Catalyst/Lyons Tactical Allocation Fund May 2023 Commentary
Fears over the debt ceiling as the June 1st deadline approached (and headlines ramped up heavily) undeservingly stole the spotlight from improving inflation expectations. A late month debt ceiling deal took a notable tail risk off the table. Though market reaction was relatively subdued, the S&P 500 broke free of its recent trading range and above the 4,200 level for the first time since August 2022, shortly after the Catalyst/Lyons Tactical Allocation Fund made a tactical shift to the safe haven asset of U.S. Treasuries. With its defensive positioning through May, the Fund declined -0.51% for the month compared with -1.37% for the benchmark Lipper Flexible Portfolio Funds Index, and -1.00% for the Morningstar Tactical Allocation peer group.
The rising longer-term trends in equity markets and consumer sentiment delivered a positive signal from our risk indicators. The Fund tactically shifted its portfolio allocation back to U.S. equities to start June after an 11 month defensive positioning that held investor capital steady. Concurrent with the allocation shift, the Fund has implemented a whipsaw hedge with options on equity market indexes intended to mitigate the risk of a potential reversal in market strength over the coming months. This hedge provided a great degree of protection for Fund investors during the COVID market crash in February-March 2020, resulting in a drawdown approximately half the degree of the broader market.
Markets have remained strong due in part to resilient economic activity in the face of high inflation. With the rate of price growth slowing meaningfully in recent months, and a resilient consumer, tail risks of a hard landing have dissipated. Downside risks do remain, with the lagged effect of Fed rate policy decisions. The Fund is positioned to grow with continued equity market strength, while also providing a buffer against large near-term declines.
Matthew Ferratusco, CIPM