Stadion Core Advantage Portfolio
US > Flexible >
Jan 11, 2013
Feb 28, 2013
Q: What is history of the fund and the company?
A : The Stadion Core Advantage Portfolio was launched on September 15, 2006.
Stadion Money Management started in 1993 as a registered investment advisor managing assets for high net worth clients. We continue to do so today, but now we also manage a growing group of funds designed to participate in market upside and limit the downside.
When it became evident to us that our asset preservation philosophy and base technical model were well suited to the needs of retirement plans, we entered the 401(k) market, where we aligned with key partners. We initially structured this strategy for the retirement market, coupling constant equity exposure with the flexibility to significantly increase or decrease risk depending on market conditions.
The Core Advantage portfolio is very flexible, with both Core and Satellite components allowing full tactical flexibility across different asset classes rather than limiting us to a particular asset class or style of investing.
Q: What key beliefs drive your investment philosophy?
A : Stadion’s investment philosophy is built on managing risk. We invest in equities when our models indicate such but when our models tell us market risk levels are increasing, we move to defensive allocations. Our philosophy is founded on avoiding market downturns and seeking participation in market upticks.
Q: How do you allocate your assets?
A : The overall portfolio allocation is designed to manage for risk. Our asset allocation process is based on market technicals as interpreted by our proprietary models, which concentrate on a macro view of the market’s overall health.
The satellite component of our Core Advantage portfolio uses the same tactical and technical model to allocate assets. When our model indicates we should be invested, we seek beta by purchasing securities that we expect will capitalize on market momentum. When we are defensive, we seek investments that will reduce beta and lower portfolio risk.
The core portion of Core Advantage has an added technical measure designed to identify cyclical bull and bear markets. We call that our long-term measure, and when it sends us a positive signal (i.e. cyclical bull market) we invest more aggressively in equities. Our investments in equities are going to be tactically adjusted within the core portfolio based on our view of market momentum because we want to stay invested in momentum leaders.
Conversely, when our long term cyclical measure signals that we might be entering a cyclical bear market environment, we tactically move the core portion of the portfolio to more defensive holdings. This may result in the portfolio holding equity ETFs that focus on sectors like consumer staples and healthcare, or other traditionally less volatile holdings, including fixed income securities.
Essentially, what we are describing is a portfolio in two pieces – the core and the satellite. Over time, the satellite piece is very tactical and the core piece is less tactical with more market exposure.
Q: How do you go about doing the research?
A : We do all of the research internally and over the years we have developed proprietary metrics that we track. Using Exchange Traded Funds (“ETFs”) as our primary investment vehicle, we presently have a universe of more than 1,000 ETFs that we can invest in.
We run these ETFs through our selection model and rank them on several measures – trend measure; a price momentum measure; relative strength measure and price performance measure; risk adjusted return measures – all of them dictating the ETFs we select for investment.
When our overall technical model looks positive, we seek out securities that are likely to benefit in the current market conditions and we begin building the portfolio from the ground up.
In the satellite portion of our portfolio, we are looking to identify and benefit from areas of the market demonstrating momentum characteristics. This can result in the portfolio investing across different sectors, countries, and/or in non-equity based exchange-traded funds like real estate or commodity related ETFs.
In our view, the majority of exchange-traded funds that are designed to track indices do quite well in meeting their objectives. Because of the complexities associated with the rebalancing of ETF portfolios we typically eliminate levered and inverse ETFs from our search process.
In summary, we conduct research based on price and market indicators that we analyze on a daily basis.
Q: Do you have exposure to international markets?
A : We do. This fund allows us to expand into international markets via U.S. exchange-traded funds that track international markets like China, Brazil, Latin America, and other emerging or developed market countries. We generally have about 30% to 35% of the fund’s assets allocated to international markets.
However, this does not mean we will force assets in this direction. If international markets are not doing well, we can avoid them, creating a more domestically weighted portfolio.
Q: Do you also take advantage of currency exchange-traded funds?
A : We certainly factor in some of the currency effects into what we do. For instance, there is a currency hedged Japan ETF in the fund as well as a non-hedged Japan ETF, so we choose between the two based on what their currency is doing.
Sometimes we want the currency play because it is adding value. Yet, we do not typically invest too much in currency exchange-traded funds, although our fund prospectus allows us the flexibility to invest broadly from non-correlated assets to equities. When our models are signaling to us to invest in equity non-correlated assets, we generally focus on ETFs that give us that select exposure.
When we go defensive in the core portfolio, we may invest in non-correlated exchange-traded funds or non-equity correlated exchange-traded funds.
Q: Do you follow the trend indicators?
A : We want to stay in trends as long as the trend will let us. When the trend starts to reverse or show signs of weakening, we generally try to trade up into a market segment that is beginning to trend upward. Our goal is to be continually trading into better performing opportunities.
Q: How do you analyze trends?
A : First, we look at market trends over a number of different time periods. Our shorter term trend measures tell us what is going on now, which gives us an idea of potential inflection points and helps us in spotting the rollover of a trend.
If our intermediate and longer term trends are still positive but the short-term trend has started to deteriorate, we know this trend could be starting to roll over and could be the beginning of that inflection point.
The same applies in the other direction too. If our intermediate and long-term trends have been negative but the short-term trend starts to improve, these indicators prompt us that this market may be at a near bottom and may already be climbing with the short-term trend improving. In a nutshell, we are constantly monitoring these trend measures to better identify any inflection points.
From an individual security selection standpoint, we generally buy ETFs that represent the improving trend.
On the flip side, when we start to see that trend measure peak and start to tick back down, we watch it carefully, keeping our eye on whether this down-tick is actually a rollover or just a temporary pullback that may resume its longer-term up trend.
In addition to spotting the trends themselves, we look at the rate of change of that trend. For example, if an uptrend continues but the rate of ascension slows, we consider this decline in upward progression as a negative development and we may begin exiting the investment. While there is no guarantee that it is going to end, it alerts us to the possibility.
If the decline in the rate of change continues, we are likely to start seeing some of our other metrics change as well, including the possibility that other up trending exchange-traded funds may leapfrog one of our holdings in terms of our rankings system. This may present us with an opportunity for a trade up.
Q: How do you build your portfolio?
A : Generally, when we are fully invested we have somewhere between 10 and 15 exchange-traded funds in the portfolio. In times when our core component is fully invested, the fund will likely hold ETFs representing a broad range of equity classes, including m international ETFs to domestic ETFs in large and small cap holdings.
But within the satellite component of the portfolio, we look for the momentum leaders with our security selection and we might go sector or country specific.
We do not go more than about 15% in any one sector, generally keeping our exposure between 10% and 15% in a specific sector, with no more than 30% in any one exchange-traded fund.
Our non-correlated assets can be as much as about 40% to 50% of the portfolio at times. But generally speaking, this is a fund focused on equity exposure, so we are predominantly invested in equities most of the time.
Our portfolio turnover is generally between 300% and 400%, which means we turn the portfolio somewhere between three or four times a year on average. This reflects our goal of following the opportunities while avoiding what we believe are unnecessary risks.
Q: How do you define risks? What do you do to mitigate them?
A : We put great emphasis on our attempts to avoid damages often inflicted by downside market conditions. The risk measures that we have put in place, both in our trade up strategy and in our sell discipline, are intended to protect the fund against major drawdowns. We seek to limit drawdowns in the portfolio so that investors can avoid any deep declines that might weaken confidence and damage long-term results.
All in all, we define risk as loss of capital. It is important to note that risk and volatility are often confused. High volatility is often feared for its potential to result in portfolio losses and for many investors is deemed something to avoid. However, in our view not all volatility is necessarily bad and we actually believe upside volatility is actually beneficial. At Stadion, we define risk as what we strive to avoid – downside volatility and loss of capital. By constantly seeking ways to reduce portfolio risk in bad times, we believe that over time investors will be able to stay the course and achieve their long-term investment goals.