- Michael Gayed’s ATAC Rotation Fund is always playing pure offense or pure defense based on just one market signal.
- Gayed shifted all of his assets to bonds in January, before the coronavirus pandemic tanked stocks and sent bond prices soaring.
- He shifted back to stocks in early April as equities began to rally.
- Combined, he’s returned 36% to investors based on those moves, crushing most other tactical funds.
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Michael Gayed says he doesn’t have to be right all the time, provided that when he’s right, he’s 100% correct. This year, he’s nailing it.
Gayed is a portfolio manager for Toroso Investments and runs its ATAC Rotation Fund. The fund looks at the performance of utility-company stocks and Treasury bonds and essentially asks a yes-or-no question: Is it a good time to take a risk?
He checks the answer once a week. If the answer is “yes,” Gayed goes all in on stocks with a handful of index-tracking exchange-traded funds to grab the gains. If it’s saying “no,” all of the fund’s assets go into a handful of Treasury bond funds, which should rally if stocks fall.
“Most major crashes, corrections, bear markets, periods of market stress are really preceded by strength first in utilities and Treasurys,” he told Business Insider in an exclusive interview. “It’s not some random correlation. The causation there is really about the demand for capital. It’s about interest rates.”
The key is that those assets rally even before the volatility shows up. And in January, with utility stocks outperforming and Treasury prices rising, Gayed’s signal started flashing “no” — time to shift to the bond ETFs. He made his move and waited, knowing that if the market was going to drop, it would probably happen in two or three weeks.
For six weeks, nothing happened. It wasn’t a surprise. The signal has given plenty of false alarms before. Some investors would be frustrated that they were giving up returns because of a mistaken indicator, but Gayed compares it to slowing down on a rain-slicked road: a good idea even if you don’t get into an accident.
But at the six-week mark, the market nosedived and a historic plunge began. The value of Gayed’s bond ETFs soared. In early April, his signal flipped back to “yes,” and he went all in on large-company stocks.
As of May 21, the ATAC fund had returned 36.4% this year, according to Morningstar. The typical fund of its type, in the tactical allocation class, is down about 8.5% this year.
The fund also surpassed the broader market and its peers in 2015 and 2017, putting its returns in the top percentile of all tactical allocation funds over the past five years and earning it a five-star rating from Morningstar.
Returning to his driving analogy, Gayed says his indicator shows him dangerous conditions. Even if those conditions don’t end with a crash, it’s smart to react to the rising risk.
“While I may not know the exact mile marker I might crash my car, I do know the conditions that favor an accident,” he said. “I know when to slow down, when to play offense, when to play defense.”
He plays defense with either long- or short-duration Treasury ETFs. Even when there isn’t a big rally in Treasurys, he still gets some returns. And his approach to offense is only a little more complicated. Based on momentum signals that tell him which group is performing best, he’ll invest in emerging markets, large caps, or his current choice, small caps.
He takes on some leverage to do that, investing 130% of the fund’s assets in the right group for that moment. According to Gayed, that’s a smart move because when utilities and Treasuries are lagging the market, volatility is likely to fall and leverage isn’t dangerous.
“When volatility is falling, you tend to have more under reaction in momentum, more persistence, more consecutive up days, which is exactly what you want when you’re levering up an asset class,” he said.
Like many fund managers who try to protect against disaster, Gayed said he worried that a lot of investors aren’t hedging their bets properly. He often asks peers what part of their portfolio they hate — and if they can’t think of anything, they’re doing it wrong, he said.
“You’re going to hate the portion of your portfolio that’s not working, that’s not going up when everything else is going up,” he said. “Because of FOMO, and because everyone always wants everything to be working at the exact same time, it actually results in people being way more concentrated relative to their risk profile than they should be.”
For Gayed, that’s the cash in his portfolio: no returns, no momentum.
Gayed, having thrived in one crisis, is watching for the next one. He thinks it’s possible that inflation is going to rise and bonds are going to sell off. He said inflation expectations have held relatively steady, even as central banks unleashed trillions of dollars in stimulus and indicators like lumber prices were also pointing higher.
But mostly, he’s aware that there’s always another surprise ahead. And he doesn’t have to foresee everything that happens as long as when he’s right, he’s really right.
“The market has proven time and time again that it will pretty much almost always do what the crowd thinks it won’t. Consistency is an illusion, always has been, always will be in markets,” he said, adding that the frequency of being right “matters a lot less than the magnitude.”
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Michael Gayed's fund relied on just one market signal to book a huge profit when the coronavirus crushed stocks — and his returns are still soaring. He breaks down his simple approach to crisis investing.