February 2024 Update

Commentary as of March 18, 2024

• -February was one of the strongest months for out-performance to benchmark across all strategies collectively
• -While the broad market US indices were all up between 3% to 6% for the month, our long equity portfolios were up materially higher than that in every category except the Dividend strategy
• -Announcing our newest strategy: Core Equity GARP SMA and Core Equity GARP – Hedged SMA
• -GARP stands for Growth at a Reasonable Price and our portfolio has delivered consistently to that factor exposure while out-performing its benchmark – the S&P 500 GARP index
• -We launched the GARP strategy in mid-April 2023 so its official GIPS start date is May 1 2023 – and we are announcing it ahead of its customary one year anniversary because the returns have been too compelling to keep to ourselves any longer
• -The strategy has already attracted $24 million in AUM in limited release and it is available now at Schwab, Fidelity, and Interactive Brokers.
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Because we have some exciting new products to discuss in this week’s email, we are going to shorten our usual monthly recap to more quickly get to the new product discussion. However, the month of February was so good for our legacy strategies that we can’t just skip over them entirely.

You can see our return data summarized in the charts below but let’s give you a quick re-cap: the long only all cap equity portfolio delivered over +8% for the month of February – with large cap equity at +8.4%, mid-cap equity at +8.2%, and small cap equity at +8.6%. In comparison, the S&P 500, S&P 400 Mid-cap, and S&P 600 small cap delivered +5.3%, +5.9%, and +3.3%, respectively. For the long implementations of these portfolios, our returns were consistently around +8% after fees. For the hedged strategies, the hedge was a drag on returns as expected in an up month for the indices but in each case, the drag was in line with expectations – or around a 30% drag like the 30 delta hedge projects.

The Alpha DNA Enhanced Dividend strategy delivered +1.24% for the month which is the only strategy we manage that did not surpass its benchmark. The S&P 500 Dividend Aristocrats ETF delivered +2.68% for the month. Overall, we are still out-performing that index since inception – which is also an index that is one of the leaders in the Dividend space. By extension, that makes our strategy a leader in the dividend space – on both a returns and risk-adjusted return basis. Our standard deviation in the Dividend strategy is still consistently 2 percentage points lower in volatility than the index – while achieving better returns.

Introducing our Core Equity GARP strategy

In Q1 of 2023, one of our advisor partners asked us to build an equity strategy for their clients that would have lower turnover than our legacy strategies but still benefit from the A.I. based signals that so accurately predict revenue and EPS out-performance. This RIA also asked that we have a bias towards growth but at a reasonable price. So we launched the Core Equity GARP and Core Equity GARP Hedged strategies in the middle of April 2023.

GARP stands for Growth at a Reasonable Price and it has been a popular approach to investing for many decades – but not an approach that is easy to pull off successfully. The ‘At a Reasonable Price’ part has always been an obvious starting point for nearly all equity investors – after all, who doesn’t love a bargain when buying almost anything. But in the last decade, stock market returns have been dominated by the Growth category – often driving stocks to a price that makes the ‘ARP’ part of the equation difficult to achieve.

This is where Alpha DNA’s proprietary alt-data research can be so helpful. We have built a custom approach to measure the ‘G’ and the ‘ARP’ of every stock in our universe. What sets us apart is that our underlying alt-data research gives us insights in to the real revenue and EPS growth which gives us an advantage in truly identifying whether the growth (’G’) of a stock justifies the right price (ie, the ‘ARP’).

Our universe of stocks is the 1,000 largest US traded equities based on market cap that also are based in the United States. As a result, our portfolio is decidedly large-cap and mid-cap in allocation. We typically are invested in around 60 equity positions and can be as high as 90 and as low as 40 stocks. We target hold times in excess of one year and aim to be as tax efficient as we can be while making sure our portfolio reflects both the GARP mandate and the alt-research bias of our core research signals. The portfolio rebalance approach is best described as ‘limit impact’ as we look to limit tax implications and target long term hold times. The portfolio is usually traded around once per month.

We also offer the same equity portfolio with a hedge for the client that wants an S&P 500 hedge for downside protection. The hedge is a long dated put option on the SPY with a target delta between -0.25 and -0.30. It is bought one year out and we target to roll it with 90 days to expiration. It will be rolled early if the delta gets too low (further out of the money) or too high (in the money).

Now that we have laid the ground work for how the portfolio is run, let’s get in to the exciting news about the GARP strategies – the recent results. The Core Equity GARP – long only and hedged versions – delivered +10.35% and +9.22% for the month of February 2024. This caps off a tremendous 10 month run since the launch in these two strategies at +38.33% and +30.74% for the period from May 1, 2023 to Feb 29, 2024, respectively.

You can drill down on the risk and return metrics on our website at these links for the GARP Strategy and the GARP Hedged SMA strategies. 

The benchmark for these two strategies of the Core Equity GARP and the Core Equity GARP – Hedged are the S&P 500 GARP index and a custom index of (100% S&P 500 GARP Index minus 30% times the S&P 500), respectively. The S&P 500 GARP index is maintained by Standard & Poors. The index is up +19.30% from May 1, 2023 to February 29, 2024 – a significant discount to the +38.33% we are up in the Alpha DNA Core Equity GARP. Over the last ten calendar months, our monthly returns have beaten the S&P 500 GARP index in eight of those months. Check out the returns below – we are certain you will find them to be compelling – for both the long-only and hedged version.

One important point to realize about our Alpha DNA Core Equity GARP strategy is the high beta we express in that strategy. It has admittedly had a higher beta than the S&P 500 and the S&P 500 GARP index. In fact, our beta to the S&P 500 has approached 1.3x. Despite the higher beta, the portfolio still maintains a lower Price to Earnings, Price to Book, Price to Sales, and Price to Cash Flow ratio than the S&P 500 – with an average discount in these ratios of more than 20%. Despite the higher than average beta, the quality has been quite high and our average price ratios have been lower than those of the S&P 500 GARP index also. But because of the higher beta, some of you will want to consider a hedge for your more risk averse clients.

The strategy has already attracted over $24 million in Assets under management as of the end of February 2024. It is now available to all of the RIAs that work with Alpha DNA on the Schwab, Fidelity, and Interactive Brokers platforms. And as usual, we report the returns of this SMA strategy to Morningstar because we qualify as a GIPS compliant reporting firm.

Please reach out to set up a call to learn more about our GARP strategy. I assure you that you will be impressed by the quality metrics of the portfolio along with the strong returns. Email me at wayne.ferbert@alphadnaim.com or use Calendly to book time on my calendar.

Comparison to Hedged Equity Leaders

Reach out to us and we’ll share with you a more detailed returns analysis. These hedged equity mutual funds are the largest Hedged Equity mutual funds by Assets under management according to Morningstar. We have decided to add a column to the report of returns since October 1, 2019. This date is the inception of the use of our market cap based algorithms that are in production today. We believe it provides the best comparison as it isolates the time period of exposure to our current live algorithms. 

Source: Morningstar
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the most recent standardized performance for the funds, click on the following respective ticker: JHQAX; GATEX; SDRAX; GTSOX; CAHEX.
 
 
These funds were chosen for comparison because they are some of the largest publicly traded funds employing a hedged equity strategy and have at least a five-year track record. We figured, let's compare ourselves to the BIGGEST players in the industry.

Our Separate Managed Account returns are summarized below:

Performance as of February 29, 2024

Long Only Strategies