Sage Tactical ETF Strategies 4Q20 Market Review & Outlook

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Sage Advisory Services market review for the fourth quarter ended December 2020, discussing what contributed to and detracted from performance for the Sage Tactical ETF Strategies.

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Q3 2020 hedge fund letters, conferences and more

Sage Tactical ETF Strategies: Equity Allocation

What Helped:

  • U.S. Small Cap
  • U.S. Cyclical Industries
  • International Equities
  • U.S. Value

What Hurt:

  • None

Risk assets ended the year with a flurry, powered by positive developments of a Covid-19 vaccine as well as additional fiscal stimulus from Congress. While virus cases ticked higher all over the world, the continued encouraging readings from consumption data and industrial activity highlighted the continuing recovery. The move in equities was more broad-based than during the summer, with small-cap and value equities joining mega-cap tech in the rally. Overall, equities markets had a stellar fourth quarter, with returns of 12% for the S&P 500, 16% for EAFE, and 19.7% for EM.

The equity allocation posted a positive quarter. The portfolio was and is currently positioned for a continued recovery, which should include a broadening of the rally in style, sector, and region. The rotation into those segments occurred in November in full force and continued into the end of the year, which resulted in solid outperformance of the equity allocation for the quarter.

Notable Portfolio Adjustments During The Quarter:

  • Added cyclical segments, such as mining, transportation, and small-cap equities
  • Increased allocation to emerging markets Asia
  • Trimmed core U.S., EAFE allocations

Fixed Income Allocation

What Helped:

  • Corporate Bonds (HY and IG)
  • Emerging Market Debt
  • Bank Loans

What Hurt:

  • Long Treasuries

Fixed income was a mixed bag in the quarter, with an increase in yields counter-balanced by the outperformance of credit spread sectors. Treasury yields moved into a higher range, catalyzed by fiscal stimulus expectations and positive vaccine news. Those same factors resulted in credit spreads compressing to near-historic lows. Consequently, spread sectors such as corporates, high yield, preferred stocks, and emerging market debt outperformed safer sectors, such as Treasuries and MBS.

The fixed income allocation turned in a positive quarter both on an absolute basis and relative to the benchmark given its lower interest rate sensitivity and overweight to non-core fixed income and investment grade corporate bonds. Corporate bonds, both high yield and investment grade, were the largest contributors to positive performance, while the strategy’s small allocation to long Treasuries was the main detractor.

Notable Portfolio Adjustments During The Quarter:

  • Added Long Treasuries allocation
  • Initiated TIPS allocation
  • Trimmed short corporate bonds

Outlook And Current Positioning

Our view is that for the first half of 2021, the continued economic recovery, supportive policy, and effective vaccines should drive further upside in risk assets, sustain some upward pressure on long rates, and keep reflationary pressures alive. On the economic front, the winter virus surge will no doubt dampen growth out of the gate, but we expect this to be short-lived and for robust global growth of close to 5% for the year.

In addition to major macro risks tied to the virus and the shifting political landscape, the primary return-limiting risk going into 2021 may be valuations, which are less favorable across most asset classes, especially fixed income. Given our views, we enter the first half positioned for upside across our strategies, overweight equities vs. fixed income in our balanced allocation, and overweight credit and higher-yielding fixed income in our fixed income allocation.

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