Suitability is a function of risk tolerance, coupled with client-specific goals. We believe the ability to withstand loss, in addition to understanding each individual client’s situation, ultimately drives the investment decision.
If a client incurs a loss in excess of his or her threshold, the investor is likely to sell at the worst time or give up entirely. Alternatively, if the investor’s portfolio stays within such threshold, the investor is likely to stay invested, which we believe is the key to success. Cabana’s portfolios attempt to address this fundamental reality by identifying a target drawdown percentage at the onset of the investment process and striving to stay within that range in adverse market conditions.
Cabana tested this strategy during the time period from 2001-2011 before formally implementing it in 2012. The results of that hypothetical test are displayed here.
Cabana numerically quantifies acceptable levels of risk by identifying a “target drawdown” percentage for each portfolio at the onset of the investment process.
Drawdown is defined as the maximum loss, or amount an investment can be expected to fall, from peak to trough during adverse market conditions.
Monthly returns are used to calculate the drawdown percentage. This method of measurement creates a new "high-water mark" each time the portfolio’s value increases, which means drawdown is determined from a portfolio’s highest value, not from an investor’s starting balance.
All portfolios in the Target Drawdown Series are constructed with the primary goal of minimizing losses where possible - especially losses that exceed a portfolio’s target drawdown parameter. This investment philosophy allows clients to remain fully invested at all times, set expectations for loss, and actively participate in favorable market conditions.
Verified Hypothetical Model Disclaimer
Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser. Cabana only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of Cabana by securities regulators and does not mean that such investment adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. This material is proprietary, and is not to be copied, reproduced, altered, deconstructed, or distributed without the express written consent of Cabana, LLC.
The Verified Hypothetical Model (“VHM”) is provided for illustrative purposes only and should not be construed or relied upon as actual performance. The performance data and metrics represented in the VHM are derived from hypothetical back-testing of Cabana’s proprietary algorithm and do not represent returns during a time when actual client funds were invested. However, the hypothetical back-tested data depicted herein has been independently examined by a third-party. Cabana started using its proprietary algorithm to manage actual client funds on January 1, 2012. Actual performance data for Cabana’s Portfolios can be found online at https://targetdrawdown.thecabanagroup.com/.
Hypothetical back testing involves a hypothetical reconstruction, based on past market data, of what the performance of a composite would have been if the adviser had managed the composite using a specific investment strategy. Hypothetical back-tested returns do not represent actual trading and will not accurately reflect the impact of transactional costs as well as material economic and market factors on the adviser’s decision-making during this time frame. As a result, actual returns will vary significantly from hypothetical back-tested returns. Specific limitations and differences between the VHM and Cabana’s Target Drawdown Series of live portfolios (“Cabana’s Portfolios”), include but are not limited to, the following:
Unless otherwise indicated, performance data, benchmark comparisons, and statistics are for illustrative purposes and shown gross of advisory fees but net of trading costs. Performance data is expressed in U.S. dollar currency and it includes the reinvestment of dividends and capital gains. Target Drawdown is identified on a gross of advisory fees but net of trading costs basis. PTTRX is comprised primarily of intermediate-term, investment grade bonds. VBINX invests roughly 60% in stocks and 40% in bonds by tracking two indexes that represent broad barometers for the U.S. equity and U.S. taxable bond markets. SPY is an ETF that tracks the performance of 500 leading U.S. large cap companies. Benchmark indices will likely materially differ from Cabana’s Portfolios. Additional information regarding the VHM methodology can be found on the Independent Verifier’s report, which is appended hereto and available upon request. Detailed information as to how the returns are calculated can be obtained online from the following link http://bit.ly/thecabanagroup_performance_reporting_methodology_July2019.
No client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for any investor. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. While loss tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account. It is the responsibility of the advisor to determine what is suitable for the client. An advisor should not simply rely on the name of any portfolio to determine what is suitable. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability. All references to Cabana’s proprietary algorithm in this fact sheet refer to the most current version of the algorithm as of the date this fact sheet is published.