Salient Tactical Growth - Sub-Advised by Broadmark Asset Management LLC
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Salient Tactical Growth
Sub-Advised by Broadmark Asset Management LLC
April 2020 Market Update
Increased fears over the rising number of coronavirus cases in the U.S. and the impact on
Strategy Overview global growth continued to negatively affect the U.S. and world markets. March was the
Salient Tactical Growth is designed to worst month for U.S. stocks since 1987 with the S&P 500 Index down over -12%. The first
help investors sidestep market quarter of 2020 was the worst first quarter on record, with a loss of almost -20% for the
downturns, while participating in its
S&P 500. At the stock market’s March low point, the S&P 500 had fallen 37% from its
growth via the continuous and active
management of portfolio market February high.1 Stocks were able to stabilize somewhat in the last few weeks of the month
exposure. The strategy seeks to on news of the U.S. Federal Reserve (Fed) lowering the federal funds target rate to near
manage risk and enhance alpha with zero2 and providing massive liquidity to the markets. Congress also finalized passage of a
the flexibility to be long, short or $2.2 trillion fiscal stimulus package to help the economy.3
neutral on the market.
· The strategy is designed as a core A rush to the safety of U.S. Treasury securities resulted in interest rates falling to their
investment for those who worry lowest levels in modern history. The 10-year U.S. Treasury Note fell to an all-time low of
about losing money in equity market 0.54% on March 9, 2020, (trading even lower—below 0.40%—intraday) and ended the
downturns but also want to month with a yield of 0.70%.4 Credit spreads soared to their highest levels since the
participate in the market’s upside.
Using active market exposure financial crisis of 2008-2009 but then narrowed somewhat in response to the injections of
management, the strategy moves in liquidity by the Fed and the passage of the congressional stimulus bill. In addition, it was
and out of the market incrementally anticipated that Congress was preparing another fiscal stimulus package to help the
based upon macro and technical economy.
factors.
· The strategy invests primarily in a The Tactical Growth investment team moved the portfolio to the maximum defensive
diversified portfolio of exchange- position in the last few weeks of February and maintained this defensive position into March.
traded funds (ETFs) and instruments Both the intermediate- and long-term models of volume and breadth turned harshly
providing exposure to indices, negative causing our risk management process to call for a maximum defensive posture.
sectors and industries based on its
four-pillar process.
This was the first time that the team had taken a maximum defensive position since the
severe stock market decline of late 2018.
· Proprietary Volume/Breadth-Based
Momentum models are used to The investment team began to see some bullish signs at the end of the month, however.
determine optimal stock market
exposure including entry points, the
First, valuations declined to their best level in over six years. Second, investor bearish
amount of exposure, the type of sentiment reached a nine-year high and exceeded the bearishness seen at the stock
exposure and exit points. market lows of 2016 and 2018. Third, several of the team’s measures of market momentum
reached their most oversold levels in many years. Fourth, these oversold levels were
Portfolio Management accompanied by some positive volume and breadth momentum divergences: measures of
Christopher J. Guptill money flow showed an easing of selling pressure as the prices sank to new lows. Lastly, the
CEO and CIO Fed promised to do “whatever it takes” to provide almost unlimited liquidity to the markets.
41 Years Experience For these reasons, the team took some opportunistic long positions in the large cap and
Sub-Advisor
technology sectors toward the end of March.
Broadmark Asset Management LLC In order to raise exposure further, the investment team will need to see its volume and
breadth momentum measures strengthen and turn positive. The team is now watching a
Benchmarks variety of thrust indicators that measure the strength of a market rally in terms of volume
HFRX Equity Hedge Index and breadth. A strong and broad-based recovery from the lows would be a positive sign. On
S&P 500 Index
the other hand, these are treacherous markets and a resumption of the decline from
current levels would likely move our volume and breadth indicators back into negative
territory causing the team to once again move to a maximum defensive posture.
Our assessment of the four pillars of our investment process is as follows:
1. Valuation: Valuations declined to their lowest level in over six years during March. The
S&P 500 median price-earnings (P/E) ratio fell to 18.8x, well below its 15-year high of
26.8x reached in January 2018 (Figure 1). As the economy slows to a virtual halt in the
coming month, earnings will decline significantly causing P/E ratios to rise from current
levels. This is a normal occurrence in a business and stock market cycle as the stock
market begins to discount the decline in earnings. The Tactical Growth investment
team expects that the ultimate low in the stock market may roughly coincide with this
upward spike in P/E ratios, whenever it occurs. Likewise, we believe the ensuing
recovery rally from the lows will likely occur as analysts begin to get a handle on when
earnings will recover. The stock market is a leading indicator that discounts changes in
earnings at inflection points.
Past performance is not indicative of future results. Short-term performance is not necessarily indicative of long-term performance. It is not
possible to invest directly in an index.Salient Tactical Growth
Sub-Advised by Broadmark Asset Management LLC
2. Monetary factors and credit conditions: Interest rates declined to modern all-time
lows in March as the Fed lowered the federal funds target rate to near zero. As
mentioned previously, the 10-year U.S. Treasury Note yield reached an all-time low of
0.54% in early March and ended the month at 0.70%, down from 1.10% at the
beginning of the month.5 While low and declining interest rates are generally positive
for equities, credit spreads widened significantly in March. Credit spreads have now
risen to their widest level since the financial crisis of 2008-2009 (Figure 2). Credit
spreads are an important measure of economic risk, and the widening of spreads is
negative. On the other hand, credit spreads began to narrow somewhat in the last few
weeks of March in response to the Fed’s massive injections of liquidity through the
new quantitative easing program and the $2.2 trillion fiscal stimulus package. A further
narrowing of spreads from these levels would be a positive indicator.
3. Sentiment: Investor pessimism rose significantly during March, which is positive from a
contrary point of view. Pessimistic investor sentiment reached levels not seen since the
2011 stock market bottom nine years ago and exceeded the levels reached at the 2016
and 2018 stock market lows (Figure 3). Investor pessimism has only been higher at the
2002-2003 and 2008-2009 major stock market lows. Coupled with the market’s
oversold condition, we see this as a positive development.
4. Momentum: With severe weakness in the markets during February and March, the
team’s measures of volume and breadth both declined sharply into negative territory.
However, the steep market decline created oversold levels, which rival those reached
at or near other stock market bottoms. For instance, the percentage of stocks above
their 10- and 30-week moving averages fell to their lowest levels since the 2008-2009
lows and, before that, the 1987 low (Figure 4). The other times these measures
reached such extremes were at the market lows of 2011, 2016 and 2018.
While these types of oversold extremes often occur at or near market bottoms,
sometimes there are multiple tests of the low, or new lows, prior to the final low point.
That is why the team’s investment process requires an upside confirmation of a
change of trend before significantly raising exposure. We will be measuring the upward
thrust of volume and breadth on any rally from oversold levels. In addition, one key
indicator of an intermediate- to long-term change in trend is upside versus downside
volume. Currently, downside volume is well above upside volume. Statistically, since
1981, when downside volume has been above upside volume, the S&P 500 has
recorded an average -2.53% annual return (Figure 5). A move of this model into
positive territory is one of the signals the team will be looking for to indicate a more
durable change in trend.
1. Bloomberg, as of March 31, 2020
2. U.S. Federal Reserve, March 16, 2020
3. Whitehouse.gov, March 27, 2020
4. U.S. Department of the Treasury, March 31, 2020
5. U.S. Department of the Treasury, March 31, 2020
Past performance is not indicative of future results. Short-term performance is not necessarily indicative of long-term performance. It is not
possible to invest directly in an index.Salient Tactical Growth
Sub-Advised by Broadmark Asset Management LLC
Figure 1.
Sources: Ned Davis Research (NDR), S&P Dow Jones Indices, S&P Capital IQ Compustat. Monthly data 03/31/1964 to 03/31/2020. Past
performance does not guarantee future results. For illustrative purposes only.
Figure 2.
Sources: Ned Davis Research (NDR), Bloomberg Barclays Indices, Federal Reserve Board. Daily data 01/03/2000 to 03/31/2020. Past
performance does not guarantee future results. For illustrative purposes only.Salient Tactical Growth
Sub-Advised by Broadmark Asset Management LLC
Figure 3.
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) = 68.7
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 03/31/2020 (log scale). Past performance does not
guarantee future results. For illustrative purposes only.
Figure 4.
For Both Indicators:
Upper and Low Modes = Bullish
Middle Modes = Bearish
Signal only changes when both
indicators confirm.
Sources: Ned Davis Research, S&P Dow Jones Indices, Investors Intelligence. Weekly data 01/02/1981 to 03/27/2020. 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 03/31/2020. 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
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.
Exchange-traded funds track an index but trade like a stock on an exchange.
Federal funds target rate is the overnight lending rate that the Federal Open Market Committee seeks to obtain through money markets in an
effort to achieve the maximum rate of economic growth.
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.
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.
NYSE Composite Index covers the price movements of all common stocks listed on the New York Stock Exchange, including American depositary
receipts, real estate investment trusts, tracking stocks and foreign listings.
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.
Quantitative easing refers to a form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero.
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.
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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