In our Sector, Balanced and Income Growth portfolios, we are initiating a strategy that does well in bear markets: managed futures, explains Bob Carlson, a retirement investing expert and editor of Retirement Watch.
In this strategy, the investment manager buys and sells futures contracts following a predetermined process. Managed futures weren’t available to individual investors on reasonable terms until fairly recently.
KFA Mount Lucas Index Strategy (KMLM) is an ETF with a portfolio of 22 liquid futures contracts traded on U.S. and foreign exchanges.
It trades contracts on 11 commodities, six currencies and five global bond markets. The fund follows the proprietary KFA MLM Index developed by Mount Lucas Management. Changes to the index are systematic and based on market momentum.
Most of the time, a managed futures strategy earns low returns or steady, small negative returns. But a well-run managed futures strategy does well, often extremely well, when market volatility and uncertainty are high, especially when stocks and bonds are declining.
Though KMLM is a new fund, the manager, Mount Lucas Management, has been investing in alternative investment strategies since 1986.
The fund’s inception was in December 2020. It was good timing. The fund is up 7.93% 12.30% over three months, 47.47% so far in 2022 and 42.11% over 12 months. The yield is 4.82%.
We caution, however, that the fund will tumble when stocks rally. In the first week of October, during which stock indexes rose 5% in two days, KMLM lost more than 6% when the S&P 500 was up more than 4%.
