Tactical allocation funds — which actively shift their portfolios to and from stocks and bonds, often with the intent to beat the market — deservedly get a bad rap. Over time, every tactical allocation fund of funds has underperformed a 60-40 mix of U.S. stocks and bonds and virtually all individual funds do too.
The Adaptive Alpha Opportunities ETF (AGOX) is an outlier. The fund by Alpharetta, Georgia-based Adaptive ETFs, has a total annualized return of 10.32 percent over the past 10 years, the best performance out of more than 100 Morningstar-rated tactical allocation funds. It’s also the only fund in its category that’s beaten the 8.9 percent annualized return of a 60-40 mix of U.S. stocks and bonds over the past decade.
The ETF strategy started as a separately managed account years ago for a client of Bluestone Capital Management, the manager and subadvisor to the ETF. Its success during and after the financial crisis are what moved the company to create the new exchange-traded fund in 2012, Greg Rutherford, CEO and President of Adaptive ETFs, said.
The “global-go-anywhere” Adaptive Alpha Opportunities ETF examines securities on a daily basis and identifies where it can capture outperformance, then models its signals over varying time periods to determine what asset classes, sectors, sub-sectors and individual holdings appear to be providing the most favorable up-down capture, Rutherford said.
It’s a small ETF compared to some others in the category, with $212 million in assets under management as of July 5. But annualized returns over the past 10 years for the Adaptive Alpha Opportunities ETF are far better than those for the $13.5 billion PIMCO All Asset tactical allocation mutual fund (4.35 percent), the $4.12 billion Goldman Sachs Tactical Tilt Overlay Fund Institutional (5.97 percent), and the $3.54 billion Columbia Adaptive Risk Allocation Institutional (5.22 percent) managed by Columbia Threadneedle.
By the same 10-year, annualized measurements, only two other funds returned better than 8 percent and five better than 7 percent. More than two dozen of the funds with at least a 10-year track record have an annualized return of less than 5 percent, according to Morningstar Direct.
Morningstar defines tactical allocation funds as ones that frequently make material shifts between stock and bond sectors. To qualify for the category, a fund must have a minimum exposure of 10 percent to bonds and 20 percent to equities, and demonstrate abrupt or gradual changes to sector or regional allocations.
But like much of active investments, the outperformance of the Adaptive Alpha Opportunities ETF could be as much about luck as skill, according to Daniel Sotiroff, a senior analyst of passive strategies at Morningstar. Unlike some other tactical allocation funds over the past 10 years, the ETF has mostly held stocks, which have performed much better than bonds and cash over that period.
“It looks like there’s more luck than skill at work over the past ten years. A fair amount of its outperformance occurred over an 11-month period from April 2020 through February 2021. The fund was holding ETFs that were overweight the best performing stocks and sectors over that period — the same stocks that fueled the market’s work-from-home rally. For example, it had an 8 percent stake in the Amplify Online Retail ETF (IBUY) at the end of March 2020, which returned 215 percent over those 11 months,” Sotiroff said.
Adaptive ETFs said that in early 2020, there was “no question” what sectors and sub-sectors, such as technology and healthcare, were providing better performance and the Adaptive Alpha Opportunities leaned into those trends and performed well. But the ETF wasn’t stagnant all of that year. By late 2020, the portfolio was shifting toward “something that looked like a Biden friendly portfolio, where infrastructure holdings were leading,” Rutherford explained.
“AGOX is a terrific strategy with a great process. I would invite the Morningstar analyst to get on the phone with me and the portfolio manager, Brian Shevland at Bluestone Capital, to learn more,” Rutherford said.
If the ETF continues to allocate so much to stocks, then Sotiroff said he expects it will continue to outperform. “But I’m cautious that it’s going to be able to repeat the success it had over those 11 months in 2020 and early 2021,” the analyst said.
Rutherford thinks the ETF can continue its standout performance and noted that it has a five-star rating by Morningstar over three, five and 10 years. “It’s not a one-hit wonder, as the Morningstar analyst suggested,” Rutherford said.
Adaptive ETFs has two other tactical funds tracked by Morningstar and neither has performed nearly as well as the Adaptive Alpha Opportunities ETF. Its RH Tactical Outlook ETF and RH Tactical Rotation ETF have annualized returns of 5.08 percent and 4.96 percent over the past 10 years, respectively.
