How MRP’s Synthetic Equity is balancing growth and protection for advisors

It’s often been said that "time in the market beats timing the market" and "asset location beats security selection," but in today’s current market environment, where the S&P 500 is up 30 percent, valuations remain stretched and financial advisors face a conundrum.

And while the industry may be optimistic about the economic environment, valuations still remain stretched, a belief espoused by Alexander Flecker, head of distribution at Measured Risk Portfolios, an RIA with almost $4 million, based in San Diego.

"People are still sitting on a lot of cash, still a little bit hesitant to get in at where the current market is. It's tough to get that money off the sidelines,” said Flecker.

This hesitancy is understandable given the performance of traditional 60/40 and 70/30 portfolios in recent years. However, MRP has launched a flagship offering to cast doubts, creating a solution designed to mitigate risk while capitalizing on market upside.

The firm’s Synthetic Equity product, also known as Synth Equity for short, combines traditional fixed income security with options-based growth, challenging conventional diversification models, while also favoring a unique portfolio allocation of 85 percent short-duration US Treasuries and 15 percent call options on the S&P 500.

At its core, the product provides advisors with a solution that can protect client assets while still offering the potential for growth. Synth Equity was initially created out of the turmoil that happened during the Dotcom crash, Flecker explained.

"The founders were essentially doing the same thing that most people do, even to this day, in trying to create efficient and optimized portfolios to balance risk and with a moderate expected rate of return,” he said. “But the problem with that is you're only using back tests or hypothetical data to project what may or may not happen in the future."

The solution they landed on was a portfolio that allocates 85 to 90 percent of the assets to short-duration Treasuries, with the remaining 10 to 15 percent invested in call options.

"I don't know what the market's going to do tomorrow, next week, next month or next year, but I can tell you with almost 99 percent confidence, that if you have 85 percent or 90 percent of your money in the relative safety of short duration treasuries, that's your fortress of solitude," said Flecker.

Not only does the product offer downside protection and uncapped upside potential for advisors, but it also offers flexibility and customization, by offering three risk sleeves: Growth, Core, and Lite, which allow advisors to tailor the portfolio to each client’s risk tolerance.

The Growth sleeve targets higher returns with a 12.5 percent risk ceiling, while the Core and Lite options cater to more conservative clients. Advisors can choose the model that aligns with their clients’ objectives, ensuring flexibility and adaptability.

“I encourage everybody to go with the Growth because 12 and a half percent counter drawdown risk isn't all that crazy, no matter what your portfolio is,” said Flecker.

“If you never want to see your portfolio down double digits and you're more concerned about capital preservation, maybe the Lite's best for you. If you fall somewhere in the middle, we have the Core. Essentially, you tell us how much you're willing to lose in a calendar year, and we’ll build you a portfolio that's appropriate for your risk tolerance,” he added.

Synth Equity’s primary drawback is a flat market with low volatility, which could erode the time value of options. However, active management helps mitigate this risk by reinvesting profits from call options into treasuries.

“Even in a challenging year, we may disappoint, but we’ll never devastate,” Flecker said.

After formalizing the strategy as a separately managed account (SMA) in 2012, Synth Equity has demonstrated impressive results. Since 2016, it has outperformed the S&P 500 net of a 75-basis point fee, with lower volatility and less than half the max drawdown, Flecker said, while noting that MRP reports the performance to Global Investment Performance Standards (GIPS).

This consistency seems to resonate with advisors and clients alike.

“Synth Equity has been such a tailwind for these advisors who really understand the story, to go out and be able to market against that feeling and those behavioral biases that are detrimental to the long-term returns,” said Flecker. “People in the industry have been familiar with these types of structures, whether it's through an annuity, or it's through something similar on the options-based investing front.”

“How we manage portfolios and have been doing it for 20 years has really shaped up to be something pretty incredible,” Flecker added.