Tag Archives: economy

Adding Risk Parity To A Portfolio

We’re always trying to build a better mousetrap around here by adding non-correlated asset classes to our portfolio. While there is no “free lunch” in economics, true diversification is about as close as you’re ever going to get. And by “true diversification,” I mean adding assets to the portfolio that really do zig when the others zag. A portfolio of 100 stocks doesn’t offer much diversification benefit when the entire market rolls over. At any rate, Dr. Phillip Guerra and I have cooked up a suite of alternative portfolios based on the principles of risk parity. We’ve been running our Active Risk Parity Portfolio With 7% Annual Volatility Target live since September, and we’ve backtested it to 1996. The results aren’t too shabby, if I do say so myself. Average annual returns of 11.5% with a maximum drawdown of just 9.8% and a correlation to the stock market of just 0.24. Rather than target returns – which are impossible to know with any accuracy in advance – we target volatility. While volatility will also fluctuate over time, we find it to be more accurate to target, and also that it gives us a better handle on risk. The key to making money over time is first to avoid losing it. I don’t consider this a replacement for a traditional long stock portfolio. In fact, most of the money I manage is long-only and dividend-focused. But I certainly do consider this a nice addition to a traditional stock portfolio. With bonds not likely to offer much in the way of return anytime soon, you need viable alternatives for the “40” in the old 60/40 portfolio of stocks and bonds. A risk parity model can certainly fill that role. This article first appeared on Sizemore Insights as Adding Risk Parity to a Portfolio . Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

Managed Futures To Smooth Out Market Bumps

This article first appeared in the March issue of WealthManagement magazine and online at WealthMangement.com . Skeptics were easy to find in the bull market, but these funds are now working as advertised. If there was ever a time when a countertrend strategy was needed, it would be now. By countertrend, of course, I mean a tactic that gains while the stock market swoons. There are bear market funds aplenty but those aren’t suitable as permanent portfolio allocations. There are bond funds of various stripes, too, which boast of low correlations to equities, but those are typically low volatility products whose gains are often swamped by equity losses. Enter the 361 Capital Global Counter-Trend Fund (MUTF: AGFQX ) , a managed futures strategy of a different sort. Employing a suite of systematic trading models, AGFQX takes long and short positions in equity index futures contracts – and equity futures only – in U.S., European and Asian markets. At times, the fund also goes to cash. Over the past 12 months, the $18.9 million fund gained more than five percent while the S&P 500 lost nearly nine. Countertrend indeed. It didn’t score its gains by simply shorting equity futures. That would be trend following, just in an opposite direction. No, AGFQX thrives where there’s short-term up-and-down movement in its target equity indices. The fund aims to sell overbought contracts and buy futures at oversold levels to harvest market “noise,” or the frequency of directional changes. The greater the number of price swings, the more opportunities to buy on down days and sell on up ones. The fund’s managers, expecting that the size of trading losses and gains will be roughly equal over time, rely upon a high “hit ratio” (percentage of winning trades) to garner profits. The fund runs into trouble when its target markets trend violently in one direction. That’s what happened late last summer when a market drop sent the fund skidding into a sharp drawdown (see Chart 1). The fund subsequently recovered, ultimately reaching new highs as the broad stock market found fresh lows. More Strategies The equity countertrend fund wasn’t the only managed futures strategy that found purchase this year. In fact, 96 percent of public managed futures funds – exchange-traded and ’40 Act alike – have booked year-to-date gains. Some capitalized on the downtrend in the petroleum complex. Some picked up bullish gold positions. Others bought bond futures. For most, though, the gains haven’t been enough to overcome a year’s worth of setbacks. Of 34 portfolios extant (31 mutual funds and 3 ETFs), 21 are still under water on a 12-month basis. A handful, AGFQX included, stand out because their year-to-date gains built on positive results earned over the preceding 12 months. They’re tallied in Table 1. Like most managed futures strategies, these five mutual funds exhibit little correlation to the equity and bond markets. Notice the low r-squared (r 2 ) coefficients versus the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) and the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ) . Think of these values representing the degree (in percentage points) that movements in the index ETFs explain the managed futures products’ price variance. Most are quite low, though AGFQX, not surprisingly, shows a modest link to SPY because of the summer selloff. Notable, too, is volatility or, rather, the relative dearth of it. Maximum drawdowns for four of the five funds are fractions of SPY’s. These drawdowns represent the greatest peak-to-trough loss for each portfolio before a new high is attained. Maximum drawdown is used to compute a managed futures or hedge fund’s risk-adjusted return. You can think of the Calmar ratio as the alternative investment world’s Sharpe ratio. The higher it is, the better an investment performed over a specified time period; the lower the ratio, the worse it behaved. Under the Hood We’ve already looked inside the 361 Capital countertrend portfolio, so let’s peek under the hoods of the others: The $555.4 million LoCorr Managed Futures Strategy Fund (MUTF: LFMAX ) manages the futures side of its portfolio through an investment in a wholly-owned Cayman subsidiary. This controlled foreign corporation (“CFC”) is not subject to all of the investor protections of the ’40 Act, a fact that might be worrisome for some investors. At the very least, the arrangement makes the fund opaque. We can see fairly well how the fund’s collateral – the fixed income portfolio used to meet margin requirements – is managed, but insight into the fund’s futures strategy is extremely limited. The fund engages a triad of trend-following commodity trading advisors (“CTAs”) on the futures side. At last look, the fund had a sizable short exposure in the energy sector. LFMAX is the most expensive product in the table with an annual expense ratio at 2.11 percent. The Abbey Capital Futures Strategy Fund (MUTF: ABYIX ) is another multi-manager product which allocates, through its own CFC, to a roster of nine global investment advisors, each pursuing diverse trading strategies. Like the LoCorr fund, ABYIX actively manages its fixed income collateral. And, like the LoCorr fund, Abbey’s $353 million futures fund most recently has been short the energy sector. Shorts in agricultural commodities also added to the fund’s gains. You’ll pay 1.99 percent a year to invest in ABYIX. Trend momentum drives the Goldman Sachs Managed Futures Strategy Fund (MUTF: GMSAX ) which has profited through short positions in the commodities, currency and equity sectors as well as positions designed to capitalize on flattening in the fixed income sector’s yield curve. GMSAX’s fund runners don’t use a CFC and manage the fund in-house, keeping the cost structure relatively low. Annual expenses run 1.51 percent currently for the $153.3 million portfolio. With assets of just $16.9 million, the TFS Hedged Futures Fund (MUTF: TFSHX ) is the table’s smallest – and best performing – portfolio. The fund relies upon a Cayman-based CFC to obtain its futures exposure which is managed internally based on proprietary models. The TFS models don’t look for trends. Instead, they plumb the futures market term structure looking for value plays – buying underpriced contracts and selling those deemed rich which, by combination, reduces exposure to the underlying asset. Ergo the “hedge” in the fund’s title. Hedging comes at a price, namely a 1.80 percent expense ratio. A Diverse Variety of Strategies Managed futures – at least those funds showcased here – represent a diverse variety of strategies. That makes them difficult to classify as a true asset class. It behooves investors, and their advisors, to look closely at a fund’s return pattern to get a sense of its ability to mesh with existing allocations. Sometimes, a fund with a high return takes a backseat to one that is the better yin to an investor’s yang. A lookback over the past 12 months (see Table 2) illustrates the impact each of our five managed futures funds might have had on classically allocated stock and bond portfolio. Here, a 20-percent exposure to managed futures is obtained with a carve-out from the equity allotment, transforming a 60/40 (by percentage, SPY and AGG respectively) portfolio into a 40/40/20 mix. Adding any of the managed futures products to the basic portfolio improves returns. Though a 20 percent allocation isn’t enough to overcome the entirety of the equity market’s damage, it comes darn close. Portfolio volatility, too, is appreciably dampened. Is it likely these funds will continue their (mostly) winning ways? Keep the words of Finnish Formula 1 racer Kimi Raikkonen in mind: “You always want to have a winning car, but there is no guarantee that it will be.”

Retail ETFs On Fire After Robust Results, Upbeat View

As the Q4 earnings season is winding down, the retail sector is grabbing attention with releases from its major players last week. Most of the retailers managed to beat our earnings and revenue estimates amid a slowing global economy, a stronger U.S. dollar and weakness in oil. In particular, better-than-expected earnings from retailers like J.C. Penney (NYSE: JCP ), Macy’s (NYSE: M ), Best Buy (NYSE: BBY ) and Home Depot (NYSE: HD ), and upbeat guidance from Target (NYSE: TGT ) and Lowe’s (NYSE: LOW ) spread optimism into the whole sector, and drove the stocks higher. However, disappointing results from Nordstrom (NYSE: JWN ) and Wal-Mart (NYSE: WMT ) weighed on the sector’s performance. Let’s dig into the details of the earnings releases: Retail Stocks Springing Surprises One of the leading department store retailers, J.C. Penney , emerged as the real champion in the Q4 earnings season as the stock popped up 14.7% and hit a new 52-week high of $9.7 1 following blockbuster fourth-quarter fiscal 20 15 results on February 25 after the market closed. The company came up with a huge beat of 77.3% on earnings and a mild beat of 0.02% on revenues. Additionally, J.C. Penney expects to post its first annual profit in five years in 20 16 (read: Retail ETFs to Watch Ahead of Q4 Results ). The big-box retailer, Target , also hit a new 52-week high of $78.97 in the last trading session, while its shares have jumped 6% since its fiscal fourth-quarter 20 15 earnings announcement on February 24. Though the retailer lagged our estimates for earnings by a couple of cents and for revenues by $0. 157 billion, it impressed investors with its upbeat guidance for the current fiscal year. The company guided earnings per share in the range of $ 1. 15-$ 1.25 for the ongoing fiscal first quarter and $5.20-$5.40 for fiscal 20 16. The mid-points were ahead of the Zacks Consensus Estimate of $ 1.2 1 for the first quarter and $5. 16 for the full fiscal at the time of the earnings release. The second-largest department store retailer, Macy’s , has seen share price appreciation of 5.8% to date post its earnings announcement on February 23. The company reported earnings per share of $2.09 and revenues of $8.869 billion that outpaced our estimates by 23 cents and $0.092 billion, respectively. For fiscal 20 16, the company guided earnings per share of $3.80-$3.90, the lower end of which was much above the Zacks Consensus Estimate of $3.72 at the time of the earnings release. Home Depot , the world’s largest home improvement retailer, cheered investors with better-than-expected fiscal Q4 results thanks to mild weather and an improving housing market. The company beat on earnings by 7 cents and on revenues by $0.6 19 billion. For fiscal 20 16, Home Depot expects earnings per share to increase 12%- 13% to $6. 12-$6. 18 and revenues to grow 5. 1%-6%, with same-store sales growth of 3.7%-4.5%. Driven by solid results, the company also raised its quarterly dividend by 17% to 69 cents per share and announced a $5 billion share buyback plan. The stock has gained nearly 2.7% to-date post its earnings announcement on February 23. The second-largest home improvement retailer, Lowe’s , reported in-line fourth-quarter fiscal 20 15 earnings but beat on revenues by $0. 182 billion. Moreover, the company provided an upbeat guidance for fiscal 20 16. The company expects sales to grow 6%, with 4% growth in comparable sales and earnings per share of $4.00. The stock has added 1.8% to-date since its earnings release on February 24. The largest U.S. electronics chain, Best Buy , topped our fourth-quarter fiscal 20 16 earnings estimate by 13 cents, but fell short of our revenue estimate by $0.049 billion. For the ongoing first quarter of fiscal 20 17, the company expects earnings per share in the range of 3 1-35 cents. Shares of BBY has gained 0.5% since its earnings announcement on February 25. The Real Dampeners The specialty retailer, Nordstrom , is the major loser as the stock has tumbled nearly 6.7% following lackluster fourth-quarter fiscal 20 15 results. The company missed the Zacks Consensus Estimate for earnings by a nickel and for revenues by $0.09 1 billion. In addition, the company issued disappointing earnings per share guidance of $3. 10-$3.35 for fiscal 20 16, the upper-end of which was well below the Zacks Consensus Estimate of $3.45 at the time of the earnings release. Nordstrom expects sales to increase 3.5%-5.5% and comps to grow in a flat to 2% growth range. The stock is modestly down 0.4% since the earnings announcement on February 18 after-market close. Shares of Wal-Mart , the world’s largest retailer, fell about 3% after the company missed on revenues by $0.687 billion for the fourth quarter of fiscal 20 16 and issued a weak revenue outlook, pointing to continued struggle with lower traffic and decelerating e-commerce. The company lowered its revenue growth projection for fiscal 20 17 from 3%-4% projected earlier to relatively flat. It also provided earnings per share guidance of $4.00-$4.30 for the full fiscal and 80-95 cents for fiscal first quarter of 20 17 (read: Consumer ETFs in Focus as Wal-Mart Disappoints ). The Zacks Consensus Estimate for the full year and the ongoing quarter were $4.56 and 88 cents, respectively, at the time of the earnings release. However, earnings per share came in at $ 1.49 for the fiscal fourth quarter, above the Zacks Consensus Estimate by 3 cents. The stock is up 0.6% to-date post earnings results on February 18. ETFs in Focus Robust performances and bullish guidance from most retailers offset the handful of weak earnings releases, leading to a rally in retail ETFs over the past 10 days. Investors seeking to take advantage of the ongoing rally in the space could consider the following three ETFs given the power-packed earnings releases. Any of these could be excellent choices given that these have a Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy), suggesting their continued outperformance in the months ahead. SPDR S&P Retail ETF (NYSEARCA: XRT ) This product tracks the S&P Retail Select Industry Index, holding 100 securities in its basket. It is widely spread across each component as each of these holds less than 1.6% of total assets. Small cap stocks dominate nearly three-fifth of the portfolio while the rest have been split between the other two market cap levels. In terms of sector holdings, apparel retail takes the top spot at one-fourth share while specialty stores, automotive retail and Internet retail have a double-digit allocation each. XRT is the most popular and actively traded ETF in the retail space with AUM of about $667.9 million and average daily volume of more than 4.3 million shares. It charges 35 bps in annual fees and gained 12.8% over the past 10 days. The fund has a Zacks ETF Rank of 1. Market Vectors Retail ETF (NYSEARCA: RTH ) This fund tracks the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket. It is a largecap-centric fund and is heavily concentrated on the top 10 holdings with 64. 1% of assets. The largest allocations go to Amazon.com (NASDAQ: AMZN ), Home Depot and Wal-Mart (read: ETFs to Watch Post Amazon’s Big Earnings Miss ). Sector-wise, specialty retail occupies the top position with less than one-third share, followed by double-digit allocations each to Internet and catalog retail, hypermarkets, drug stores, departmental stores and healthcare services. The fund has amassed $ 149.6 million in its asset base while average daily volume is moderate at about 77,000 shares. Expense ratio came in at 0.35%. The product added 8.2% in the same period and has a Zacks ETF Rank of 2. PowerShares Retail Fund (NYSEARCA: PMR ) This retail fund provides a diversified exposure across various market caps with 45% in large caps, 43% in small caps and the rest in mid caps. This is easily done by tracking the Dynamic Retail Intellidex Index. The fund has accumulated just $22.8 million in its asset base while trades in a light volume of under 5,000 shares a day. The ETF charges 63 bps in fees per year. In total, the product holds 29 securities with none accounting for more than 5.88% of assets. In terms of industrial exposure, specialty retail takes the top spot at 48%, while food retail ( 19%) and drug stores ( 12%) round off the top three positions. PMR is up 8.5% in the past 10 days and has a Zacks ETF Rank of 2. Bottom Line The string of earnings and revenue beat has allowed retail ETFs to surpass the broader market fund by wide margins in the same period. This is likely to continue given the solid trends in the space. This is especially true as consumer spending has started regaining momentum on a slow but recovering economy, better job and wage prospects, and low oil prices. Original Post