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April 13, 2017

Dear Clients and Friends,

Investment Changes

Constructing an optimal portfolio takes the following three attributes into consideration:

  1.       Return – what is the long-term expected average return from an asset?
  2.       Risk – what is the expected variability (severity of ups and downs) of those returns?
  3.       Correlation – how does the asset price move compared to other assets when faced with the same stimuli?

In a perfect world, one would select two inversely correlated assets that each averaged 8%+ returns. That would produce a smooth line of return with no volatility, which would benefit both wealth accumulation and preservation. With level returns there would be no point-of-entry or point-of-exit risk. An investor could simply contribute to their portfolio knowing that it would always move up, even in the short-term. Unfortunately, these magical assets do not exist. 

While less than perfect, the next best way to construct a portfolio is to combine non-correlated or lower-correlated assets. Doing so used to be fairly straightforward by building a portfolio of cash, bonds, U.S. stocks, and international stocks.   Globalization and market interconnectedness has made this quite a bit more challenging as equity markets around the world move more in lockstep than ever before. With that in mind, we are presenting some portfolio changes.


Ironclad Managed Risk and LS Theta funds

We will be replacing the Ironclad and LS Theta funds. To remind you, both funds sell downside market protection (i.e. market insurance using equity put options).   The economic basis for these investments is simple to understand: like all forms of insurance, over time, the premiums charged exceed what is paid out. The mechanics of insurance are appealing. If actual losses exceed expectations, the insurance company raises premiums going forward.   Both Ironclad and LS Theta have executed on this strategy as advertised and we believe they are the best in class in this space.   They represent a low volatile way to gain market exposure with moderate correlation to the equity market, somewhere around 50-60%.   

We now have access to two funds that incorporate a much broader set of “insurance writing”, including the equity puts. Access is limited to pre-screened investment advisors and their clients. The compelling reason for making this switch is that the new funds offer the same risk and return, but with virtually no correlation to the stock market.   If given the choice between assets that have similar return streams, we will always prefer the asset that has lower correlation to other assets in the portfolio. The new funds are summarized below. 


Stone Ridge All Asset Variance Risk Premium Fund (AVRPX) 

This fund writes insurance on a multitude of asset classes, not just U.S. equities like the LS Theta and Ironclad funds. Doing so significantly lowers the fund’s correlation to the U.S. stock market. The targeted long-term average return is 8% net.

One unique feature of this fund is that it provides quarterly liquidity, not daily liquidity. This is because the fund needs to manage inflows and outflows to effectively execute on its strategy.  Please also see the enclosed fact sheets.  


Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX)

This fund invests in a slice of business from 21 leading global reinsurers, including 6 of the largest 7. The insurance is written on perils such as hurricanes, earthquakes, typhoons, as well as losses related to aviation, marine, and fine art. The targeted long-term average return is 8% net. Investing in this fund allows us to have the same investment opportunities as the leading global reinsurers.

The fund provides quarterly, as opposed to daily liquidity, because the fund needs to manage inflows and outflows to effectively execute on its strategy.

To understand the return spectrum of this fund, it could earn double digit returns in years without any major catastrophes, but then suffer sharp declines from a combination of natural disasters or other perils. Following a period of high payouts (negative returns) would be an ideal time to add exposure to this fund as premiums are increased. For example, hurricane insurance is more expensive after insurers suffer from hurricane-related claims. Please see the enclosed fact sheet for more information. 

We will initially be assigning a higher allocation to AVRPX and rebalance to SRRIX as appropriate (i.e. following large natural disaster events). 

Finally, both funds are collateralized 100% in U.S. Treasuries. This means that interest rate increases add to, rather than detract from, their performance.


We continue to work daily to earn your trust and confidence.

Best Regards,


Vincent A. Schiavi, CFP®, CPA/ PFS               Ravi P. Dattani, CFP®, CPA

President                                                          Vice President


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