July - August 2024

Alpha Capture Portfolio

The Alpha Capture ETF Model Portfolio rose +1.34% in July and +2.51% in August, underperforming its global 60/40 benchmark by -73 basis points (bps) and outperforming by +69 bps respectively. The declining stock/bond correlation has benefitted conventional balanced portfolios during a volatile market environment. Meanwhile, the Alpha Capture portfolio’s avoidance of bonds left it exposed to the brief correction in risk assets, albeit making up for lost ground in August. 
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Exposure to the Fairlead Tactical Sector ETF (TACK) helped the portfolio maintain a positive absolute return in July. Our models highlighted relative strength of TACK versus the S&P 500 in early July, which indicated an underlying defensive rotation ahead of seasonal weakness in risk assets. TACK’s holdings are evenly distributed across sectors, which helped to reduce concentration risk despite the portfolio’s overweight to US equities. 

International non-US equities displayed relative strength and improving momentum versus US equities. This was evident over the past two months, and provided enough conviction to warrant a slight tilt during the upcoming rebalance. In August, equities advanced with improving breadth. Importantly, the equal-weight S&P 500 index maintained strength, which continues to benefit TACK and helped the portfolio regain outperformance. 

Although the decline in bond yields has benefitted government bond prices, there is not a convincing shift in long-term relative strength of bonds versus equities. Instead, our models show the potential for greater interest rate volatility, which typically occurs when the Treasury yield curve disinverts (steepens). We are comfortable with hedging volatility risk before tilting decisively in government bonds. 

The portfolio is also prepared to capitalize on a seasonally positive Q4 for risk assets, which could be evenly distributed given the significant dispersion in sector returns experienced earlier this year. As the US interest rate cut cycle begins, our models are on watch for potential dollar weakness, which could benefit certain commodities such as gold and cyclical assets such as emerging markets. For now, we remain disciplined, relying on long-term shifts in relative strength and momentum to justify timely positioning.

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