Innealta Capital's Innealta Country Rotation strategy is based on a quantitatively driven, cyclical and tactical asset allocation approach that potentially invests in up to 20 countries based on the specific risk/reward characteristics of each one by investing in representative equity-only exchange-traded funds (ETFs).
Those dollars not allocated to equities are invested in fixed income and alternative asset classes, including commodities, real estate, and currencies, and the fund's fixed income component aims to generate above average yield with strict risk controls by consistently investing in those fixed income sectors that have strong risk-adjusted performance potential and eligible ETF representation.
"People like to think this is an equity portfolio but it's really a fixed income portfolio with an equity enhancer," said Gerald Buetow, CIO at Innealta, "We feel it's much more robust than throwing things into a single bucket as it spans the entire spectrum of risk and of beta and duration. The new generation of ETFs allows us to effectively manage in this way."
The fund monitors 36 different international equity markets around the globe on a weekly basis using a proprietary multifactor econometric and quantitative framework that was built by Buetow and a team of academics. The model is based on economic, fundamental, risk and technical analyses that evaluate the risk/reward potential of investing in those markets versus fixed income
"We look everywhere from emerging markets to growth oriented economies to developed country markets, and if we believe there are growth opportunities present, we'll have an equal weighting to all," Buetow said.
Deciding which market to invest in and how much to invest in that market depends on its liquidity, he said, "because getting in and out of some of these exposures can be dicey and we have to identify the underliers, the market makers and so on." That's why investments are incremental: If the expected return per unit of risk of a country is more favorable when compared to fixed income, the fund will invest in the country at an initial allocation between approximately 1% and 10%, with an estimated 5% target weight.
