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Lee Adaptive Strategies

Monthly Commentary                                                                         

March 2021

Broadly speaking, it was a good month and a good quarter. The S&P 500 and MSCI AC World were up respectively 4.38% and 2.72% total return for the month of March. For the first quarter of 2021 they gained 6.18% and 4.68%. Often when we recite solid but not spectacular returns such as these we provide a caveat that the quiet total result hides more exciting details. Not in this case.

There was much discussion of a rotation within the market, from formerly favored names and sectors to formerly unfavored ones. And this was more than an idle rumor. It did happen, but it was not particularly extreme, nor is this sort of reversion to the mean, where underperformers and outperformers switch places, anything out of the ordinary.

The table above shows the first quarter 2021 and full 2020 total returns for the eleven State Street sector ETFs, as well as the iShares small cap (Russell 2000) ETF. Energy was by far the best performer in the first quarter, just as it was by far the worst performer in 2020. Indeed, it is hard not to mention that even though it was up more than 30% over the past three months, it is still down -11.71% since the end of 2019, a period during which the S&P 500 gained 25.71%.

Technology is, as advertised, near the bottom of the table, at up a mere 2.36% for the quarter. Then again, it did go up. Considering the is-that-a-typo appreciation it enjoyed in 2020, that it added further to its gains is somewhat remarkable, even if it did lose a bit of ground relative to the broader market.

But to many observers, that technology was a laggard in a period of increasing economic optimism is confusing, if not alarming. Generally speaking, as you come out of a recession, or anticipate coming out of a recession in the near future, economically sensitive sectors such as technology, consumer discretionary, and communication services would be expected to do best, just as those same sectors would have been expected to suffer during the recession. This cycle seems backward.

Economic crises often inspire a flight to safety in the stock market, meaning that investors typically shift their equity holdings in favor of reliable and less economically exposed names. Historically this has led investors to such places as health care, staples, and utilities, none of which particularly prospered in 2020. (And, somewhat unfairly, all did poorly this past quarter.)

The safe destination for investors in 2020 was not places like Proctor and Gamble (which lagged the S&P for 2020 at up 13.90%) or Pfizer (up 3.27%), but Amazon (up 76.26%) and Tesla (up 743.44%). We think that is not quite as crazy as it might appear to be at first. The idiosyncrasy of this recession was that it was widely understood to be temporary. With hindsight, all recessions are temporary, but in the past that fact has not been so obvious while they were occurring.

If you expect a lousy economy for the next 12-24 months, but then a return to exuberant prosperity, where would you put your money? A company that makes laundry detergent, or better yet toilet paper, might be a good choice. But how about a company that is on such a strong and long-term growth trajectory that the next two years of results are immaterial to its valuation? The Tesla story is not about 2020, it is about 2030 and 2040, by which time we will each own at least four of their cars.

Of course, the more significant rotation over the past year has not been within the equity markets but into and out of them. Running scared to safer stocks is not nearly as reassuring as running out of the stock market altogether. And as notable as Tesla is, the big picture story of 2020 is a period of panic in February and March followed by a long and sustained market rise as that panic receded. Interestingly, the rally continues today, long after the S&P surpassed its pre-panic levels.

The obvious destination for money leaving equity was fixed income, and combined with unprecedented purchases by central banks, at the height of the crisis bond prices soared. Some of the more recent appreciation in the stock market has likely been due to an unwinding of this flight to fixed income, but the Fed continues to heroically support bond prices and interest rates are still near historic lows. We will not reshare our inflation anxieties this month, but suffice it to say that Treasures paying negative real rates are likely to see downward pricing pressure.

Does a worsening of the outlook for bonds imply an improving outlook for stocks, as investors shift from one to the other? That may be the recent experience, but it is worth remembering that returns are not always driven by rotation, that the returns from the equity and fixed income markets are positively correlated, and that when one goes up or down the other usually does too.

The Market Sentiment Framework

We use our Market Sentiment Framework to adapt the mechanics and weightings of our full quantitative models to changing market conditions.

The Sentiment Framework gauges the current state of market psychology on two dimensions. Efficiency measures the crowdedness of the market, the volume of participants seeking investment opportunities. Lower levels of efficiency imply more market mispricing. Optimism measures the willingness of investors to take on risk in exchange for distant anduncertain rewards. Higher levels of optimism imply a better outlook for risky asset classes.

Both measures modestly rose in March.

Optimism began the month at 0.55 and increased to 0.67. Although a small increment and still at a low level in absolute terms, the multi-month positive trend continues to suggest a warming in investor outlook.

Efficiency also gained, beginning March at 0.30 and ending at 0.71. Efficiency continues to be comparatively low in absolute terms, which suggests a market that is still under stress.

Both measures are higher than where they were pre-COVID. The current positioning of the Sentiment Framework implies a market that is functioning less than ideally, with marginally optimistic but fearful investors. This would imply a positive but challenged outlook for the market as a whole, but possibly an opening for value strategies to find opportunities.

Performance and Portfolio Positioning as of March 31, 2021:

Lee Adaptive Large Cap Sector (LALCS)

For the month of March 2021, the LALCS composite, on a net of fee basis, was up an estimated +5.15%, ahead of the S&P 500, which was up +4.38% on a total return basis. The three month return for the LALCS composite, on a net of fee basis, was up an estimated +6.35%, ahead of the S&P 500, which was up +6.18% on a total return basis.

The strategy began March invested in 10 sectors, missing only Energy, which it added on the 25^th. It ended the month invested in all sectors.

Lee Adaptive Broad Market Sector (LABMS)

For the month of March 2021, the LABMS composite, on a net of fee basis, was up an estimated +4.64%, ahead of the Russell 3000, which was up +3.59% on a total return basis. The three month return for the LABMS composite, on a net of fee basis, was up an estimated +7.24%, ahead of the Russell 3000, which was up +6.35% on a total return basis.

The strategy began March invested in 11 sectors, missing only Energy, which it added on the 25^th. It ended the month invested in all sectors.

Lee Adaptive China (LACS)

For the month of March 2021, the LACS composite lost -5.04%. This was ahead of the MSCI China Index, which was down -6.29% on a total return net US Dollar basis. The three month return for the LACS composite, on a net of fee basis, was up an estimated +1.73%, ahead of the MSCI China Index, which was down -0.48% on a total return net US Dollar basis.

The portfolio began March fully invested in equity, holding 50% in KBA, the broad market A Shares ETF, 25% KURE, the healthcare ETF, and 25% in OBOR, the One Belt ETF. On March 10^th, it swapped OBOR for KWEB, the internet ETF.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS OR PROFITABILITY.

Definitions:

Lee Adaptive Large Cap Sector Composite (“LALCS Composite”).  A capital weighted performance composite of an investment strategy known as the Lee Adaptive Large Cap Sector strategy (the “LALCS Strategy”) that holds some combination of the U.S. large cap sector ETFs and/or cash, as determined by a proprietary quantitative model.   The LALCS Composite performance is based on actual trading profits/losses/expenses net of a management fee of 0.50%.  Actual expenses of operating the LALCS Strategy may vary, depending on the investment structure in which the Strategy is used, which could result in lower returns than those stated for the LALCS Composite. Such expenses may detract materially from the performance of the LALCS Strategy and, consequently, the results shown above may not be fully indicative of the actual performance results of the LALCS Strategy.

THE LALCS COMPOSITE IS BEING SHOWN FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE RELIED UPON.  NO REPRESENTATION OR ASSURANCE IS MADE THAT ANY INVESTOR WILL OR IS LIKELY TO ACHIEVE RESULTS COMPARABLE TO THOSE SHOWN ABOVE OR WILL MAKE ANY PROFIT OR WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES.

PAST PERFORMANCE OF THE STRATEGY AND THE LALCS COMPOSITE ARE NOT INDICATIVE, OR A GUARANTEE, OF FUTURE RESULTS.  IT SHOULD NOT BE EXPECTED THAT THE LALCS STRATEGY’S ACTUAL RETURNS WILL REPLICATE THE RETURNS SHOWN IN THE PERFORMANCE MODEL.

Lee Adaptive Broad Market Composite (“LABMS Composite”).  A capital weighted performance composite of an investment strategy known as the Lee Adaptive Broad Market Strategy (the “LABMS Strategy”) that holds some combination of the U.S. large cap sector ETFs, a small cap ETF and/or cash, as determined by a proprietary quantitative model.   The LABMS Composite performance is based on actual trading profits/losses/expenses net of a management fee of 0.50%.  Actual expenses of operating the LABMS Strategy may vary, depending on the investment structure in which the Strategy is used, which could result in lower returns than those stated for the LAUSE Composite. Such expenses may detract materially from the performance of the LABMS Strategy and, consequently, the results shown above may not be fully indicative of the actual performance results of the LABMS Strategy.

THE LABMS COMPOSITE IS BEING SHOWN FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE RELIED UPON.  NO REPRESENTATION OR ASSURANCE IS MADE THAT ANY INVESTOR WILL OR IS LIKELY TO ACHIEVE RESULTS COMPARABLE TO THOSE SHOWN ABOVE OR WILL MAKE ANY PROFIT OR WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES.

PAST PERFORMANCE OF THE STRATEGY AND THE LABMS COMPOSITE ARE NOT INDICATIVE, OR A GUARANTEE, OF FUTURE RESULTS.  IT SHOULD NOT BE EXPECTED THAT THE LABMS STRATEGY’S ACTUAL RETURNS WILL REPLICATE THE RETURNS SHOWN IN THE PERFORMANCE MODEL.

Lee Adaptive Global Equity (“LAGES Composite”).  A capital weighted performance composite of the of an investment strategy known as the Lee Adaptive Global Equity strategy (the “LAGES Strategy”).  The LAGES Composite performance is based on actual trading profits/losses/expenses net of a management fee of 0.50%.  Actual expenses of operating the LAGES Strategy may vary, depending on the investment structure in which the LAGES Strategy is used, which could result in lower returns than those stated for the LAGES Composite. Such expenses may detract materially from the performance of the LAGES Strategy and, consequently, the results shown above may not be fully indicative of the actual performance results of the LAGES Strategy.

THE LAGES COMPOSITE IS BEING SHOWN FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE RELIED UPON.  NO REPRESENTATION OR ASSURANCE IS MADE THAT ANY INVESTOR WILL OR IS LIKELY TO ACHIEVE RESULTS COMPARABLE TO THOSE SHOWN ABOVE OR WILL MAKE ANY PROFIT OR WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES.

PAST PERFORMANCE OF THE LAGES STRATEGY AND THE LAGES COMPOSITE ARE NOT INDICATIVE, OR A GUARANTEE, OF FUTURE RESULTS.  IT SHOULD NOT BE EXPECTED THAT THE LAGES STRATEGY’S ACTUAL RETURNS WILL REPLICATE THE RETURNS SHOWN IN THE PERFORMANCE MODEL.

Lee Adaptive China Equity Composite (“LACS Composite”) Performance.  A capital weighted performance composite of the of an investment strategy known as the Lee Adaptive China strategy (the “LACS Strategy”).  The LACS Strategy is currently offered by LCM to certain qualified investors through certain accounts managed by LCM on a discretionary basis (“LACS Managed Accounts”).  The LACS Managed Accounts use the same investment program as the LACS Strategy.  The Composite performance is based on actual trading profits/losses/expenses net of a management fee of 0.35%.  Actual expenses of operating the LACS Strategy may vary, depending on the investment structure in which the LACS Strategy is used, which could result in lower returns than those stated for the LACS Composite. Such expenses may detract materially from the performance of the LACS Strategy and, consequently, the results shown above may not be fully indicative of the actual performance results of the LACS Strategy.

THE LACS COMPOSITE IS BEING SHOWN FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE RELIED UPON.  NO REPRESENTATION OR ASSURANCE IS MADE THAT ANY INVESTOR WILL OR IS LIKELY TO ACHIEVE RESULTS COMPARABLE TO THOSE SHOWN ABOVE OR WILL MAKE ANY PROFIT OR WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES.

PAST PERFORMANCE OF THE LACS STRATEGY AND THE LACS COMPOSITE ARE NOT INDICATIVE, OR A GUARANTEE, OF FUTURE RESULTS.  IT SHOULD NOT BE EXPECTED THAT THE LACS STRATEGY’S ACTUAL RETURNS WILL REPLICATE THE RETURNS SHOWN IN THE PERFORMANCE MODEL.

S&P 500 Total Returns Index.  The returns for the S&P 500 index on a total return basis, that is, with dividends included and does not reflect the deduction of fees and expenses.  You cannot invest directly in this index. The returns for the S&P 500 Index are provided for comparison purposes only to show how the LALCS Composite compares to a broad-based index of securities.  The S&P 500 is comprised of a representative sample of 500 large-cap companies.  The index is an unmanaged, float-weighted index with each stock’s weight in the index in proportion to its float, as determined by Standard & Poors.  The index is one of the most widely used benchmarks of U.S. equity performance.  The index is not subject to any of the fees or expenses to which the LALCS Composite is subject.  It is not possible to invest in this index.  The index is used for comparison purposes only.  It should not be assumed that the LALCS Strategy will invest in any specific securities that comprise the index or that the investment program of the LALCS Strategy will track the index.  Consequently, the returns of the LALCS Composite may or may not be highly correlated with those of the index.

Russell 3000 Index. The Russell 3000 Index is a market-capitalization-weighted equity index maintained by FTSE Russell that seeks to be a benchmark of the entire U.S. stock market.  It measures the performance of the 3,000 largest publicly held companies incorporated in America as measured by total market capitalization and represents approximately 98% of the American public equity market. The returns for the Russell 3000 index are provided for comparison purposes only to show how the LABMS Composite compares to a broad-based index of securities.  The index is not subject to any of the fees or expenses to which the LABMS Composite is subject.  It is not possible to invest in this index.  It should not be assumed that the LABMS Strategy will invest in any specific securities that comprise the index or that the investment program of the LABMS Strategy will track the index.  Consequently, the returns of the LABMS Composite may or may not be highly correlated with those of the index.

MSCI All Country World Index. The returns for the MSCI All Country World Index (“ACWI”) on a total return basis, that is, with dividends included and does not reflect the deduction of fees and expenses. The returns for the index are provided for comparison purposes only to show how the above composite returns compare to a broad-based index of securities. The MSCI AC World Index is composed of large and mid-capitalization developed and emerging market equities. The index is one of the most widely used benchmarks for global equity performance. You cannot invest directly in this index. It should not be assumed that the strategies above will invest in any specific securities that comprise the index or that the investment program of the strategies above will track the index. Consequently, the returns of the composites above may or may not be highly correlated with those of the index.

MSCI China Index Net. The returns for the MSCI China Index Net on a total return basis, that is, with net dividend tax withholding and does not reflect the deduction of fees and expenses. The returns for the index are provided for comparison purposes only to show how the above composite returns compare to a broad-based index of securities. The MSCI China Index represents large and mid-capitalization across H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 495 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.  It should not be assumed that the LACS strategy will invest in any specific securities that comprise the index or that the investment program of the LACS strategy will track the index. Consequently, the returns of the composite above may or may not be highly correlated with those of the index.

Disclaimer:

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS OR PROFITABILITY.

At the time of this writing 3D/L held positions in all the ETF’s listed above. The above is the opinion of the author and should not be relied upon as investment advice or a forecast of the future. It is not a recommendation, offer or solicitation to buy or sell any securities or implement any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes, and opinions of others are assumed to be true and accurate however 3D/L Capital Management does not warrant the accuracy of any of these. There is also no assurance that any of the above are all-inclusive or complete.  

3D/L does not approve or otherwise endorse the information contained in links to third-party sources. 3D/L is not affiliated with the providers of third-party information and is not responsible for the accuracy of the information contained therein.

Past performance is no guarantee of future results. None of the services offered by 3D/L Capital Management are insured by the FDIC and the reader is reminded that all investments contain risk. The opinions offered above are as of March 31, 2021, and are subject to change as influencing factors change.

More detail regarding 3D/L Capital Management, its products, services, personnel, fees, and investment methodologies are available in the firm’s Form ADV Part 2 which is available at https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=669397 or by calling (860) 291-1998, option 2 or emailing sales@3dlfinancial.com or visiting 3D’s website at www.3dlfinancial.com.