Even When Traveling Through a Storm, Some Paths are More Pleasant than Others

Most of the time we use this section of the Co-Founders’ Note to explain current events in the financial markets in the context of how a systematic investing approach can benefit financial advisors in real time. However, approximately once a year we use it to remind our readers about the challenges of a systematic investing process. We do this for two reasons:

1. Credibility and trust are arguably the most important currency we hold. Regardless of their merits, all investment processes have imperfections and, at times, cause their investors and creators to question their conviction. Acknowledging that reality as part of the journey to successful implementation is critical, in our view.
2. The most common question we receive when sharing our process with advisors is, “If it’s so great, why doesn’t everyone do it?” Regardless of the question’s underlying motives, it demands a response that we are happy to provide. See, long ago we decided it is better to go deep than wide; we aim to serve a tight-knit group of advisor partners who embrace our process rather than a large group of the only mildly-committed. Consequently, answering this question becomes a litmus test for whether an advisor can be committed enough to maximize the long-term benefits of a systematic investing process.

If someone were looking for a period to define why our style of systematic investing can at times challenge your discipline, 2022 might be a good example:

• Closing 2021 at all-time highs in U.S. equities meant maximum exposure for our strategies entering the new year.
• As is often the case, when markets subsequently declined, our strategies participated in stage 1 of that decline before cutting exposure.
• From the middle of the first quarter until the fourth quarter, the strategies spent their time protecting capital and outperforming their respective benchmarks.
• The fourth quarter brought a rally from lows in October, followed by another decline in December. This meant our strategies went from being fully defensive to having marginally higher equity exposure during the quarter. The end result was that calendar year absolute returns generally exceeded benchmarks but not by the margins seen at the Q3 lows in equities.

A skeptic might look at the 2022 performance and ask, “What’s the big deal about trend following?”

Looking at one snapshot in time, they might have an argument. But that’s a little like judging a painting that is still in progress.

A more granular view of 2022 reveals that a trend following process, even one with a long bias like ours, spent much of the year outperforming benchmarks – and by significant margins at times. Consider the following graph, which displays the rolling 3-month total equity exposure for the Blueprint Tactical Balanced Strategy against its baseline allocation.

Tactical Balanced Strategy: Rolling Equity Exposure vs. Baseline Allocation

Source: Blueprint Investment Partners, 1/1/2022 to 12/31/2022

Once downtrends emerged as a result of January, the Strategy steadily reduced equity exposure and spent almost the entire year well below its baseline allocation.

Even in a year when the destination wasn’t great (i.e., negative returns), the ride was much better for advisors and their clients than a traditional approach, in our view.

The data below demonstrate “the ride” in terms of the relative equity exposure of the Tactical Balanced Strategy during the S&P 500’s worst 10 performance days of 2022.

Tactical Balanced Strategy: Positioning During S&P 500’s Worst 10 Days of 2022

Source: ICE and Blueprint Investment Partners, 1/3/2022 to 12/28/2022

As we have written before, the worst days in equities tend to occur after downtrends emerge. And 2022 was no exception. As we’d expect in these conditions, the 10 worst days coincided with our strategies being underweight equity exposure or fully defensive.

Underweight and defensive positioning helped lower the volatility and drawdown levels in our portfolios, and there was the added benefit of our advisor partners being able to communicate plans and actions to their clients at every turn. We believe the ability to take decisive action and communicate the rationale clearly is a tremendous benefit of our approach because it can put clients at more ease than simply repeating the mantra of, “Hang in there! The market always comes back!”

And this approach reinforces what matters most to us at Blueprint Investment Partners: serving our advisor partners. Without you, our partners, we wouldn’t get to do what we enjoy the most. So, with that in mind, we are invigorated and excited about what 2023 has in store. We will continue to execute our strategies and look for innovative ways to serve our advisors better.