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Portfolio Research Partners

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The Pegasus Model Equity Portfolio was developed to enable individual investors to effectively manage their own investment portfolios achieve consistent superior returns and to avoid third-party fees in the process.

Problem

Investors and professional money managers continue to approach portfolio management in the same way that has been done since 1817 when the New York Stock Exchange was formed under the Buttonwood tree in New York City. That method is to accumulate a basket of individual equities that the investor or manager believes for some reason will rise and outperform the overall broad indexes.

The problem is that most investors or professional money managers don’t meet the performance of the broad indexes (S&P 500) much less beat it on a consistent basis.

Most individual investors fail to make money in markets because:
  • They buy at the wrong times;
  • Adopt an ad-hock approach to deploying capital (hope & prayer);
  • Rely on tips and hearsay;
  • Hold losing positions to long and sell winning positions to early;
  • Never use stops and let losses get out of control.
Investment advisors or money managers still attempt to build equity portfolios by buying individual stocks from companies that they believe will outperform the overall stock market. Typically, this approach fails for several reasons, in fact 89% of professional money managers fail to meet the S&P500 Index performance because:
  • They are not sensitive to market cycles and deploy capital at inopportune times;
  • A basket of uncorrelated stocks hardly ever matches Index performance;
  • They build portfolios that are over diversified which depresses returns;
  • Most include mutual funds as a portion of the portfolio and 80% of mutual funds fail to meet benchmarks and have double fees (12b1, admin., etc.);
  • They do not limit losses (hold forever);
  • They remain in risk assets and do not hedge when markets turn down (more fees);
  • Fees and expenses compound negatively in both up and down years.
  • A systemic reason that stock picking does not beat the market is because
  • the S&P500 Index is geared to disproportionately increase earnings by removing companies that have lower earnings and replacing with companies that have higher margins and earnings. Therefore, there is a systemic upward bias for earnings within the Index as compared to individual companies.
  • Fees, expenses, and systemic issues makes
  • beating the market a virtual impossibility by investing in anything other than the Index itself.

Solution

The Pegasus Equity Portfolio model eliminates all of these flaws and traps for investors that lead to underperformance.
The beauty of the Pegasus Equity Portfolio strategy lies in its simplicity and mechanical nature. The strategy is executed using only four components.

pegasus components


With the recent improvements in Exchange Traded Funds, there is no need to risk exposure to individual stocks when the goal is to meet and beat the performance of the overall market. This is typically defined as a relative performance to the S&P 500 Index.

The Pegasus Model Portfolio uses Exchange Traded Funds and Notes that are designed to match the performance of the S&P 500 Index in both a direct and inverse manner. This gives us the ability to make money during up cycles and to protect holdings during down cycles, thereby generating superior portfolio performance.

  • Portfolio Research Partners has been paper-trading this strategy since August of 2015 and has performed as follows:• Beginning with a hypothetical $500,000 portfolio the model Pegasus Equity Portfolio has grown to $825,897 (as of 6-20-2017);
  • A total return of 65.18% as compared to the S&P 500 Index performance of 22.34%;
  • An annualized return of 35.94% as compared to the S&P 500 Index performance of 12.32%;
  • An average of 2 transactions per month after the initial capital was deployed.

The Pegasus Equity Portfolio strategy is designed to capture the momentum movements within the trading range for the broad market. These momentum trends tend to last months at a time. By applying the propriety analytic tools used by Portfolio Research Partners, these trends are easy to identify.

Markets oscillate within a trading channel, moving up approximately 70% of the time and down 30%. The proprietary analytics used by Portfolio Research Partners enable us to make opportunistic capital allocation modifications that produce superior portfolio performance.

The key to meeting and beating the broad market indexes on a consistent basis includes the following key elements:

  • Be exposed to the equity market at all times since the market rises roughly 70% of the time;
  • Add Alpha to enhance return’s during periods of rising prices;
  • Reduce Alpha positions at market tops;
  • Hedge and add portfolio insurance at cycle tops to protect core positions.
  • These hedging positions generate incremental cash so additional long positions can be added at cycle bottoms, and;
  • Generate income by selling covered calls at pauses in bullish cycles and cycle tops.

Market Cycles

Asset prices tend to create and to move within two trading ranges; the primary range and the secondary range. These trading directions and boundaries are created as the market digests supply and demand levels, market and economic news and other factors that create investor perceptions and sentiment regarding the value of assets.

Investor perceptions are not perfect and subject to change. This creates the volatility of the market place. Because of this volatility, market highs and lows are formed. These price movements create the upper and lower bounds of the two trading channels.

Analysis shows that when prices begin to adjust from the extremes of these channels, the best trading opportunities exist.

Chart evaluation techniques first suggested by Richard Demille Wyckoff are the basis for determining where possible tops and bottoms in the market cycle. This analysis is supported using the proprietary technical indicator the Directional Oscillator and the Momentum Trend Indicator.

Tactical Execution

The first rule of investing is to deploy capital when market trends are favorable and the risk-reward ratio is attractive. This strategy depends on the overall market signals from the Directional Oscillator (“DO”). The DO is a proprietary market timing tool that will indicate the direction of the equity markets based on the S&P 500 and has a history of identifying changes in direction for this index.

The Directional Oscillator is designed to signal when excessive price action occurs in the trading of a particular security. When this occurs at extreme points of the trading channel, this is consistent with a climatic event that could mark the beginning of a trend change. The DO is very accurate at identifying these turning points, but it will also generate false signals. We use the confirmation line to ensure that these signals can be relied upon.

As further verification, we use the Momentum Trend Indicator to validate a confirmed DO signal. These signals are then verified by chart analysis in order to make our s and other technical analysis.

PRP’s goal is to provide unique and profitable trading and investing strategies to the independent investor community. We believe that the independent investor is underserved by the brokerage and investment advisors and are therefore hungry for unbiased and creative ideas for investment strategies. We believe that there is a deep dissatisfaction with the current array of investment services available to the independent investor community.
Our goal is to shift the risk/reward equation away from the market and to the benefit of the individual investor.

The construct of the Pegasus model is based on the following beliefs:

  • Markets are driven by the principle emotions of Fear & Greed.
  • This creates Supply & Demand, which causes the markets to move in cycles.
  • Markets generally have a Bullish bias by moving higher 65%-70% of the time and moving down 30%-35% of the time.
  • These broad cycle moves are traditionally viewed as a negative, but we view them as a positive.
  • Market timing is not a bad thing, in fact each and every share traded is in effect a timing decision, two in fact. The buyer believes that today the shares are cheap and the seller believes the shares are expensive today. It is all timing.
  • The goal of every investor should be to at least match the performance of the broad market indexes each year, and to find a way to consistently beat the benchmark(s).
  • Investors must find a way to enable their portfolio to compound at higher rates of return.
  • A basket of individual stocks should not be expected to match the performance of an Index that it has no correlation with.
  • There are paired trades that can be used to enhance portfolio performance.
  • Avoid dilutive fees and expenses.
  • The money management business is geared to under-perform markets and to drain portfolios of fees and expenses.
  • Generally, money managers sell the highest fee producing products, which typically have the lowest comprehensive returns for investors.
  • The single most important factor in beating the benchmarks is to avoid the drawdowns of the market cycles.
  • No one cares as much about your money as you do.
In summary, the Pegasus Equity Portfolio is designed to have exposure to the S&P 500 Index at all times. This means that the core equity positions are never traded. We do add positions designed to enhance performance at tactical points in the market cycle. We also add protection and hedge core long positions during corrections or bearish periods. The enhancements and hedging are accomplished using Exchange Traded Funds and Notes.

A Step-by-Step Approach
  • Step one is to implement a strategy that ensures your core holdings match the benchmark performance. This can be done by buying the Exchange Traded Fund “SPY”. “The SPDR S&P 500 ETF SPY is the largest ETF, leapfrogging nearly every single mutual fund. It's outperformed 80% of active mutual funds over the past five years, according to State Street, which runs the fund.” Source CNN.
  • SPY trades over $20 billion each day providing massive liquidity, has total assets of $182 Billion and a current yield 2.12% as compared to the SP500 yield of 2.2% and has a +.99 correlation to the SP500 Index
  • Step two is to avoid the market drawdowns
  • This can be done with a hedging technique using highly correlated leveraged ETFs for SPY and selling covered calls on the long core positions for portfolio income.
  • Step three is to add Alpha to the portfolio by adding leveraged positions as the market rebounds
  • Step four is to reduce the Beta in the portfolio by adding a small Volatility component. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
  • Step Five is to have the analytic tools to guide you in identifying the market cycle turns.

The basic idea is to:

  • Create core equity positions with Index ETFs, which are not traded (about 70%);
  • Allocate a small portion of the portfolio to Leveraged ETF which will protect the core positions in downturns and add Alpha in upturns;
  • Add small positions of Volatility products as portfolio insurance when the VIX moves to extreme points thereby reducing Beta.

Summary

  • The Pegasus Equity Portfolio construct is very simple especially as compared to a portfolio of 20 or more equities.
  • Most trading is confined to periods of market change so 80% of the time it is a hands-off strategy.
  • After initial positions are placed all future portfolio management trades are small.
  • Members receive email notifications when model portfolio modifications are made.
  • Members simply decide whether or not to follow Model Portfolio changes.
  • Proprietary analytics increase the odds of portfolio performance.
  • Portfolio Beta (average 1.38) is lower than the average for the companies in the SP500 Index (average 1.497).
  • This approach eliminates all of the negative attributes that cause most individual and professional investors to fail.
  • Markets are driven by human emotions, which is the basis for a relatively new field of study in finance called Behavioral Finance.
  • These emotions drive supply & demand, which is the holy grail of directional determination.
  • The Pegasus Equity Portfolio uses a simple construct that is available to all individual investors, but the tools necessary to effectively execute this strategy are proprietary to Portfolio Research Partners.