Salient Tactical Growth - Sub-Advised by Broadmark Asset Management LLC
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Salient Tactical Growth
Sub-Advised by Broadmark Asset Management LLC
March 2020 Market Update
Fear over the impact of the coronavirus on global economic growth hit the global markets
Strategy Overview hard during February with the major U.S. market indexes recording their worst month since
Salient Tactical Growth is designed to February 2009. The S&P 500 Index was down -11.44% during the last week of February and
help investors sidestep market declined -8.23% for the month.1 This decline is one of the fastest and steepest stock
downturns, while participating in its
market reversals since World War II, as the major averages had recorded all-time highs just
growth via the continuous and active
management of portfolio market days prior to the market’s worst week since 2008. The pneumonia-like coronavirus was first
exposure. The strategy seeks to identified in China and has now spread around the world, increasing fears of disruptions to
manage risk and enhance alpha with worldwide commerce, particularly in Asia.
the flexibility to be long, short or
neutral on the market. On the last day of February, Federal Reserve (Fed) Chair Jerome Powell issued a statement
· The strategy is designed as a core saying that the fundamentals of the economy remained strong but that the coronavirus
investment for those who worry posed evolving risks to economic activity. Powell indicated that the Fed would be closely
about losing money in equity market monitoring developments and that it would act as appropriate to support the economy.
downturns but also want to Investors were buoyed by the Fed’s statement and stock prices rose off their intraday lows
participate in the market’s upside.
Using active market exposure on that day. Nonetheless, the flight to the safety of Treasury securities continued and
management, the strategy moves in interest rates declined to or near their lowest levels on record. The 10-year U.S. Treasury
and out of the market incrementally Note (10-year Note) ended the month with a yield of 1.13%, down from 1.54% at the
based upon macro and technical beginning of February.2 This is the lowest yield on the 10-year Note in modern U.S. history.
factors.
· The strategy invests primarily in a The Tactical Growth investment team began lowering market exposure in January due to
diversified portfolio of exchange- elevated optimistic investor sentiment (negative from a contrary point of view) and high
traded funds (ETFs) and instruments equity valuations. As February’s stock market weakness unfolded, the team lowered
providing exposure to indices, exposure to the maximum defensive position as the strategy’s volume and breadth models
sectors and industries based on its
four-pillar process.
both turned harshly negative. It was the first time that the team took a maximum defensive
position since the severe stock market decline of late 2018.
· Proprietary Volume/Breadth-Based
Momentum models are used to With the Fed’s statement of reassurance and interest rates at historically low levels, a
determine optimal stock market
exposure including entry points, the
positive for equities relative to bonds is that 70% of all stocks in the S&P 500 now have a
amount of exposure, the type of higher yield than the 10-year Note — the highest percentage in over 50 years.3 On the other
exposure and exit points. hand, the decline in the longer end of the yield curve has once again caused the yield curve
to invert. The 1-month Treasury Bill yield of 1.45% is now 32 basis points above the 10-year
Portfolio Management Note’s yield of 1.13%.4 As we have noted before, yield curve inversions have often preceded
Christopher J. Guptill recessions and market downturns, although the timing is uncertain and has ranged from a
CEO and CIO few months to several years. Another danger signal on the otherwise positive monetary
41 Years Experience front that occurred in February is that one measure of credit spreads (the ratio of
Sub-Advisor
Bloomberg Barclays U.S. Corporate High Yield Bond Index yield to the yield on the 10-year
Note) widened to its highest level in almost three years. Further deterioration in credit
Broadmark Asset Management LLC
spreads from this point would be negative for the monetary picture, despite the low level of
Benchmarks interest rates.
HFRX Equity Hedge Index In order to raise exposure, the investment team will need to see its volume and breadth
S&P 500 Index
momentum measures stabilize and turn positive. The team would also like to see its
measures of investor sentiment recycle toward more pessimism, which would be positive
from a contrary point of view. This happened quickly during the last week of February. As
has happened in years past, an interest rate cut by the Fed to provide liquidity to the
market could quickly turn the market to the upside and mark a bottom. The team is closely
monitoring Fed activity and will be quick to respond should this happen.
Our assessment of the four pillars of our investment process is as follows:
1. Valuation: The S&P 500 median price-earnings (P/E) ratio stands at 21.8x at the end of
February, declining from its highest level in a year.5 The historically low level of interest
rates and the Fed’s more dovish stance have provided a generally positive
environment for these higher valuations. However, while the median P/E ratio remains
below its 15-year high of 26.8x reached in January 20186, this indicator shows that the
market has risen into overvalued territory on an absolute basis. On the other hand, a
positive for equities is that 70% of the stocks in the S&P 500 have a higher dividend
yield than the 10-year Note, the highest level in at least 50 years (Figure 1). Of course,
this measure is based upon the current level of dividends. A slowdown in globalSalient Tactical Growth
Sub-Advised by Broadmark Asset Management LLC
economic activity due to the coronavirus could change this situation quite rapidly if
corporations see a bleaker outlook for profits and reassess their dividend policies.
One longer-term measure of equity valuation is flashing warning signals. Stock market
capitalization as a percentage of nominal gross domestic product (GDP) has now risen
to its highest level in 20 years — that is, since the dot.com top. From a long-term
perspective, this indicator clearly shows that the market is in overvalued territory
relative to GDP (Figure 2).
2. Monetary factors and credit conditions: Interest rates declined to modern day all-
time lows in February. The 10-year Note yield ended the month at 1.13%, down from
1.54% at the beginning of the month.7 While low and declining interest rates are
generally positive for equities, credit spreads began to widen during February, which is
a potential negative. One measure of credit spreads, the ratio between the
Bloomberg Barclays U.S. Corporate High Yield Bond Index yield and the 10-year Note,
has now widened to its most negative level in three years (Figure 3). Due to the low
absolute level of rates, when measured in basis points, this spread has not yet entered
negative territory — which is a positive sign. However, credit spreads are an important
measure of economic activity and risk, and a further widening of spreads would be a
significant negative factor in the otherwise favorable monetary picture.
3. Sentiment: The market’s move to new highs in January and early February produced a
significant increase in optimism among investors, which is negative from a contrary point
of view. We commented last month that this measure would likely have to recycle to
more pessimistic readings to indicate a market bottom. It appears that this process has
already begun with pessimistic investor sentiment reaching levels not seen since the
2018 stock market decline (Figure 4). Coupled with the market’s oversold condition, we
see this as a positive development.
4. Momentum: With the market’s severe weakness at the end of February, the team’s
measures of volume and breadth both declined sharply into negative territory. One
measure of supply (down volume) and demand (up volume) improved during the stock
market’s rise to new highs in January and early February 2020. But this measure has
reversed sharply, recording one of the steepest downturns in a decade (Figure 5).
This type of reversal often leads to oversold extremes and at least temporary market
low points. If the stock market does reach an interim low point and our volume and
breadth models turn positive, it would be a signal to once again raise market exposure.
1. Morningstar, as of March 5, 2020
2. Ned Davis Research, February 29, 2020
3. Ned Davis Research, February 29, 2020
4. U.S. Department of the Treasury, February 29, 2020
5. Ned Davis Research, February 29, 2020
6. Ned Davis Research, February 29, 2020
7. U.S. Department of the Treasury, February 29, 2020Salient Tactical Growth
Sub-Advised by Broadmark Asset Management LLC
Figure 1.
Sources: Ned Davis Research (NDR), S&P Capital IQ Compustat. Monthly data 01/31/1972 to 02/29/2020. Based on annual dividends. Past
performance does not guarantee future results. For illustrative purposes only.
Figure 2.
NDR Estimated Fixed-Weighted
GDP used from December 1924–
February 1946.
Chain-Weighted GDP used after
February 1946.
Calculation uses NDR estimated
common stock market
capitalization of U.S.-based
companies.
Dow Jones total stock market
capitalization used from January
1973–September 1980.
NYSE market capitalization used
prior to January 1973.
Sources: Ned Davis Research (NDR) (concept courtesy Jim Bianco). Monthly data 12/31/1924 to 02/29/2020 (log scale). Past performance does
not guarantee future results. For illustrative purposes only.Salient Tactical Growth
Sub-Advised by Broadmark Asset Management LLC
Figure 3.
Sources: Ned Davis Research (NDR), Bloomberg Barclays Indices, Federal Reserve Board. Daily data 01/03/2000 to 03/03/2020. Past
performance does not guarantee future results. For illustrative purposes only.
Figure 4.
Extremes Generated When
Sentiment Reading Moves:
Above 61.5% = Extreme Optimism
Below 55.5% = Extreme Pessimism
Sentiment must reverse by 10 percentage
points to signal an extreme in addition to
the above extreme levels being reached.
Arrows represent extremes in optimism
and pessimism. They do not represent
buy and sell signals and can only be known
for certain (and added to the chart) in
hindsight.
Average Value of Indicator At:
Optimistic Extremes (down arrows) = 68.6
Pessimistic Extremes (up arrows) = 46.9
Average Spread Between Extremes = 21.5
Sources: Ned Davis Research (NDR), S&P Dow Jones Indices. Weekly data 07/31/2002 to 03/03/2020 (log scale). Past performance does not
guarantee future results. For illustrative purposes only.Salient Tactical Growth
Sub-Advised by Broadmark Asset Management LLC
Figure 5.
Sources: Ned Davis Research, S&P Dow Jones Indices. Daily data 10/30/1998 to 03/03/2020. Past performance does not guarantee future
results. For illustrative purposes only.Salient Tactical Growth
Sub-Advised by Broadmark Asset Management LLC
You should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. The prospectus
contains this and other information and is available, along with information about the series of funds under the Forward Funds trust (“Salient
Funds”), by downloading one from www.salientfunds.com or calling 800-999-6809. The prospectus should be read carefully before investing.
The series of funds under the Forward Funds trust (“Salient Funds”) are distributed by Forward Securities, LLC. Forward Management, LLC
d/b/a Salient is the investment advisor to the Salient Funds.
Salient Tactical Growth Fund’s investment objective is to produce above-average, risk-adjusted returns, in any market environment, while
exhibiting less downside volatility than the S&P 500 Index.
RISKS
There are risks involved with investing, including loss of principal. Past performance does not guarantee future results, share prices will
fluctuate and you may have a gain or loss when you redeem shares.
Borrowing for investment purposes creates leverage, which can increase the risk and volatility of a fund.
Debt securities are subject to interest rate risk. If interest rates increase, the value of debt securities generally declines. Debt securities with
longer durations tend to be more sensitive to changes in interest rates and more volatile than securities with shorter durations.
Derivative instruments involve risks different from those associated with investing directly in securities and may cause, among other things,
increased volatility and transaction costs or a fund to lose more than the amount invested.
Investing in exchange-traded funds (ETFs) will subject a fund to substantially the same risks as those associated with the direct ownership of
the securities or other property held by the ETFs.
Foreign securities, especially emerging or frontier markets, will involve additional risks including exchange rate fluctuations, social and political
instability, less liquidity, greater volatility and less regulation.
Short selling involves additional investment risks and transaction costs, and creates leverage, which can increase the risk and volatility of a fund.
Investing in smaller companies generally will present greater investment risks, including greater price volatility, greater sensitivity to changing
economic conditions and less liquidity than investing in larger, more mature companies.
Alternative strategies typically are subject to increased risk and loss of principal. Consequently, investments such as mutual funds which focus
on alternative strategies are not suitable for all investors.
Asset allocation does not assure profit or protect against risk.
Definition of Terms
1-month U.S. Treasury Bill is a short-term debt obligation issued by the U.S. Treasury that has a term of one month.
10-year U.S. Treasury Note is a debt obligation issued by the U.S. Treasury that has a term of 10 years.
Alpha is a technical risk ratio that shows a fund’s excess return relative to the performance of its benchmark index.
Basis point (bps) is a unit of measure that is equal to 1/100th of 1% and used to denote a change in the value or rate of a financial instrument.
Bloomberg Barclays U.S. Corporate High Yield Bond Index covers the USD-denominated, noninvestment-grade, fixed-rate, taxable corporate
bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.
Breadth is a technique used in technical analysis that attempts to gauge the direction of the overall market by analyzing the number of
companies advancing relative to the number declining.
Credit spread is the spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.
Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price.
Exchange-traded funds track an index but trade like a stock on an exchange.
Federal Reserve is the central bank of the United States that is responsible for regulating the U.S. monetary and financial systems.
HFRX Equity Hedge Index is comprised of private funds with strategies that maintain both long and short positions primarily in equity securities
and equity derivatives.
Momentum is the rate of acceleration of a security’s price or volume.
Nominal gross domestic product (GDP) is the monetary value of all the goods and services produced in a country evaluated at current market
prices.
NDR Crowd Sentiment Poll is a composite reading based on seven different individual sentiment indicators designed to highlight short- to
intermediate-term swings in investor psychology.
Price-earnings (P/E) ratio is a measure of the price paid for a share of stock relative to the annual income or profit earned by the company per
share. A higher P/E ratio means that investors are paying more for each unit of income.
S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.
Valuation is the process of determining the value of an asset or company based on earnings and the market value of assets.
Volume is the number of shares or contracts traded in a security or an entire market during a given period of time.
Volume/Breadth-Based Momentum Model is a proprietary model used by Broadmark Asset Management to determine optimal market exposure.
Yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.
One cannot invest directly in an index.
Not FDIC Insured | No Bank Guarantee | May Lose Value
Charts are © copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. See NDR
disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
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