Smart Beta pursuing Alpha™

The paradigm portfolios are smart beta growth strategies that seek to provide alpha in good times and to avoid large market losses in bad times. 

Factor investing is a distinct approach often characterized by the popular phrase “smart beta.” We believe smart beta by itself is not always so smart. The different factors contained within these ETFs come in and go out of favor, shifting regularly.

A paradigm is defined as a distinct set of concepts or patterns. A paradigm shift occurs when there is a fundamental change in these concepts or patterns.

We apply these two concepts to offer a tactical, quantitative approach in both fixed income and equity, depending on your desired exposure, to seek attractive risk-adjusted returns and large loss avoidance. Smart beta growth strategies have become more popular, but many lack the defensive component desired by most retail investors. 

Adapt Actively

Over time, natural environments will unavoidably change as seasons, resources and climate conditions change. Whether it’s due to an unexpected event or a gradual shift, environments and those individuals living in them learn to adapt to unstable periods in order to survive.

Investors and the markets behave in a similar way. The BCM Paradigm strategies follow the premise that volatility is driven by human behavior, and that investors are loss averse rather than risk averse. Certain human behaviors, including panic, tend to repeat over time and can become useful investment signals. The BCM Paradigm strategies are built on this notion that investor behavior can trigger a paradigm shift in market volatility, and seeks to adapt to these changes in market environments.

Is your manager adapting to market changes?

 

Smart Beta Growth Strategies with a Defensive Approach

The BCM Paradigm strategies use factor investing with a rules-based approach to portfolio construction in an attempt to create alpha (attractive risk-adjusted returns).

  • Factor ETFs are risk weighted according to current market conditions.
  • No ETF purchase will represent more than 30% or less than 3% of the portfolio.
  • The portfolio raises cash during volatile markets and may allocate up to 100% in money markets.
  • The models are trained on different time periods seeking to eliminate bias from past economic environments.

For more information on Factor Investing and Smart Beta, click here.

The BCM Paradigm Strategies

The BCM Paradigm Strategies use a set of quantitative models to examine patterns in investor behavior that may induce a paradigm shift or a change in market environment. The process begins by identifying if each ETF candidate is in a “normal” or “volatile” market. The candidates that are considered to be in a “normal” market are selected and risk-weighted to construct a portfolio that seeks positive returns while minimizing volatility and drawdown. The candidates considered to be in a “volatile” period are excluded from the portfolio. The system is run daily and is typically reviewed for a rebalance on a weekly basis to reflect the current level of risk.

BCM Paradigm Tactical Factor Selection

Exposure to U.S. core equity as an alternative to a S&P 500® Index. Using Smart Beta factor ETFs, the strategy seeks more up capture and less down capture than the market over a full market cycle.

The strategy may allocate up to 100% in money markets for defense.

BCM Paradigm Tactical Fixed Income

Exposure to U.S. core fixed income using the ETF representing components of the U.S. bond market; and seeking yield and total return while reducing portfolio volatility and drawdown.

The strategy may allocate up to 100% in ultra-short duration bonds or cash for defense.

Learn more on our GIPS® verified performance.

Determining the Universe

The BCM Paradigm system uses multiple quantitative models composed of short and long term sub models to identify normal versus volatile market environments for each ETF in the strategy’s respective ETF pool.

BCM Paradigm Tactical Factor Selection

The ETFs in the BCM Paradigm Tactical Factor Selection investment pool are selected from the universe of widely recognized factors showcased by academic research such as value, size, momentum, volatility, yield and quality.

 

BCM Paradigm Tactical Fixed Income

The ETFs in the BCM Paradigm Tactical Fixed Income investment pool are selected from the available liquid components of the U.S. bond universe such as U.S. treasuries, treasury inflation protected securities, mortgage-backed securities, commercial mortgage backed securities, and both investment grade and high yield corporate debt.

Tactical Smart Beta

Both strategies look to take advantage of the opportunities that the markets present. By using the risk premia found within the Smart Beta ETFs, the Paradigm system is engineered to avoid the majority of bear market volatility and drawdowns found in volatile times and to grow whenever market conditions are normal.

Key benefits include:

  • Uses smart beta to pursue alpha using risk-weighted allocations and downside risk protection.
  • Remove the risk of emotional investing during volatile markets through a tactical, quantitatively-driven approach seeking attractive risk-adjusted returns.
  • Designed to avoid whipsaw and excessive trading.
  • Invest solely in long-only ETFs –no margin, no shorting, nothing complicated.

For more information, register for our advisor portal by clicking here to access more detailed strategy information. You can also read more on Factor Investing here.

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Paradigm:

A distinct set of concepts or patterns. A paradigm shift occurs when there is a change in environments.

BCM Paradigm Strategies:

Smart Beta solutions pursuing alpha using volatility targeting and downside risk protection.