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Salient Adaptive Income SMA

Overview

Philosophy

The Salient Quantitative team abides by three core principles:

  • Delivering consistent risk in all market environments.
  • Providing unparalleled diversification.
  • Evaluating markets without investor bias.

By developing instruments designed to accomplish these three tenets, the team aims to provide strategies that adapt to changing market conditions.

Strategy

The Salient Adaptive Income strategy is designed to provide investors with a high-level of current income for a specific risk target. We cast a wider net for yield to generate a high-level of current income and to diversify an investors’ exposure to the risk associated with changes in interest rates. We then apply a disciplined and systematic approach to managing risk to ensure that investors are not left reaching for yield when the reward doesn’t compensate them for the risk.  Finally, the Salient Adaptive Income strategy is implemented via Exchange-Traded Funds (ETFs). The ETFs used for each asset class are selected based on their liquidity and cost, which is viewed as a combination of expense ratio and the competitiveness of the bid/ask spread.

Process

The team uses a four-step, entirely systematic, process to achieve highest level of current income per unit of risk:

  1. Uncover Value: Relative Yield Analysis calculates the spread between asset class yield found in the universe of ETFs and 10-year Treasury
  2. Forecast Volatility and Correlation: Combines a mathematical model with a method for taking into account individual stock and bond market conditions, as well as the global economy.
  3. Optimize to Achieve Targeted Level of Risk: Inputs are then used to build a portfolio that delivers the highest-level income at an annualized standard deviation of 6.5%.
  4. Provide diversification: Apply asset class limits targeting a maximum 20%, except for treasurys and cash.

Every 5th day, the positions and construction of the Salient Adaptive Income Strategy are evaluated as the it moves incrementally from the existing portfolio to a new model portfolio.  This helps us avoid the randomness that can occur with standard monthly rebalancing by allowing us to measure the market on a more frequent basis.

Team

Roberto Croce, Ph.D.

Managing Director, Quantitative Strategies
Houston

Nathan J. Rowader

Senior Portfolio Manager
San Francisco

Nicholas Millikan, CAIA, CFA

Director, Head of Investment Strategy
San Francisco

Xuan Huan

Senior Analyst
Houston

Scott Chun

Analyst
San Francisco

Performance

Quarterly Performance (%) as of 09/30/2017

  Q3 YTD 1 YR 3 YR 5 YR SINCE
INCEPTION
Composite GROSS 2.60 9.25 7.27 4.41 5.06 5.76
Composite NET 2.41 8.74 6.50 3.17 3.71 4.39
15% MSCI ACWI/85% Barclays Global Agg NET 2.28 7.85 1.53 2.27 1.94 2.58
Source: Morningstar.
Periods greater than one year are annualized.
Returns are Preliminary.
Inception Date – 07/01/2012
Net returns are calculated using a highest management fee of 0.50%.
Shown as supplementary information. Please see important disclosures below.

GIPS Performance & Disclosure

Year Gross Return* Net Return† 15% ACWI / Assets (millions) Number of Accounts Annualized 3-Year
85% Barclays Standard Deviation
Global Agg. Bond Composite Benchmark
20167.97%6.55%3.02%$95.965 or fewer5.05%4.87%
2015-2.98%-4.37%-2.92%$142.215 or fewer5.19%4.18%
20145.56%4.05%1.15%$151.275 or fewerNANA
20132.84%1.37%0.90%$194.905 or fewerNANA
20128.00%7.21%3.83%$86.995 or fewerNANA

*Un-annualized performance beginning 7/1/2012.
Dispersion is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.
N/A – Not enough periods to calculate annualized 3-year standard deviation.

The Salient Adaptive Income strategy was designed to provide investors with a high level of current income for a specific risk target. The strategy utilizes up to 15 different asset classes covering traditional and non-traditional income sources. This not only helps generate a high level of current income, it also helps diversify an investors’ exposure to the risk associated with changes in interest rates. The strategy includes a disciplined and systematic approach to managing risk. The combination of unique stock and bond asset classes and risk management endeavors to ensure that investors aren’t le ft reaching for yield when the reward doesn’t compensate them for the risk they are taking.

The Adaptive Income Composite was created on January 31, 2017.

Salient claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Salient has been independently verified for the periods beginning January 1, 2011 to March 31, 2016. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis, and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

Salient includes all assets of Salient Advisors, LP, Endowment Advisors, LP, and the non-trust and advisory assets of Salient Capital Advisors, LLC, which are all being managed by Salient’s Asset Management Group. The firm maintains a list of composite descriptions, which is available upon request.

Results are based on fully discretionary accounts under management in this style. Taxable and non-taxable accounts are included. The minimum account size for this composite is $250,000. Past performance is not indicative of future results.

For comparison purposes the composite’s primary benchmark is 15% MSCI ACWI and 85% Barclays Global Aggregate Bond Index. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 45 country indices comprising 24 developed and 21 emerging market country indices. The Barclays Capital Global Aggregate Bond Index is a broad-based fixed income total return index that includes investment grade government and non-government investments from both developed and emerging markets.

Salient’s investment management fee schedule is 0.50% on the first $500 thousand, 0.40% on the next $500 thousand, and 0.30% in excess of $1 million. Actual investment advisory fees incurred are negotiable on an account by account basis and may vary.

Gross returns are shown after transaction costs but before management fees, and net returns are shown after transaction costs and actual management fees. The U.S. dollar is the currency used to express performance. Returns include the reinvestment of all income. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.

Related Resources

Separately Managed Accounts and related investment advisory services are provided by Forward Management, LLC, a federally regulated Investment Advisor.