ACTIVE MANAGEMENT: “The report of my death was an exaggeration” 

Long-Term Investment Strategies Require More Than Low Expense Ratios

After a decade of steadily increasing valuations, even a reasonable observer might have forgotten how hard it is to beat the market. Investors have, quite simply, enjoyed the longest running bull market on record. So, too, have mutual funds and exchange-traded funds designed to track the indexes. By all accounts, these passive approaches have provided just what they promised: Market-like returns with low fees.

A terrific strategy for rising markets. Not so effective when the markets head lower.

With the U.S. facing the sharpest decline in economic activity since the Great Depression, passive vehicles that can only go up or down with markets present a particular risk. In this environment, active management may be better positioned to deal with complex investment forces unlike anything we’ve seen in our lifetimes.

A Shift in the Trend

With worries over the economic impact of the spread of COVID-19 sending shivers throughout the global economy, major stock indexes have — in spectacularly short order – fallen up to 30%.

Funds tracking the indexes have produced similar results. That’s no surprise — buy-and-hold strategies by definition lock in most if not all of the market’s losses.

Keep in mind these are the same funds that have benefited from the biggest trend in the asset management business across the last decade: index investing. With seemingly every financial publication emphasizing how low-cost indexing had won the race for assets and returns, the idea that active investment managers could beat the index almost became an investing truism.

It’s taken the worst equity sell-off in recent memory, but active funds pushed to the shadows by the proliferation of passive investing are in the light once again and many are outperforming their respective index.

Take for example, the Shelton Core Value Fund (EQTIX), which sells covered call options to generate additional cash flow and enhance distribution rates to shareholders. Owning equities allows the Fund to participate in the market upside and selling call options helps reduce volatility. Although some of the upside on equities is capped, when the market is in a downturn, the premiums received help offset losses and premiums are directly correlated to volatility. As chart below highlights, over the past month and a half, the Fund was able to closely track the S&P 500, but significantly differentiate itself as the market collapsed.

Source – Morningstar Direct


Good Time for an Active Share

While the active-versus-passive debate has often been framed as an either/or proposition, this surely needn’t be the case. We believe that combining active and passive management is the best way to construct a portfolio, focusing active strategies in areas where they are most likely to succeed.

History shows that active managers tend to deliver stronger relative returns during difficult markets. Any added value an investor gains is an important opportunity to outpace the index. Said another way, a fund’s recovery time could be dramatically reduced by quick and decisive decision making.

We all want to maximize returns when prices are trending higher, but there’s specific value to controlling the damage on the way down. It’s basic arithmetic…the larger the loss, the larger the gain it takes just to break even.

Percentage Loss Percentage Rise Needed to Break Even
10% 11%
20% 25%
30% 43%
40% 67%

Shelton Capital’s International Select Equity Fund (SISEX) which seeks to achieve long-term capital appreciation by identifying companies (mid-to-large cap foreign equity securities) that generate superior and consistent internal returns on capital. The Fund has an active share of over 95% and as of March 27th, outperformed the MSCI ACWI ex-US index by over 400 basis points. Active management allowed the Fund to have a tactical holding in cash during the recent market pullback, something an index fund would not have the flexibility to do. Importantly, just being different from the benchmark is not the only key to outperformance. A portfolio manager also needs to be correct. And this conviction level can at least be displayed with a high active share percentage, the percentage of how much a portfolio differs from its benchmark.

The Shelton Green Alpha Fund (NEXTX) also boasts a high active share of 96% and does not track a traditional benchmark. The Fund is focused on ESG investing and seeks companies with sustainable solutions. “Real risks related to climate change, resource degradation, and widening inequality are rapidly materializing,” said Green Alpha Co-founder and Chief Investment Officer Garvin Jabusch. “Innovative companies addressing these systemic risks are leading long-term economic growth and we think investing in those companies is our best opportunity to preserve and grow clients’ capital.”

A Call For Expertise 

Advocates of passive management are supported by evidence that markets cannot be beaten over the long haul, especially net of fees and taxes. But there have been sustained periods of time when active managers have delivered superior relative returns and certain asset classes in which they have demonstrated the ability to add value. Markets can be very disappointing during certain periods, and especially, in extreme markets like this one, investors should be looking for active and niche expertise.

Important Information

It is possible to lose money by investing in the Fund. Past performance does not guarantee future results. Fund information is not intended to represent future portfolio composition. Portfolio holdings are subject to change and should not be considered a recommendation to buy individual securities.

Investments in derivatives may be risker than other types of investments. They may be more sensitive to changes in economic or market conditions than other types of investments. Many derivatives create leverage, which could lead to greater volatility and losses that significantly exceed the original investment. Positions in equity options can reduce equity market risk, but can limit the opportunity to profit from an increase in the market value of stocks in exchange for upfront cash as the time of selling the call option. Unusual market conditions or the lack of a ready market for any particular option at a specific time may reduce the effectiveness of option strategies and could result in losses.

Investors should consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about a fund. To obtain a prospectus, visit or call (800) 955-9988. A prospectus should be read carefully before investing.

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Distributed by RFS Partners, a member of FINRA and affiliate of Shelton Capital Management. 2020