Volatility Adjusted Adaptive Asset Allocation (VA4)

The Milwaukee Company’s Volatility Adjusted Adaptive Asset Allocation strategy (“VA4”) invests in index tracking, exchange traded equity and bond funds, as well as individual bonds, selected by The Milwaukee Company’s portfolio managers.

If the current market volatility of a market sector included in VA4’s well diversified portfolio significantly exceeds its historical average, VA4’s algorithm will recommend lessening the investment in the ETF that tracks that market sector, and correspondingly increase the amount invested in bonds.  Likewise, when the current market volatility of a market sector is significantly lower than its historical average, the allocation to the ETF that tracks that market sector is increased, and the allocation to bonds is decreased.

VA4’s algorithm also uses a variation of statistical-based model known as the Hidden Markov Model (“HMM”) to identify upward or downward trends in the market.  Absent special circumstances, if HMM signals a bear market for stocks, allocations to equites are reduced, and allocations to bonds are increased.

Classic Asset Allocation Rebalancing (CAAR)

The Milwaukee Company’s Classic Asset Allocation Revisited (CAAR) strategy is a rules-based investment strategy that uses a statistical process known as “mean-variance optimization” (MVO) to create optimal portfolios with the highest expected return for a given level of risk – a target that Nobel Prize-winning economics professor Harry Markowitz referred to as the “efficient frontier”.

CAAR utilizes a variation of Harry Markowitz’s Critical Line Algorithm (CLA) to create efficient frontiers and identify optimal portfolio allocations. CLA allows for additional flexibility when solving a mean-variance optimization, allowing CAAR to control risk and maintain equal-weight diversification amongst its holdings.  

Under normal market conditions, CAAR is rebalanced under a new efficient frontier semi-annually using a trailing six-month period in order to emphasize the momentum factor as a compliment to the portfolio optimization process. However, CAAR monitors the CBOE Volatility Index (VIX) and will rebalance monthly on a trailing three-month period when market volatility is high. 

Economic Cycle Strategy (ECS)

The Milwaukee Company’s Economic Cycle Strategy (“ECS”) is a cyclical investment strategy that invests in 13 index-tracking exchange traded funds (ETFs) that, in the aggregate, are representative of the global stock and bond markets.  The rules-based methodology for the strategy adjusts the amount invested in each ETF depending on how the ECS algorithm assesses the state of the U.S. business cycle. 

ECS uniformly increases bond allocations when it appears the economy is contracting; increases allocations to equities when it appears the economy is expanding at an accelerated pace; and adopts a neutral weighting the rest of the time (i.e., when the economy is expected to grow at a moderate pace). 

ECS uses a combination of the three-month moving average of the Chicago Fed National Activity Index (CFNAI) and proprietary analytics applied to several economic indicators to assess the current state of the economic cycle.  We refer to this combined signal as The Milwaukee Company’s Economic Index (MCEI).

Market Tracking Strategy (MTS)

The Market Tracking Strategy (MTS) is an investment strategy that focuses on U.S. markets and utilizes broad market trends to tactically adapt its portfolio to reflect those trends.  The strategy uses The Milwaukee Company’s “Momentum Tracking Indicator” (MTI) to track the growth of the U.S. stock market relative to that of the U.S. bond market, and adjusts allocations to a broad mix of U.S. stocks and bonds using exchange-traded funds (ETFs) accordingly. 

MTI compares the trailing one-year performance for the U.S. stock and U.S. bond markets over the prior 12 months to assess the stock market’s trend.  Depending on the relative strength of stocks vs. bonds, MTI classifies the stock market trend into one of the three states: Bull, Bear or Neutral.

The portfolio holds a 75% weighting in index tracking equity ETFs when MTI signals that the stock market’s trend is bullish; 60% is invested in equities when the market trend is neutral, and 45% is invested in equities when the market trend is bearish.  The strategy also holds a modest allocation in a gold ETF to enhance diversification.

Sector Rotation Strategy (SRS)

The Milwaukee Company’s Sector Rotation Strategy (SRS) is a growth-oriented, rules-based investment strategy that combines the evidence-based concepts of momentum and contrarian investing by tactically increasing and decreasing amounts invested in equities and fixed income in response to changing market trends and economic conditions.

The equity component of SRS invests in market-weighted sector ETFs that represent the main sectors of the S&P 500 Index, a large-cap U.S. stock market benchmark.  It uses momentum and value factors as the foundation for tactical decisions. The signals are further refined with a multi-factor model known as The Milwaukee Company Risk Index (MCRI) to generate a near-term forecast for the stock market.

More specifically, SRS:

• Seeks capture the momentum factor by overweighting sectors that have outperformed over the prior six months.

• Engages in contrarian investing by underweighting sectors that have outperformed over prior two years.

MCRI incorporates a range of economic and market indicators to generate a near-term forecast of S&P 500 risk based on the 1-year return outlook for the stock market.  If MCRI assesses the current level of equity risk as favorable then the strategy recommends 100% allocation to equities.  Otherwise, the strategy will allocate 50% of the portfolio to fixed income.

Targeted Risk Strategy (TRS)

The Milwaukee Company’s Targeted Risk Strategy (TRS) is a trend-following strategy that is intended to generate attractive risk-adjusted returns by encouraging portfolio stability during bear markets. 

Trend following is based on the premise that over shorter time frames, markets tend to continue their current trend for a period of time.  In other words, markets that are trending lower tend to continue moving lower, and vice versa.  In turn, trend following strategies avoid/sell securities exhibiting a negative trend and favor/buy those with a positive trend. 

TRS uses a Trend Signal indicator based on drawdowns and rebounds to evaluate the current trends of each of the Primary ETFs. TRS will invest in the Primary ETF whenever its Trend Signal is positive, and will invest in the Alternative ETF if the Primary ETF’s Trend Signal is negative.

Fixed Income Trend Strategy (FIT)

The Milwaukee Company’s Fixed Income Trend (FIT) strategy invests in a broadly diversified fixed income portfolio consisting primarily of U.S. securities.  The strategy adjusts the portfolio risk exposure to adapt to the evolving state of bond-market price trends.

Under normal market conditions, FIT invests in a core portfolio comprised primarily in U.S. government, municipal and investment-grade corporate bond ETFs.  Small allocations to funds targeting high-yield bonds, foreign bonds, real estate investment trusts, and convertible securities are also held for diversification purposes.

When bond-market risk appears to be elevated, the strategy reduces or eliminates exposure to sectors that are relatively vulnerable to rising interest rates and reinvests the proceeds in defensive-oriented funds until the bond market trend looks bullish again.

FIT uses a combination of two indicators to assess bond market risk.

• The first uses a type of trend - following indicator known as a moving average convergence/divergence oscillator (MACD), that shows the relationship between two moving averages.
• The second is tied to a simple ratio of the 10-week and 100-week exponential moving averages of the returns generated by the strategy’s core portfolio.