Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

4th Quarter | 2023

Quarterly recap



Current market environment performance of dynamic, risk-managed investment solutions.

By Will Hubbard

December is a great month. It offers a time for both personal and professional reflection on the past year.

Personally, I’ve learned a few more things about what it means to be a “girl dad” and a husband. First, the old adage about kids always being sick really is true—and their sneezes have a mysterious way of finding my water glass, which means I’m always sick. Second, Taylor Swift’s song “Shake It Off” works wonders in diffusing my 3-year-old’s tantrums. While I wouldn’t call myself a “Swiftie,” I’ll admit to singing and dancing along. Lastly, my wife Abby is the perfect person to laugh my way through raising our two girls.

Professionally, I’m starting to digest what happened in the market and economy this year and think about the emotional and psychological effects on investors. As the holiday season approaches, investors’ thoughts naturally pivot toward the upcoming new year, placing their focus firmly on the future rather than the past. While I agree that it’s important to look ahead, understanding our past is crucial for making informed decisions for the future. It’s like investment professionals say all the time, “The past doesn’t repeat itself, but it often rhymes.”

That focus on the future is also prevalent in the minds of market experts this time of year as they start releasing their annual outlooks. Forecasting is difficult, regardless of the profession. I empathize with meteorologists—the unsung heroes of forecasting—and hope they know that investment professionals understand what they go through every day.

With that in mind, let’s take a look at last year’s market forecasts to see what the experts thought, check in with the passive indexing crowd, and see if the tides are turning in favor of active investment managers.

A “blank space” in forecasts: Predicting the future is hard for experts—and even harder for investors

Let’s rewind to the end of 2022: Stocks and bonds were suffering double-digit declines, with long-duration Treasurys underperforming equity markets. On top of that, inflation was stubbornly high, prompting continuous interest-rate hikes by the Federal Reserve amid widespread concerns of a “hard landing.”

On December 2, 2022, the S&P 500 closed at 4,071. At that time, forecasts for the year-end 2023 index value were already coming in. Among the reviewed firms, predictions ranged from 3,675 to 4,500, with an average of 4,045 and a median of 4,000. This median projection suggested that 50% of firms anticipated a decline in the S&P 500 over the course of 2023.

In hindsight, it turns out that all of the firms’ year-end forecasts were too conservative compared to the actual performance of the S&P 500 Index as of last Friday’s (December 8) close. Some underestimated the return of the index by more than 20%. The closest estimate came from Deutsche Bank, which estimated a year-end target of 4,500.

Moving to 2024, it seems many of these investment teams are taking a cue from Taylor Swift, choosing to “shake off” past inaccuracies. While not all firms have released their predictions for the year, those that have are showing a more optimistic outlook. On average, they anticipate a 5.3% increase from the current index value for this year, with the median projection sitting at a 4.1% rise.

I’m not highlighting these forecast figures because I expect all of these firms to be correct. I simply want to acknowledge that forecasting is hard—really, really hard. Not only that, but you have to remember that these teams are made up of people, each wrestling with the same concerns as the rest of us.

This is why quantitative managers like Flexible Plan Investments (FPI) rely on historical data to help them create a bias toward more accurate portfolio allocations. It’s a strategy akin to consistently hitting singles in baseball—a steady, methodical approach that ultimately leads to success.

“Ready for it?”: Preparing your portfolio for 2024

The goal for active managers is to outperform passive allocation strategies, like those offered by robo-advisers such as Betterment. According to Betterment, based on hypothetical historical allocations, a portfolio set to a 100% aggressive allocation would have yielded a 7.3% return after fees from November 1, 2022, to October 31, 2023. However, what it doesn’t show is that the S&P 500 Index returned 10.1% over the same period.

For active managers, the goal is to leverage a variety of investment methodologies and asset classes to produce more consistent returns over time. FPI’s dynamic turnkey solutions embody this approach. These solutions harness data-driven insights, enabling them to capitalize on strategies designed to work in various market conditions. Crucially, this approach avoids relying on emotions. Instead, these solutions were built on a foundation of informed, strategic decision-making grounded in robust data analysis.

One notable example of FPI's effective solutions is the QFC Multi-Strategy Explore: Special Equity strategy, which achieved a 13.9% return in the same time frame as the Betterment aggressive portfolio model. This return includes management fees but excludes investment adviser representative fees.

While this is just one of FPI’s many investment offerings, it exemplifies the impact of a dynamic, risk-managed approach to investing. The strategy’s success in this instance demonstrates how carefully adjusting the portfolio in response to changes in the market can yield the kind of steady, incremental gains—those “single base hits”—that are essential for accumulating wealth and safeguarding against significant market downturns.

The performance of robo-advisers, particularly following the market’s rally from the lows of October 2022, seems to have left investors yearning for more. With the varied economic forecasts for 2024, it’s understandable why investors might be reevaluating their strategies for the new year. The long-standing dominance of large-cap market-weighted indexes won't last forever. When that era ends, having a truly diversified portfolio will become even more crucial. This includes not just a diversity of asset classes or categories but also embracing different investment methodologies such as momentum, trend following, and mean reversion. This can help a portfolio manage the risk and capitalize on the opportunities present in all market environments.

Like I said earlier, I might not be a huge Taylor fan, but her lyrics resonate: “It’s like I got this music in my mind, saying it’s gonna be alright.” I’m optimistic about the outlook for active management and for 2024.

Comments are closed.