No, We’re Not Market Timers

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A local institution asked us this week to describe the “tactical asset allocation” approach we employ in our Controlled-Risk Flexible Allocation style.  My reply, which follows, should fill in some gaps for others who have looked into our approach and provide some history for clients who have not been with us many years.

While Mission and Marathon do alter portfolio asset allocation quite significantly over time, we are not tactical asset allocators in the sense that most people use that term.  In our view, that title implies active market timing.  With very few exceptions, we are not market timers.  We tend to modify allocations based on valuations–a very fundamental, not technical, methodology.

Our allocations through this calendar year reveal little about our approach.  Over that period we have had essentially an unchanged allocation: low single digits in stocks, nothing in bonds and most of the portfolio in cash equivalents.  Equity valuations remain high, and economic and market danger levels are substantial.  In such a volatile environment, we believe that conditions could change dramatically and very quickly.  With an essentially liquid portfolio, we are highly defensive, yet ready to take advantage of opportunities in domestic stocks, bonds, gold or foreign securities, which could arise very rapidly.  So far this year, our portfolios are up with the S&P 500 down.  Our careful, valuation-based approach has produced positive returns in 23 of our 24 years.  In 2008, our worst year, our portfolios declined by just under one percent.

A longer-term view is far more illustrative of our approach.  Over nearly 25 years, equities have ranged from a high of 74% of our Controlled-Risk Flexible Allocation portfolios to low single digits, where they are today.  Bond holdings have fluctuated from slightly more than half of portfolio assets down to zero.  Cash equivalent holdings have varied from negligible up to almost 100% of portfolio assets.

Over the very long term there exists a clear priority in our holdings: stocks first, then bonds, then cash equivalents.  We recognize, however, that each asset class can go into positive or negative cycles that last for many years.

A long strong cycle in stocks began in the early 1980s and continued through the end of the century.  Stocks reached levels of extreme overvaluation in the last few years of the 1990s.  In 1998 and 1999, our equity allocation dropped from just over 50% of portfolio assets down to 32%, as individual stocks hit their sale points and fewer replacements met our valuation-based selection criteria.

A major weak cycle, which we forecasted in the late-1990s, began in 2000.  We found fewer and fewer stocks meeting our selection criteria as the new century progressed, and our equity holdings declined from 32% of total assets to today’s 4%.  In a period in which stock prices declined, our freedom to restrict purchases solely to stocks that met all of our valuation criteria resulted in those stocks providing a strong return.  If we had had to buy a larger number of stocks to meet an allocation minimum, it would have been unlikely that our portfolios would have done as well.

Between 2004 and 2008, volatile markets intermittently created some very oversold conditions.  In five instances, we strategically added between 10% to 25% to our existing small base of equity holdings by purchasing an exchange-traded fund for the S&P 500.  Four of the five instances proved profitable, which also added to long-term portfolio profitability.  Those purchases were the closest we have ever come to market timing.

From the late-1980s into the mid-1990s, our portfolios held as much as 50% in long term U.S. Treasury bonds as interest rates were declining from double digits to the 5% level.  In the years since then, we have been strategic holders intermittently.  While those holdings have been consistently profitable, we would have done even better had we not moved away from bonds before Federal Reserve policies brought interest rates down near all-time lows.  Our present caution is born of the knowledge that bonds underperformed risk-free cash equivalents for more than four consecutive decades from 1941 to 1981 in the last rising interest rate cycle.  We do not profess to know when the next rising rate cycle will begin, but there will be great destruction to bond portfolios when it does.  At current rate levels, careful attention is mandatory.

Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to or call (520) 529-2900 to speak with one of the Portfolio Coordinators.