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  1. Recent Market Volatility Difficult To Navigate
  2. Scotia Partners, Ltd. – Our Latest Find
  3. A Leveraged Long & Short Equity Strategy, With A Twist
  4. Impressive Results In Recent Volatile Market Environment
  5. Hedge Fund-Like Strategy For Only $25,000


Over the last year or so, we have experienced an increase in market volatility that has proven to be difficult for many investors and investments to weather.  A Wall Street Journal article from earlier this year documented how from 2004 through 2006, the Dow Jones Industrial Average had only one day with a gain or loss of over 2%.  In 2007, amid concerns over the subprime mortgage bust, the bursting of the housing bubble and the credit crisis, this number rose to 14!

In fact, last Thursday and Friday were good examples of this volatility.  After an impressive gain of 1.9% in Thursday’s trading, the S&P 500 Index reversed course and lost over 3% percent the very next day.  However, as the WSJ article noted, this level of volatility is nothing new.  And in fact, the current market volatility is relatively tame compared to the bear market of 2000 – 2002.

Such recurring market uncertainty is one reason that I decided over 10 years ago to seek out professional money managers who have established successful historical track records using active management strategies. In volatile markets, investors are often hit with conflicting messages from the gloom-and-doom crowd who says “the end is near,” and the buy-and-hold crowd who counsels “this, too, shall pass.”  I continue to believe that active management strategies can offer investors an effective option for dealing with virtually any kind of market environment.

That’s why I am especially pleased this week to be able to introduce you to an Advisor who has not only posted an enviable track record over the past 3½ years, but has also shown the ability to not only survive the market’s recent volatility, but to thrive in it.  The Advisor is Cliff Montgomery, CFA, founder of Scotia Partners, LTD. and its Growth S&P Plus Strategy has now been added to our list of recommended actively managed investments.

While past performance cannot predict future results, Scotia’s 12-month gain of over 90%, and year-to-date gain of 32.56% is a testament to a trading strategy that has been able to tame the market’s recent volatility.  These are real numbers for real accounts and are net of all fees and expenses.  Scotia’s trading model is different than any I have ever analyzed, and I’ve seen a lot of trading systems in my 30+ year career.

As we review Scotia’s Partners’ strategy and performance this week, you will see numbers that will likely look better than those of any other investment alternative you may have seen.  Keep in mind that Scotia’s money management system is an aggressive program which uses leverage with both long and short positions.  It is therefore not suitable for all investors.  Past performance is not necessarily indicative of future returns.

Volatility And Your Investments

It is now quite clear that the stock markets have moved to a higher level of volatility since the beginning of the subprime crisis last year and the subsequent bursting of the housing bubble.  And, it remains to be seen how long this period will last.  Unfortunately, few sources of financial and investment information take the time and effort to discuss just what volatility is, and why it can be bad, or good, for your portfolio.

“Volatility” means the measure of the uncertainty of the returns on any particular investment, or even in regard to the market as a whole.  This uncertainty about the direction and magnitude of market returns moves higher and lower over time.  In periods of low volatility, the markets may move up or down in a seemingly orderly fashion, without many unexpected events.  But in periods of high volatility, as we have seen over the last 12-18 months, the markets can experience very large moves in one direction one day, and reverse course the next. 

While there are a variety of ways to calculate, evaluate and try to predict volatility, it still comes down to trying to “know the unknowable.”  Even so, the financial services industry has come up with ways to measure market volatility, with the best-known of these indicators being the Chicago Board Options Exchange (CBOE) Volatility Index, or “VIX” for short.  This index seeks to measure the expectations of near-term volatility based on the prices of S&P 500 index options.  The thought is that, since options represent an expectation of future price movements, then measuring the magnitude of such expectations can shed light on possible future volatility.

The following chart shows the movement in the VIX since 1990:

CBOE SPX Market Volatility

As you can see in the above chart, volatility is a regular, recurring feature in the stock markets.  More importantly, we see that periods of high volatility can last for several years, as was the case from 1998 to 2003.  While we do not know how high volatility may get in the near future, or how long it may persist, a growing number of analysts I respect believe this period could last for several more years.

One interesting thing about the market’s most recent bout of volatility is that it has proven to be very difficult to trade, even for some seasoned active managers that fared well during the 2000–2002 bear market’s even higher level of volatility.  Space does not permit me to go into some of the various theories for why the markets have been so difficult to navigate over the last couple of years.  Suffice it to say that many previously very successful money managers are scratching their heads as to why their systems have not worked over the last 12-24 months.

As a result, my staff and I have combed through the various money management databases, looking for active money managers who have shown the ability to invest successfully in this very tricky market environment.  Specifically, we looked for managers that have shown the ability to manage money in both high and low volatility markets.  As you will read below, Scotia Partners is one of the few success stories, and that is putting it mildly!

Scotia Partners, Ltd.

Scotia Partners, Ltd. was founded in 2006 by Clifford J. Montgomery, CFA. Cliff graduated from Messiah College in Grantham, PA with dual degrees in Environmental Science and Accounting but has spent most of his working career in the financial services industry.

Early in his career, Cliff worked as a mutual fund trader for a medium-sized SEC Registered Investment Advisor.  After that, he became a research analyst at Theta Investment Research, LLC, a firm that his father, Paul, had established. At Theta, Cliff had the opportunity to witness how different market environments affected the performance of different types of money management strategies.  He also began to notice how some active money managers were “whipsawed” by market action, especially during periods of high volatility.

Cliff reasoned that there should be some way to build a trading model that would issue trading signals only on days when there was the greatest probability of success and stay in the safety of a money market account the rest of the time.  Ideally, such a system would trade both long and short, and use leverage to enhance returns. 

With that in mind, Cliff began researching how markets and trading systems worked with the goal of producing his own active management strategy.  In 2003, Cliff finalized his basic trading model and began trading it in real time with real money.  He soon found that during periods of low volatility, his program did well.  More importantly, in high volatility markets, his model actually did even better.  I can tell you, this is very rare.  As always, past performance does not guarantee future results.

Over time, Cliff continued to enhance his trading model and in 2004, began actively trading his Growth S&P Plus Strategy.  In 2006, Cliff established Scotia Partners, Ltd., as a Registered Investment Advisor with the State of Pennsylvania so that he could offer his programs to investors.  Cliff chose the name “Scotia” because it reflects his Scottish heritage.  Cliff notes that his family motto, “Garde Bien,” which means “Watch Well,” serves as a reminder of the approach Scotia takes to managing client money.

Ever seeking to increase his investment analysis skills, Cliff received the prestigious Chartered Financial Analyst (CFA) designation in 2005. With so many professional designations available in the financial services business, investors sometimes can’t tell which are meaningful and which are not.  I can attest that the CFA certification is one of the most challenging financial professional designations in the investment industry, and is a distinction shared with many successful mutual fund managers and noted market analysts.

The Scotia “Growth S&P Plus” Strategy

Investors familiar with alternative investment strategies, such as hedge funds, often seek out programs that can go both long and short in the market.  In such programs, the potential for profit exists no matter what the market’s direction.  Some also seek out leveraged programs that offer greater potential gains (or losses) per dollar invested, especially in volatile markets.  Unfortunately, many such programs are available only to wealthy investors, but the Scotia Growth S&P Plus Strategy offers both long/short trading and 2X leverage without the barriers to entry found in many hedge funds.

The Growth S&P Plus investment strategy is a combination of Cliff’s basic trading model plus a proprietary overbought/oversold indicator that overlays the basic model.  The objective of the strategy is to provide positive returns regardless of market conditions, with significantly reduced risk due to limited market exposure.  Of course, there are no guarantees that Scotia can continue to achieve this objective.

Using technical analysis, the basic model begins the process by seeking to determine a long-term market trend (6-12 months) for the S&P 500, which then sets the overall direction for any trades.  If the long-term trend is determined to be bullish, only long S&P positions will be taken.  If the overall trend is gauged as bearish, the basic model will only take short S&P positions. 

Once the long-term trend is identified, the intermediate trend is then determined by plugging S&P 500 Index prices into several different technical indicators over different time intervals within a 2-4 week time period.  If the intermediate trend is in agreement with the long-term trend, the basic model is eligible for positioning on either the long or short side of the S&P.  If the intermediate trend is not in agreement with the long-term trend, then the model will remain in the safety of a money market account.

With both long-term and intermediate trends identified, the basic model then looks for short-term movements against the trend, to potentially take advantage of the probabilities in favor of “reversion to the mean.” In other words, Cliff’s model views a contra-trend market movement as an opportunity, since future market action should move back in line with the overall trend. Thus, Cliff describes his model as being trend-following in the long term, but contrarian in the short term. 

But there is yet one more wrinkle to Scotia’s Growth S&P Plus program.  Cliff has also developed a proprietary overbought/oversold indicator that overlays the basic model.  This added signal seeks to identify long or short trades that have a high probability of success, without regard to the direction of the long-term trend indicator. Accordingly, this overlay generally results in more trades per year than would be possible under the basic model. 

The Growth S&P Plus Strategy is exceptional in that it has historically been in the safety of a money market account over half of the time and trades only on days when Cliff’s proprietary strategy indicates chances are optimal for a gain.  Again, this is one of the most interesting trading strategies I have ever seen, and it has certainly done extremely well in a market environment reeling in the wake of the subprime/housing meltdown.  Remember, however, that past performance does not guarantee future favorable results.

Cliff’s methodology is 100% mechanical with no discretionary input, and no provision for Cliff to override any trading signal.  In addition, the Growth S&P Plus Strategy does not make graduated or partial investments. Instead, the model will be 100% long in the Rydex S&P 500 2X Strategy Fund, 100% short in the Rydex Inverse S&P 500 2X Strategy Fund or 100% neutral (money market), depending upon the signal.  These Rydex S&P 500 Index funds seek to provide investment returns equal to 200% of the daily performance of the underlying S&P 500 Index, with the S&P 500 2X Strategy providing a leveraged long exposure and the Inverse S&P 500 2X Strategy providing a leveraged short exposure.

Historically, the strategy has averaged approximately 65 round-trip trades per year, and has been in the safety of a money market fund approximately 65% of the time.  Scotia does not employ any formal stop-loss techniques to limit risk other than the relatively short duration of trades.  If a trade makes money, the model automatically retreats to cash. If a trade loses on its first day, the model may stay long or short, but if even one indicator disagrees with the others, the model exits the market and goes to cash.

Performance Evaluation

To say that Scotia’s track record is one that attracts a lot of attention would be an under- statement.  As of May 30, the Growth S&P Plus Strategy had a 12-month gain of over 90% and a year-to-date increase of 32.56%. While past performance doesn’t guarantee future results, these numbers are hard to ignore.  However, we feel that the real story is how Scotia’s trading model has been able to be effective in the volatile markets of 2007–2008, when many other previously successful trading systems failed miserably.

You will note that the Scotia growth chart below shows a more modestly sloping growth line from its inception to apprx. June of 2007, at which time the growth line took a much steeper upward angle. When comparing this chart to the VIX chart above, we see that the higher level of growth coincided with an increase in the market’s volatility, brought on by the subprime fiasco and subsequent bursting of the housing bubble.

As a result, we essentially split Scotia’s track record into two parts and scrutinized each using our various investment analysis software.  As noted above, Scotia’s performance during the market volatility that began around June of 2007 has been spectacular.  As I noted in the Introduction, Cliff’s cautious approach to money management not only survived, it thrived. 

Since we know that the market goes through cycles of high and low volatility, we also analyzed Scotia’s performance prior to June of 2007 to see how Growth S&P Plus might perform in more “normal” market conditions. We were pleased to find that, between its inception in August of 2004 and May of 2007, the Growth S&P Plus Strategy produced an annualized gain of 12.84% with a maximum month-end drawdown of only -7.36%. 

Since any long-term investment horizon is likely to include periods of both high and low volatility, Scotia's strategy would appear to give investors the potential to do well in either type of market environment.  However, if you believe as I do that the stock market will continue to be volatile over the next few months or even longer, the Growth S&P Plus Strategy may be exactly what your portfolio needs now.

Though the worst month-end drawdown is a relatively tame -7.36%, Cliff says that potential drawdowns in the Growth S&P Plus program can be -20% or more based on his analysis and testing. This, again, confirms that this program should only be considered by investors with an aggressive risk tolerance.

Since its inception in August of 2004, the Scotia Growth S&P Plus Strategy has proven its ability to navigate past periods of both high and low market volatility by posting an annualized return of 29.35% through May 30, 2008, net of all fees and expenses, with a worst-ever month-end losing period (or “drawdown”) of –7.36%.  See the actual performance history in the tables below for more comparisons and detailed monthly returns.  Also note that there are no guarantees of favorable future performance.

In short, dear readers, I have not seen a real performance record like this in a long time!

Performance Statistics
(Net of all fees and expenses)

 Performance Statistics

Please see Important Notes at the end of this E-Letter.

While Scotia’s performance is very impressive by itself, it’s even more so when compared to the S&P 500 Index’s annualized return of 8.43% and the Nasdaq 100 Index’s annualized return of 7.86% over the same period of time.  While past performance is not necessarily indicative of future results, it’s clear that Cliff’s high-probability approach to money management has been effective in the past, especially when faced with highly volatile market conditions.

Since Scotia’s Growth S&P Plus Strategy has numbers that are sure to attract attention, it is important to note that this investment may be most suitable for aggressive investors who are comfortable with using leverage and a long/short exposure to the S&P 500 Index. You should only consider this program if you have a three-to-five-year investment horizon and are comfortable possibly spending a large amount of time in a money market account, awaiting the next high-probability trading opportunity.

Even though Scotia’s Growth S&P Plus Strategy has been in the market less that half the time and has delivered outstanding results with limited losing periods, this is an aggressive investment and should only be considered by investors who are comfortable with taking on significant investment risk.  Cliff counsels his direct clients to invest no more than 20% of their portfolios into this program, as he feels the recent big run-up in performance may not be sustainable.

The Trading Platform

Cliff has outsourced administrative tasks to Purcell Advisory Services, a Registered Investment Advisor in Tacoma, Washington that we also work with. Purcell provides back-office support for his trading activities, allowing him to concentrate on market analysis and the generation of a trading signal. Cliff communicates his trading signals daily to Purcell, and they execute the trades and maintain client accounts. Purcell is highly experienced when it comes to providing back-office operations for professional money managers, and currently does so for a number of Investment Advisors nationwide. 

Because of this outsourcing, the Halbert Wealth Management due diligence team has also subjected Purcell Advisory Services to a full review of their administrative capabilities and internal controls, including an on-site visit to their offices in Tacoma, Washington.  We are happy to report that they passed our due diligence review with flying colors.

Cliff shares offices with his father, Paul, and Theta Investment Research.  As a result, Paul is very familiar with the trading strategy, and provides an ample level of backup should Cliff be unable to trade for any reason.  Purcell also serves as an extra measure of backup so that trades could be unwound if both Cliff and Paul were to become incapacitated, or in the case of a regional disaster, power outage or Internet disruption.

All accounts are held in individual accounts at Rydex Funds, and clients have online access to their accounts via the Rydex website. Both Rydex and Purcell issue quarterly statements, and Rydex provides year-end tax reporting for those investing through non-retirement accounts. 

Since this program has the potential to trade frequently, investors in taxable accounts may have to deal with “wash sales” and short-term gains.  Given the actual performance numbers of late, it may be well worth any tax disadvantages.  Even so, it may be most suitable for IRAs and other tax-qualified retirement accounts. The Growth S&P Plus program may also be managed within no-load, low-cost variable annuity products available through Purcell that can help to address the negative tax consequences of frequent short-term trading in a non-retirement account. 

Scotia’s minimum account size is $25,000. Management fees are billed quarterly in advance, based on the following schedule:

First $100,000


$100,001 to $1 million

2.25% (entire account)

Over $1 million

2.00% (entire account)


The Scotia Growth S&P Plus Strategy can be a very attractive option for investors who understand the risks and want to diversify their portfolios by adding an investment that has both leverage and a long and short exposure in the market.  As noted above, the program has an annualized return of 29.35%, net of all fees and expenses, with a worst-ever month-end drawdown of only –7.36%. 

Yet the most impressive thing about this program is that it has shown outstanding results during the last 12 months, gaining over 90% during a time when other money managers found it difficult to stay above water.  Keep in mind that past results are not necessarily indicative of future performance, and you should not expect the same return over the next 12 months.

And you can access Scotia’s Growth S&P Plus Strategy for a minimum investment of only $25,000, which is important for investors with smaller portfolios who want access to an investment option that uses both leverage and a long/short trading strategies.

Our analysis has also shown that Scotia’s historical returns show little or no correlation to the major stock market indexes, or to other Advisors I have written about in this E-Letter.  Thus, the Growth S&P Plus Strategy may be an ideal complement to the other actively managed investments offered under the Halbert Wealth Management AdvisorLink® Program.  For more information on the Growth S&P Plus Strategy, visit our website at www.halbertwealth.com.

If you believe, as I do, that market volatility could continue to be high, or go even higher, and that the equity markets will face some tough times in the next several years, then I suggest that you take a serious look at Scotia’s very successful program.  Having the potential to make money in a very volatile market may prove extremely important over the next few years.

If you have any questions or would like to talk to one of our experienced Investment Consultants about whether this program may be suitable for a portion of your portfolio, please give us a call at 1-800-348-3601, or e-mail us at [email protected].  You can also request additional information, including paperwork to establish an account, by going to our online request form.  Also be sure to read the Important Notes about this investment program following my signature below.

Very best regards,

Gary D. Halbert

IMPORTANT NOTES:  Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL), and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states.  Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice.  Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors.  HWM receives compensation from PAS in exchange for introducing client accounts.  For more information on HWM or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II.  Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), and the NASDAQ Composite Index represent unmanaged, passive buy-and-hold approaches.  The volatility and investment characteristics of these benchmarks may differ materially (more or less) from that of the Advisor.  The performance of the S & P 500 Stock Index and the NASDAQ Composite Index is not meant to imply that investors should consider an investment in the Scotia Partners Growth S & P Plus trading program as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks that comprise the NASDAQ Composite Index.  Historical performance data represents an actual account in a program named Scotia Partners Growth S&P Plus, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Scotia Partners Growth S&P Plus.  The signals are generated by the use of a proprietary model developed by Scotia Partners.  Statistics for “Worst Drawdown” are calculated as of month-end.  Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.  Mutual funds carry their own expenses which are outlined in the fund’s prospectus.  An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results.  The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Scotia Partners Growth S&P Plus trading program.

In addition, you should be aware that (i) the Scotia Partners Growth S&P Plus program is speculative and involves a high degree of risk; (ii) the Scotia Partners trading program’s performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell Advisory Services will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Purcell Advisory Services  trading  program’s fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees.  They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability.  Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss.  The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 06-10-2008 1:42 PM by Gary D. Halbert