Volatility – We’ve actually been here before.

We are frequently asked if we are in an unprecedented period of volatility, with the implied and more important question being can our investment decision model handle this volatility.  Let me say first that we are not in unprecedented territory. In the chart below you can see many periods in which the market, the S&P 500, has experienced large price swings of greater than 5% over short periods of time.  In the last 3 months, we have had 11 of these 5% swings with an average duration of 4.4 days for each move (up or down).   And this has happened many times before:

• September 2009 to August 2010: 15 swings of this size or more averaging 15.6 days in duration.
• Late 2008 to early 2009: 29 price swings of this magnitude averaging only 3.4 days in duration.
• June 2002 to March 2003: 26 similar price swings averaging only 7.6 days in duration.
• January 2000 to January 2001: 28 similar price swings averaging only 9.8 days in duration.
• January 1999 to October of 1999: 17 price swings of 5% or greater averaging only 11.5 days each. During 1999, Stadion experienced 7 back to back whipsaw (losing) trades, but ended with, what now looks like, a very good year (see below for specific performance). The year turned around because a definite trend developed in the 4^th quarter of that year.
• Sept 1998 to Oct 1998 (Just 2 months!):  6 price swings of 5% or greater averaging just 4.3 days in duration. Yet in 1998 the Managed Portfolio had a decent return for the year (see below for specific performance).
• August 1997 to January 1998: 9 of these rapid price swings.
• Again 1997 and 1998 ended up being good years for us.

(Click for Larger Image)

Here is the point: this type of volatility is not unprecedented, and this is certainly not the first time we have managed through it.  Going back to 1996 (the inception of our Managed Strategy),  we have had a number of these “range bound” markets that include similar, large price swings over a short duration.  In each of the previous occurrences the markets eventually broke out of these range bound zones and trended in one direction or the other. Between August 1997 and January 2001, there were 4 similar consolidations that occurred. In 1997, 1998, and 1999, the market saw some very strong positive trends that followed these consolidations.  Conversely, during 2000 the market broke out of the range bound zone to the down side in a big way.  At the end of another range bound volatile period in March of 2003, the market went on a very nice positive trend as the next cyclical bull developed.  But even during this cyclical bull run, from 2003 to late 2007, there were periods of volatility, see 2004 and 2005, similar to the price swings we have seen lately.  A range bound zone developed from July ’07 to March of 2008.  At that time no one knew for sure we were headed for one of the worst bear markets we have seen in the modern era. In fact, we had numerous inquiries in February and March of 2008 as to why we were not invested during those rallies as many of the talking heads were saying the worst was over.

When looking back at these short-term periods on our long-term return chart, these volatile periods look like noise.  Especially when compared to our performance over that 16 year period; and even more so on a risk adjusted basis.  During those periods we suffered similar short term frustrations but by sticking to our principles we have been able to effectively navigate and mange through some very pronounced market cycles; that include the lost decade.

The markets will eventually break out of this range bound zone one way or the other.  If the trend is a strong, positive one the model will pick up on it and call for us to try and participate.  If the trend is severe to the down side, as we have seen before, our risk control mechanisms will have us defensively positioned so that we can avoid much of the ensuing market declines.

By Brad Thompson, CFA – Chief Investment Officer

Stadion Managed Strategy Calendar Year Returns 1996 – 2010

Stadion Money Management, LLC claims compliance with the Global Investment Performance Standards.

Stadion Money Management, Inc. (Stadion) is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940. The Stadion Funds business unit manages two publicly traded registered mutual funds. Stadion is also the investment manager to a number of separate accounts and collective investment trusts (“Stadion 401k Satellite Funds”) offered as an investment option within various 401k plans The Stadion Select business unit provides investment advisory services to individual investors under a separately managed account structure and has full discretion over the separately managed accounts. Stadion Select also offers separately managed accounts via sub-advisory relationships under wrap programs. The Stadion Managed Strategy Composite performance inception date was January 1, 1996. The Managed Strategy, Stadion’s more conservative strategy, has the ability to invest 100% in money market instruments during difficult market conditions (when our model indicates the market is exceedingly risky) or all portfolio assets in equity positions (when our model indicates that the probability of loss is lower) — or any combination in between.  Managed portfolios are actively (“tactically”) managed among exchange traded funds (ETFs) and money market funds. We regularly assess not only market conditions, but portfolio holdings—and make adjustments accordingly. The composite includes all accounts which are under full investment discretion of Stadion Money Management, and which utilize the Managed Strategy. A complete list and description of all firm composites is available upon request. Stadion does not manage any strategy toward a specific benchmark index, and each strategy may be invested in mutual funds, exchange-traded funds (ETFs) with underlying holdings in stocks and/or bonds, and cash positions from time to time. The comparative performance results shown for the S&P 500 and other referenced indexes demonstrates how the U.S. stock market performed generally during the same periods, and how a hypothetical investment in the market would have performed during such periods. The indexes are not available for direct investment and there are no trading expenses associated with the index. Inception dates provided for the market indexes are shown for comparative purposes only. Actual inception dates of each index vary. Returns are expressed in U.S. dollars. Gross of fees returns are calculated gross of management and custodial fees and net of transaction costs. Net of fees returns are calculated net of management fees and transaction costs and gross of custodial fees. Both returns are calculated gross of all withholding taxes on foreign dividends. The composite results portrayed reflect the reinvestment of dividends, capital gains, and other earnings when appropriate. Accruals for fixed income and equity securities are included in calculations. Stadion’s current annualized fee schedule based on the value of the client’s account is as follows: First $1,000,000 1.25%; Next $2,000,000 0.95%; Over $3,000,000 0.85%. Prior to 2005, a flat annual fee of 2% was netted out, on a monthly basis, for all accounts and all assets within the strategy. All assets in all accounts are under a bundled fee structure for all periods presented. To receive a complete list of Stadion’s composites and/or a presentation that adheres to the GIPS standards, please contact Stadion at 800-222-7636 or write to Stadion Money Management, LLC, 1061 Cliff Dawson Road, Watkinsville, GA 30677. Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion‘s  investment strategies may lose money. Investment return and principal value of an investment will fluctuate so that an investor’s portfolio may be worth more or less than their original investment. The investment strategy presented is not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets.