology based on “average” size could label it as “Mid-Cap Value” even though it doesn’t hold any Mid Cap stocks.

A twist of fate

Problems arose as the tool evolved from being a means of measurement into being the actual investment criteria. For example, an earnings momentum manager may be in the Small-Cap Growth box during one phase of an economic cycle and in Mid-Cap Value during another phase. While sticking to his style, the tool would say this manager was drifting. Eventually, many large institutional investors began hiring managers based on their ability to outperform their peers while staying inside their box. No longer did they want to hire an earnings momentum specialist or a turnaround analyst. Instead, they sought out Mid-Cap Growth and Small-Cap Value managers. Many of these new style box managers were said to have a “mandate” for the particular box they were in, and some were subsequently fired for straying too far outside their assigned box.

Exchange-Traded Funds (“ETFs”) have revolutionized much of the investment landscape, and industry growth has been rapid. There were less than 200 ETFs available to US investors a decade ago, and today there are more than 1,650 listed for trading. Not surprisingly, many of the first 1,000 products targeted one of the nine style boxes or well-known indexes. This area of the investment landscape quickly became saturated with products, forcing ETF sponsors to look for new ways to distinguish their new funds.

What’s old is new again

Factor investing is an idea that has become popular with ETF sponsors recently, and although it may seem like something new, it is very much akin to “style” investing before the age of the Morningstar Style Box. Today, there are ETFs available that focus their selection criteria on specific factors, and they sound very much like the lost investment styles of yore. Factors targeted by new generation ETFs include volatility, current yield, dividend growth, beta, revenue, price momentum, and company size.

In addition, there are many special situations that can be identified, quantified, and used in selecting securities. Special situations targeted by ETFs include spin-offs, buybacks, splits, mergers, and IPOs.

Tools for active management

Whether you prefer to use the 1980’s definition of investment style, the Morningstar Style Box, or today’s factor and special situation definitions, one thing remains constant—each goes through periods of being in favor, followed by periods of being out of favor.

Each specific style can potentially be thought of as a valid stand-alone investment approach, but Flexible Plan prefers to think of them as tools. FPI believes there are times to own some of these style-based products and times to avoid them as determined by our non-emotional quantitative-based approach. Adding these ETFs as tools instead of end-products gives FPI the potential to better meet the needs of its clients.

For recent performance on some of our ETF strategies, view Other Custodians.

 

All the best,

Ron

 

Ron Rowland of Capital Cities Asset Management is the guest author of this week's "In My Opinion." Having run a hedge fund, a mutual fund, and now managed accounts, Ron has experience in both money management and investment publications. Ron developed his own fund/equity momentum indicators in the 1980s and has continued to refine them over the years. Quoted widely in the financial press, Ron is the industry go-to guy for sector rotation insight and ETFs, and has had his work published in Forbes, Seeking Alpha, TheStreeet.com, MarketWatch.com and others. Ron offers the following primer on the basics of active management.

 


Next week, Executive VP Renee Toth and Ken Whitley, Corporate Secretary and Managing Director, Special Projects, will be heading to Denver to attend the Schwab Impact 2014 Conference, where they will network with other industry professionals and attend educational sessions to learn strategies for effectively managing portfolios in the new market environment.


Stocks surge 4% in a week

Earnings beat forecasts, and investors bought back in: in five days, the S&P 500 rose 4.12% to 1,964.58, the Dow 2.59% to 16,805.41 and the Nasdaq 5.29% to 4,483.72.4

% Change Y-T-D 1-Yr Chg 5-Yr Avg 10-Yr Avg
DJIA
+1.38
+8.36
+13.70

+7.24

NASDAQ
+7.35
+14.12
+21.62
+13.43
S&P 500
+6.29
+12.13
+16.39
+7.94
Real Yield 10/17 Rate 1-Yr Ago 5-Yrs Ago 10-Yrs Ago
10Yr TIPS Yd
0.39%
0.36%
1.51%
1.63%

  September-YTD returns
DJIA
2.81%
NASDAQ
7.59%
S&P 500
6.70%

Sources: online.wsj.com, bigcharts.com, treasury.gov - 10/24/14 5,6,7,8
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.


Gains in new & existing home sales

According to the National Association of Realtors, the pace of resales improved 2.4% in September. NAR reported fewer sales of distressed properties and more home sales to families versus investors. The Census Bureau measured only a 0.2% rise in new home buying last month, but a 17.0% annualized advance.1


Little inflation pressure, less pressure on FED

September saw both the headline and core Consumer Price Index rise 0.1%, putting the yearly gain for each at 1.7%. If inflation continues to be so mild, the Federal Reserve may choose to stand pat on interest rates well into 2015. Food prices are up 3.0% over the past year, but energy prices have fallen 0.6%.2


Leading indicators stage September climb

The Conference Board’s Leading Economic Index rose 0.8% last month to 104.4 after a flat August, suggesting solid Q4 economic growth. It rose 1.1% back in July.3



Citations

1 - csmonitor.com/Business/new-economy/2014/1024/New-home-sales-inch-up-to-a-six-year-high-in-September [10/24/14]
2 - 247wallst.com/economy/2014/10/22/september-cpi-avoids-deflation-fears/ [10/22/14]
3 - conference-board.org/data/bcicountry.cfm?cid=1 [10/23/14]
4 - markets.on.nytimes.com/research/markets/usmarkets/usmarkets.asp [10/24/14]
5 - markets.wsj.com/us [10/24/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F24%2F13&x=0&y=0 [10/24/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F24%2F13&x=0&y=0 [10/24/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F24%2F13&x=0&y=0 [10/24/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F23%2F09&x=0&y=0 [10/24/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F23%2F09&x=0&y=0 [10/24/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F23%2F09&x=0&y=0 [10/24/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F25%2F04&x=0&y=0 [10/24/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F25%2F04&x=0&y=0 [10/24/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F25%2F04&x=0&y=0 [10/24/14]
7 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [10/24/14]
8 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [10/24/14]

 


Although the specters of disease and terror are scaring us this Halloween season, it is the ghosts of deflation that frighten the Federal Reserve and other central banks the most.

The “Ghost of Deflation Past” wears a ragged costume of an unemployed American living in a makeshift shanty-town dwelling. This was what haunted Ben Bernanke, who after his research of the Great Depression, advocated raining down US Dollars on this ghost from Fed helicopters.

The “Ghost of Deflation Present” wears the costume of a Japanese samurai, cutting down growth wherever it has raised its head for the last 15 years. Like Godzilla from the atomic bomb, this monster came from an unholy alliance of entrenched business interests and government.

The “Ghost of Deflation Future” wears a French beret, Spanish cape, and Italian boots—very scary indeed!

Ultimately, if massive printings of their fiat currencies fail, governments will be forced to turn towards pegging gold at high prices to spur inflation and drive these ghosts away.


Over the last week, the gold spot price declined 0.59% despite that the US Dollar strengthened. The Gold Bullion Strategy Fund (QGLDX) lost 0.65% for the week. The difference was partly due to QGLDX’s early close at 1:30PM (rather than 4:00PM). The prices of short-duration fixed income ETF holdings were slightly lower, on average, over last week, while the COMEX gold futures contracts dropped 0.58%.

 

 

Total Return

Fund (Inception) Symbol Qtr Ending 9/30/14 YTD Ending 9/30/14 1 Year Ending 9/30/14 Since Inception Ending (9/30/14)* Annual Expense Ratio
The Gold Bullion Strategy Fund (7/5/13) QGLDX (9.06%) (0.58%) (10.13%) (2.91%) 1.66%
Quantified Managed Bond Fund (8/9/13) QBDSX (1.66%)
2.02%
2.07% 1.63% 1.68%
Quantified All-Cap Equity Fund (8/9/13) QACFX (4.12%)
(4.49%)
1.18% (0.03%) 1.51%
Quantified Market Leaders Fund (8/9/13) QMLFX (6.04%)
(0.86%) 6.08% 4.75% 1.71%
Quantified Alternative Investment Fund (8/9/13) QALTX (2.20%) 0.85% 8.49% 8.05% 2.20%

*Annualized

As of the most recent prospectus, the expense ratios for the Gold Bullion Strategy Fund are as follows: Investors’ Class (No Load), 1.66%; Class A, 1.66%; Class C, 2.41%. The maximum sales charge imposed on Class A share purchases (as percentage of offering price) is 5.75%. An additional 2% redemption fee applies to all share classes, including Investors’ Class, when shares are redeemed within 7 days of purchase.

The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. For current performance, please call 1-855-647-8268.

Risks associated with the Quantified Funds include active frequent trading risk, aggressive investment techniques, small and mid-cap companies risk, counter party risk, depository receipt risk, derivatives risk, equity securities risk, foreign securities risk, holding cash risk, limited history of operations risk, lower quality debt securities risk, non-diversification risk, investing in other investment companies (including ETFs) risk, shorting risk, asset backed securities risk, commodity risk, credit risk, interest risk, prepayment risk, and mortgage backed securities risk. For detailed information relating to these risks, please see prospectus. 

The principal risks of investing in The Gold Bullion Strategy Fund are Risks of the Sub-advisor’s Investment Strategy, Risks of Aggressive Investment Techniques, High Portfolio Turnover, Risk of Investing in Derivatives, Risks of Investing in ETFs, Risks of Investing in Other Investment Companies, Leverage Risk, Taxation Risk, Concentration Risk, Gold Risk, Wholly-owned Corporation Risk, Risk of Non-Diversification and interest rate risk. “Gold Risk” includes volatility, price fluctuations over short periods, risks associated with global monetary, economic, social and political conditions and developments, currency devaluation and revaluation and restrictions, trading and transactional restrictions. 

An investor should consider the investment objectives, risks, charges and expenses of each Quantified Fund and The Gold Bullion Strategy Fund before investing. This and other information can be found in the Funds’ prospectus, which can be obtained by calling 1-855-647-8268. The prospectus should be read carefully prior to investing in The Quantified Funds or The Gold Bullion Strategy Fund. 


There is no guarantee that any of the Quantified Funds or The Gold Bullion Strategy Fund will achieve their investment objectives.

 

For more information on the Quantified Funds, sub-advised by Flexible Plan Investments, Ltd., pleasereview the prospectus and fund performance.

Current or historical holdings of the funds
 

 

 

 


US equity markets were up last week. The NASDAQ Composite gained 5.29%, the S&P 500 was up 4.12%, and the Dow Jones Industrial Average recorded a weekly gain of 2.59%. All ten of the S&P industrial sectors were up for the week. The move upward was led by Health Care (6.57%), Information Technology (4.68%), Industrials (4.29%), and Consumer Discretionary (3.79%). Except for the Quantified Managed Bond Fund (QBDSX, -0.39%), all of the Quantified Funds were up. The largest gain was in the Quantified Market Leaders Fund (QMLFX, 4.88%), followed by the Quantified All-Cap Equity Fund (QACFX, 2.42%), and then the Quantified Alternative Investment Fund (QALTX, 1.74%).

The Quantified All-Cap Equity Fund (QACFX) made some changes last week, shifting its weightings in four leading stock baskets, which were over 65% of the portfolio’s composition: “Ultimate Dividend Portfolio” (40%), “All-Cap Quality Acceleration” (11%), “All-Cap Upside” (11%), and “All-Cap Earnings” (4%). Among domestic sector distributions, Consumer Staples and Financials led with portfolio allocations of 11% and 27%, respectively. The largest stock holdings in the All-Cap portfolio were in the common stock of McDonald’s Corp. (MCD, 4.00%) and the common stock of 3M Company (MMM, 4.00%).

The cash level within the All-Cap Fund decreased to 10.88% last week. The Fund’s daily pattern trading of S&P 500 futures started the week 20% long, changed to 8% short on Tuesday’s close, and neutral on Wednesday’s close to begin this week. Our TVA-based futures hedge started the week 10% short, changed to 5% short on Monday’s close, and neutral on Tuesday’s close to begin this week.

The Market Environment Indicator (MEI) remained bullish last week. On Friday, equity asset class allocations changed to the following: Large-Cap Growth (19.2%), Large-Cap Value (14.4%), Mid-Cap Growth (9.6%), and Mid-Cap Value (4.8%). Total sector ETF weightings were increased from 14.6% the prior week to 27.6% at the end of last week. Distribution of sector holdings and weights were as follows: Electronics (0.35%), Health Care (13%), Biotech (13%), and Technology (1.25%). As a result, the Fund held 24% of the portfolio as cash into this week. The individual ETF positions with the leading portfolio weightings were the Ultra Mid-Cap 400 ProShares ETF (MVV, 9.0%), the Ultra Dow30 ProShares ETF (DDM, 7.0%), the ProShares Ultra Nasdaq Biotechnology ETF (BIB, 6.5%), and the Ultra QQQ ProShares ETF (QLD, 6.0%).

Within the Quantified Alternative Investment Fund (QALTX), the Long/Short Market Neutral Alternative sub-portfolio decreased allocations to the Hundredfold Select Alternative Svc Fund (SFHYX, 1.70%) and to the Driehaus Active Income Fund (LCMAX, 1.40%).

Among the largest ETF positions there were a few changes: allocations to the Market Vectors Nuclear ETF (NLR, 4.3%) and the SPDR S&P Pharmaceuticals ETF (XPH, 3.0%) increased, while allocations to the Schwab Dow Jones US Select REIT ETF (SCHH, 1.8%) and the DJ Wilshire REIT ETF (RWR, 1.7%) decreased.

The cash level within the Fund decreased to 27.5% last week. The daily pattern trading of S&P 500 Index futures with 10% fund capital allocation started the week 10% long, changed to 4% short on Tuesday’s close, and neutral on Wednesday’s close to begin this week. The 7.5% capital allocation of the volatility-based systematic trading of NASDAQ 100 Index futures started the week 4.5% long, changed to 3% long on Tuesday’s close, 1.5% long on Wednesday’s close, and 3% long on Thursday’s close to begin this week.

The Quantified Managed Bond Fund’s (QBDSX) two leading broad-bond index ETF holdings, the iShares S&P National Muni Bond ETF (MUB, -0.48%) and the Peritus High Yield Bond ETF (HYLD, 0.66%), were mixed for the week.

The 10-year US Treasury yield increased to 2.27% for the week. The Fund increased weightings in the iShares S&P National Muni Bond ETF (MUB) from 10.98% to 13.26% and in the Peritus High Yield Bond ETF (HYLD) from 5.26% to 9.86%, while decreasing allocation in the SPDR Nuveen Barclay Capital Short-Term Municipal Bond ETF (SHM) from 1.50% to 0.30%. Cash decreased to 5.14%.

The 10% active portfolio exposure to 30-Year US Treasury Bond futures in the Fund started the week long and remained long into Friday’s close to begin this week. The position lost around 1.32%.

 

 

Total Return

Fund (Inception) Symbol Qtr Ending 9/30/14 YTD Ending 9/30/14 1 Year Ending 9/30/14 Since Inception Ending (9/30/14)* Annual Expense Ratio
The Gold Bullion Strategy Fund (7/5/13) QGLDX (9.06%) (0.58%) (10.13%) (2.91%) 1.66%
Quantified Managed Bond Fund (8/9/13) QBDSX (1.66%)
2.02%
2.07% 1.63% 1.68%
Quantified All-Cap Equity Fund (8/9/13) QACFX (4.12%)
(4.49%)
1.18% (0.03%) 1.51%
Quantified Market Leaders Fund (8/9/13) QMLFX (6.04%)
(0.86%) 6.08% 4.75% 1.71%
Quantified Alternative Investment Fund (8/9/13) QALTX (2.20%) 0.85% 8.49% 8.05% 2.20%

*Annualized

As of the most recent prospectus, the expense ratios for the Gold Bullion Strategy Fund are as follows: Investors’ Class (No Load), 1.66%; Class A, 1.66%; Class C, 2.41%. The maximum sales charge imposed on Class A share purchases (as percentage of offering price) is 5.75%. An additional 2% redemption fee applies to all share classes, including Investors’ Class, when shares are redeemed within 7 days of purchase.

The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. For current performance, please call 1-855-647-8268.

Risks associated with the Quantified Funds include active frequent trading risk, aggressive investment techniques, small and mid-cap companies risk, counter party risk, depository receipt risk, derivatives risk, equity securities risk, foreign securities risk, holding cash risk, limited history of operations risk, lower quality debt securities risk, non-diversification risk, investing in other investment companies (including ETFs) risk, shorting risk, asset backed securities risk, commodity risk, credit risk, interest risk, prepayment risk, and mortgage backed securities risk. For detailed information relating to these risks, please see prospectus. 

The principal risks of investing in The Gold Bullion Strategy Fund are Risks of the Sub-advisor’s Investment Strategy, Risks of Aggressive Investment Techniques, High Portfolio Turnover, Risk of Investing in Derivatives, Risks of Investing in ETFs, Risks of Investing in Other Investment Companies, Leverage Risk, Taxation Risk, Concentration Risk, Gold Risk, Wholly-owned Corporation Risk, Risk of Non-Diversification and interest rate risk. “Gold Risk” includes volatility, price fluctuations over short periods, risks associated with global monetary, economic, social and political conditions and developments, currency devaluation and revaluation and restrictions, trading and transactional restrictions. 

An investor should consider the investment objectives, risks, charges and expenses of each Quantified Fund and The Gold Bullion Strategy Fund before investing. This and other information can be found in the Funds’ prospectus, which can be obtained by calling 1-855-647-8268. The prospectus should be read carefully prior to investing in The Quantified Funds or The Gold Bullion Strategy Fund. 


There is no guarantee that any of the Quantified Funds or The Gold Bullion Strategy Fund will achieve their investment objectives.

 

For more information on the Quantified Funds, sub-advised by Flexible Plan Investments, Ltd., pleasereview the prospectus and fund performance.

Current or historical holdings of the funds
 

 


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Disclosures

To our readers
Everything in the newsletter pertains to strategies available on our Strategic Solutions platform at Trust Company of America. The same strategies are implemented on many other products: mutual funds, variable annuity, variable life and retirement platforms. Therefore, we expect the strategic discussion may be of interest to you. Note, however, that since these products have their own subaccount and fund universes and different internal expenses, the results and trading of the same strategy on other platforms may differ substantially from those described herein.

Managed Retirement Plan Participants:
Most of you are managed using Lifetime Evolution and our sub-advised funds, so those topics will be most applicable to your account. But, more and more of you are in plans using Market Leaders. If so, that newsletter section may interest you